CMG: The Web Giant Nobody Knows

By Paul C. Judge in Boston
Business Week

July 27, 1998

Forget Silicon Valley's venture-capital powerhouses for a minute and check out the Boston suburb of North Andover, Mass. That's where CMG Information (CMGI) Services Inc. CEO and Chairman David S. Wetherell set up the company's first Internet venture fund in 1995. Now, the little-known investment and holding company's Net startups are coming into their own. Take CMG's 80% investment in America's No.4 search engine company Lycos Inc. (LCOS) It paid $2 million three years ago, when search engines were still being tinkered on in garages. Today, CMG's 30% stake is worth $390 million, and it could go higher if Lycos strikes a widely anticipated partnership with CBS (CBS), Time Warner Inc. (TWX), or another major media company.

That's just the most prominent of CMG's 24 investments, running from the Engage Technologies service, used by Web site operators to collect and analyze user data, to GeoCities, the third most popular Web site, where consumers can set up home pages. When combined, the companies CMG has stakes in rank third in total Internet traffic, behind America Online Inc. (AOL) and Microsoft Corp.'s (MSFT) Web sites. That has spurred such interest that CMG's third investment fund, which totals $150 million and closes in mid-August, will be the first to include outside investors.

With characteristic lack of fanfare, the 43-year-old Wetherell has quietly become a major force on the Web. As an Internet landlord, CMG has valuable stakes in some of the most popular virtual real estate on the Web. But Wetherell has bigger plans: to spawn a wired network of companies that work together to zero in on an individual's tastes, deliver targeted ads, meter Internet traffic, and enable electronic commerce. The goal driving CMG's investments, he says, is ''to bring together the most eyeball time and measure it more accurately than anyone else.''

Pretty grand for a mathematics graduate who started CMG in 1986 when he bought College Marketing Group, which sells lists of college professors and their courses to book publishers. From there, CMG branched out into direct marketing, hitting on the Internet in 1994. An early Internet browser program Wetherell financed, called BookLink, was sold to AOL that year for $30 million in stock. And while AOL buried Wetherell's program, an early casualty of the browser wars, Wetherell sold his stock and invested the proceeds in Lycos, a startup out of Carnegie Mellon University.

Today, publicly traded CMG functions like an Internet mutual fund, taking leading or full ownership stakes in companies. Even though several CMG companies have yet to prove they're survivors, only one--free E-mail provider Freemark--has failed. ''Venture capitalists are doing well if 75% of their companies go belly-up,'' says Ullas Naik, an analyst at First Albany Corp. The mutual-fund approach has caused investors to pile into CMG's stock during the past year, sending it up more than tenfold, to 72. And it has drawn some powerful backers, including Intel Corp. (INTC) and Microsoft, CMG's third- and fourth-largest investors, respectively.

What exactly are investors buying? CMG is a pure Internet play. And, like so many of these nowadays, CMG's profits are nonexistent--it recorded a net loss of $22.8 million last year and has no earnings in sight. Paul Noglows, an analyst with Hambrecht & Quist, expects the company to record a net loss of $28.4 million on revenues of $85 million for fiscal 1998, ending July 31.

CLOSE LINKS

On the surface, Wetherell's strategy looks similar to that of Microsoft co-founder Paul Allen's Vulcan Ventures Inc., which invests in a complementary set of companies that sometimes share customers, partners, and technologies. But Vulcan hasn't exactly set the world on fire using that approach. One crucial difference is that while the companies in Vulcan's portfolio may not pay off for 10 years, analysts expect CMG to spin off as many as six IPOs in the next 18 months, starting with GeoCities later this year.

Still, some venture capitalists see pitfalls in Wetherell's efforts to build a network of companies that are tightly linked. ''It's pretty difficult to dictate mutual strategies to a greater end and have it benefit shareholders of both companies,'' says Jeff Brody, partner at BrentwoodVenture Capital, a Los Angeles-based firm. Counters Robert J. Davis, CEO of Lycos: ''We share where it makes sense, and through CMG we get great exposure to emerging companies and technologies.''

CMG also has to prove its strategy can be maintained over time. The company, whose oldest investment spans three years, is new to the game of funding startups and following them as they grow and change. ''The challenge for CMG will be to continue to build out their network of companies, since they are still a relatively young fund,'' says Jennifer Fonstad, an associate with venture-capital firm Draper Fisher Jurvetson in Redwood City, Calif. ''That's the only way to validate their model.''

CMG's appeal, investors say, is the prospect that early-stage investments will pay off in initial public offerings or acquisitions, boosting the value of CMG shares and generating shareholder dividends. But with so much riding on IPOs and mergers, a meltdown in Internet stocks or a chill in the IPO market could hit CMG hard. Meanwhile, the pressure to demonstrate growth has risen with CMG's stock price. ''Some of these investments would have to grow into monster companies to have an impact on the stock price,'' says analyst Sherri L. Wolf of Adams Harkness & Hill Inc.

MATCHMAKER

Unlike many hands-off venture-capital firms, CMG is taking an active role in making that happen. It provides crucial introductions, as in the case of Silknet, a three-year-old startup based in Manchester, N.H. The company, which provides customer service over the Web, added CMG-investor Microsoft to its list of customers on July 1. Similarly, when Japanese conglomerate Sumitomo Corp., another CMG investor, was looking for a way to deliver ads to an Internet browser on Japan's largest Internet service provider, Internet Initiative Japan (IIJ), Wetherell steered them to ADSmart, a CMG company used by advertisers to deliver ads on Web sites.

And Wetherell isn't shy about using his influence to make things happen. Engage was ready to roll out its consumer profiling technology last spring, but Lycos, an obvious target customer, had its hands full digesting acquisitions, including community service Web site Tripod Inc. Then, CMG asked Lycos to make working with Engage a priority, and in six weeks, Lycos delivered half of the 19 million visitor profiles in Engage's growing database. ''Because CMG wanted Engage to ramp up, it became a priority,'' says Engage CEO Paul Schaut. But executives at the affiliates say they aren't forced to work together. Says Bo Peabody, CEO of Tripod: ''In an industry like the Internet, you need to be free to make adjustments very fast.'' CMG has shown it's nimble. Now, it has to show it has staying power as well.

CMG's Wired World of Investments

LYCOS                                   VALUE AND 1998

Search engine and                       REVENUE (MILLIONS)

community service that                  $1,300

is the seventh most                     $62*

visited Web site.

CMG STAKE: 30%



GEOCITIES                               VALUE AND 1998

Most popular site for                   REVENUE (MILLIONS)

users to build home                     $1,000*

pages, IPO pending.                     $25*

CMG STAKE: 34%



ENGAGE                                  VALUE AND 1998 

TECHNOLOGIES                            REVENUE (MILLIONS)

Service used by Web                     $300*

sites to place and                      $15*

target ads.

CMG STAKE: 100%



SILKNET SOFTWARE                        VALUE AND 1998 

Web customer service                    REVENUE (MILLIONS)

software. Customers                     $60*

include Microsoft,                      $5*

NationsBank.

CMG STAKE: 24%

*Estimated

		DATA: COMPANY REPORTS, ANALYSTS, BUSINESS WEEK

Copyright 1998, by The McGraw-Hill Companies Inc.