In the Hot Seat

When great talent makes a bad bet, something's got to give.

They had the midas touch—and suddenly lost it. For what seemed to be a whirlwind minute, Internet Capital Group built a dot-com kingdom that stretched across dozens of companies. Investors and top managers from Microsoft and Tech Data joined ICGs crusade. The incubators stock soared during the height of dot-com madness. But a confluence of factors—ranging from the dot-com fallout, investor skepticism, questionable investments and other factors—has knocked ICG from its throne.

ICGs current financial condition wont be known until Feb. 21, when the company is slated to announce Q4 financial results. ICG declined to comment for this article, citing a financial quiet period. However, the first three quarters of 2000 didnt look good: Even as revenue rose 47 percent to $21.7 million, losses for the period nearly hit $100 million. Impatient investors have pounded ICGs stock, which trades for about $5—down from its all-time high of $246.

During the companys heyday, ICG raised $1 billion and even mustered a market cap of more than $40 billion, bigger than some iron giants like Ford.

But those go-go times are ancient history, and some analysts wonder what ICG will do to survive. "They made some big bets in the wrong part of the B2B economy," says Patrick Walravens, senior equity research analyst at Lehman Brothers. "They bet heavily on the independent B-to-B market place, and those types of companies are going out of business in droves."

Smart Staff To be sure, ICG isnt at a loss for talent. During the height of its popularity, ICGs corner offices attracted top names like Sam Jadallah, a former VP at Microsoft; Tony Ibarguen, former president and COO of distributor Tech Data; and Mary Coleman, former CEO of Baan.

Jadallah earned high grades managing much of Microsofts channel strategy before taking another post at the software giant and then turning his attention to ICG. And Ibarguen helped Tech Data to successfully navigate a downturn in the distribution market.

A Little Luck Helps Still, it takes more than top talent to succeed in business. The golden touch that ICG co-founders William Buckley III and Kenneth Fox seemingly had when they started the company in 1996, is all but gone, industry experts say.

The company bet heavily—make that too heavily—on its expectation that independent business-to-business markets would sweep corporate America off its Old Economy feet. But that bet was a big miss. Instead of rushing to an independent vertical sites like MetalSite or VerticalNet, companies within certain industries—like General Electric in plastics or General Motors in manufacturing—formed their own B-to-B sites.

Now, the problem that ICG faces is one of cash. The company had hoped to make money using a keiretsu-style model. As of September, ICG had invested heavily in about 80 companies. But ICGs road to profitability requires many of those companies to go public.

And theres the rub. Few companies can stomach an IPO during the current economic slowdown. Five ICG partner companies last year pulled their IPOs, and a sixth is still in registration. Meanwhile , the ICG partner network companies that have gone public are currently suffering: VerticalNets stock is in the $3 range, Breakaway Solutions is hovering at the $1 level, and US Interactive filed for bankruptcy protection.

To date, ICG has taken serious steps to save and raise cash. The company, with a market cap of about $1.4 billion, had about $500 million in cash as of Sept. 20. ICG has moved quickly to cut its cash burn-rate, which is about $25 million a month. However, Pegasus Research reports that ICG burned through $86 million in the third quarter and could run out of cash in 17 months.

Slim Fast ICG underwent a restructuring in December, evaluating which partner companies had the most promise and market traction. ICG plans to continue funding only 15 of its most promising companies, cutting off cash infusions to the rest. To raise money, ICG last month sold its stake in Servicesoft to Broadbase Software and its stake in eChemicals to Aspen Technologies. It also merged partner companies FreeBorders and Applied Intranet Technologies.

Analysts say the cost-cutting measures are necessary if ICG is going to survive. "I think they are going to conserve their capital any way they can, by liquidating any assets to bringing some more cash and invest in the firms that are solid," says Dan Leben, assistant analyst at R. W. Baird & Co., an investment firm.

However, selling a brood of companies may not be an easy nor profitable task, says Ed McCabe, director, Merrill Lynch: "Its tough market to find a buyer; this is not a sellers market."

Even with that outlook, ICG does have some potential gems in its mix. For instance, RightWorks, which is a provider of e-procurement software aimed at B-to-B exchanges, could be one of the companies that will fall into its favored list. ICG took a huge stake last year in RightWorks for $22 million in cash and $656 million in stock. ICG named Coleman (the Baan veteran) CEO of RightWorks and appointed Jadallah as its chairman. These executives, analysts say, bring experience in building a software firm and developing indirect models for selling software.

Questions Remain But can a focus on a few good companies put ICG back on track? Its hard to say.

"I think its up in the air," says Merrill Lynchs McCabe. "They have to execute on the strategy of de-emphasing the non-strategic assets to raise cash and focus on the more mature partner."

Others are not that hopeful. Especially because of the skepticism about ICGs stock not responding after ICG took action on specific partner companies "They need critical mass for their partner companies to be successful," says Leben. " Im not sure there is much they can do."

Come Feb. 21, well see whats left of ICGs golden touch.