The folks behind Business.com made quite a splash back in November, when Santa Monica-based incubator eCompanies, which spawned the business Web site, paid a whopping $7.5 million for the sole right to the compelling domain name.
The plan was to create a comprehensive, all-business news and information site. It’s a crowded field to be sure, but Business.com did get what seemed to be a leg up by acquiring such an easy domain name to remember.
Since then, untold millions of additional dollars have been poured into Business.com, including enough dough to lure Peter Gumbel, former Los Angeles bureau chief for the Wall Street Journal, to head up news operations. At last count, 128 staffers now make their living there, including 60 in editorial.
Three week ago, Business.com announced it had received a financial vote of confidence, in that it sold a large stake in the site for $61 million to a quartet of business publishers, including The Financial Times Group, Cahners Business Information, Primedia Inc. and The McGraw-Hill Cos.
One interesting aspect of the deal is that the quartet got newly issued equity in exchange for their money, rather than a portion of eCompanies’ pre-existing equity. The end result is that the new money went directly into Business.com, not eCompanies’ coffers. So eCompanies has not recouped any of its original financial investment in Business.com, yet its equity stake has been diluted by the deal.
Christian Gunning, a spokesman for eCompanies, elaborated last week that the four new investors, when combined with earlier investors, now own a majority of Business.com.
In short, eCompanies’ stake in Business.com has been diluted to minority shareholder status, yet none of its financial stake has been recouped and it is still fully at risk in the fledgling site.
But Gunning said that’s par for the course. “We are still the largest single shareholder… and we generally don’t sell our equity in companies we help start up,” he said.
Citing his busy schedule, Jake Weinbaum, founder of eCompanies, declined to discuss Business.com, despite several calls over several weeks. But Business.com spokeswoman Jennifer Stephens said Weinbaum’s plan is to move the Web site to profitability using the latest cash infusion. (It’s not profitable now.)
The business model of the site, which launched in June, is pretty simple. It “aggregates” business news content generated by others in the media into 25,000 different categories, and then solicits banner advertising by category or subcategory. For instance, a maker of “type a2 widgets” could advertise under the category manufacturing, or the subcategory widget manufacturing, or the even more specifically under “type a2 widget manufacturing.”
Said Stephens: “With 25,000 categories, we can supply very targeted advertising opportunities to our advertisers.” The idea is that makers and buyers of type a2 widgets would naturally check that subcategory frequently and see the banner advertising.
Stephens added that advertising sales have been strong and above expectations but declined to discuss revenues or the number of “hits” generated by Business.com. One local boutique investment banker, Dick Israel in Beverly Hills, said the site looks similar to the portion of Yahoo’s site that’s dedicated to business news, a comparison that’s hard to dispute.
One thing is for sure: the people at Business.com are definitely into the cyber-world. The Web site does not even list a telephone number to call to reach them, only an e-mail form.
Why no phone? “I don’t know,” said Stephens. “We do get a lot of odd calls. But we are going to start to list our number on the site.”
No IPO
When a news event doesn’t happen, there are typically no headlines. That was the case in August with a quiet decision by Marina del Rey-based Sonoma Systems Inc., a telecom hardware manufacturer, to be bought by Boston-based Nortel Networks Corp. for $550 million in stock.
So just what didn’t happen? In February, Sonoma Systems had registered its S-1 filing for an initial public offering to be handled by J.P. Morgan & Co. and Donaldson Lufkin & Jenrette Securities Corp. Obviously, that IPO has been scotched permanently.
The reason is a telling financial tale. Of course, one obvious reason is that the IPO market has been choppy, even for Internet companies on the infrastructure side of the fence, such as Sonoma, said Steve Waszak, chief financial officer of the firm that makes equipment to be installed on-site at businesses. The equipment enables high-bandwidth Internet transmissions (both voice and data) to pass simultaneously through a single line, including optical networks.
But a bigger reason for the no-IPO has to do with marketing power.
“We have been working with Nortel on an OEM (original equipment manufacturer) basis,” said Waszak. “They saw our product as fitting well into their service. Their salespeople sold our product before, but maybe held back a little. You never know when we (Sonoma) might be sold to a competitor of Nortel’s. Now they can really sell us.”
The selling of a startup to a larger, affiliated company is a favorite strategy of some venture capitalists, including Frank Kline at Santa Monica-based Kline Hawkes & Co. venture shop. He argues that a more predictable exit strategy can be arranged if a product is developed in concert and consultation with a larger firm, which then buys the smaller firm lock, stock and barrel.
Kline and others also point out also that stock received in a buyout is usually liquid immediately, while stock taken to venture capitalists in an IPO is usually locked up for 180 days or more, by SEC law.
By the way, the merger exit strategy does not necessarily mean a smaller payday. Sonoma Systems launched just three years ago in late 1997 is expecting year 2000 sales of $20 million, meaning Nortel paid 25 times revenues (forget earnings).
“Their (Nortel’s) offer was in the IPO filing range,” said Waszak. “Our investors made money.”
(While the $550 million acquisition price may seem considerable, for a sense of scale, consider that Nortel had a market capitalization of $185 billion last week.)
In the first round, local venture shops Crosspoint Venture Partners and VantagePoint Venture Partners both backed Sonoma. Waszak estimated those venture shops scored “10-to-one” returns on their investments, with the Nortel buyout.
But Waszak said Nortel should also do well, predicting that the company’s sales force could push sales up 20-fold in 2001.
Contributing columnist Benjamin Mark Cole writes about the local investment community for the Los Angeles Business Journal. He can be reached at [email protected].
