The CMGI Farce

At a recent gathering of venture capitalists and other pious alumni of HIT brought together by Technology Review magazine in Mountain View, Bob Metcalfe–the inventor of Ethernet, founder of 3Com, high profile tech pundit and MIT alumnus in his own right–put the state of the YC world in fast perspective. “At one time, the venture capital community was a cartel,” he said in the night’s featured presentation. “But I believe that cartel has been broken. Competition has intensified and now the VCs are slitting each other’s throats–and that can only be good for everybody.”

The comment had stopping power not only because Metcalfe spoke pointedly to his audience, but because he spoke the truth. Today more than ever, VC firms face intense competition, because–in the words of Mohr, Davidow general partner George Zachary, “Much as anyone with a keyboard can call himself a journalist, anyone with a checkbook these days calls himself a venture capitalist.”

To be sure, there’s a lot of cash to go around. Old-line Silicon Valley firms have their checkbooks at the ready; upstart East Coast companies try to beat them to the quick. Software and hardware companies are squarely in the ring–treating VC investments as the ’90s version of R&D. Investment bankers struggle to keep up. Each works to identify a niche and articulate a message in the quest to fund the highest flyers.

cgmiFor one of the highest flying VC firms of the day, Andover, Mass.-based CMGI, that niche is marketing. An unlikely niche, considering that VCs have historically cared little about the discipline, but not surprising, given CMGI’s roots.

Until four years ago, CMGI toiled in the obscurity of providing direct marketing and fulfillment services. Then in 1995, management saw the Internet coming and set up a VC unit to fund Net startups. Microsoft and Intel, seeing the potential, backed the fund. And CMGI’s @Ventures Internet unit was born. Four years, 41 investments and four successful IPOs later, the company is the toast of both the Street and the Valley.

The financial types and techies may hog the glory for the rise of the Net, but thanks in part to CMGI, marketing is winning the day. True, the general partners are the mix of software gurus and Harvard MBAs you’d expect to find at a VC firm. But the company’s marketing roots shape the way @Ventures does business and the help it offers member companies.

While other tech VCs tend to have a broad spectrum of investments–software, hardware, resellers, etc.–CMGI @Ventures focuses exclusively on dotcoms.Jon Callaghan–one of nine general partners and by the firm’s own account, one of its most astute marketers–claims that CMGI’s DM roots have served the firm above all else. “There are so many new sites coming online every day, but only the ones that understand their customer[s] and know how to reach [them] will survive,” he says.”Gaining an understanding of the customer is critical and that [concept] has its roots in direct marketing and database marketing technologies.”

Because anyone can offer money, CMGI offers a package to its member companies. CMGI @Ventures gives companies the nurturing and marketing advice they need to build successful–or since this is the Internet, potentially successful–businesses. That, of course, makes member firms more prized in the eyes of Wall Street, which increases CMGI’s own valuation. Which allows CMGI to make deals like the recent $2.3 billion acquisition of AltaVista and its sister sites.

The AltaVista acquisition is expected to give CMGI a distribution network for its properties, further raising their profiles and traffic. AltaVista has nearly 7.5m unique visitors a month and generates nearly 150m page views–far more than any of CMGI’s existing properties, according to Nielsen/NetRatings. The idea is, then, that this single acquisition can shine a halo over all of CMGI’s investments, and pay off when it comes time for them to IPO.

And while the successful implementation of that plan will have players like Callaghan rolling in spoils, it will more importantly foster a success story behind the company itself–giving CMGI an advantage against other leading VCs in the battle for the next big thing.

“AltaVista twill be] a tremendous asset in attracting the best and brightest entrepreneurs,” Callaghan says. “No other venture player has a controlling stake in something like AltaVista.”

Even before the AltaVista deal, CMGI almost always made an entrepreneur’s short list. First Albany Securities analyst Ullas Naik mentions CMGI in the same breath as Silicon Valley VC pioneers Kleiner Perkins Caufield & Byers, and Benchmark Capital. “Each have a fair claim to leadership in the Internet venture capital space,” he says.

That’s a long way to come in five years. What’s put CMGI @Ventures on the map? Two words: Lycos and GeoCities. CMGI made an initial investment of just $2m into search engine-turned portal Lycos in 1995. That gave it an 80 percent share of the company. Over time, CMGI would invest another $1.8m in Lycos. A successful IPO early in 1996 and strong performance of the stock since then makes CMGI’s current 18 percent share worth $700m-$800m, depending on market fluctuations. (For further discussion of Lycos, see “A Marriage of Convenience,” p. 12).

With GeoCities, which sold to Yahoo! earlier this year for $2.87 billion, the firm’s ROI was even more staggering. CMGI’s $4. I m investment in 1996 is worth $1.2 billion today. Other, less notable successes also returned huge margins–e.g., IPOs for Critical Path and Silknet, and several transactions such as the sale of Reel.com to Hollywood Video.

Such a track record interested Bernard Louvat. When Louvat took his business-to-business e-commerce site, BizBuyer, to the Valley earlier this year shopping for VC funding, he met with CMGI (@Ventures has an office in Menlo Park), Kleiner, Benchmark, Idealab Capital Partners and Brentwood Capital. Louvat says CMGI was in his top three to begin with, and it quickly came to light that CMGI was the best fit. BizBuyer became one of CMGI’s newest investments, joining the @Ventures portfolio in June.

“We perceived them as partners who could help us grow successfully, based on their track record with Lycos and GeoCities and the fact that they’re focused solely on Internet investments. It’s what they do every day. They’ve built an excellent knowledge of the industry and what it takes to build a success story.”

Louvat says BizBuyer hopes to leverage both CMGI’s operations knowledge as well as its investment knowledge. “We want to grow fast and build a successful business,” he says. “It’s beneficial to have them as a partner because they’ve been where we’re headed.”

Louvat’s enthusiasm is shared by other affiliates. “They ye helped us in a number of tactical and strategic ways,” says Bruce Milligan, vp of marketing at Koz.com, an @Ventures affiliate that helps media outlets develop community sites. “They’re sort of a Good Housekeeping Seal of Approval for the Internet, A lot of people don’t know who we are or what we’re all about. But once we say we’re a CMGI company, there’s an immediate sense of a value. That would be hard to generate on our own.”

“We handpicked CMGI as our VC partner of choice,” adds a spokeswoman for Ancestry. com, in which CMGI took out a 30 percent stake last fall. “They immediately got the concept of what we were about better than the others did.”

Ancestry.com is @Ventures’ most popular web property, with more than 1.8m unique visitors a month, according to the most recent Nielsen/NetRatings report. Because of the nature of the property, that number figures to be considerably higher the next time that report comes out. Ancestry, like many of the Net properties CMGI invests in, employs a viral marketing model that helps the site build traffic organically–as each user’s interaction brings in several more users.

Ancestry.com is devoted to genealogical research, by itself a pretty hot interest these days. It also has a sister site, MyFamily.com, where users can post their family trees, which theoretically, they could research and develop at the Ancestry.com site. Ancestry’s third site, FamilyHistory.com, bills itself as an “online genealogy community,” hosting 50,000-plus genealogy message boards devoted to family history research.

Callaghan calls Ancestry. com’s strategy, “genetic marketing.” “Every new user brings, on average, six to eight additional users,” he notes.

It’s a phenomenon most CMGI sites have in common. OneList is a network of topical email lists. Users can subscribe to email lists on just about any topic–or start their own list. They spread the word around to others they know with similar interests and voile, viral marketing.

The idea, of course, is to let the customers do the marketing–a much cheaper alternative to prime time television campaigns. “OneList is a happy partner in viral marketing” says Callaghan. “It works so well for them that they’ve had to spend very little on any kind of marketing campaign”

OneList has 4.4m registered users and handles 20m emails a day from its 170,000 lists. Not bad for a company that wasn’t even a company until CMGI discovered it about 18 months ago. Prior to that, founder Mark Fletcher ran the lists from the basement of his home, while maintaining his day job as a computer programmer.

How long do such funding arrangements take? As Callaghan recounts, initial contact was made with Fletcher the Monday of Thanksgiving week, 1997. By the weekend, OneList was a part of the CMGI @Ventures family and Fletcher had quit his day job. OneList was incubated at CMGI’s Menlo Park offices for three months before it was turned out on its own. But it’s still enjoying the vast support system that CMGI provides. “There are some amazing synergies that come from being part of an extended family of Internet companies,” says Joe Gillach, OneList’s vp of marketing. “All the other companies have faced similar challenges and there’s no competition between any of them.”

The @Ventures companies can turn to each other as well as form relations with the companies in CMGI’s Internet division, most of which are wholly owned by CMGI. Adsmart, for example, can find online advertisers for the @Ventures sites; Engage Technologies can provide site visitor profiling; and NaviSite can provide site hosting and management services.

Of course, the companies CMGI invests in need a foundation to build on. Callaghan says 1,000 business plans a month wash across the desks of the general partners. So, naturally, with only 30 companies currently in the portfolio, few make the cut. “We look for companies that can grow extremely quickly and have understood their marketing challenges,” he says. “Companies with rapidly growing applications and top-tier management and technical talent. People are the first criteria.”

CMGI @Ventures properties tend to focus on one or all of the three Cs: content, community and commerce. Raging Bull provides news and discussion groups on the stock market, with the CMGI forum being one of its most popular. MotherNature.com sells vitamins and other food supplements, while providing information and discussion groups about them. Asimba features information and online communities for fitness enthusiasts, including online personal training regimens. All require users to register.

So as viral marketing increases site traffic, the sites have a ready supply of demographics for advertisers, such as gender, age and geographic location. “The Internet has proven a great enabler of communities,” says Callaghan. “We have some broad, but very specific communities in our portfolio.”

There’s no shortage of marketing assistance that the company provides affiliates once on board. “We mentor and sit on the boards of the companies we fund. We stay involved,” says Fiona Wilson, CMGI’s director of marketing. As CMGI’s profile grows–try to find a business magazine that hasn’t written about them in the last three months–the firm intends to lift its affiliate companies with it. At this fall’s Internet World in New York, CMGI will showcase 10 of its @Ventures affiliates at its booth. “It’s a really powerful venue to help some of our smaller, less well-known companies benefit from our name and build a much bigger presence,” Wilson says. “There will be 40,000 people there who by definition are heavy web users.”

CMGI has already held summits for the CEOs and CTOs of its affiliates, giving company executives a chance to exchange ideas and best practices. In January, CMGI will conduct its first “marketing summit,” giving marketing execs a chance to do the same.

“There’s a lot of sharing and learning between our companies,” says Wilson. “We only add companies to our family who will be in complementary situations as opposed to competitive with each other.”

CMGIers describe the networked relationship between the @Ventures companies and the other divisions in Zen terms like “keiretsu” (Japanese for corporate affiliation) and “virtuous circle” Such terms may be overused in the business world today, particularly among VCs, but there’s no question CMGI is having success with the model.

“The level of value-add in the CMGI model is really powerful,” says OneList’s Gillach. “Other VCs are trying to emulate them. They remind me of Berkshire-Hathaway, the way companies they invest in speak so glowingly about them”

On paper, CMGI looks like an unstoppable jugger-naut, poised to dominate every Internet sweet spot. But Internet venture capitalism is not a segment so easily conquered. Naik, though highly complimentary of the shop, will only go so far as to put the firm on a level with Kleiner and Benchmark. “It’s a little blurry,” the First Albany analyst says. “You can’t really put one ahead of the other two. They’ve all had enormous hits.”

Steve Harmon knows the volatile world of Internet investments as well as anyone. Harmon is a senior investment analyst for Internetcom, the author of the Internet Stock Report and the creator of the Internet Stock Index. To him, Kleiner is still the team to beat. He points to Kleiner’s building the @Home Network (now [email protected]) from scratch into a $10 billion entity, something, he says, no other VC firm could pull off. “Kleiner is definitely the gorilla. Benchmark is aggressive but they haven’t proven it beyond eBay. Kleiner has Netscape, Amazon, Halcyon. Nobody’s come out with as many winners. With Kleiner you’re talking about at least six. With CMGI, you’re talking about two, Lycos and GeoCities. With Benchmark, you’re talking about eBay. Kleiner’s in a league of its own. Half of Silicon Valley has come through Kleiner Perkins”

So while CMGI has no shortage of business plans crossing partner desks, when it comes to the big ideas–the ones from the minds of proven entrepreneurs–the firm often finds itself among the also-rans along with a revolving list of the usual suspects: Kleiner, Benchmark, Softbank Technology Holdings and Paul Allen’s Vulcan Ventures.

Increasingly, the upstarts also see a target in CMGI. Take the freshly minted Odeon Capital Holdings, which was formed last December and has since signed seven Internet firms to a $12m portfolio. Odeon, which doesn’t invest very far from its New York base, hasn’t seen CMGI in any competitive situations yet, but partner Jeffrey Finkel says he’s ready. “They’re doing some good things, but they don’t have a patent on those ideas,” says Finkel. “Softbank started the keiretsu concept; even Kleiner Perkins before them. Many of our companies have similar attributes and collaborate with each other, share information, leverage each other’s skills for the greater good. There’s a lot of cross-collaboration between our properties, too”

To counter the big VC brands and upstarts alike, for the prize investments, CMGI is falling back on its core competency: marketing.

CMGI has succeeded wildly in the media. Troll through the firm’s press clippings and you’ll see that CMGI’s PR department has scored innumerable hits in publications as integral as Upside and The Red Herring, as well as in/on Time and CNBC. Most tech and business publications cover their every move, and CEO David Wetherell seems to be on everybody’s list of the top tech CEOs. The Industry Standard recently named him the second most influential tech investor behind only Bill Gates.

Many of the other major VC players, Kleiner and Benchmark included, are privately held companies without PR staffs. The @Ventures group is a limited partnership, like its chief competitors. But it’s part of a publicly held firm, which it leverages both in megadeals like with AltaVista and in generating PR.

Callaghan describes the Internet VC world as “extremely competitive.” He notes that having success stories like Lycos and GeoCities to tout has helped the company tremendously in signing up the hottest Internet commodities that crop up.

“The good teams are looking out for us,” he says. “That will improve the quality of the investments we make going forward. But we’re seeing a lot of competition for those investments. A lot of the old line venture firms are getting into this game, some later stage funds, some hedge funds, a lot of people that weren’t there at the early stage of the market”

But the CMGI PR and marketing machine is ready. PowerPoint slides from an internal presentation detail the company’s plans to raise the profile of and generate buzz about @Ventures and its portfolio companies. The goal, a slide asserts, is “Maintain[ing] perception as the fund of choice for emerging web companies and talented entrepreneurs.”

That’s happening now.

Advertising is next–in The Red Herring, Upside and The Industry Standard as well as The Wall Street Journal, San Jose Mercury News and The Boston Globe. The company, as much as it likes to distance itself from the Sand Hill Road clique of VCs, even touts its participation in the Sand Hill Road Rally, a charity event cum soapbox derby.

But the news hasn’t always been so good for CMGI and its @Ventures unit. In late 1996, when the company was still basking in the glow of the Lycos IPO, it had its first, and by most accounts only, major stumble: Freemark. The Freemark story is worth noting because it not only stands out as a major black mark but also shows CMGI’s clumsy handling of the dissolution. The direct marketing experience, which has otherwise served the company well, proved no help at all with Freemark. In fact, it may have been a detractor, in that CMGI didn’t acknowledge the inherent differences between DM and the Internet.

Freemark was a proprietary, free email service, similar to Juno. CMGI began investing in the startup in 1994, but it wasn’t until October of 1996 when the service became available. By Dec. 1, CMGI pulled the plug, shutting the company down after it had amassed just 50,000 subscribers, compared to its rival, Juno, which had nearly a million at the time.

Freemark had marketing deals with Citibank and several college alumni associations; it had as many as 50 advertisers lined up including The Wall Street Journal, The New York Times, Wired, Life Savers and Campbell’s Soup. But it never had the right execution.

Vin Crosbie, the former director of content development at Freemark, now runs his own new media consulting company, Digital Deliverance, in Greenwich, Conn. He says the responsibility for Freemark’s failure rests more with its own management than with CMGI. Most of its financing (of which CMGI provided half, or $8.5m) was spent in the two years it took to develop the business, he says.

Meanwhile, he says, Juno had $20m to play with and a commitment for up to $100m from its chief investment backer, D.E. Shaw. When Freemark went to CMGI looking for more money, CMGI decided to cut its losses and shut the company down. That, Crosbie says, is where CMGI went wrong.

Crosbie doesn’t blame them for not wanting to invest more money, but he claims that Freemark presented a proposal to keep the service running at a bare bones level for $25,000 a month until a buyer could be found, but CMGI wasn’t interested. Instead, it pulled the plug, thinking it could sell a list of 50,000 spurned email users after the dissolution. Of course, the 50,000 subscribers were gone for good at that point. As soon as the firm shut down, they all ran out and got new addresses.

Indeed, CMGI missed all the signs when it came to Freemark–exposing a great irony: While the firm had invested $5m into an email service, it knew almost nothing about the category. “They left 50,000 subscribers without email,” Crosbie says. “They came from the direct marketing world and were used to selling subscriber lists and thought they’d just be able to sell this one like all their paper lists.

“They blew it and just shut it down,” he continues. Mail.com “eventually bought the domain and brand, but the list was worthless”

Callaghan was not directly involved with Freemark and won’t comment on the specifics–but attributes the failure mostly to timing. Freemark didn’t have the right management in place and the technology was early. “We learned a few lessons from that. We didn’t have the right team and we were probably a little too early with the technology,” he says. “Market timing is important We live that everyday. And we have to be good judges of the team we have in place and the technologies required to win”

Crosbie agrees–to a certain degree. He says executive management came from the pre-packaged software world and couldn’t understand the concept of letting customers download the software. Instead, they insisted on mailing diskettes with unique registration numbers, like off-the-shelf software. Lycos and GeoCities would run banner ads for Freemark that linked back to Freemark’s site, but users still couldn’t download the software.

However, Crosbie disagrees vehemently with Callaghan’s suggestion that Freemark was early. “That’s a good way of excusing themselves, but in this industry, being first to market is the most important attribute of success” he says. “They just didn’t understand the email stuff. If it was too early, then why is Juno still here? They didn’t realize there was room for two in that market.”

Crosbie says Freemark was working on content deals that would have enabled it to deliver news, sports, weather and other information to subscribers’ inboxes, similar to what InfoBeat has done. CMGI “never understood what it had,” he laments.

Yet Crosbie concedes that this isn’t the same CMGI today. “They didn’t have as many companies in their portfolio then,” he says. “They have more support now and more cross-marketing opportunities.”

When all’s said in done, nowhere is the cult of failure stronger than in the venture capital world. Does CMGI regret Freemark? Probably not. As long as the company has learned from the experience, as Callaghan suggests, it was probably a worthwhile investment.

So where does CMGI go from here? It should make some waves when it debuts its ICast site in the fall. ICast will be CMGI’s foray into the Internet broadcasting medium, providing interactive audio and video. Judging by some of the talent CMGI has assembled for ICast, it’s going to be a serious foray.

The company is partnering with Neil Braun, the former president of NBC. Braun will be ICast’s CEO while Matt Farber was hired away from MTV to be evp and GM. Farber, an eight-year veteran of MTV, is credited with bringing MTV online and was most recently the evp of MTV Online.

Though the startup will be a part of CMGI’s Internet group, not @Ventures, it will offer further partnership and cross-collaboration opportunities for the @Ventures companies. Beyond that, look for more IPOs, sales and acquisitions involving both the @Ventures and Internet properties. The AltaVista acquisition will likely speed that process.

There will be more success stories and possibly some not so successful stories. Harmon insists there’s some dead wood in the @Ventures portfolio. One certainty is that CMGI will continue to move farther and farther away from its direct marketing origins. SalesLink, which provides online and offline marketing and fulfillment services to retail and tech companies–sexy stuff like product distribution, supply chain management, customer service and statistical reporting–is the only entity left in CMGI’s direct marketing group.

Even if CMGI becomes a 100 percent Net company, it will continue to apply the lessons learned from DM to its investments, its majority and wholly owned Net subsidiaries like AltaVista, and in positioning itself in an increasingly crowded, competitive VC market. In five years it’s gone from the sleepy world of direct marketing to becoming not only a major player in the Internet, but a driving force behind continued growth of the Net.

“I’ve been saying for so long that we’re only in the first inning of a nine-inning game. Maybe now I’ll say it’s the second inning,” says Callaghan. “In any case, we’re not too deep into it. With both our strategic and capital resources, our approach is long-term.” And it had better be. While CMGI has had its successes in the Internet investment space, success hasn’t translated into operating profits. All of the Net companies CMGI has invested in remain in the red.

The question is not whether the profitless phenomenon will change, but when. The biggest knock on CMGI’s fiercest competitor, Kleiner Perkins, is that the company is great at bringing investments public at insane valuations, but horrible at helping them become successful companies. That’s because Kleiner understands investment banks and the Street, but seems to have little knowledge of real people. Which is where CMGI’s marketing and communications expertise should help the firm compete. In the end, profits matter. But they’re impossible to achieve without a sound understanding of how to communicate in the marketplace.

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| December 31st, 2015 | Posted in Business |

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