SAN FRANCISCO -- Once touted as vital to the development of the Internet, Web incubators now are hatching little but bad news.
On Friday, CMGI, rushed to deny its once high-flying venture arm, which helped launch dozens of startups, including Lycos (parent company of Wired News) and Yahoo, was out of cash.
CMGI's denial followed a Wednesday announcement by privately held Idealab -- the force behind bankrupt Web retailer eToys Inc. -- that it would close its office in California's Silicon Valley, the epicenter of the Internet world.
Internet incubators, holding companies based on finding, funding and grooming Web start-ups, were bound to turn in bad news, according to Thomas Hellmann, a strategic management instructor at the Stanford Graduate School of Business. Hellmann believes the incubator concept's days are numbered.
Web startups may have needed help only a few years ago, but now it makes no sense for startups to seek expertise from within a limited business network -- especially if startups in the network are struggling.
"These conglomerates were precommitting their companies to seek synergies with a set number of players," Hellmann said.
"You only want internal markets when external markets fail," Hellmann said. "That may have been the case in the very early days of the Internet, but when it took off, markets for various kinds of services these companies needed were actually very efficient."
Of course, it has not helped Internet incubators that investors have been running from tech stocks since the Nasdaq reached its all-time closing high near 5,050 on March 10, 2000. On Friday -- just a day shy of a year later -- the Nasdaq index closed at a 27-month low of 2,052.78, down more 59 percent from its peak.
The once red-hot initial public offering market is dead, and startups are finding private money has turned tightfisted -- especially toward Web startups.
Internet incubators, along with a growing list of venture capital firms, are paying a toll for betting all on a Web-driven New Economy, and for funding both solid and flimsy business plans when Web start-ups were all the rage.
Lack of discretion was stressed by Harvard Business School faculty in the school's most recent New Business publication.
'Forming an incubator made perfect sense," said Donald Sull, a Harvard Business School professor. "With few barriers to entry, capital providers could play in the Internet space and thus diversify their portfolios."
But, Sull stressed, "The problem is that people financed businesses that should not have received funding."
Nitin Nohria, also with Harvard Business School, noted the Web's "gold rush phenomenon" boosted the number of U.S.-based incubators to 214 in June 2000 from 42 a year before, a sign of weak players joining a bandwagon.
"Just as everybody thought that they needed to join the Internet movement or be left behind, a large group of people with new venture experience decided to start incubators," Nohria said. "And just like the Internet, some people were credible players, and some were not."
Web incubators now face a credibility gap, making for big shows of strain in past weeks.
CMGI, for instance, on Friday swung into action to deny a report that its once high-flying venture arm, which helped launch dozens of startups was out of cash.
Andover, Mass.-based CMGI denied a report in the San Jose Mercury News that said the company's +Ventures fund was tapped out. The fund fueled the run-up of the company's stock in 1998 and 1999 as Wall Street snapped up shares from a string of CMGI start-ups that went public.
But when the IPO market for Internet shares dried up, CMGI's (CMGI) stock plunged. Its shares fell about 97 percent over the past year to around $4-3/32 in Friday trade on the Nasdaq.
CMGI did, however, acknowledge +Ventures will slow its investment pace.
"In recent months, +Ventures has realigned its investment practice to focus on fewer new investments, with activity concentrated on earlier stage businesses emphasizing enabling technologies," CMGI Chairman David Wetherell said in a statement.
Other incubators likewise are pulling back. Pasadena, Calif.-based Idealab, for instance, on Wednesday said it will close its Silicon Valley office due to what Idealab executive Brian Steel told Reuters is a "tough funding environment."
Idealab has reportedly lost $800 million from a $1 billion infusion early last year, and some of its best known startups, such as eToys, free-Web access provider NetZero Inc. and discount PC marketer eMachines Inc., have faltered since going public.
Also on Wednesday, Divine Inc., formerly divine interVentures, said it would shut down its FiNetrics start-up, a provider of Web-based financial applications for businesses.
The move comes a few weeks after Chicago-based Divine announced it would reposition itself as a business software provider. Divine had styled itself as an "Internet Zaibatsu," a concept borrowing from Japanese business structure to form a network of companies with shared interests.
At least Divine is still operating -- unlike New York-based Efinanceworks. Late last month, the niche incubator said it would return nearly $150 million to its founders, venture capital firms General Atlantic Partners and Capital Z.
Efinanceworks was launched to invest in startups working on Web-based financial services technology. Its backers, however, concluded they could directly manage Efinanceworks' 13 portfolio companies.
