InformationWeek: The Business Value of Technology

December 4, 2000

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Family Values

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More on venture capital firms:

Computer Reseller News: SHUGART REINVENTS HIMSELF IN VENTURE CAPITAL ARENA (11/27/00) TechWeb Investor: Tradition, Policy Takes Toll On Japanese VC (11/17/00) Tele.com: Just a Pipe Dream (11/13/00)

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During the past few months, CMGI has shut down Furniture.com, an online consumer furniture store, and MotherNature.com, an online vitamin and herbal supplement store. In addition, CMGI merged Green Witch LLC, a provider of Internet radio broadcast software it acquired in January, with iCast Inc., an online provider of MPEG and other music-related merchandise.

Because Safeguard has managed to diversify its holding across 300 companies that focus on various technologies, analysts say it's still a sound investment. "When the IPO market improves, then Safeguard's stock will improve," Renouard says. "But if the capital markets remain the way they are today, it's negative for Safeguard's performance."

One way Safeguard is able to create valuable returns for its investors is via a unique program that lets individual and institutional investors that take a position in Safeguard get first crack at Safeguard IPOs. CMGI tried to do something similar, but failed because there was too much paperwork and investors had to confirm trades with E-Trade the day before, says Steven Frankel, an analyst with Adams Harkness. "This made it too complicated. Plus, institutional investors weren't allowed to participate," he says. "But the Safeguard program adds significant value since investors can purchase stock on the cheap."

Safeguard certainly isn't hurting for partners. IBM bought $50 million in Safeguard stock earlier this year and works on a strategic level with Safeguard and some of its partner companies.

Frankel isn't overly concerned about Safeguard's stock performance. "It could be one to two years before Safeguard's stock recovers, but the company is in very good shape," he says. "It will clearly be a survivor because it's been around for so long and is quite skilled at finding emerging technology trends and then buying, forming, and growing companies to take advantage of those trends."

Safeguard disagrees with analysts who predict most Internet companies will fail over time. "We don't think 90% of Internet companies will fail," Wallaesa says. "We're going to pursue Internet infrastructure and pervasive computing companies and help them to succeed."

One of the most promising is Wireless Online, which provides infrastructure technology to allow data transmission to wireless devices. Wireless Online's core offering is a narrow-beam signal that's designed to be integrated into mobile transmission towers to provide high-quality and high-capacity transmission. By replacing the existing antenna-based transmission signals, the narrow beams not only will reduce interference but will also eliminate the need to build more or larger towers. Greg Oslan, Wireless Online's chairman and CEO, says it's an issue the wireless industry is grappling with as transmitting data wirelessly becomes a reality--and no one wants the towers in his or her backyard.

Parts Of The Family: Some Of Safeguard's Interests
Company Name	Voting % Owned
Software partner companies
Atlas Commerce	35 %
Buystream.com	33%
e-Profile	25%**
eMake	41%**
Fob.com	30%
LifeFX	12%*
Nextron Communications	44%
RealTime Media	45%
Sanchez Computer Assoc.	25%*
USData	41%*
Communications partner companies
Ethentica	29%
NexTone Communications	38%
Pac-West Telecomm	7%*
Persona	29%
Presideo	43%
Sotas	66%
Tellabs	less than 1%*
ThinAir Apps	35%
Vitts Networks	42%
WebTelecom	53%
Wireless Online	43%
E-services partner companies
Cambridge Technology Partners	17%*
Medium	31%
Mi8	38%
Opus360	7%*
TechSpace	49%
US Interactive	10%*
Zer0 to 5ive	33%
Technology operating companies
Internet Capital Group	14%*
Redleaf	31%
TechSpaceXchange	70%
XL Vision	42%
Enabling partner companies
4anything.com	39%
AgWeb.com	43%
Chroma Vision Medical Systems	29%*
CompuCom Systems	59%*
DocuCorp	18%*
eMerge Interactive	16%*
EqualFooting.com	5%
HoopsTV.com	25%
Kanbay	30%
MegaSystems	50%
OAO Technology Solutions	31%*
QuestOne	31%
Tangram Enterprise Solutions	66%*
*Public company. **Wholly owned subsidiary of existing partner company; ownership percentage reflects ownership in parent
DATA: SAFEGUARD SCIENTIFICS

The technology is smart, says Sam May, a senior research analyst at U.S. Bancorp Piper Jaffray, but Wireless Online's biggest issue is execution. One roadblock may be customer resistance. "It's a new way of rolling out infrastructure," May says. "But they're selling this to operators that are putting out equipment from companies like Motorola and Ericsson, which might not want anyone else's equipment."

However, Wireless Online is proving it can close the big deals it needs to stay alive--with Safeguard on its side. The company recently signed a $30 million deal to upgrade WorldCom's Skytel division's networks, and it hopes to lock down another big contract before year's end. "It's not easy, but any time you're selling a big product to a few people, you don't have 10 sales a month," says Oslan.

Also, Safeguard is making strategic investments in companies that help Internet startups. For example, Safeguard has a direct investment in TechSpace LLC. Debra Larsen, founder and president of TechSpace, was working in the commercial real estate business when she came up with a business plan for TechSpace. "I came across many small companies that couldn't get real-estate space because they were a credit risk," she says. With the help of Safeguard, she launched the first TechSpace facility in 1998. TechSpace has facilities in Boston, New York, and Canada that house 15 to 30 companies each. Unlike other incubator firms, however, TechSpace doesn't take an equity stake in the startups that reside within the its facilities. Instead, TechSpace asks for the right to invest when those startups place their next round of funding. "By setting the business up in this manner, we're able to collect revenue and gain the investment opportunity," Larsen says. "But we're not relinquishing control from the startup."

Larsen is also co-founder and an investor in TechSpaceXchange, a venture-capital firm that invests in early-stage B-to-B and infrastructure companies. Safeguard owns a 49% stake in TechSpace and a 70% stake in TechSpaceXchange.

For the most part, Safeguard seems to know when to get out of investments that have gone sour, and which to avoid altogether. "Many of the business-to-consumer investments are very questionable," Andriole says. "There's a high degree of commoditization, and that's why many of them are failing. If 90% of Internet companies fail, it will really be 90% of B-to-C companies, not Internet companies in general."

Still, some B-to-B investments haven't panned out as Safeguard had hoped. Last spring, Safeguard sold Arista Knowledge Systems Inc., an E-learning company, to DigitalThink Inc. Safeguard held a 45% interest in Arista and realized a $12.1 million gain with the sale. Safeguard also sold its 21% stake in communications company Extant Inc., a national clearinghouse for telecom service providers in the wholesale marketplace, for $30 million in August to Dynergy Inc., an energy company. Safeguard says it sold its interest because Dynergy could provide Extant with the financial strength it needed to continue its plans to build a nationwide network.

"As long as we feel we can make significant contributions to the company, we continue to invest," Andriole says. After cashing out of Novell, Safeguard re-invested in the networking company, but has since sold off its shares. Recently, the networking company's stock has been struggling, and it's rumored to be up for sale.

Safeguard also decreased its holdings in Cambridge Technology Partners, from 25% at the time of Cambridge's IPO in 1995, to 16%. Musser is still chairman of the company, but Cambridge's stock is at about $2 a share, down from its 52-week high of $27, and is showing an earnings shortfall of 25.7% during the past five years, down more than 1,000% this year alone.

For the record, Safeguard realized a 22,000% return on its investment in Novell and returns on the Cambridge investment to date are about 500%, according to Andriole.

Which of Musser's new crop of investments will Safeguard nurture to the point of profitability--and which will Safeguard look to offload? If he knows, Musser's not telling. "They'd better all be profitable," he says with his best poker face. CTO Andriole is a bit more realistic. He estimates 75% to 90% of Safeguard's investments will survive. However, analysts say less than half of Safeguard's investments will become profitable, thriving companies. "Most likely, it's only 10% to 20% that will truly become viable, profitable businesses for the long haul," says Baird & Co.'s Renouard. "Yet the gains Safeguard will receive from the successful ones will far outweigh any losses."

Illustration by Jamie Hogan
Photos by Bruce Katz

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