Simply put, Internet Capital Group (ICG) finds itself at the epicenter of this B2B explosion. It is essentially an incubator of upstart and adolescent B2B companies, owning significant equity positions in some 61 companies. Beyond seed capital, ICG provides ongoing consulting services to its partner companies, helping them grow and, in the process, increasing the value of its equity stakes.
As you might guess, this has been a profitable modus operandi. Probably the most salient example of how insanely profitable being an incubator can be is ICG's stake in VerticalNet <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: VERT)") else Response.Write("(Nasdaq: VERT)") end if %>. Back in 1996 ICG invested $16 million in VerticalNet and helped shepherd the company to become the preeminent host of numerous highly specialized B2B marketplaces. Today, ICG's stake in VerticalNet, even after the recent tech-stock meltdown, is worth some $1.3 billion. Not bad, eh?
Let's get back to the opportunities of B2B, since the success or failure of the industry as a whole is the probably the single largest factor that will influence ICG. B2B e-commerce is all about reducing costs for businesses by using the Internet to increase the efficiencies of the manufacturing process. Moreover, by using the Internet, companies can more effectively interact with their suppliers and customers, making connections that might not have otherwise happened. These trillion-dollar market opportunities so often thrown around are not pie-in-the-sky numbers. There really is an incredible opportunity here for B2B companies to grease the wheels of the entire economy. (For more information on B2B, check out this article.)
Of course, B2B companies won't see $1.5 trillion in revenue in 2003, but that doesn't mean the opportunity is trivial. Let's assume we're in 2003 and only 20% of the $1.5 trillion of the goods and services exchanged B2B actually go through market makers like VerticalNet and eMerge <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EMRG)") else Response.Write("(Nasdaq: EMRG)") end if %>, the balance traded among companies over private networks. (I think 20% is a conservative number, but let's roll with it.) Twenty percent of $1.5 trillion brings us to $300 billion worth of goods transacted between companies on virtual exchanges.
The vertical market makers, needless to say, will only take a small percentage of these transactions. Say they take a 3% commission or markup on each sale. That brings us to $9 billion in revenue for the vertical market makers come 2003, and this revenue is going to be extremely high-margin. The point is that when you take only small percentages of large numbers, you still end up with a large number.
It's also worth noting that the above example is only for vertical B2B companies; there is a whole other type of B2B that will serve 100% of the market -- horizontal companies. These are the "picks and shovels" B2B companies, and ICG owns both vertical market makers as well as horizontal service providers.
One of the interesting characteristics about Internet Capital Group is that it has the largest network of B2B companies. This is an important and sustainable competitive advantage. Incubators of all types are popping up all over the place (largely validating the market opportunity), but ICG's keiretsu is the largest and most influential. By having the most partners, it is also able to share the most experience and knowledge among its partner companies. After all, Internet Capital Group is anything but a passive investor in these companies.
Let's now turn an eye to valuation. As of this writing, the market value of Internet Capital Group's publicly held positions is over $2 billion. We get this figure by adding up the value of the shares ICG owns in VerticalNet (its largest investee), Breakaway Solutions <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BWAY)") else Response.Write("(Nasdaq: BWAY)") end if %>, Universal Access <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UAXS)") else Response.Write("(Nasdaq: UAXS)") end if %>, and the other public companies in the ICG portfolio.
Some Fools may be tempted to look at ICG's $11 billion market capitalization and immediately write the stock off as insanely expensive at four times the company's public portfolio. However, these Fools would be missing some of ICG's other important assets. One such asset is its portfolio of private companies, a portfolio that may actually exceed the value of the publicly traded stocks. Internet Capital Group owns stakes in 61 companies, and only 6 of these companies are public. Of the 55 private partner companies, 9 have already filed to go public.
I would be remiss if I didn't mention that Internet Capital Group also has some $1.3 billion in cash (and no debt) sitting on its balance sheet, ready to deploy where it sees the greatest chances to profit. Considering ICG's public shares, its stakes in numerous private companies, its cash on hand, and, perhaps most importantly, its ability to create value down the road, Internet Capital Group's valuation today actually makes quite a bit of sense.
The bottom line is that Internet Capital Group is the best proxy there is for the overall B2B industry, and B2B companies of all shapes and sizes have tremendous opportunities for growth ahead of them. As one of the top dogs in one of the most explosive new markets to be created in recent memory, the company has several durable competitive advantages that should allow it to continue to realize mind-boggling returns on its invested capital.
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