By Paul Larson (TMF Parlay)
May 3, 2000

Internet Capital Group is indeed a volatile stock, but so have been many of the Internet's dominant companies (and best investments), such as America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> and Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %>. Just because a stock is volatile doesn't mean it isn't worthy of Foolish consideration.

Let's tackle the issue of Softbank and CMGI entering the B2B fray. Both companies may have higher market capitalizations than ICG, but most of their assets remain in the consumer realm. ICG has nearly 100% of its investment dollars working in the B2B realm, and its network of B2B partners is second to none. Don't believe me? Compare CMGI's roster to ICG's roster and decide for yourself. (Don't get me wrong. CMGI is a strong keiretsu, but it's just not a B2B specialist.)

And Softbank? Hmm, didn't they just decide to partner with ICG's star pupil to form VerticalNet Japan? Wonder why Softbank would do a goofy thing like that?!

As the clear leader in the B2B incubator space, I think ICG has a distinct competitive advantage. By having the widest network of B2B companies, it should be able to attract the best investments. I know that if I were an entrepreneur trying to grow my B2B business, I'd be knocking on ICG's door instead of some no-name, no-partner incubator. The network effect does apply to the incubator industry.

I'm also a little confused why Bill has this fixation on the lack of revenues at ICG. For better or worse, Internet Capital Group is much closer to an investment fund than it is an operating company. Should we really penalize the company for being a buy-and-hold investor, preferring to keep its investments instead of "flipping" them to create "revenue"? I think not. ICG may very well see the market value of its portfolio quadruple in the next year without recording an incremental dime in revenue.

I also find it a bit hard to believe that Bill actually used some boilerplate warning in his bearish arguments. Anyone who's read any 10-K filing or prospectus gets bombarded with warnings. ("If the sun explodes tomorrow, we may not be able to attain substantial market share.") Bill's point is true that the barriers to entry are fairly low and the competition will increase in B2B, but that doesn't change the fact that most of ICG's partners were first and are leading their respective market niches. It's just like in the consumer Internet realm that eBay and Amazon are competing in -- the barriers to entry are low, but the barriers to leadership and survivability are very high.

I'd also like to point out that ICG is not "only designed to bring companies public." Bringing adolescent companies public is certainly part of the modus operandi of any incubator, but there's a whole other side that Bill is ignoring. I'm talking about catalyzing growth, sharing market intelligence, encouraging collaboration among its portfolio companies, etc. As the premiere B2B incubator and network hub, Internet Capital Group is poised to do this better than anyone else.

Will the big guns in any given industry just set up B2B exchanges of their own, bypassing third-party market makers like ICG's partner VerticalNet? That's certainly a probability in industries where there are only a handful of major players, like the automotive and aerospace industries. Where B2B companies will be able to add the most value are in industries that have a great number of suppliers and buyers, and there is still an awesome opportunity for B2B firms of all types to increase efficiency and create value.

In short, the advantages of B2B are real, and so is Internet Capital Group.

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