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News Analysis: Dot.Coms Getting Bred By Scient: Will Scient Spawn Into a Giant or Will Andersen Have the Edge?

Written By: R. Krause
Published On: March 15 2000

News Analysis: Dot.Coms Getting Bred By Scient: Will Scient Spawn Into a Giant or Will Andersen Have the Edge?
E. Robins - March 15th, 2000

Event Summary

Scient (NASDAQ SCNT) announced in February that it intended to act as an incubator for dot.com companies through its Systems Innovation services. The accelerated programs would mean a rapid growth in the number of companies that Scient helps, and potential continued partnerships with them. This could establish for Scient a network of companies with a mutual parent: Scient.

However, the heat is on as Andersen Consulting is pouring $1.2B into its campaign to accelerate dot-coms to IPOs, and other vendors join the already expanding market to attract dot-coms.

Market Impact

SCIENT is a leading Digital Business Service Provider (DBSP) that assists businesses in becoming digital (read web) enterprises. It describes itself as an "eBusiness Systems Innovator". It's clients include Chase and First Union - established Brick and Mortar (B&M) financial companies - and dot.com's.

Scient is betting the dot.com's it incubates will become long term partners as they grow and mature By using an incubator approach, Scient can well propel these dot.com's to a successful business launch - after all, it did it itself not too long ago (1997).

The incubator essentially provides a low cost environment where business planning is assisted by the incubator's dedicated staff, and business launch occurs with minimum overhead. The key is the ability for the incubator to provide the fundamentals to building a business - business model development, business planning, financing, office facilities, and launch assistance. Once launched, the baby should at some point grow big enough to support itself and leave the incubator for the real world. Its empty nest is then ready for another bird.

Scient is also well placed by being in the heart of U.S. IPO country - and geography can still count. An analysis of 3,169 U.S. IPOs shows that about 21% of all IPOs originate in California, and the west as a whole contributed nearly 32% (see figure). The second largest is the Northeast where NY and MA account for 16% of the 25% of IPOs. This is a good indicator of the distribution of the IPOs with a confidence of order 97%.

It is also interesting that the total from the rest of the world where Andersen et. al. play accounts for slightly under 10% of all IPOs on U.S. exchanges (365 out of 3,534). Canada, Israel, the UK and China (23 from the mainland and 10 from Hong Kong) have respectively the largest IPO volumes for single countries outside the U.S. These figures are indicative (confidence level is between 85%-90%) of the creation rates of technology companies in these countries. It is notable that China exceeds recently democratized Russia by 10:1.

From its own history, Scient's culture is geared for dot.com startups, and has had its main strength is in digital strategy. These two background building blocks give it an advantage over legacy companies like Deloitte Consulting, PriceWaterhouse, and Andersen Consulting. However, the latter three should not be overlooked. These gargantuan legacy vendors have established venture capital funds for dot.com's, or investment programs which leverage partnering relationships with the technology upstarts (oops, I meant startups). They also have reputations that can be used for credibility with clients.

Andersen Consulting has created a global network of 17 launch centers for dot-coms, largely, it seems, aimed at the B2C side. Andersen however is not so liberal with trust - it requires financing and good management to be in place prior to taking on the company, so it isn't a startup incubator. I'd also bet that you need globules of money - some Andersen consultants can cost $700 an hour or more. Further, the locations of these incubators, as one might expect, are in the hotbeds of IPO generation.

It should be noted that Scient's offering is a true incubator, and willing to go the mile of arranging funding, business planning, etc. Another player in this area is Xcelerate, which is a much smaller organization than Scient, but has the basis for providing lower cost engagements in its e-Business Supercenters. The intent in these Supercenters is to provide fast implementation rather than detailed and careful business planning and financing.

IXL also has a program directed at dot-com's. Ospry and NEXGENIX, two other DBSPs derive about 50% of their revenue from dot-com launches. Successful dot-com launches typically take about 90 days provided sound business plans and business models are understood by all - a fact sometimes related to the culture match of the DBSP and the new business management.

These companies - amongst others - recognize the enormous potential of startups to earn money on NASDAQ, where market caps run up to (end even beyond) 50 times revenue. While this high market cap markup persists, you can bet that programs like Scient's will increase (95% probability) in number, and others in the marketplace will follow, maybe more cautiously. Proxicom, for example, provides a discount on its services to dot-coms in return for what amounts to sweat equity, but no incubation facilities per se.

As yet, there seems no sign that the stock market markup bubble will burst (I rate the current probability of it bursting badly at 1-2% over the next eighteen months, though there will be some major ups and downs). The potential of the Internet for business is deemed so vast (in the trillions of dollars) that the current losses incurred by Internet companies (as well as the high investment costs) are bets against at least some of these dot.com's becoming the IBM's, Microsoft's, and DELL's, and HP's of the future. Scient's program will make at least some other players ponder.

As well, one should not overlook the potential of incubating a baby. As baby grows it can start making money, and one would guess go to daddy or mommy for advice. In turn, if Scient plays its cards right, it will develop a network of businesses in which it has investments. This could prove a bigger and more attractive play than its own current (known) business model.

That's roughly how Mondragon (see www.mondragon.mcc.es/ingles/ ) started out - a cooperative with about a dozen young guys supported by a local priest who had the vision and raised love money from the town of Mondragon's people and businesses. They used their culture to create similar-cultured and networked industries that today have well over 40,000 members spread over hundreds of businesses (with, I might add, success rates of well over 90% in creating and launching and 'surviving' those businesses compared to around a 75% failure rate of current internet spawned businesses). (Mondragon is the world's most successful Cooperative movement. It began in the Mondragon region of Basque country in Franco's 1950's Spain.)

The prey of dot-com start-ups by established companies - young and old - will definitely heat-up, though good business sense should prevail most of the time. Vendors currently draw between 30% and 50% of their revenue from (mostly) funded dot-coms.

Vendor Recommendations

Vendors should be aware that the market competition is stiffening up for dot-com business. Having programs in place which provide smooth processing of acceptable business plans are essential in attracting this type of business.

Growing a network of client companies is an opportunistic method for future revenue growth and annuity relationships. By being selective, it is possible to breed interrelated businesses with potentially very high long-term business success rates.

User Recommendations

If you've got a good idea, and can stand the pressure, dot-com'ing is getting attention, and competition to support you should heat up in the market place (95% probability). You should look around and check out what Service Providers can do for you. You may be surprised by the responses. If you're well financed and well structured, and come from a B&M, then take a look at the larger firms. Just remember, they come with a name and price tag to match. It depends if the name is what you want more than the price tag.

The lessons of Mondragon are that a culture fit with a good all-round mentor and good planning leads to a high success rate. But you still need the business and technical savvy to carry it off. Mondragon was driven by ideals and self-earned hard cash and love money; this marketplace is driven by other people's money, and they will want a return - a major one - at the end of the day. That'll include anyone you choose as a mentor. The bottom line is that the right partner is worth more than money.

Glossary

DBSP - Digital Business Service Provider

IPO - Initial Public Offering

B&M - Brick & Mortar (non e-business with established building facilities)

Dot-com - an Internet driven company using largely the Internet as a means to do business.

 

 
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