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.