From Sunday's Chicago Tribune:
chicagotribune.com
Pressed for time, Divine
realigns
By Barbara Rose
and Rob Kaiser
Tribune Staff Writers
August 20, 2000
It's a good thing there aren't any nameplates on
managers' doors at Mercantec Inc.
Since February, when Divine Interventures Inc. bought
40 percent of Naperville-based Mercantec for $23.5
million, four new executives have been installed and at
least as many have left.
Divine's team slashed Mercantec's marketing budget and
pushed the firm to strengthen its ties with big Internet
service providers that can help it sell its
electronic-commerce software to small and midsize
businesses.
"They are the most active venture capitalists I have ever
worked with," says Tom Lewicki, Mercantec's former
chief financial officer, who runs a consulting practice in
Champaign.
Divine can't afford to be passive.
The year-old company is among the boldest of hundreds
of incubators that sprang up around the U.S. during last
year's Internet euphoria, when investors snapped up
shares of companies with scant financial histories.
Now, with Internet stocks off more than 50 percent
since April, Divine is trying to persuade investors that its
business model will work, even in a market that is
soured on risky start-ups.
That won't be easy.
Only a handful of the 53 companies in which Divine
bought stakes are profitable, and two-thirds are
expected to continue losing money next year.
Divine is cutting expenses and preparing to let some
start-ups fail while pushing more promising ones as
quickly as possible toward mergers, sales or public
offerings—at higher valuations, it is hoped, than those at
which Divine invested.
"We are very realistic in that some of [the companies]
will survive and some of them won't," founder and chief
executive Andrew "Flip" Filipowski told analysts last
week. "It becomes clearer over time which we will focus
on and which we won't."
There is little time to waste.
Divine raised a total of $338 million from public
investors and big corporations last month enough to
meet its working capital and cash needs for at least 12
months.
But Divine needs to prove quickly that it can produce
winning companies in order to build credibility and boost
its stock price so that it can return to the market later for
more money, people who follow the company say.
"We believe there's some great companies [in Divine's
portfolio]," says local venture capitalist George Garrick,
one of Divine's 43 directors and former CEO of Internet
marketer Flycast Communications Corp., now part of
CMGI Inc.
"But until some of them start going public with
multibillion valuations," Garrick adds, "we're not going to
know."
So far, investors don't share Garrick's confidence.
Divine's stock has trended down to the $7 area since its
$9 per-share offering July 12.
That's barely higher than the $6 price (adjusted for a
6-to-1 reverse split at the IPO) paid last year by early
private investors—including a high-profile board of
Chicago CEOs who backed Filipowski's vision for
building a powerful Internet consortium.
Employee option prices range from $4.50 to $13.50,
split-adjusted, which means that recruits who were
banking on a windfall when Divine went public are
sorely disappointed.
Nonetheless, backers such as San Francisco-based
brokerage Robertson Stephens, the lead underwriter for
Divine's IPO, view the stock as a good long-term
investment worth as much as $35 per share, based on
the potential market value of Divine's holdings.
Filipowski's team has been working with Divine's
companies to revamp their business plans in light of
investors' demand that start-ups offer convincing
timetables for becoming profitable.
For many firms, that is requiring a big adjustment from
last year, when venture capitalists favored spending
aggressively to gain advantage in the race to capture
customers and grow sales.
"We're concentrating on plans that allow [companies] to
break even in the shortest amount of time … even if it
means sacrificing some on the growth," Filipowski told
analysts.
Divine also is looking to combine complementary
companies into bigger enterprises that can be profitable
faster. One scenario calls for merging Divine's Internet
services providers—firms offering Web design, strategy,
public relations, real estate and other services—into a
single company called Charisma.
The mood at Divine's wide-ranging companies,
meanwhile, varies as widely as the companies'
prospects.
At Web Design Group in Chicago one of Divine's
profitable companies—the staff has more than doubled,
to 60, since January.
"I think everyone is cautious about the stock right now,"
says Charles Stevenson, chief operating officer, who
started the company five years ago in an apartment. "We
wish it had done better."
Others are bluntly pragmatic.
"We wanted a couple of things [from Divine] some cash,
to solidify our management team and to move from
working with start-ups to mainstream clients," says Nate
Weersing, founder and CEO of Westbound Consulting
Inc., an integration services firm with programmers here
and in India.
"Would it be great if Divine were the greatest thing since
sliced bread? Yeah, but we got what we wanted. We
made the [partnership] work."
At Mercantec, which reported a slim $1.5 million in
sales last year, Divine's revamp left hard feelings.
Several former employees say the company needed
better focus, but that they felt bowled over when
Divine's recruits took charge.
"A lot of them didn't know a thing about software or the
Internet," says a former employee. "They were a little
heavy-handed."
Mercantec CEO Andy Parker disagrees. "It's not like
[Divine] pushed people down our throats," he said. "The
company was a little screwed up and we brought in
some people … who could help fix it."
At Closerlook Inc., a growing digital strategy and design
firm with 1999 sales of $7.4 million, investment bankers
are starting to call on founder and CEO David
Ormesher—a sign the company may be considered a
promising IPO prospect, though Ormesher is in no
hurry. Divine invested $17.5 million in February for a 43
percent stake.
Motorola Inc. joined Divine in an $18 million investment
in Perceptual Robotics Inc., which offers software that
allows Internet users to operate remote cameras. The
4-year-old firm recently moved to Chicago from
Evanston with the help of Divine's majority-owned real
estate services firm, Dotspot.
Unlike companies such as Mercantec, Perceptual
Robotics is gearing up to spend more on marketing.
"We could become profitable relatively easily by cutting
back the rate at which we're investing," says CEO Paul
Cooper. "For us, it's really a question of how much we
want to invest in being the leaders in our market.… We
plan to invest to grow for at least another 18 months."
As for Divine's overall prospects, insiders say
Filipowski's team is convinced the company's portfolio
includes at least a few bright stars.
"That's certainly what investors are hoping for, those
home-run hits," says Paul Bard, analyst at Renaissance
Capital in Connecticut.
Bard's firm declined to invest in Divine's IPO, but he
believes incubators as a class have big potential.
Says Bard: "All it takes is a small number of really strong
investments in one of these companies' portfolios to
really do well." |
