Incubator as Intermediary

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The New New Thing?

The Web M&A Update        Volume II, Issue 34, Oct. 31, 2000
___|INCUBATOR AS INTERMEDIARY |__________________________
While some financiers are playing internal yenta, at least one incubator has gone the next step, transforming itself into an M&A brokerage of sorts.  
Santa Monica-based incubator NetCatalyst is positioning itself as a "liquidity engineering" outfit that takes a hands-on approach to fix sellers' business models before taking them to the auction block. Its activist role might well be dubbed "M&A accelerator."
NetCatalyst believes activism is necessary. "You can no longer just go out there and sell an Internet company," says NetCatalyst Managing Director and startup veteran Riggs Eckelberry, "You have to DO something in order to get a decent valuation."
In the dot com battlefield, Eckelberry sees NetCatalyst as a field hospital for companies that still have some life - and cash - left. "VCs and incubators can only handle one or two of their wounded at a time, so in a way we're an outsourced resource for them, " he said. "We'll be their extension into that company… We identify what's needed and have a strong CEO-level team come in and take immediate action while we pursue opportunities."
Is NetCatalyst just engaged in high-end window-dressing?   No, says Eckelberry.  "It's like shocking a pool, your only option is to shock it when it gets green and gross." And, he added, "It's a lot more than what most merchant bankers do."
For example, NetCatalyst might to an instant makeover of a client's customer relations management system to goose revenue from added upsell or cross-sell of products.
The firm has a half-dozen active engagements, Eckelberry said. In one non-M&A- related engagement, NetCatalyst worked with Email Shows, a dot com that enables users to eavesdrop on fictional email exchanges between actors from Hollywood features - an effort to "monetize" fan clubs. For this company, NetCatalyst acted as virtual business development resource, bringing them deals with a number of Tinseltown fan sites.  In another deal earlier this year, NetCatalyst helped roll up about three dozen music fan sites into a portal for music fans called     
NetCatalyst doesn't have its own fund but rather relies on funding partners on an as-needed basis.  The firm has three revenue models.  For active advisory work, which in many ways resembles traditional venture capital role, the company usually receives equity.  When it sends in a 'strike team' for two to four months, NetCatalyst usually asks for a hybrid fee-plus-incentive deal.  An M&A deal works on a success fee basis with fee commensurate to the amount of "liquidity engineering" that takes place.    
Netcatalyst emerged out of the union of two incubators run by technology executive Ron Posner and former financial executive Cris Karkenny. Eckelberry said it is the union of Karkenny's financial skills with Posner's operating experience that gives NetCatalyst an activist edge.
"Financial organizations can do great deals, but they are powerless when it comes to dealing with a broken company," he said.
Posner is an active investor and former CEO or senior executive at such companies as Peter Norton Computing, WordStar and Ashton-Tate.   Karkenny is former treasurer of Quarterdeck Corp. and Eckelberry started an Internet direct marketing company and had previously helped sell several Internet companies.
Eckelberry says he believes the worst of the Internet auto wrecks are over and said he plans to add buy-side services to the roster next year "Our role in 2001 is to very clearly be the agent for several rollup platforms," he said. "Most companies don't have the internal bandwidth to do it. We are there to manage the process end to end."     
NetCatalyst is aggressively creating offices and partnerships around the world soas to enabling portfolio companies to expand or merge globally. It has partners in England, France, Italy, Sweden and Asia and recently took a stake London-based Mindship, a networking outfit that attempts to link global Internet accelerators to aid in cross-border collaboration.
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