Internet Incubators Rethink Strategies, Become Choosier

Internet "accelerators" have hit a speed bump.

In recent months these accelerators, so-called because their mission is to take nascent Internet companies to market quickly, have been popping up like weeds from Boston to San Francisco. The accelerators are essentially souped-up business incubators offering office space, funding, technology infrastructure, and management expertise to young Internet companies.

By ELEENA DELISSER
Staff Reporter of The Wall Street Journal.

But the financial roller coaster of today’s stock market is forcing some of these accelerators to rethink their strategies. When Katalyst, a Radnor, Pa., accelerator, opened in September, it planned to work with Internet companies in various stages of development, including the seed stage. Now because of stock-market volatility in the technology sector, Katalyst won’t consider working with newly hatched companies, whose leaders come armed with only a dream and an idea.

"There are many deals that we’re passing on that are very early stage and they don’t have the long-term revenue potential. There’s no way we’d get involved with them," says Jonathan Kalman, Kataylst’s chief executive officer. "We’re looking to have more of the idea fleshed out, more of the management team and capital together."

The accelerators also are being more selective about the kind of Internet companies they want to handle. E-tailing concepts, for example, have fallen out of favor since several publicly traded Internet retailers have stumbled and their stock prices have taken a hit as a result.

Instead, these accelerators say they are setting their sights on developing Internet offshoots for Old Economy companies. For example, Katalyst is working with eRisks.com, an online resource for "risk professionals" such as finance chiefs, credit officers and actuaries. ERisks.com is the Internet unit of a subsidiary of Oliver, Wyman & Co., a risk-management consulting firm in New York.

Working with these established businesses is attractive because they already have customers, distribution systems, a corporate infrastructure and working relationships with other companies. What they lack is a meaningful Web presence.

"You’re seeing a tide of brick-and-mortar business move to the Internet," says Robert Frasca, CEO of Internet Venture Works Inc., of Waltham, Mass., who calls these new start-ups "dot bam." "That’s where the investors are going to be putting their money. Gone are the days where a company can spend $30 million quarter to quarter building a brand nobody’s heard of."

But the uncertainty that now exists also means the hefty valuations some young concerns were getting from venture capitalists just a few months ago could be a thing of the past.

"Before, you’d get people who came in the door and they’d say, ‘Hey, we’ve got this concept and the valuation is $10 million.’ Now it might be $5 million," Mr. Frasca says hypothetically.

But both Messrs. Frasca and Kalman say the decline in valuations is healthy, predicting that it will flush out poorly conceived business ideas. Both men believe more effort will be made to identify and nurture companies that have sustainable business models where revenue and profits aren’t afterthoughts.

"None of us could see this correction that has happened," says Mr. Kalman, the Katalyst executive. "It’s a reminder that you have to be in for the long haul."

Small companies lag behind their big-company brethren in surprising ways when it comes to their board of directors.

While big companies have been taken to task for their low numbers of female directors, the picture remains worse at small to midsize companies, according to a new study by the Segal Co., an employee benefits and compensation firm.

Only 4% of the directors were female at small to midsize companies, compared with 11% at large companies. This is the third year the boardroom study has been done and the numbers of female directors have remained very small. The continuing meager representation is puzzling considering the ranks of seasoned businesswomen and female entrepreneurs has expanded greatly in the past decade.

Howard B. Goldsmith, a Segal vice president, says, "I’m disappointed in both the large and small companies for the degree to which they represent women on the board."

Another way in which small- and large-company boards differ is that small-company directors are more likely to receive larger initial stock option grants. The median initial option allotment at small-to-midsize companies is 10,000 shares, more than three times the 3,000 shares awarded at large companies. Once they are on the board, these small-to-midsize-company directors can expect to get an annual stock option allotment in the neighborhood of 4,000 shares, compared with 2,500 for large-company directors.

As a result, among companies that award stock options, the median number held by directors for small-to-midsize companies was 26,000, more than five times the median number of options held by directors of large companies.

Small companies "realize the competition for talent at the board level so they need to up the ante a little bit," Mr. Goldsmith says.

Of course, directors at large companies can take home more compensation once director fees and other benefits are factored in. But small companies are attempting to do better on that front. Director retainer fees for small-to-midsize companies increased 25% to $10,000.

ODDS AND ENDS: Looking busy? Internet users say the Web is having a strong impact on how they work and how well. In a new survey conducted by Greenfield Online, a market researcher, 13% of respondents say access to the Internet makes it harder for them to stay focused at work and 9% say their job performance has declined as a result.

Perhaps it is because they are spending so much time obsessively checking their e-mail. Men are twice as likely as women to click open their e-mail more than 15 times a day. But this compulsion is a young thing. About 21% of workers under the age of 25 check their e-mail more than 15 times a day, compared with only 1% of workers who are 55 years or older.

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