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High stakes as dotcoms offer equity, not cash

LONDON: Cash-strapped Internet companies are paying their way through the European technology boom with that most precious commodity - an equity stake, offering big companies a slice of their future prosperity.

Despite million-pound venture capitalist backing, dotcoms are struggling to keep on top of spiralling marketing costs as well as spending heavily on logistics and the infrastructure of their Web sites.

With so many competitors seeking to grab a share of the market and venture capitalists estimating that start-up costs have soared fivefold in 12 months, media owners are making the early running, grabbing a portion of start-ups by offering them lucrative media exposure.

Britain's Channel Five television, owned by Pearson Plc, United News and Media and Germany's CLT-Ufa, said it aimed to secure five equity-for-airtime tie-ups in 2000.

"We are hoping to bring each Internet venture into the consumer's eye and make it successful," said James Burgon, head of new business at the station.

"We benefit from the equity that we hold increasing in capital value. It is a bit of a gamble, but based on the U.S. model it is a proven gamble," he added.

Broadcasters and poster companies are being enticed by potentially huge increases in stock values if they pick a winner, mirroring the model of Internet and media convergence in the United States.

NBC has an equity stake in more than a dozen online ventures through its NBC Internet Inc., including the women-oriented site iVillage and the online community Talk City.

Burgon, who has received 20 inquiries from interested Internet companies in the last three months and says he gets on average another five each week, said that the risk of the Internet companies failing despite better marketing opportunities was slim.

"Thank goodness we are seeing this sort of thing happening in the UK," said Serena Doshi, managing director of online community liv4now.com, in which new media agency Hard Reality took a small stake in return for redesigning its Web site in 1999.

"I think it makes sense from both sides," she added.

"They don't have to pay any cash for that investment - for a venture capitalist to get the same equity stake would take millions."

Dotcoms can also trim costs by offering a slice of their future prosperity to advertising agencies such as M&C Saatchi, whose eM&C division was set up in October 1999 with the aim of taking a mix of equity and cash to produce vital brand-building campaigns, subject to an impressive business plan.

"We know that in the early days, new brands don't have the cash to pay as well as they might, and we think there will be huge upside with those brands that are successful," said Nick Hurrell, M&C Saatchi chief executive and chairman of eM&C.

The offshoot, whose clients include late deals specialist lastminute.com (www.lastminute.com) and upmarket clothing retailer dressmart (www.dressmart.co.uk), is receiving up to 10 approaches a week from Internet companies.

More than 70 e-businesses spent more than 12 million pounds ($19.39 million) on poster advertising in 1999, compared with one million the previous year, according to poster monitor Outdoor Connection.

Other media companies already have small stakes in Internet operations, including BSkyB and United News and Media.

Privately-owned poster giant JC Decaux, which owns Mills & Allen in Britain, said it was looking into equity stake tie-ups, but rival Maiden Group Plc was less keen on the idea.

"There certainly is going to be a big increase in the amount of dotcom business but we'd rather have them as paid-for advertisers than trying to pick which are the winners," said managing director Francis Goodwin.

BEHOLDEN TO MEDIA GIANTS

There is also dissent among some Internet firms who shrink from the idea of being beholden to media giants.

Easyshop.co.uk said it was constantly being approached by media owners interested in taking a stake in the online underwear store, but talks have always failed when it comes to placing a value on the company.

"Media owners can give what appears to be very high value airtime and space that frankly, if they don't use is worth zero to them...and they can get large amounts of equity for it," chief executive Michael Ross told Reuters.

"The best way to establish your value is to get an external round of funding, which means you can raise the cash and can probably pay for the promotion yourself," he added. Ross forecast a future where media owners would take advertising for dotcoms only if they were paid with an equity stake, or restricted their dotcom advertising to companies they already had an interest in.

Naive start-ups can also lose out by offering too large a stake for too little in return.

"Either way the advertisers win if they're getting cash or they are getting equity," he said.

Burgon at Channel Five countered that it was in the best interest of media owners to offer dotcoms a good deal.

"Clearly they will not benefit from us giving them a poor airtime package and therefore we won't benefit through our shareholding."

And what happens after the media company has invested and the start-up's value has soared? Burgon said there were two options - "in and out", where it sells its stake in an Initial Public Offering (IPO), or a long-term strategic tie-up, via programming and the broadcaster's own Web site.

"That depends on how successful a trading joint venture would be as well as the equity stake," Burgon said.

Hurrell at eM&C said that investors with serious money to pump into the sector need not fear them.

"We are not becoming venture capitalists or managers of other people's business, we are simply aiming to be partners," he said.

Doshi at liv4now sees the trend blossoming. She points to the United States, where even accounting and law firms are eyeing the main chance to offer their services before a start-up can properly afford to pay its way.-Reuters