Cyber Scrambling for Survival.

ECompanies Exiting Incubation Business

It was a simple concept with a simple slogan. Start a business with a lot of money that would hatch ideas for companies to leverage the awesome power of the Internet, attract outside investors, go public and make everyone rich.

So began eCompanies in early 1999, with the motto "Where Internet Companies Grow."

Not anymore.

Eighteen months later, despite boasts of creating one company a month, none of eCompanies' offspring has gone public and some have simply died. And the Santa Monica company is getting out of the Internet incubator business.

ECompanies recently laid off 10 of its staff of 60 and halted all operations geared toward starring online businesses. Its remaining employees will devote their energies to a recently formed "wireless incubator" developed in partnership with Sprint Corp., or to the companies still under its umbrella.

The assertion that eCompanies is abandoning its Internet incubator "is overly dramatic," said company spokesman Christian Dunning. "A more appropriate characterization is we're suspending building new businesses in the Internet incubator."

Through Dunning, company founders Jake Winebaum and Sky Dayton declined to comment. But clearly the two have realized that starting several companies from scratch and quickly creating value isn't a viable business model anymore.

"As far as (eCompanies) goes, it's a case of unfortunate timing," said Brad Jones, managing partner at Redpoint Ventures. "The business ended up being very tough as they were bringing some of their companies to market."

Others were less gracious about the company and its prospects, arguing that the idea that a number of viable online businesses could be created from executive brainstorming rather than from building upon the plans of people working out of their garages was doomed to failure.

"You need real entrepreneurs," said one local venture capitalist. "L.A.-based incubators were hatching business concepts rather than driving towards a technological advantage that made things better, faster or cheaper. There were stupid ideas getting funding."

Early 1999 was a heady period in the world of Internet investing, a time when it seemed as if anyone with enough money--and there was plenty to go around --could transform a bright idea into a multimillion-dollar business.

Aiming high

Dayton, who founded Internet service provider EarthLink Inc. at the age of 22, and Winebaum, former head of Walt Disney Co.'s Internet division, decided to start their own company while eating enchiladas at a Mexican fast-food stand in Burbank. They poured $20 million of their own money into eCompanies, and with a healthy P.R. blitz, they set about to emulate Idealab, the Pasadena incubator headed by Bill Gross.

At the time, it seemed that creating an online business was simply a matter of jumping on a cool idea, like eCompanies' first offering eParties, which Dayton came up when thinking about how, to plan, his 28th birthday party.

"An idea can come whenever, in the shower or surfing or shopping," Dayton told the Business Journal last year, talking about how he dreamed up the idea for eParties. "This is clearly a huge market that's untapped that the Internet can move into."

This rush to fund e-businesses also enabled eCompanies to start its own venture capital arm, raising $160 million from institutional investors. Combined, the incubator and the VC firm quickly had more a dozen fledgling companies under its roof.

"It's a symbol of the times that they were able to get as far as they did," said another prominent venture capitalist.

But eParties soon floundered, and its remnants were sold to eToys Inc. for a song earlier this year. As the stock market grew increasingly harsh toward Internet concept ideas, it became harder for eCompanies to sustain its creative pace.

"Part of what they learned was to scale back from making one company a month," Dunning said. "Originally, speed was essential when there was so much venture capital money out there. But speed for speed's sake is kind of ridiculous."

That is the kind of tune that experienced industry watchers have been singing for some time.

Sustaining momentum

"The build-to-Hip incubator model was created on a proposition we know now has no legs," said Tyler Orion, executive director of the Pacific Incubation Network, an organization of non-profit and for-profit incubators. "Getting a company to launch is one piece of the puzzle. Helping that company sustain itself is what incubation is all about."

That now seems to be the plan for eCompanies. There are six companies under the incubator and another 14 under the venture capital enterprise, which has been combined with New York investment firm Evercore Partners. The two most prominent of these fledglings are online animator Icebox.com and business information site Business.com. Icebox just sold an animated series to Fox Broadcasting Co., and Business.com recently raised $61 million in its third round of financing, but it has been criticized for its ad-based revenue scheme and unimpressive site design.

Winebaum will continue to devote much of his time to Business.com, while Dayton will spend his energies toward nursing the new wireless incubator, which has three early-stage companies. Wireless applications for the Internet have certainly captured the interest of many investors, and if eCompanies can slowly nurse these companies to fruition and ride out the downturn with its other hatchlings, it may yet be a success.

"They have talent, they have money and they have a more mature awareness now of how complex the model is," Orion said.

It's clearly not a path for the faint of heart.

"When the market is against you it's hard for anybody to build successful companies," Redpoint's Jones cautioned. "The question is making sure you've got staying power to let the winners prove out and be around for the next time. You can't get into this business and a year later be proven successful."