The Internet's Money Machine

What's the most valuable product you can manufacture? Supercomputers? Stealth bombers? Beanie Babies? David Wetherell, 44, has figured out how to fabricate the dearest items in all the land: stock in Internet companies. As chairman and CEO of CMGI, based in Andover, Mass. Wetherell has melded together the trends and technologies of the Internet into a virtual initial-public-offering factory that analysts expect will churn out perhaps half a dozen highly lucrative offerings in the next 12 months.

There is nothing mysterious about Wetherell's business model: find promising Internet company, buy stake, fund growth, provide guidance, sell company; or take it public and pocket billions. (It's one that is also widely implemented on Sand Hill Road in Menlo Park, Calif.--the Main Street of venture capitalism.) But what has set Wetherell and CMGI apart has been his phenomenal success. His early investments in Lycos, Booklink, GeoCities, Critical Path and a slew of other Internet companies have established Wetherell as an uncanny picker of soon-to-be-ripe Internet fruit.

If you are trying to figure out how Internet companies will ultimately figure in the economy--Will they crash and burn? Or soar even higher?--CMGI is a good place to start. It is a company very much in the middle of the clash between the old and new market models, and between old and new media, that is occurring all over Wall Street. To smitten Internet investors today, profits don't matter; it's the new economic order of the future that counts. So buying a company's stock on the basis of profits is irrelevant. These investors look only to the next harvest of CMGI's hot IPOs, which is why they have driven the company's share price from $17 this past October to a high of $330 two weeks ago.

That kind of thinking has created a huge gap between the valuations of Internet stocks and the rest of the world. "It can't last forever," says Intel chairman Andy Grove, whose company owns 8.6% of CMGI. "The Web world has one set of rules and the rest of the world has another." In other words, something's got to give. Last week some of CMGI's investors took their money off the table, and CMGI traded as low as $185 before bargain hunters--and only in the Net world is $200 a share a bargain--drove it back up. It finished the week at $259.

Wetherell can't believe that anyone is questioning these never before reached values. He says that not only is the Internet not a high-risk investment, but it is also "absolutely the safest bet I know." He has been making this wager since 1994, when CMGI (then known as College Marketing Group) was still a company that hawked textbooks to college professors. He took the firm public and used the proceeds to invest in then obscure companies such as Lycos and Booklink--the latter of which he would later sell to AOL for $70 million. The soft-spoken, laid-back Connecticut native and Ohio Wesleyan University math major has never looked back, riding the trend to a personal net worth of $2.5 billion. Regrets? He passed up a chance to invest in eBay, the wildly successful Internet auction house. Wetherell figures that oversight cost him $4 billion.

Wetherell sees Net company valuations through a mathematical as much as a financial lens. He loves to cite Metcalfe's Law of Connectivity as the driving force behind his approach. The law, set down by Robert Metcalfe, founder of 3Com, states that the value of an interactive network--such as Lycos, Yahoo or AOL--is a function of the number of people attached to the network; and value increases exponentially when another person comes online. Thus a network of 10 people is at least four times as valuable as one with five. What this means is that every extra AOL subscriber is worth more than every extra cable subscriber. How much more is the umpty-billion-dollar question, because that new customer can be marketed to, advertised to, sold to, and may even be the impetus for a whole new form of commerce that will make the network more valuable still. "The growth is incredibly viral," says Wetherell, using one of his favorite words. "Online companies tend to grow along Metcalfe's Law. We have companies growing at a rate of 1% a day. The Internet is growing at a rate of 3% a day. If you can't make money in this business, then you might as well go pick oranges."

Wetherell's Internet world view is getting its fiercest test in a takeover tussle with Barry Diller--a real-economy mogul if ever there was one--who has made a bid for Lycos, the Internet portal that Wetherell financed and of which he owns 18.5%. While Diller and Wetherell agree that the partnering of Lycos' new-media assets and Diller's traditional media hodgepodge of USA Networks, Home Shopping Network and other film- and television-production interests makes strategic sense, they disagree sharply on the value Diller ascribes to Lycos.

In the world Diller comes from, you don't pay a premium for unprofitable businesses. But in the Internet economy, where almost nobody has made a profit yet (and certainly Lycos hasn't), that hasn't kept Yahoo from shelling out $4.35 billion for GeoCities, or stopped the Internet portal @Home from paying $6 billion for Excite--both deals made at hefty price premiums. Of course, they used their richly priced shares as currency. Diller's offer to merge part of his USA Networks with Lycos to form a new company, of which Lycos would own 30%, values Lycos at approximately $85 a share, substantially less than the $130 it was trading at when Diller made the offer. Wetherell, after initially supporting the bid, changed his mind, withdrew from the Lycos board and pledged to vote his shares against the deal at a shareholders' meeting next month.