Like so many Net companies, the Wayne, Pa. holding company Internet Capital Group was a high-flyer in 1999. Going public that August at a split-adjusted price of $6, ICG jumped in one day to over $12, then climbed to $212 by late December.

But ICG, which now has stakes in 80 business-to-business Internet companies, has fallen with the Net group this year, recently hovering around its $6 IPO price. In mid-November it announced a 35% staff cut. Some Wall Street analysts have downgraded the stock.

One of ICG’s biggest boosters, Merrill Lynch analyst Henry Blodget, turned on the company in a mid-November report to investors, accusing it of a “frenzied acquisition pace” that caused it to invest in companies at excessive prices. ICG, he said, had “bloated corporate overhead and a cash burn that could only be sustained in the most bullish of markets” – which, of course, does not exist today.

ICG lost nearly $264 million in the third quarter, and its chief source of new funds, IPOs for its partner companies, has dried up. From the outside, things don’t look too good. But how do they seem from the inside?

Beth Kaplan, an ICG managing director for operations, told Wharton students Nov. 30 that ICG’s future is not as grim as it might appear. The company has recently gone through an extensive restructuring, expects to retain most of its portfolio of companies and should rebound if market conditions improve so that some holdings can be taken public, she said.

All 80 “partner” companies were evaluated this fall, Kaplan noted, and ranked according to their prospects. Fifteen or 20 companies probably will get no more cash from ICG, but will continue to get other ICG services, such as recruiting help. “We had to go to those companies and have the honest conversation….Hey, you’re a great company but we’re not going to fund you anymore….That was not fun,” she says. ICG has said it will concentrate its efforts on its 15 most promising companies.

Kaplan joined ICG earlier this year after four years at RiteAid, where she most recently was senior executive vice president for marketing and merchandising. From 1981 to 1996 she was at Procter & Gamble, spending her final four years there as president of the Noxell Division, the cosmetics and fragrance unit.

All of ICG’s companies are in business-to-business Internet services, ranging from Agribuys, a California firm that helps food companies obtain services, to Farming Online, a British provider of agricultural information, to, a Philadelphia company that collects and sells highway traffic data. It was founded in 1995 by Walter W. Buckley III, a former vice president of acquisitions for Safeguard Scientifics, and Kenneth A. Fox, formerly Safeguard’s director of West Coast operations.

A typical venture capital company invests in unrelated startups, seeing each as a distinct investment that may be “flipped,” or sold after it’s taken public. But ICG expects to remain active in most of its holdings for at least 10 years, Kaplan said. In most cases, ICG has a 35% stake.

To create synergies between ICG companies, each, in addition to cash, gets management and other professional assistance from ICG. The companies are also given special opportunities to do business with one another, Kaplan told the students. The typical ICG company is in a large, fragmented business with opportunities to make large profit margins, she added.

Synergy is enhanced by nurturing holdings in three areas. Vertical market makers are companies that specialize in individual industries, such as consumer products, health care or transportation. They are companies that make money selling products or services or by charging transaction fees. ICG helps these companies use the Internet to streamline procurement, reduce transaction costs, speed distribution and automate customer support.

A second group, horizontal market makers, is composed of companies that each serve a variety of industries. Some of these companies serve customers’ human resources needs, aid them in acquiring used equipment or sell excess inventory. The Internet can be used to help these companies reach scattered customers, Kaplan said. A third group, technology infrastructure companies, provide customers in wide-ranging industries with things like financial and procurement services. These, too, can make operations more efficient by using the Internet, Kaplan said.

ICG puts executives on its companies’ boards and advises on business strategies and day-to-day operations. ICG also helps find executives for the partner companies.

Kaplan told the students that soaring Internet stock prices last year were bound to be followed by a downturn, as the long-term strategy of a company like ICG could not produce results quickly enough to justify investors’ inflated expectations. “These are still really, really young companies,” she said of ICG’s partners. “Building these companies is more of a journey than an event.”

Nonetheless, she acknowledged that ICG has had to revise its strategy. A year ago, the goal was to help the partners grow as fast as possible on the theory that profits would inevitably follow. “Well, it didn’t turn out that way,” she said. The downturn in technology stocks has caused investors to focus much more intensively on profits, or the prospect of profits, and ICG is doing the same, she added.

Many young companies can choose when to become profitable by controlling investment aimed at expansion. “You have some very interesting, stimulating conversations about when is it right to turn profitable,” she said. “You’ve got to have a high degree, in this environment, of intellectual honesty.”

One of the companies she oversees is, which collects data from an expensive system of towers along major highways. “That company’s not going to be profitable anytime soon, and it shouldn’t be,” she said, noting that to dominate the market it must make enormous capital expenditures, and must do it ahead of any competitors.

Managers of young companies tend to have boundless enthusiasm, which is good, she noted. But one of ICG’s roles is to be “brutally honest about what you can and cannot do.”

Kaplan was brutally honest about ICG as well. If the now-dormant market for Internet IPOs perks up, ICG will be able to raise money in the public markets, which it tried unsuccessfully to do last summer. She predicted a tough first half in 2001, but said the IPO market may perk up in the second half.

“The company never should have had a $212 stock price,” she said, describing the bubble that carried many technology stocks too high last year. She predicted that ICG shares will go far above the current $6 range but added: “Do I think it will be a $200 stock in my near-term lifetime? No.”