The Bank of Dell is now open
Published: 26 Aug 1999 16:15 BST
With his Dell Computer already one of the Internet's phenomenal success stories, Dell Chairman and Chief Executive Michael S. Dell is increasingly putting his own money into a stream of Internet and electronic-commerce startups.
Dell's MSD Capital, a personal-investment firm formed last year, has quickly become one of the top investors in e-commerce and Internet start-ups, prized as much for its namesake's reputation as its fast-growing portfolio of companies. Backed by an estimated $1bn (£620m)of Dell's money, MSD Capital is buying stakes in companies aiming to transform industries as varied as automobiles and consumer marketing into online businesses, according to a review of public filings and interviews with venture-capital groups.
Among its hits: Cerent, a tiny networking-equipment maker that Cisco Systems has just agreed to buy for $6.4bn in stock.
MSD is "being very opportunistic in going after the hot deals and hot sectors. Michael Dell's cachet is successfully getting MSD into these deals", says Todd Dagres, a venture capitalist whose Batterymarch Ventures has invested with MSD Capital. For instance, MSD has purchased stakes in e-commerce start-up BeFree, which helps electronic retailers increase revenue by adapting the store-within-a-store concept to the Web; and webMethods, which helps businesses build electronic links to suppliers.
Another key investment: Greenfield Online, whose online consumer surveys "are changing the whole area of marketing research and business intelligence", says Jerry Murdock, whose InSight Capital Partners has invested along with MSD. Greenfield one day may be able to instantly poll a million online consumers, compared with the more limited telephone and mail queries now used, Murdock says.
Neither Dell nor Glenn Fuhrman, an MSD partner, agreed to be interviewed on the company's investments. But Nicholas J. Hanauer, an early investor in Amazon.com who has discussed Internet investing with Dell, says that "if there is a theme in his investments, it's [buying into] companies that share his view of how to successfully interact with consumers". Dell, he says, "has a unique perspective on what it takes to transform industries".
Dell's newest investments also involve companies that deal directly with buyers -- the hallmark of his Dell Computer. For instance, CarsDirect.com can deliver a new car directly to a customer's driveway -- unlike rivals such as Autobytel.com, which refers buyers to dealers. MSD also put $5m into Works.com, a company that sells office supplies wholesale over the Internet. Unlike rivals such as Staples' Staples.com and Office Depot's OfficeDepot.com, it doesn't have storefront operations to support.
Previously, Dell had made successful bets on a range of chip and software companies, such as Jato Technologies, Rambus and Knowledge Adventure. But since forming MSD Capital last year, his investments have targeted e-commerce and Internet infrastructure companies. That focus has given MSD a leg up in hotly contested deals. Gordon Hoffstein, chief executive at BeFree, says his company "tried to align ourselves with investors who can take us into their kieretsu. We saw Michael Dell as being involved in a lot of infrastructure plays that can open doors". (Kieretsu is a Japanese term describing a network of related companies.)
Venture capitalists say Dell's investments are largely "late-stage" purchases, meaning they are stakes in more-established companies that are just shy of making a public offering. The amount invested tends to be higher than at the early stages, but the risk is lower because the businesses ideally have a track record. However, that strategy can backfire when markets cool. One of the fund's first investments, EXE Technologies, a Dallas developer of supply-chain software, filed for an initial public offering shortly after MSD bought a 5.5 percent stake for $8m last year. The IPO was cancelled in March, a victim of the downturn in complex business software at PeopleSoft and Baan.
MSD's other late-stage investments include Cerent and Top Layer Networks. Cerent, a highly regarded networking company backed by Cisco Systems, filed to go public shortly after MSD Capital purchased $30m in convertible debt. Top Layer was formed in 1996 and this past April shipped its first product, a network switch that can prioritise business data.
investments The investment company also has begun to tiptoe into early-stage funds and leveraged-buyout investments. MSD recently put some $20m into an InSight Capital Partners fund that focuses on e-commerce start-ups. "It's a fund's way of leveraging its assets, to see more deals without a bigger staff," says Jess E. Reyes, a director at Thomson Financial's Venture Economics, which tracks venture investments and measures investment-company returns.
MSD, along with the private investment funds owned by Microsoft Chairman Bill Gates and Oracle CEO Larry Ellison, also put money into Silver Lake Partners, a high-profile $2bn investment fund that is pursuing leveraged buyouts of undervalued technology companies.
Banking on a turnaround, MSD last month purchased shares valued at $50m in McKesson HBOC, the nation's largest drug distributor and supplier to online pharmacies PlanetRX and Soma.com. McKesson HBOC's shares tumbled earlier this year after it said it had to restate revenue and earnings related to the acquisition of a computer-software company.
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