Publishers put their cash to work

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After Paul Kagan recently sold his closely held firm, Kagan World Media Inc., to b-to-b publishing giant Primedia Inc., he could have spent the rest of his days doing most anything. But instead of spending a year touring Provence or hanging out a consulting shingle in Palm Beach, he chose to become vice-chairman of Primedia Ventures, the publisher's venture capital division.

Kagan's move was hardly surprising. In recent months, venture capital investing has become big business at b-to-b publishing companies. Among the recent VC plays:

• Bertelsmann AG has committed up to $1 billion to a new private equity fund.

• Reed Elsevier plc has introduced a $100 million venture capital unit.

• VNU and KPN Royal Dutch Telecom are jointly forming the $30 million KPN-VNU Convergence Fund.

 B-to-b publishers are pursuing VC for one obvious reason: to turn a relatively small, early-stage investment into a windfall that will look good on the bottom line. They also hope to gain insight into new technologies, thereby getting a jump on competitors.

 The publishers are also investing in VC because it can be a top-rate marketing vehicle. In some cases, the companies they invest in will become clients that not only use their content but also market it.

These are the reasons, of course, that technology companies such as Dell Computer Corp., Microsoft Corp. and Intel Corp. have invested in start-ups for years.

Overseas players

Much of the VC action is coming from European-based publishers.

Dutch publishing giant VNU announced in September that it and KPN Royal Dutch Telecom were forming the KPN-VNU Convergence Fund to invest in mobile Internet application, broadband and other new economy start-ups focusing on the convergence of telecommunications, media and information technology. The fund will focus on European start-ups.

In the U.S., VNU is one of many backers of the $100 million JEGI Internet Economy Partners L.P. fund affiliated with The Jordan, Edmiston Group Inc., an investment bank. The fund has invested in Bowstreet, a company using an extensible mark-up language infrastructure to build e-marketplaces, and Bluewater Information Convergence, an IT outsourcing operation.

For Rein Goedkoop, VNU's director-worldwide business development, a key reason for his company's involvement in the JEGI fund is the access it provides to new technology, especially for electronic commerce and information delivery. "Technology is not a strong point of most publishers," he said.

London-based Reed Elsevier's new venture capital unit, Reed Elsevier Ventures, was launched because its executives saw other publishers moving into VC and doing well at it, said Diana Noble, managing director of the new unit. The company also saw many deals being entered into by its subsidiaries, such as Cahners Business Information, and wanted to create a centralized way to invest in them, she said. "People were unclear as to how to handle it," Noble said.

 More important, VC is viewed by Reed Elsevier's executives as the engine that can help it morph from a publisher into an Internet-centric business information company.

"Reed wants to be as much a technology company as a content company. And it has to be," Noble said. Reed Elsevier Ventures will seek out companies, primarily in the U.S. and Europe, that can help it do that.

  Reed Elsevier Ventures will also be used as a marketing play. The idea is that some of the start-ups that the unit invests in will be able to use services from its parent company, such as Lexis-Nexis research.

Reed Elsevier will also look to become a client of Reed Elsevier Ventures' portfolio companies, creating a potentially big revenue stream for them. "The sweet spot," Noble said, "will be where the relationship can work both ways."

Reed Elsevier Ventures has gained instant credibility, especially among the European dot-com set, for having hired Noble, who is especially well-known among London's tightknit VC community. Prior to joining Reed Elsevier Ventures, she was CEO of eVentures Ltd.'s U.K. branch, the joint venture between News Corp. and Softbank Corp.

Caution ahead

Primedia's Kagan, a b-to-b publishing vet who also has been active in VC for years, brings a similar degree of credibility to Primedia Ventures. Though bullish on Primedia Ventures' future, Kagan said b-to-b publishers should tread carefully into the VC space, especially given current market conditions. "The dot-com world is rife with failures," he said.

Kagan said he doesn't expect publishers to make investments at a fast clip. "There is cyclical caution," he said. "You've got to step more carefully. A year ago, it was 'give me a deal, any deal.' Today, that is more tempered."

Cahners is among the b-to-b publishers taking a tempered approach to investing. The New York-based Reed Elsevier subsidiary recently led a $37.5 million investment in e-procurement company PartMiner Inc. It is one of only a handful of VC investments it has made.

"Cahners makes strategic investments only when it is helpful in creating a strategic alliance," said CEO Marc Teren.

Gutersloh, Germany-based Bertelsmann's $1 billion VC play is among the biggest by a publisher to date. The closely held conglomerate has said little about the initiative since its announcement in late September. Liz Young, the company's U.S. spokesperson, declined to comment about the fund. Certainly the fund's impact will be marked, given its size and Bertelsmann's reach.

For International Data Group, publisher of PC World and The Industry Standard, the goal of its foray into VC is basic: return on investment. In October 1999, IDG launched the $100 million Pacific Technology Venture USA II. The fund follows IDG's first Pacific Technology Private Ltd. fund, which invested in Netscape, Excite and other IT-oriented start-ups, generated a return of eight times its initial investment. More recently, IDG has invested in B2BWorks Inc., VA Linux Systems Inc. and other companies.

Industry observers see the value in business media companies wading into venture capital. "It allows them to take a greater risk outside of normal corporate operating restraints," said Roland DeSilva, managing partner at DeSilva & Phillips Inc., a media investment bank. "Where companies can free up the funds to do it, I think they're better off."

Some holdout

Not every business media executive, however, agrees that this is a solid strategy. Some would rather take investment stakes in more established companies than in unpredict-able start-ups. Indeed, not every large business media publisher is joining the trend.

Neither Penton Media Inc. nor Advanstar Inc. has created a venture capital fund, although both companies have invested in more mature technology companies. "Generally, the purpose [of a VC fund] is to get a window on new technology," said Robert L. Krakoff, Advanstar's chairman-CEO. "To me it seems a fairly circular way of doing that." There are many vendors offering media technology, he said, adding wryly, "Surprisingly, the vendorsfind you."

Krakoff questioned the wisdom of investing in immature technologies and companies. "You're making a financial bet before you know if you want to be involved with the company," Krakoff said. As a rule, Advanstar has invested in more mature companies, such as Inc., which is helping the media company build its vertical portals.

It's an approach that has worked for Advanstar. Its equity stake in yielded strong returns for Hellman & Friedman L.L.C., Advanstar's former owner. Hellman sold off its stake earlier this year when DLJ Merchant Banking Partners and some Advanstar managers acquired the business media company for $900 million.

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