David Pecaut is a born salesman. Everyone says that about him, whether in admiration, deprecation, or both. It’s not so much that he’s smart — although like most Boston Consulting Group alumni, he is that. At 45, Pecaut radiates boyish enthusiasm. He infects others with a sense of possibility. He knows how to spin a yarn.
When he was about 10, his younger brother recalls, Pecaut cadged seed capital from his Sioux City, Iowa neighbors to produce a battle-action movie. Today, he canvasses CEOs of the world’s largest corporations. Here is his pitch: In the early days of Internet-driven transformation, companies came to appreciate the disruptive power of speed. A generation of well-funded startups demonstrated that they could collapse the horizons of invention and collect new customers faster than ever before. It wasn’t the big companies that would eat the small; it was the fast that would eat the slow.
Fast-forward five years. The Internet remains a singular lever for strategic transformation, a force with the power to reorder entire industries. But winning, companies have learned, is about more than speed. It’s about momentum — mass times velocity. “The next chapter,” Pecaut predicts, “will be defined by large companies that have big offline businesses and leading market positions. The question becomes, How do we take advantage of new technologies and put them together with legacy assets in ways that are powerful?”
His answer: Find a partner that can apply Internet-era urgency to the creation of new, high-impact ventures. The right partner? Why, that would be Pecaut’s company, iFormation Group.
If you are the CEO of a huge corporation who is trying to sort through the promises and perils of the new economy — a leader who is grounded enough to appreciate the power of brick-and-mortar assets but open-minded enough to recognize that there are radically new ways to play the game — Pecaut offers a seductive tale. You like this guy with the grin and the tousled hair. Pecaut, you think, just might have it right. Or maybe not.
New Blood From Blue Bloods
It is 9 AM on a Monday in midtown Manhattan and time for iFormation’s weekly all-hands meeting. Twenty executives pack into a modest conference room. Another dozen join in by phone from Hong Kong, London, and various airports. Pecaut, just in from his home in Toronto, fiddles with his BlackBerry email device.
This is what the second chapter of the Internet revolution looks like. Imagine a company started by the best-connected investment bank in the world, by what is perhaps the top management-consulting firm, and by one of the preeminent venture-capital firms. Give it $300 million to play with — and then set it loose to reinvent big business.
It’s a tantalizing formula. IFormation was founded in June 2000 by Goldman Sachs Group, the Boston Consulting Group, and General Atlantic Partners LLC. They had arrived at the same conclusion more or less at the same time: Many of their biggest corporate clients owned assets that, given fresh capital and free-thinking management, could become new, powerful, independent businesses. “Our shared belief was that incumbents were going to be the driving force in the disruption to come,” says Gene Sykes, a Goldman managing director.
IFormation would build companies to weld a startup’s change-the-game energy to the muscle of a corporate giant. They would start out with actual brands and customers and a pile of operating capital. They would be big. But they would also be nimble. Pecaut imagined an eventual portfolio of 15 or so such investments: Big companies would supply the foundational assets in exchange for equity, and iFormation would kick in cash and management. These investments could be pure carve outs, where a company’s asset is simply turned into a freestanding business. Or they could be consortiums of multiple partners set up to address a technology-enabled market, with iFormation building the business and acting as independent broker.
In a sense, iFormation is the 21st-century incarnation of the leveraged-buyout firms that reordered business in the 1980s. But there is one huge difference: Leveraged-buyout firms were financial engineers. Pecaut and his colleagues think of themselves as new-economy innovators. “Leveraged-buyout firms created value mostly by restructuring costs,” says Peter Maillet, who joined iFormation in March from J.P. Morgan Chase & Co. “What we’re doing is largely about using technology to create new revenues.”
This new blood is being supplied by blue bloods. Between Goldman, BCG, and General Atlantic, iFormation enjoys high-level introductions at hundreds of global corporations. Its professionals tap the industry and technology expertise of Goldman’s analysts and BCG’s consultants to help evaluate and structure deals. They tap money connections too: Among a list of investors that iFormation was pursuing for Site59, a packaged-travel Web site that it inherited from BCG, more than half came from leads supplied by the three partners.
Pecaut is iFormation’s networker in chief. He was senior VP of BCG’s consumer global practice before cofounding the company’s global e-commerce unit in 1997. He advised Ford, Goldman, and Whirlpool, among others, accumulating a fat trove of CEO-level contacts. He estimates that he has met with the CEOs of 41 Fortune 100 companies in the past year.
Pecaut’s goal at iFormation was to build an organization of deal makers, company builders, and strategic innovators whose ideas and contacts would feed the company’s collective imagination. Surely, the ideas do flow and multiply at iFormation: Its executives investigate dozens of opportunities each week. But those possibilities haven’t yet coalesced into investments. To date, the firm has started only one rapidly expanding company, not counting Site59. Transactions that Pecaut guessed were four to six weeks from completion back in March remain, as of June, unconsummated. The promising deal pipeline remains just that.
At the all-hands meeting, executives run through a roster of potential plays in digital-rights management, mortgage automation, and e-learning. At the mention of one deal, an executive observes, “It’s a tremendous opportunity but incredibly hard to pull off.” In fact, these are all complex transactions that require months of negotiations even to reach the point of serious consideration. “Everything takes longer than I’d like it to,” Pecaut admits, frustrated. And that underscores the central challenge that iFormation confronts.
In the spring of 2000, iFormation’s basic proposition seemed undeniable. Then came the NASDAQ crash and the telecom bust. Pecaut argues that, if anything, the collapse of technology markets in the past year has shown potential partners just how hazardous it might be for them to create new ventures on their own. On the other hand, Pecaut admits, the sense of urgency that drove deals a year ago has dulled. “Getting everyone on board,” he says, “takes a very long time.”
Of Speedboats and Battleships
Ric Duques remembers precisely when he decided to rethink First Data Corp.’s Internet strategy. The $6 billion electronic-payments giant had made a dozen small investments in online ventures. “The thinking,” says Duques, CEO and chairman, “was that we’d stay close to what was happening” in emerging payments technologies.
The reality, though, was that a bunch of minority holdings wasn’t keeping First Data close to much of anything. The company’s core businesses were focused on processing billions of credit-card payments each year for 1,400 financial institutions and 2.6 million merchant locations. “We couldn’t see or focus on opportunities until they hit us in the face,” Duques says.
In April 2000, Duques traveled up and down the East Coast, meeting with experts on digital payments, smart cards, wireless systems, and other emerging technologies. “I realized that things were just moving too fast in this space,” he says. “We needed a better vehicle to keep up with it all.”
First Data had at least two intriguing Net ventures that could be repackaged as independent businesses. One was CashTax, an $80 million operation that focused on electronic business-to-government tax payments. CashTax, now called govOne Solutions, was growing slowly but was extremely profitable. The second venture was SurePay, an uncommercialized technology company aimed at business-to-business payments.
These operations, largely unproven, weren’t universally attractive. In themselves, “they’re not great businesses,” says one investment banker who looked at the opportunities and passed. But what First Data brought to the party was the enormous potential that resided in its core transaction-processing systems and its massive distribution network. The new businesses had to be managed independently and built for speed — but they also had to leverage strategic connections to a payments infrastructure that no stand-alone dotcom could hope to reproduce.
Duques deputized Garen Staglin, a trusted First Data director, to seek out partners who could engineer such a deal. Staglin’s first call was to Steve Denning, with whom he had served on the advisory board at Stanford Business School. Denning was managing partner of General Atlantic Partners. Within days, Staglin, Duques, and the then-skeletal crew at iFormation had started talking.
First Data met all of iFormation’s basic criteria. First Data was eager to participate as partner, and it would bring key assets to leverage. Even more, its idea was obviously huge. “This thing was unique,” says Bob Trudeau, the iFormation director who spearheaded the negotiations. “What we saw was small and nimble — but by the way, it leveraged the assets off of this giant called First Data. There was no animal out there like it.”
Trudeau didn’t know the payments business. So after inking a 60-day exclusive letter of intent with First Data, he met with Jeff Sloane, a Goldman banker who covers the industry, and with BCG partner Nick Viner, an expert in wireless payments technologies. Together, they mapped out what the enterprise might look like — and what it might be worth. By last October, they had arrived at terms: IFormation would pay $135 million for a 25% interest in the new business, called eOne Global. For its contributed assets, First Data would take the remaining 75%.
Staglin, it was agreed, would run eOne as president and CEO. IFormation moved quickly to help him build his organization. Annie Austin, iFormation’s internal director of recruiting, stepped in as eOne’s interim human-resources chief. Soon, she had hired executives from American Express, Dell, and Novell to fill key posts. Caroline Watteeuw, the managing director of technology at iFormation, became eOne’s temporary CIO.
Trudeau, for his part, continued to map out eOne’s future. In January, eOne purchased the payments-processing division of govWorks.com, a battered startup whose technology nicely complemented that of CashTax. EOne negotiated a $20 million investment in SurePay from VeriSign Inc., which markets security-infrastructure services, and secured a key partnership with online marketplace provider Commerce One Inc.
Now Trudeau is building out eOne’s third leg: a foray into wireless payments systems. It is a potentially huge opportunity, although it’s also insanely competitive. In the United States, eOne hopes to partner with wireless carriers or financial institutions to develop systems that would allow consumers to pay for purchases through their cell phones and other devices. In Europe, where First Data’s merchant network isn’t as pervasive, the company imagines selling payments-processing solutions to wireless service providers.
It is a dauntingly complex and challenging strategy that Trudeau expects to launch by this fall. Within weeks, he hopes to nail down eOne’s wireless partners. Soon after, he’ll hire key executives to run the new operation. The furious pace pleases Staglin, who knows that it wouldn’t have been possible if eOne was still lodged inside First Data. “This is very fast,” he says. “It’s like attaching a speedboat to a battleship.
“What we’re creating here,” Staglin continues, “is an organization built around nimbleness, speed of action, and disruptive technologies. But we’re using an existing infrastructure, and that’s tough to compete with. That’s the yin and the yang.”
New Models to Create Value
If David Pecaut succeeds — if his deal pipeline finally bears fruit, if those transactions yield viable companies, if those enterprises grow and flourish, and if the capital markets someday return from their ice age — iFormation will comprise a dozen or more holdings that are similar to eOne. At any one time, perhaps a third of its investments will require intensive hands-on management. Another third, though operationally developed, will still need capital. A few will be mature enough to harvest.
If all of those things happen, iFormation will have graduated from provocative abstraction to defining business model. And the company will have started to answer one of the defining questions of the next phase of the new economy: How do leaders build companies in a business environment that keeps remaking itself?
“The transition from industrial economy to information economy has massive implications for how value is constructed and held,” Peter Maillet observes. “CEOs have been forced to understand the essence of what their companies are good at — what really drives value. When someone buys my stock, what are they really buying? In more and more companies, you can isolate a narrowly defined set of best-in-class skills.”
The evidence for Maillet’s argument lies at the heart of iFormation. After all, its founding partners, Goldman, BCG, and General Atlantic, have done to themselves exactly what iFormation proposes doing to others. “In a funny way, those companies have deconstructed themselves,” Pecaut says. “They have admitted that there’s an opportunity here that leverages their legacy assets, but it’s something that they can’t get at alone.”
In other words, Goldman, BCG, and General Atlantic, three of the most successful entities in the business universe, are reinventing themselves. The reinvention is nascent and modest, surely: For all three, after all, iFormation is an unaccustomed venture into uncertainty. Beyond the sheer financial risk, the firms are exposing their relationships and their reputations.
Why? Because they grasp the power of strategic leverage. Because the potential payoff is so huge. Because together, speedboats and battleships just might rule the seas.
Keith H. Hammonds (email@example.com) is a Fast Company senior editor based in New York. Contact David Pecaut by email (firstname.lastname@example.org).