News: Analysis & Commentary: Entrepreneurs
Bill Gross: "They Thought We Were Crazy"
His idealab! turns Internet startups into big IPOs
Bill Gross has been accused of having a lot of crazy ideas that never seemed to go anywhere. But suddenly, some of those wacky ideas are starting to pay off quite smartly.
Gross runs idealab!, a Pasadena (Calif.) company that provides seed money and an incubator environment for startup Internet companies, mostly his brain children. Two have already gone public and a third, eToys Inc., an online toy retailer, filed on Feb. 17 for a public offering to raise as much as $115 million. The Internet toy store--the most successful in its category--could be among the top initial public offerings this year. "They'll have a very strong showing," says Nicole Vanderbilt, an analyst at Jupiter Communications in New York. "EToys is one of the top dozen online-only retailers."BIG PC GIVEAWAY. Other idealab! companies are paying off in another way: as takeover targets of bigger, richer companies looking for Internet assets. On Jan. 11, for example, Compaq Computer Corp. agreed to buy Shopping.com, the first publicly traded idealab! company, for $220 million in cash. On Jan. 26, Tickets.com announced that it was merging with ticketing company Advantix Inc., a move that puts it in direct competition with Ticketmaster Online-CitySearch Inc. CitySearch was idealab!'s first success and, after it was acquired by USA Network Inc.'s Ticketmaster unit, the combination went public in a Dec. 3 IPO that valued it at $2.8 billion by the end of the first day of trading. Its market capitalization today is about $2.7 billion.
Gross's most outrageous idea to date, however, came on Feb. 7 when he announced that he would form a company to give away 10,000 PCs in exchange for detailed demographic information and the right to present advertising to their users. Early critics predicted that people would never part with their privacy, a notion blown away the next day when 375,000 showed up on Free-PC's Web site, as well as hundreds at idealab!'s headquarters, and did just that. So far, the company has received 1.2 million applications. Now, skeptics are questioning the business model, which presumes that Gross can generate enough advertising and transaction revenue to pay for thousands of $500 PCs.
Does Gross mind? "The biggest thing going for me is that nobody thinks it will work," he says. That's the same reaction that his critics had when he launched GoTo.com last year, he points out. With GoTo.com--which plans to go public later this year--a Web site agrees to pay money to GoTo when visitors to GoTo actually click on the site's listing. The more a site is willing to pay, the higher up it appears on lists generated by the GoTo search engine. "They thought we were crazy," he says, noting that Yahoo! Inc. is now charging Web sites $199 to get an "expedited listing" in its directory. Moreover, the little GoTo.com that everyone thought would flop even has the chutzpah to take on the Walt Disney Co. and Infoseek Corp. On Feb. 18, the company sued the pair for copying the GoTo.com logo in their recently launched Go Network."RISKY DEAL." All told, idealab! has raised $20 million from partners who include director Steven Spielberg, Compaq Computer Chairman Benjamin M. Rosen, and former AT&T executive Robert M. Kavner II. Half of that has been invested in 30 idealab! companies over the past three years, and those companies have raised another $500 million on their own. Idealab!'s $10 million investment is now worth $1 billion, Gross says, based on share prices and last-round valuations for the private companies.
Gross also has a venture-capital fund, idealab Capital Partners (ICP), to provide financing beyond seed capital to idealab! companies and for other Internet startups. That may turn out to be even more successful. ICP has raised $100 million, and at least four of its investments look ready for an IPO. "That's very unusual," says John Fisher, a partner at Draper Fisher Jurvetson, a Redwood City (Calif.) venture capitalist. "It usually takes more time for a young, first-time fund to attract that kind of deal flow." Fisher joined ICP in funding the four companies--GoTo.com, NetZero, Aveo, and Centraal.
For now, however, Fisher's taking a pass on the chance to invest in Free-PC Inc. "It's an interesting model, and I believe its the direction the industry is moving in, but it's a risky deal." Then again, he notes, he passed on eToys. That wasn't such a smart idea.By Larry Armstrong in Los AngelesReturn to top