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A Stirring at Idealab

He's an entrepreneur with nine lives. Bill Gross, founder of the Pasadena (Calif.)-based technology firm Idealab, rode the dot-com rocket as high as anyone in the late 1990s. His Internet "incubator" hatched dozens of companies with names such as, WeddingChannel, and CitySearch. But by 2000, the one-time billionaire was scrambling. Idealab laid off workers, closed offices in New York and Silicon Valley, and negotiated settlements with angry shareholders who sued him to get their money back.

Lately Gross has been hatching his comeback. On Mar. 21, Idealab shareholders approved the purchase of a $50 million personal loan from Bank of America (BAC) that Gross had taken out to buy the company's stock back in the boom days. Gross argued that the company was making a good investment, paying only $20 million for the loan, which he’ll pay back in full, with interest, plus $1 million-a-year in fees over four years. Some insist that Gross got a sweetheart deal. "It's easy to characterize this as bailing Bill out," says Charles Conn, the former chief executive of CitySearch and a current Idealab shareholder, "but Idealab is buying the loan at a discount, and Bill is still on the hook for more."

BACK TO THE STREET? Although many of his ideas were flops -- online retailer eToys, most notably -- Gross can rightly claim his share of successes. Overture Services (formerly, an early Idealab creation, popularized the concept of advertisers bidding for key words in Web searches -- later to become the foundation of Google's (GOOG) multibillion-dollar stock market valuation. Yahoo (YHOO) bought that company in 2003 for $1.7 billion.

Now with his business right-sized and lessons learned, Gross says one of his companies is contemplating its first IPO of the new millennium, a $300 million-a-year company called Internet Brands, parent of Gross spoke with BusinessWeek correspondent Christopher Palmeri at the single-story brick building that's served as Idealab's offices since 1997.

A 2-year old company called rejects an almost $1 billion buyout offer (see BW Online, 3/28/06, "Facebook’s on the Block"). It is 1999 all over again in some respects. Do you think we're in another Internet bubble?

Since 1995, with the Netscape IPO, the amount of interconnectivity has grown continuously every year. The impact the Internet has had on our lives has grown continuously -- the number of minutes we spend, the number of transactions. The only thing that took a dip was the market caps of all these companies.

But our utility derived from connected applications has grown. I don't see it stopping. Over the next 10 years, I see the impact of online activity -- of Web 2.0 -- just increasing in our daily lives. If there's a bubble, it's only in certain areas.

Do you have a lot of investment bankers calling again?

You still don't have companies going public every week from the Internet sector like we did. The only ones that are going public are the ones that deliver consistent growth in profits and have a history of doing so. Back in 1999, companies were going public that were really in the venture capital stage. Today you don't go public until your business model is already proven.

You have some legacy companies--CarsDirect and survived the bust while others, like eToys, did not. How did those guys survive?

Those companies grew prudently as opposed to the ones that said, "Grow as fast as you can." eToys was a great company, but they built out new warehouses and new inventory faster than the growth rate of the sales. When investment capital dried up, that proved fatal. never went public and never overbuilt. It's carefully and profitably grown. Companies always should be in a race to profits, not in a race to revenues.

What are some of the strategy changes you've made at Idealab?

You really need companies with protectable intellectual property. had patents all over the core technology and ended up earning a tremendous amount of money. eToys did not. We began looking for businesses that didn't hold as much inventory, didn't need as many people. We looked at all of our ideas through that tougher filter and found there are just a lot fewer businesses. In 1996 we were making a business a month, post-2000 we've been making a business a year.

There are changes happening in the search-engine category. You were early with GoTo, and you have a couple of companies -- Snap and Insider Pages -- addressing the next wave there.

Right now, $250 billion a year is spent on advertising. Only $10 billion is spent online. In the next 20 years, online will grow to 25% or 50%. We were the first to charge you by the click, as opposed to the impression. Charging people for listings was real radical at the time. It took 10 years for that to take hold. Now everyone accepts that.

We believe the next frontier is cost per transaction. The advertiser only pays when they make the sale. There's zero risk. Insider Pages is doing it in local search, Snap in broad search. It's turning advertising from a marketing expense into a variable cost.

Are you paid a flat fee or a percentage of sales?

It can work either way. [At Snap] a Web site is paying us a 6% commission on every pair of shoes they sell -- that's a real deal we have. The site that comes up first is the one with the highest customer conversion rate. It's great for consumers because they are directed to the site that satisfies customers the most.

Insider Pages has one very powerful twist: You can type in [for example] "Pasadena plumbers," and there will be phone numbers that ring through to them but they are our numbers. And so plumbers, landscapers, and dentists are paying us between $10 and $100 per call. It's generating six million page views a month, which is incredible for a local site. Snap is generating a similar number. My dentist is getting a lot of business from Insider Pages.

You have the technology to audit these sales yourself?

That's one of the things Web 2.0 has brought us: many more tools and capabilities. You can do all that tracking automatically. Back in 1998 you would have had to rely on manual reporting from the Web sites.

You haven't been tempted now that the Web is hot again to launch more new businesses?

We really are still holding to our guns, making sure that each business has world-changing criteria. We did learn a big lesson that when you're doing something radical, it can take years for it to catch on. So rather than blitzing and doing all the public relations in the first year, give yourself five years or ten.

One company that did not succeed that could have worked today is Free-PC (which gave computers away to people who agreed to watch online advertising). The PC has come down in price from $500 to $199. Online advertising has come up. We say that you can be too early or really too early. It's important not to be the latter.

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