Idealab!: That's One Hot Incubator

It's IPO could be one of the Net's biggest ever

It's hard to find a better image of the New Economy replacing the old one: On the fifth floor of a former Mattel Inc. office on the fringes of New York's Silicon Alley, the walls are coming down to create new open-space digs for idealab!, an Internet incubator. Replacing the former offices will be a cluster of desks, each made of a hollow wooden door balanced on two filing cabinets. The scrappy decor is a trademark of Bill Gross, the eccentric founder of the Pasadena (Calif.) outfit that has turned out such hits as eToys, CitySearch, and The New York satellite, announced on Mar. 2, is the first Eastern outpost for idealab.

It won't be long before those low-cost desks are more symbol than necessity. Although idealab isn't talking, several sources close to the company say it is hoping to file for an initial public offering in the coming weeks. How much does inspiration go for these days? Analysts figure that idealab, having spawned about 40 companies, is worth somewhere between $7 billion and $10 billion. With Gross expected to sell as much as 10% of the company, it has the potential to ring up one of the biggest Internet IPOs ever. "I think it's a slam-dunk," says Tom Taulli, an Internet stock analyst at Corp.'s office in Newport Beach, Calif.

That's not to say the IPO is going to be a simple matter. Because of a 60-year-old law, the Securities & Exchange Commission deems an outfit such as idealab--essentially a collection of venture holdings in disparate companies--an investment rather than operating company. That makes it much more difficult to go public. Still, a similar entity, Internet Capital Group Inc. (ICG), successfully traversed the regulatory landscape by getting an SEC exemption. Although it took more than a year, ICG eventually got the exemption which allowed it to go public in 1999 with a $209 million offering. Idealab is trying to do the same, according to a filing it made with the SEC on Jan. 28. "Now that the SEC has established a comfort level with this, new applicants should get the exemption in a shorter period of time," says Marco Adelfio, a partner in the Washington law firm Morrison & Foerster.

GRANDDADDY. Idealab's massive potential payoff does seem to be attracting some top-flight executives. Andrew B. Zimmerman left his job as global leader of e-business consulting at PricewaterhouseCoopers on Feb. 1 to help head up idealab's new office in New York. Although he won't discuss an IPO, Howard Morgan, vice-chairman of idealab, does say he has watched the successful public offering of other incubators, such as ICG and CMGI Inc.

As the granddaddy of all incubators, idealab has a more compelling story than most. Launched in 1996 by Gross, 41, a lifelong entrepreneur, idealab provides seed funding, administrative services, and technical support primarily to consumer companies.

Like most other executives of Internet businesses, Gross won't be parading stellar earnings figures for investors. In the nine months ended Oct. 31, idealab generated revenues of only $3.6 million, according to the Jan. 28 filing. But because it can raise prodigious amounts from private investors--as of October it had $336.8 million in cash and short-term securities--idealab is profitable, with interest income alone helping it earn $14.5 million in the recent nine-month period.

Back in Pasadena, there's an unmistakable feeling of an expected influx of money. Next door to Gross's year-old headquarters, workers are knocking down the walls, preparing to double the space. If this continues, Gross will have to put in a standing order for hollow doors at That's an idealab company, too.

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