[Red Herring] Idealab grapples with reality

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From: Adam Rifkin (Adam@KnowNow.Com)
Date: Mon Oct 23 2000 - 23:29:58 PDT

How in heaven's name does Idealab squander six million bucks a month???


Idealab grapples with reality
By Stephen Lacey and Hildy Medina
Redherring.com, October 20, 2000

Bill Gross, meet fate.

Mr. Gross had stunning success with his Idealab incubator, churning out
business-to-consumer (B2C) companies that went public with a blast. The
lemmings followed, both public and private, turning incubation into a dirty
word. Now, with his portfolio pummeled by the markets, Mr. Gross has
suffered the humiliation of withdrawing Idealab's public offering.

It's about time. Idealab filed to go public in April, hunkering down into a
quiet period. While Mr. Gross was sheltered away, his whole world changed.
The Idealab companies that went public with a bang are now whimpering,
several of Idealab's private companies have cut their staffs, and the
incubator has had just one liquidity event (the sale of Mylife.com to
Stayhealthy.com) since it filed to go public.

"The advantage for them to withdraw is that they don't have to say
everything they know and where the bodies are buried," says Jesse Reyes,
managing director of Venture Economics, a Newark-based venture capital
research firm.


Despite such criticism, the firm does not intend to shelve its IPO plans
permanently. Instead, Idealab wants to "come back to the market when it's
good," says Mr. Gross, the firm's founder and CEO.

But will there ever be a "good" market for a public incubator again? Wall
Street has soured on the once-solid building blocks of the Internet
economy, such as Internet Capital Group (Nasdaq: ICGE) and CMGI (Nasdaq:
CMGI). When Idealab was valued at $7.8 billion in its $1 billion private
round in March, Internet Capital and CMGI boasted market caps north of $35
billion. Their valuations now stand at about $3 billion and $5 billion,

The market has also closed for the type of less technical, B2C companies
that Idealab historically has helped start. Idealab's seven incubated IPOs
are about 75 percent off of their offering prices. The high-profile
disasters include eToys (Nasdaq: ETYS), which closed at $3.75 on Thursday,
down from its 52-week high of $86; NetZero (Nasdaq: NZRO), which slumped to
$2.06 Thursday, off its high of $40; and GoTo.com (Nasdaq: GOTO), which
closed at $11.02 Thursday, down dramatically from its high of $114.50.


The private companies within Idealab's portfolio have struggled, especially
in the entertainment sector. Firstlook.com, which produces previews of
movies, music, and games, recently laid off about one-third of its
103-person staff. Portfolio company Z.com, which produces online games and
interactive entertainment, sent half of its 95-person staff packing and
said it planned to scale back on its original programming.

While Mr. Gross had immediate and high-profile success, his demeanor now
reflects a more subdued, long-term strategy. "When we went to our investors
who invested in March and asked them if they wanted us to go public sooner
rather than later, they said, 'we're long-term investors, just go public
when it's the right time,'" Mr. Gross says.

Thanks to its windfall in March, Idealab appears to have plenty of capital
to keep going without the pressure of going public soon. The company's burn
rate is $6 million a month, Mr. Gross claims. (Redherring.com was unable to
secure a follow-up interview to determine if that burn rate is for Idealab
itself or the incubator and all of its portfolio companies.)

Dave Wright, vice president of private equity services at research firm
Aberdeen Group, isn't so sure that Idealab is finished with fundraising. He
believes Idealab will eventually have to return to the venture market for a
mezzanine round, and it will suffer from the depressed valuations of
comparable public companies, such as CMGI.

Mr. Gross also brags that even though none of his hatchlings have turned a
profit, a few of them are "very, very close to profitability." Mr. Wright,
however, is waiting to see that claim manifested in more portfolio
companies' IPOs. "If they had a portfolio that was that ready to go public,
they wouldn't be postponing," he says.


Mr. Wright adds that while Mr. Gross was in his quiet period, other
incubators rose to the fore. "The days of the general soloist sitting in
his room ... and creating companies to fill in the white spaces is just not
tenable any more," he says. "How are they going to compete with the
vertically-focused incubators that are allying with corporate partners,
with access to their R & D?"

Those alliances include Ecompanies's joint venture with Sprint to form
Ecompanies Wireless, and Campsix's partnership with Dow Chemical.

Whether or not the public markets ever endorse another incubator remains to
be seen. What's not in dispute is the fallout of the incubator model, both
in the public and private markets.

So why write about it all? The reasons the incubator's filing caused such a
stir at the time of filing have completely reversed course, begging the
question of whether such early-stage investors have a place in the public
market at all.


I can't complain, but sometimes I still do. -- Joe Walsh, "Life's Been Good to Me So Far"

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