Internet Incubator Has Been Slow to Hatch

It’s easy to see what excites people about Idealab, Bill Gross’ Internet start-up factory.

Known and respected as an idea machine, crackerjack technologist and marketing marvel, Gross is the quintessential computer industry entrepreneur. The Caltech grad and Pasadena resident sold his first software company to Lotus and went on to found Knowledge Adventure, the children’s software publisher that CUC International snapped up in March for $100 million.

With Idealab, a privately funded incubator for creating Internet software and service companies, Gross promised to pump out new businesses at a pace frenzied enough to match that of the online industry. The Pasadena company’s game plan: Come up with a concept, feed it some seed capital, pull together a management team and spin the company out while retaining part ownership.

But as good as that sounded in theory, 16-month-old Idealab has proved less agile than expected. Some of the first fruits of Gross’ labors are just now coming to market--not exactly the quick turnaround he originally promised.

In a recent interview, Gross gave himself only passing grades in several areas. Idealab start-ups have raised close to $50 million in investments, but the lion’s share--about $45 million--has gone to CitySearch, a leading Web-based city directory that’s not a true Idealab venture. Gross started CitySearch while he was still at Knowledge Adventure and used it as a blueprint for creating Idealab.

Of the $6 million that Idealab itself has received from investors such as movie director Steven Spielberg and venture capitalist Ben Rosen, $1.5 million has gone into ideas or companies that haven’t panned out--though some failed research has led to ideas for new projects.

Rounding up enough top-level executives to run start-ups and managing ventures based in other cities has proved difficult. And the demands on Gross have left him little time for the creative thinking he loves.

All in all, nothing out of the ordinary for your average Internet start-up. But then, Idealab was supposed to be more than that.

In discussing Idealab’s shortfalls, Gross identifies with Thomas Edison, whose many famous inventions obscured numerous failures.

“Failure is a great lesson if you can use it as such,” Gross said. “The things we learn about how to make it work . . . that’s the real value. That’s what we’re inventing.”

Gross is taking a number of steps to revitalize his original business plan. On the financial front, Idealab recently received a $1-million investment from Foundation Capital, making the Menlo Park, Calif., venture capital firm the company’s largest investor. More important than the money--Foundation received a mere 2% stake in Idealab for its investment--is the role the venture capital firm will play in helping groom Idealab companies to seek other investors. In exchange, Foundation gets first crack at promising start-ups.

“We don’t have a lot of knowledge about venture capital for later-stage companies, exit strategies and initial public offerings, all the things companies need to know as they get out of their adolescent stage,” Gross said. “Rather than learn it from scratch, I’ll learn it faster by allowing a venture capital firm to invest for the chance they get to invest in companies as we grow them.”

Because Idealab start-ups are taking much longer than expected to leave the nest--18 months instead of the six months he originally estimated--Gross has temporarily stopped forming new companies until the old crop is on its feet.

As often happens with start-ups, Gross said he’s taken on too many responsibilities--he sits on a majority of the start-ups’ boards--and needs to refocus. To that end, he is hiring two senior executives who will assume some of his board positions, freeing him up for what he’s best at: being creative.

The next few months will be critical as half a dozen or so Idealab start-ups begin selling products and services. One, Santa Monica-based PeopleLink Inc., opened its Internet-based instant message service earlier this month. The company has raised more than $2 million from AT&T; Ventures and others to launch the ad-based service, which will compete against companies many times its size, including America Online, Excite and iChat.

Also launched this month is Wedding Channel, an online wedding planner. IntraNetics, one of a handful of Idealab firms based outside California, expects to begin selling its “intranet in a box” series of software programs for small businesses next month.

Woburn, Mass.- IntraNetics, formed late last year, originally said it would have products available in March, but that goal was unrealistic, said Chief Executive Steve Crummey.

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Other Idealab companies that are already operating: Centra, which sells software for online corporate training; Answers.com, which sells custom research via e-mail; Smart Games, an online and CD-ROM game developer; and EntertainNet, a Pointcast-type personalized entertainment broadcast network.

At least a dozen other Idealab companies still exist only on paper, including Bandwidth, a service that speeds up Web site downloads and that Gross expects to launch in August. Others are Web-based consumer services aimed at making it easier to shop, buy tickets, meet people or take classes online.

So far, Idealab’s biggest disappointment has been IdeaMarket, a general-purpose, pay-per-view information service that former employees claim was mismanaged to death but that Idealab executives maintain is merely being repositioned as a business and computing resource.

In the last month, all but one of IdeaMarket’s 14 or so employees have quit or been let go, including former New York Times Internet columnist Peter H. Lewis, who left his post as editorial director after disagreements with senior managers.

Two weeks ago, IdeaMarket moved from its base in Austin, Texas, to Idealab’s Pasadena headquarters. Gross stepped in as interim chief executive, taking over from Jim Seymour, and the company is concentrating on selling software on the site.

A few Idealab ventures never made it off the drawing board. Gross pulled the plug on a home-finding service called HomeLink after deciding it wasn’t different enough from what was already available.

He also shelved plans for a company called InterTel that was to have sold discount long-distance telephone service over the Internet, after he concluded that the voice quality currently possible on the Net simply isn’t good enough.

Gross admits to exploring as many as 20 ideas for companies, sometimes spending as much as $100,000 to research ideas, before deciding they were duds or that investors would never back them.

Even CitySearch’s success isn’t a sure thing. The local information and entertainment guide is operating in eight cities and expects to launch in several others soon, with plans to hit 30 locales by the end of 1998. The company is holding its own against similar services from Yahoo, Digital City and Microsoft Sidewalk, and recently teamed with several major newspaper publishers and TV stations to sew up its position.

Times Mirror, publisher of The Times, made an investment in CitySearch in June, and The Times will partner with CitySearch on a Los Angeles service.

CitySearch Chief Executive Charles Conn says the company expects to make an initial public stock offering by early 1998, but analysts believe the company could be acquired by then.

“It’s a very difficult market,” said Gardner, of Digital Technology Partners. “There’s a huge audience, but it’s a saturated market, and there’s only room for three or so localized search engines. I think CitySearch will be around but not as an independent.”

A sale at the right price, of course, could finance Idealab for a long time. And that, in the long run, is part of the plan.