From Incubator to Investor, Idealab’s Optimism Is Intact

Running a high-tech business incubator with 15 companies to its name would satisfy most full-time entrepreneurs. But not Bill Gross.

The software millionaire who built and sold Knowledge Adventure, then founded Pasadena-based Idealab to turn his inspirations into corporations, has launched a venture capital fund to expand his involvement with Internet-related start-ups along the Tech Coast.

Idealab Capital Partners has raised $65 million since March and expects to collect $105 million by the end of the year. With investments in 12 companies, the Pasadena venture fund’s holdings range from Internet search engines to a virtual toy store to data mining to an online service for kids.

Gross launched the fund with investment advisor Bill Elkus, and the two managing directors were recently joined by principal Jim Armstrong. They have attracted investments from Union Bank of California, SunAmerica and Compaq Computer Chairman Ben Rosen, among others.

Wall Street keeps changing its mind about the prospects for Internet companies, and their stock prices have been undergoing whiplash-inducing swings lately. But in an interview with The Times, Gross and Elkus explained why they have high hopes for Internet start-ups, especially those in Southern California.

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Times: What inspired you to start a venture capital fund?

Gross: Bill and I were talking about what kind of return one would have gotten if they had participated in all the Idealab companies.

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Times: What would the return have been?

Gross: Well over 100% a year.

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Times: If you’re looking to get the best return for your investors, does it make sense for you to be based in L.A. and focusing on L.A. companies?

Elkus: We look at companies wherever they are. But like most venture capitalists, we put a premium on companies that are closer to us because we can spend more time with them. Venture capital is a very active investing profession. Your job starts when you put the money in, and then you have to do whatever you can to help make the company successful.

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Times: One of the things that Tech Coast companies complain about is what they see as a lack of venture capital, especially compared with Silicon Valley. What do you think?

Gross: We think there has been a shortage not of money but of management--basically, the people to help companies grow. A lot of Silicon Valley occurs because there’s so many examples to observe. But just this year, a number of new examples have emerged in Southern California to act as role models, such as GeoCities and CitySearch [which Gross helped found in 1996].

We’re also missing the collection of infrastructure to help the company at all stages. But it’s getting there. It really is a virtuous cycle--you need some companies to go public to get law firms that have taken companies public.

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Times: Are you doing anything to encourage law firms and accounting firms and other professional-services firms to start catering to high-tech start-ups like they do in Silicon Valley?

Gross: The best way to influence them is to make the companies that demand the services. It’s already happening. We’ve been working as hard as we can to do that.

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Times: What are some of the companies you’ve invested in?

Gross: In addition to some of the Idealab companies, there’s one in Woodland Hills called Net Zero. They have an idea for Internet access that is completely free and is supported by a small window that is on your screen at all times and has an ad every 30 seconds. The idea is to make the Internet much more like television.

Elkus: Centraal is a very exciting company in Northern California. They made an alternative naming system for the Internet. If you go to Bambi.com, you’ll get an X-rated site. Disney is not very happy about that. Centraal has a system where you go to their Web site and type in Bambi and it takes you to the Bambi site and Disney pays a fee that’s about $100 a year. Unlike the official domain name system, which is a first-come, first-served system, Centraal is a license and it’s their discretion of who they think is the best person to get a particular name.

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Times: So you’ve looked at a lot of companies down here. In general terms, do you think there are things they should specialize in?

Gross: Down here, it’s more e-commerce. Northern California is more focused on big business, and I’d say we’re focused a little bit more on consumers. There’s a ton of creative talent that comes from Hollywood that can be applied to merchandising and selling and entertaining on the Internet.

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Times: One of the areas people were expecting L.A. to be big in was Internet content, like interactive TV shows on the Web. So far it hasn’t lived up to its promise. Do you think that will change?

Gross: I believe there’s going to be a resurgence, and I believe that they will be successful.

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Times: Why?

Gross: I just got a cable modem at home, and it really changes the way information and entertainment could be gotten on demand in such a profound way that I believe there’s a lot of room for people to be innovative there. In the next few years, there’s going to be enough of an installed base to warrant an entrepreneur tackling that marketplace. I believe there will be business plans that start to occur for things that wouldn’t have been practical two years ago when the Web soap operas were out.

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Times: When you’re rounding up investors, what is your pitch to sell them on Southern California companies?

Gross: It’s a huge plus for ICP that we’re focused only on the Internet. Focus is always better--unless you pick the wrong focus. But we feel the Internet’s here to stay. Everybody will be connected to the Internet in some form or fashion, whether it’s their watch or a pager or cable TV. It’s just inevitable.

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Times: With the market so volatile--especially for Internet companies--and so many high-tech public offerings being put on hold, has that made it harder for you to get investors?

Elkus: Actually, it’s easier. This spring, a number of people said to me, “I can earn 30% [annually] compounded in the public markets and be liquid. Why should I lock my money up in small companies without sales?” One of those people has now put $5 million in the fund.

Gross: People are worried that these Internet companies were overvalued, and that worry is certainly justified. But the reason I don’t think they’re overvalued--and why I think they actually will be undervalued soon--is because people don’t realize how valuable it is to be an offramp for the main spot for collecting eyeballs on the Internet.

When I moved to California in 1969, we used to drive on the brand-new Pomona Freeway and it was 10 empty lanes. You would see a mall being built right at one of the offramps and you couldn’t believe why because there was nobody there. Then five years later, the mall was jammed because they were right at that offramp. If you weren’t at that exit, you were dead. We’re making the investment now.

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Times staff writer Karen Kaplan can be reached at karen.kaplan@latimes.com.