Idealab May Be Hatching IPO Plans

Internet business incubator Idealab is planning to raise at least $100 million in an initial public offering that could make it one of the most highly valued Web incubators in the country, according to people familiar with the plans.

Although Pasadena-based Idealab has not filed its IPO documents with the Securities and Exchange Commission and could abandon a first-time stock sale if the IPO market suddenly sours, sources said the incubator is preparing to make an SEC filing within the next few months.

Idealab founder Bill Gross was unavailable for comment Wednesday, and the firm’s chief financial officer, Brad Ramberg, declined to discuss whether Idealab is considering an IPO.

“We don’t make public comments on our financing plans,” said Ramberg. “We will do what’s in the best interests for our companies.”

Gross was one of the first people to recognize the commercial value of the Internet, and his incubator has produced more than two dozen companies since 1996, most based in Southern California. Five of them have gone public themselves and now have market values measured in the billions of dollars. Among them are online toy retailer EToys (market value: $7.7 billion), Internet search firm GoTo.com ($4.4 billion) and free Internet service provider NetZero ($2.4 billion).

“These guys have done extremely well in incubating a variety of very prominent companies,” said Ullas Naik, senior vice president of research at First Albany in Boston. “They have a very strong reputation, and to the extent they can monetize their reputation and their brand, they should do that.”

Idealab helps young companies recruit executives, raise seed capital and handle administrative functions such as payroll.

Some ideas for companies are pitched by entrepreneurs, but many of them come directly from Gross. Early investors in Idealab include movie director Steven Spielberg and Compaq Computer Chairman Ben Rosen.

As a public company, Idealab could rival other publicly traded Web incubators, such as Andover, Mass.-based CMGI, which has incubated half as many companies and has a market value of $16.8 billion. Idealab’s stakes in its publicly traded offspring alone are worth nearly $2.3 billion.

So far, investors love publicly traded incubators such as CMGI, which also has stakes in about 50 other companies. CMGI’s stock has surged sevenfold over the last 12 months and closed Wednesday at $143.63 in Nasdaq trading.

Internet Capital Group, the only other publicly traded Net business incubator, has seen similar success. The Wayne, Pa.-based firm went public in August at $12 a share and closed Wednesday at $165.50 in Nasdaq trading. Its market value is nearly $21 billion.

Based on the experience of CMGI and Internet Capital Group, Naik expects Idealab’s IPO will be popular with investors.

“This will be one of the deals that will be very, very hotly pursued,” said Naik, who added that he couldn’t estimate how much Idealab might be worth.

Because Idealab has not filed its IPO plans, key details such as deal size, share price and what percentage stake would be sold to the public were unavailable.

Goldman, Sachs & Co., which served as lead investment banker on IPOs for several Idealab ventures, is said to be the lead investment banker on Idealab’s IPO.

Proceeds from the offering would probably be used to help Idealab expand its incubator concept to other cities, such as New York, Seattle and Boston, sources said. Idealab recently opened a satellite office in Silicon Valley, and Gross has said he plans to open more offices around the country.

In addition, becoming a public company gives Idealab a new source of funds to finance new start-up companies. The exposure that comes with being public will also help the incubator attract even more of the most promising business plans.

“It will raise their profile not only with investors, but also with entrepreneurs,” said Rich Petersen, a senior analyst with Volpe Brown Whelan in San Francisco.

Many Idealab companies are typical e-commerce start-ups: Eve.com peddles beauty products on the Web, MyHome.com sells home furnishings and fixtures online, and Cooking.com offers cookware, cutlery and other kitchen goods.

But several Idealab firms have introduced new business models to their industries.

Westlake Village-based NetZero was the first company to offer free Internet access to customers who were willing to share personal information and look at ads, and Free-PC.com of Pasadena was the first to give away personal computers in exchange for personal data and a tolerance for targeted advertising.

A serial entrepreneur, Gross, now 41, launched his first company in college and used the profit to pay his tuition at Caltech. In 1991, Gross founded Knowledge Adventure to create educational software for children and later sold it to CUC International for $100 million. Proceeds from the sale helped Gross start Idealab.

In 1998, Gross formed venture capital fund Idealab Capital Partners, which doesn’t invest exclusively in Idealab start-ups but does get a first look at them. ICP’s first fund raised $105 million, and the second fund recently closed with $364 million, one of the largest such funds ever created in Southern California.

Idealab and ICP have financial stakes in each other, but Ramberg would not reveal details of the relationship. ICP will remain privately held after the IPO, sources said.

Times Mirror Co., parent company of the Los Angeles Times, is not an investor in Idealab, but it has invested in some Idealab companies.

It has also invested funds with Idealab Capital Partners.

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Good E-Breeding

As an incubator of more than two dozen Internet start-ups, Pasadena-based Idealab has helped fuel the electronic-commerce boom. Some of Southern California’s most successful e-commerce firms--including online EToys, Internet search firm GoTo.com and free Internet service provider NetZero--are Idealab creations. A sampling:

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Market Idealab’s Company Location capitalization stake EToys Santa Monica $7.7 billion $1.2 billion GoTo.com Pasadena 4.4 billion 887.0 million NetZero Westlake Village 2.4 billion 115.0 million Tickets.com Newport Beach 1.2 billion 91.2 million Ticketmaster Online- Pasadena 2.9 billion 15.6 million CitySearch

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Idealab at a Glance

* Chairman: Bill Gross

* Headquarters: Pasadena

* Founded: 1996

* Employees: 25

* Number of start-ups: 27