Net Incubator Idealab Seeks $300 Million in Ambitious IPO

Idealab, the business incubator that has launched more than 30 “dot-com” companies, plans to raise as much as $300 million in one of the biggest initial public offerings ever for an Internet firm, according to federal filings made Thursday.

The offering could give the Pasadena company a valuation of more than $10 billion, analysts speculated. It will also give investors a chance to own a piece of the company behind online toy retailer EToys, free Internet service provider NetZero, Web search firm Goto.com and dozens of other Net start-ups.

The company did not specify how many shares it would sell or at what price they would be offered. Idealab plans to use the money to start more companies and for general corporate purposes. The incubator has already expanded to Silicon Valley, New York, Boston and London.

The Idealab IPO comes at a time when tech stocks are down generally, especially Internet incubators. Some analysts questioned the wisdom of taking the company public in such a volatile market.

Although nearly all of Idealab’s offspring are losing money, the incubator itself reported a profit of $118.5 million for its 2000 fiscal year, which ended Jan. 31. The bulk of that income came from selling more than 3.8 million shares of Santa Monica-based EToys for a gain of $193 million.

But like most Internet companies, Idealab’s filing with the Securities and Exchange Commission reveals that it had an operating loss of $241.2 million in the 2000 fiscal year, up dramatically from the $11.5-million loss the year before. The filing said Idealab has more than $700 million in cash and other assets on hand, which analysts called encouraging.

When the company sells its shares to the public--which is expected in about two months--it should be a huge payday for founder Bill Gross. As chairman and chief executive of Idealab, Gross earns a relatively modest salary of $250,000. But the 41-year-old serial entrepreneur owns more than 351 million shares of Idealab, or about 45% of the company. That stake would likely make Gross--an excitable, imaginative and fast-thinking engineer--one of the richest individuals in Los Angeles, in the same league as multibillionaires Marvin Davis and Eli Broad.

Four-year-old Idealab develops only businesses that it believes will serve large markets, usually with a unique twist. Its board of directors includes General Electric Chairman Jack Welch and Compaq Computer Chairman Ben Rosen.

The bulk of Idealab’s companies are in the so-called business-to-consumer realm, selling items such as cosmetics, cars and even electrical power to online shoppers. Another group of companies offers free services over the Internet, and a few companies make software “infrastructure,” such as tools for online communication.

Seven of Idealab’s offspring have gone public or merged with companies whose shares are publicly traded. Some of those companies, such as EToys and NetZero, are onetime highfliers that have been slammed to Earth by skeptical investors wary of seemingly limitless losses. That could dampen investor enthusiasm for the company that hatched them, analysts said.

“You look at the public companies and there’s not a stellar track record,” said Tom Taulli, an analyst who follows initial public offerings. But Taulli speculated that Idealab might have interesting companies in the works that it can’t discuss because of the “quiet period” imposed by the SEC before and after any IPO.

“Their reputation is great,” Alison Ressler, a securities lawyer with Sullivan & Cromwell in Los Angeles, said of Idealab. “But the market for these types of companies has been hard hit.”

Idealab could rival other publicly traded incubators, such as CMGI of Andover, Mass., which has developed half as many companies. But Internet incubators took big falls from record highs in the last two weeks, as the value of their stock positions tumbled and the prospects for future IPOs looked dim. CMGI’s stock is down 65% from its peak, and Internet Capital Group of Wayne, Pa., is off 79% from its high.

IPOs are one of the more battered market segments this year, and many companies have postponed or pulled their offerings since last week’s dramatic market decline. But analysts said Idealab probably decided to file now because it is betting on a market recovery by late May or June, when it is likely to go public.

Idealab was able to file after qualifying for an exemption--after much red tape--to a 60-year-old federal securities law that requires some companies to be classified as a mutual fund or investment firm because of its stakes.

Idealab’s lawyers applied to the SEC for a special exemption to the Investment Company Act of 1940. Under this law, a company is considered an “investment company” or “mutual fund” if its investments in companies it does not control represent 40% or more of its total assets, excluding cash and government securities. Such companies face strict SEC disclosure rules and increased shareholder rights.

By getting the exemption, Idealab followed in the footsteps of Internet Capital, which won an exemption last summer by arguing that it was a controlling investor in the companies in its portfolio and that its primary business was actively managing and operating those firms, as opposed to being a passive investor such as a traditional investment firm.

Idealab’s underwriting team is led by Goldman Sachs, one of the IPO performance leaders. So far this year, Goldman has seen its IPOs rise 17.3% from their offer prices, on average, versus a 0.4% decline for new stocks overall, according to data tracker CommScan. Donaldson, Lufkin & Jenrette, Merrill Lynch & Co., Robertson Stephens and Thomas Weisel Partners will also underwrite the deal.

Idealab plans to trade on Nasdaq under the ticker symbol ILAB.

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Idealab’s Businesses

In papers filed to go public, Idealab revealed that it made a profit of $118.5 million in its 2000 fiscal year but had operating losses of $241.2 million. The profit was largely due to $202 million in gains realized from stock sales. A look at some of Idealab’s companies and percentage of ownership:

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Idealab’s ownership Company (type of business) stake EntryPoint (personalized desktop information) 55% DotTV (Internet names ending with “.tv”) 50 CarsDirect.com (online car buying) 44 Swap.com (online merchandise trading) 44 GoTo.com (Web search engine) 27 Petsmart.com (online pet supplies store) 21 EToys (online toy store) 12 EMachines (low-cost PCs with embedded Internet ads) 10 NetZero (free Internet access) 5 Tickets.com (online ticketing) 5 Ticketmaster Online-CitySearch (online ticketing and local events) 1 Centra Software (business software) Less than 1

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