Idealab’s IPO Ambushed by Bear Market
The bear market in Internet stocks forced once-highflying Internet business incubator Idealab on Wednesday to abandon its grand plans for an initial public stock offering.
As the creator of such companies as online toy retailer EToys, search engine firm GoTo.com and free Internet service provider NetZero, Pasadena-based Idealab was celebrated as a darling of the New Economy. But as investors lost faith in money-losing Internet start-ups, including Idealab’s, the 5-year-old incubator has lost its luster.
“Look at their portfolio--there’s really no companies that stand out,” said Tom Taulli, a stock analyst with Internet.com. “Idealab used to have home runs, but now they’re gone. There’s nothing they can still brag about.”
On Wednesday afternoon, Idealab Chairman Bill Gross gave the news in an e-mail to his 230 employees. “Over the past several months, we have seen dramatic shifts in the market,” Gross wrote. “We have decided that it is in the best interest of the company, its employees and investors that we not proceed with the IPO during this volatile time.”
When Idealab registered for its share offering on April 20, venture capitalists were encouraging Internet firms to spend whatever it took to win market share, with the expectation that profits would come in due course. Investment bankers predicted that Idealab--which does not produce any goods or services directly--would achieve a market valuation of $10 billion.
Then the speculative bubble burst, and Gross watched through the summer and early fall as demand for new Internet issues continued to dwindle.
Idealab has experienced that volatility firsthand. Shares of EToys closed Wednesday at $3.56, compared to an IPO price of $20, and down 96% from its all-time high of $86. NetZero shares were worth $2.03 at the end of trading Wednesday, versus an IPO price of $16 and 95% lower than their high of $40. GoTo.com finished Wednesday at $10.25, down from its IPO of $15 and 91% below its record high of $114.50.
Idealab’s three other publicly traded offspring--online ticketer Tickets.com, discount PC maker EMachines and business software firm Centra Software--are also trading at significant discounts.
Last November, Idealab’s stakes in its public portfolio were worth nearly $2.3 billion. Today those stakes are worth less than $220 million.
The IPO might not be the only thing Idealab is forced to abandon. Analysts and venture capitalists who watch the company closely predict that a number of its start-ups will be shut down in the coming months. Idealab’s business-to-consumer e-commerce firms, which sell items ranging from cookware to cosmetics, are especially vulnerable, they said.
Gross said every company in the Idealab portfolio is in the process of retooling to meet Wall Street’s new preference for profits over market share, and in his companywide e-mail he implied that some shut-downs are likely. “Not all of our companies will survive this period of intense scrutiny,” he wrote.
But in an interview, Gross insisted that each Idealab firm can survive.
“We restructured every company fundamentally to be profitable,” he said. “We adjusted the valves, the rate of how fast you want to grow.”
Idealab will be able to operate for at least several years without raising additional money from the public markets or from individual investors, Gross said. In March, the company raised $1 billion from private sources and, because the incubator’s burn rate is currently $6 million per month, it has enough cash to last for years even if none of its start-ups hit it big in the marketplace, he said.
Gross finally decided to pull the plug on Idealab’s IPO after the incubator last week won a hard-fought exemption to the Investment Company Act of 1940 from the Securities and Exchange Commission.
The law would have classified Idealab as an “investment company” or “mutual fund” because it holds stakes in so many of its spinoffs. Such a classification would have forced Idealab to adhere to strict SEC disclosure rules and increased shareholder rights.
But Idealab won an exemption by redeploying its funds and taking controlling stakes in more than 25% of its companies.
“That was an important milestone to reach,” Gross said Wednesday.
When Idealab makes a new attempt to tap the public markets, that exemption will already be in place, he said.
Idealab currently has 35 companies in its portfolio.
