Idealab Spawning Discord
In a small room in Pasadena that looks like a high school machine shop, the man whose high-tech incubator once spawned some of the hottest companies in Southern California is in the midst of what he insists could be his biggest idea ever.
Bill Gross spends most of his time here these days, behind glass doors, tweaking the design of solar engines at a venture tentatively called Pasadena Power. Though the business hasn’t been formally launched, Gross -- never known for understatement -- declares unabashedly that it “will change the world.”
“It’s like the atom bomb with its significance for the planet,” he said.
Unless, that is, Gross’ business empire gets blown apart first.
Gross, who once had hundreds of millions of dollars thrown at him by some of the smartest investors in America, is locked in a bitter court battle with some of those same backers. They want to shut down his incubator, Idealab Inc., and take back as much of their capital as they can get.
The next showdown will come today when Los Angeles County Superior Court Judge Ralph Dau is set to decide which charges in the investors’ complaint, including “deceit by concealment” and “breach of fiduciary duty,” can go forward to trial, expected to start early next year.
Dau also is expected to decide whether these shareholders, who own only about 10% of Idealab even though they had put up about 96% of its capital at its peak, are significant enough investors to call for the firm to be dissolved.
Civil court documents filed this year by the group of about 40 angry investors maintain that Gross wants to use the estimated $350 million of liquid assets that Idealab has left to support salaries for himself; his new wife, Marcia Goodstein, who is the company’s president and chief operating officer; and his brother Larry -- rather than create companies that make both sense and profits.
Among those leveling the allegations: an investing arm of Dell Computer Corp.; mutual fund giant T. Rowe Price; a group of former top executives at Microsoft Corp.; and Jeffrey Berg, who heads talent agency International Creative Management.
The investors rushed to give Gross $1 billion in cash in exchange for so-called preferred shares in early 2000, just as the tech-sector boom was peaking and as Idealab was considering going public. Now, the investors contend that Gross has mismanaged the company and is using it to his own ends.
Gross, 44, says he has no intention of shutting down. He intends to prove that the incubator concept -- in which Idealab spawned such hits as Internet search engine Overture.com, as well such bombs as EToys Inc. -- is still viable.
Indeed, Gross, who at one point could claim to have generated more than 6,000 jobs and millions of dollars in shareholder wealth from more than 50 companies, says he has new ventures in development that will surely flourish.
He promises to make money for the very same investors who are so angry with him now -- if they’d only leave him alone.
For their part, the investors contend that their main beef isn’t with Gross’ high concepts; rather, it’s with what they see as his high living.
“We’re willing to go the distance and will go the distance,” said one former investor who asked not to be named. “We’re not going to sit by and watch Idealab spend $50 million a year to support the lavish lifestyles of Bill Gross and his wife with what we believe is our money.”
Added Jay Ferguson, a partner with Kline Hawkes, a Los Angeles venture fund that holds about $40 million of Idealab’s preferred shares and is a plaintiff in the suit: This “is not at all about Bill Gross’ plans for the future. It’s not about what great ideas he has. It’s about the abuses we allege in the complaint. We can’t stand by and see what’s going on and look the other way. This is about doing what’s right for our own stakeholders.”
The plaintiffs allege that Gross’ salary increased 60% in 2001 to $400,000 and Goodstein’s salary increased 85% to $350,000 after they received the investors’ money. However, Gross counters that in the six years that Idealab has existed, his salary and bonus has averaged $300,000 a year.
The plaintiffs also allege Idealab lent almost $36 million to Gross and Goodstein and other former directors. Gross acknowledges taking a loan of $30 million to buy into the preferred stock in 2000, but says he paid it back within 30 days using a personal bank loan.
Gross calls the investors’ accusations “completely false,” adding, “All the money at Idealab is being used to build new companies.”
“The only money I’ve taken out of Idealab is my salary,” he said. “There is no way I could be supporting the lifestyle they are claiming.”
Gross says he put $42 million into Idealab at the same time the preferred investors did and on the same terms. He says he stands as the fifth-largest cash investor in the company and thus has more money at risk than many of those suing him.
Because Idealab is a private company, the investors can’t sell their shares in a marketplace. Idealab in December offered to buy them out at 10 cents on the dollar, a deal they refused. The investors then asked for 37 cents on the dollar, an amount that Gross rejected in April.
So how did this creative genius put himself in this position?
The son of an Encino orthodontist, Gross has always had an entrepreneurial bent. While at Caltech, he built stereo speakers and sold them to classmates. In 1996, after selling Knowledge Adventure, an educational software firm he founded, Gross decided to start Idealab.
The original company name was Bill Gross’ Idealab, because there already was an Idealab in California. His initial investors -- who are not part of the lawsuit -- included director Steven Spielberg and actor Michael Douglas.
Despite the distraction of the lawsuit, Gross keeps plugging away, working out of the same cavernous office space off Colorado Boulevard that he has always occupied.
Idealab now counts about 10 ventures being explored under its roof. The incubator employs 100 people, fewer than half what it did during the heyday of the dot-coms.
Gross is betting big on Evolution Robotics. Unveiled this year, the company has produced a robot called ER1, which looks like a laptop on wheels -- though you have to supply the laptop -- with a digital camera attached. It can see, so it can recognize certain things, be programmed to perform certain tasks and respond to commands. At $600, it’s one of the cheapest robots around, says Gross, and is available for Christmas shopping in stores such as CompUSA and FAO Schwarz.
Another major project is Omnilux, a wireless broadband company that Gross predicts will offer low-cost but fast Internet service. The company makes Omni-Nodes, which can sit on a customer’s roof and create low-cost broadband networks for various places, including hard-to-serve areas.
Then there’s Pasadena Power, the most secretive of Gross’ ventures.
Although Gross has his supporters in the local high-tech community, some wonder about his stubbornness, given the dot-com shakeout and the collapse of similar Internet incubators, such as CMGI and Internet Capital Group.
“If anything suffered and died in the dot-com boom, it’s the concept of vision as a substitute for sound business practices,” said Jon Goodman, who ran USC’s technology business incubator, knows as EC2, for six years before the university shut it down in June.
“It’s fool’s gold,” Goodman said. “It flies in the face of everything we’ve seen in the past 20 years. If Gross makes this work, he’ll be the first one. Then we could say he has business skills that no one else has ever had.”
As for Gross, does he ever have doubts? Does he worry that his ideas might not pan out?
“Never. I never have doubts,” he said. “Not when I see what we are doing here.”
