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Famed Internet entrepreneur Bill Gross has walked away from his grandest idea yet: taking his incubator, idealab!, public. On Oct. 18, the company -- which had filed to raise $300 million in an IPO in April -- pulled the filing, citing volatile market conditions. Pasadena (Calif.) idealab! has spawned some of the Internet's biggest names, including eToys (
ETYS
), NetZero (
NZRO
) and GoTo.com (
GOTO
), but Gross has seen the value of the eight public companies in his portfolio plummet from $2 billion to $300 million since March. Some of his holdings have announced recent layoffs, including FirstLook.com and Z.Com. Business Week correspondent Arlene Weintraub caught up with Gross in Los Angeles to find out what's next for idealab! Here are edited excerpts from their conversation:
Q: Why pull the IPO now?
A: Our main reasons for going public were to give liquidity to early investors and provide an upside for idealab! employees. I went to every one of my investors and asked if they would prefer for us to go public now, and they all said no. The market is not very good, and they don't need that liquidity now. All of us -- employees and investors -- are in it for the long term. I know I'll be doing this for the rest of my life.
Q: What about the importance of having publicly traded stock to make acquisitions?
A: Acquisitions aren't the focus of our business. We focus on idea creation. We come up with all of our company ideas ourselves and acquire other companies only for the purpose of enhancing what we have already started. But having raised $1 billion in our recent private-equity round, we have plenty of cash, and our burn rate is low -- only $6 million a month.
Q: Many of the companies you are most famous for starting are consumer-focused. In light of the backlash in the market right now, will that focus change?
A. Yes. You will see us primarily focus on infrastructure, business services, networking, and other areas that are scalable and technology-driven. In fact, many of our newer companies are not aimed at consumers. Of the 50 we now have in total, only 10 are consumer companies.
Q. How is your process of launching a company changing in light of demands by investors to see a path to profitability?
A. The expectation used to be: Build Internet companies, grow them fast at any cost, and IPO in 12 months. Now, we need to build profitable businesses with less capital. It's a very different mindset. It means we have to look for business opportunities with higher margins -- 80% gross margins or better -- whether they are consumer companies or not.
Q. What are some examples of recent companies you've started that you believe fit that mold?
A. We've started Blastoff Network, which will be an online TV network that works much like a cable network. There will be multiple channels that are sold off to other Web sites for their use. This will be heavily tech-based, very protectable with patents, and we think we can achieve ridiculously high margins. We're already seeing that with DotTV.com. It sells domain names at 95% gross margins. We can get that company to profitability very fast.
Q. What is your game plan for the companies that are struggling?
A. We're merging some of them, we're reducing the size of others, and in some cases we're changing business models. For example, we merged PayMyBills.com with PayTrust. We took the No. 2 player and the No. 3 player and hope we can create the No. 1 player through the merger. With entertainment site Z.com, we realized that we had scaled it too fast, so we needed to lay off some of the 90-person staff to make our capital last through 2001. With FirstLook.com, where people go to watch entertainment previews, we completely refocused. Now, the company sells its content to other sites that want to carry previews. We expect gross margins to double from 30% to 60%.
Q. What's your response to critics who say the incubator model isn't working?
A. I agree with some of that speculation, but it depends on how the word "incubator" is defined. Some incubators simply house companies, provide them services and support, and take an equity stake in them. But that's not the important part. You can be a wonderful service organization, but if you're not starting the right kinds of businesses, that won't matter. We think our strength is idea creation. We don't rush ideas out. We have a careful process that we think builds better companies.
Q. Has investors' pessimism dampened your enthusiasm for Internet startups?
A. No. The Internet is still completely exploding. Just because stocks are down, that doesn't mean the opportunities have lessened. Internet usage is exploding, the impact on our everyday lives is growing easily at 10% a month. So we are now in a period of greater opportunities, but with tighter capital restraints. I'm comfortable with that.
Edited by Douglas Harbrecht
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