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At Idealab, Rewards Outweigh the Risks

Start-ups: The Internet venture factory is widely celebrated for its successes. But there have been some flops too.

March 13, 2000|KAREN KAPLAN | TIMES STAFF WRITER

Internet start-up factory Idealab is celebrated for turning inspirations into corporations, sometimes in mere weeks. In the four years since entrepreneur Bill Gross founded Idealab in a Pasadena warehouse, five of its offspring have become national symbols of sudden Internet stock wealth.

The success of online retailer EToys, Web search engine firm GoTo.com, free Internet service provider NetZero, Ticketmaster Online-CitySearch and Tickets.com, have pushed Gross and Idealab into celebrity status. Even after some recent declines, the combined stock of this quintet of Idealab businesses is worth more than $10 billion.

But Idealab has created nearly 30 companies--and some of its ideas have completely failed. Idealab quietly pulled the plug on four companies, IdeaMarket, Answers.com, FeatureCast and EntertainNet, and a handful of others have struggled for years to stay alive.

"Even though [Idealab] has a lot of smart people there and potentially a lot of good ideas, they're never going to have a 100% success rate--or even 50%," said Tim Bajarin, an industry analyst with Creative Strategies in Campbell, Calif. "They only have two or three companies at any given time that are going to make it out the door" and into a successful public stock offering.

A closer look at three of Idealab's earliest ventures--kids' bartering site Swap.com, online communications software maker PeopleLink, and free intranet firm Intranets.com--reveals much about the perils of trying to create a hot Internet company. Each firm has spent years searching for a successful formula to follow its siblings to big wealth on Wall Street.

None has suffered more than Swap.com, which has gone through four different business plans, layoffs, executive turnover and three name changes.

The company began as Learning.Net, founded by Gross along with movie mogul and early Idealab investor, Steven Spielberg. Their plan was to create an educational Web site with reading and math exercises. By early 1998, the company planned to merge with a Philadelphia firm called Electric Schoolhouse, which had a similar Web site for use in schools. Getting schools to buy their product proved difficult, however, so the deal fell through and Learning.Net's staff was reduced to one.

But Gross, who became rich by founding educational software maker Knowledge Adventure, was determined to harness the Net for the good of education. Learning.Net then metamorphosed into Kids Online, a subscription Internet service patterned after America Online with special youth-oriented content and safety features to prevent children from viewing pornographic and other Web sites. With financial backing from Gross, the staff climbed back to 10 and within four months the company was testing prototypes of its subscription service.

"We found out that [although] parents are concerned about their children's safety on the Internet, they're not really willing to pay for it," said Steve Damron, who was Kids Online's chief executive.

In search of a new business idea, Damron and his colleagues visited chat rooms and talked to kids about what they liked to do online. Shopping was the answer, but kids had no way to pay for goods they wanted to buy. So Kids Online retooled itself again as a site for kids to keep track of their allowance, convert it into e-cash, and spend it online with their parents' permission.

Though Gross backed the switch, many Kids Online employees didn't. Some of them were used to working in big companies, and they were jarred by the sudden change in strategy. Those who signed on with the company because of its educational mission couldn't stomach the shift to naked commerce.

With the help of Idealab's engineering staff, the remaining Kids Online employees launched a prototype for the allowance Web site. It showed potential, but it also faced competition from three more established sites. So Kids Online decided it was time for a change--again.

The company would still run an e-commerce site for kids. But this time the currency on their site would be toys, CDs, video games, Pokemon cards, anything that kids would be willing to trade. In October, Kids Online turned down money from venture capitalists who were interested in the allowance business, changed its name to Swap.com, and began building a new Web site.

Every one of the remaining 15 employees stayed on through the transition. Several new people were hired, including former E! Entertainment Television Chief Financial Officer Bill Keenan, who took over as CEO. Keenan expects Swap.com to finally move its operation out of the Idealab incubator and into its own offices by summer, with an IPO further down the road.

If so, that will make up for feelings of resentment among Swap.com employees who watched other Idealab companies leave the nest quickly and go public.

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