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Beleaguered Idealab Needs to Hatch a Plan for Its Survival

Internet: The start-up incubator has fallen on hard times along with many of its dot-coms.


EToys Inc., one of the Internet's flagship companies, filed for bankruptcy protection Wednesday, becoming the biggest online company yet to fail amid the devastating dot-com shakeout.

More than the demise of a single company, the collapse of EToys shows just how far Bill Gross and his Pasadena-based Idealab Inc. have fallen.

Besides EToys, Idealab churned out early Internet hits such as Web search engine, free Internet service provider NetZero and online guide CitySearch, generating at its peak more than 6,000 jobs and billions in shareholder wealth.

All that activity put Southern California on the "new economy" map and made Gross a high-tech celebrity, entrepreneurial hero and paper billionaire. But the dot-com decline has left Gross and Idealab in a precarious and unfamiliar position.

With an Internet turnaround nowhere in site, Idealab has been forced to slash spending and lay off more than half its employees just to make it through this year.

After pouring $800 million into a virtual black hole, Gross now finds himself in the humbling position of fending off investors who recently tried to seize control of his company. Gross also is facing several lawsuits from a growing list of disenchanted former executives.

"We go through these cycles where we think there's a suspension in the rules of business and we learn--pretty painfully--that there isn't," said Frank Baxter, chairman of the Los Angeles investment bank Jefferies Group. "There was a certain suspension of reality, and Bill responded to it. It changed abruptly and maybe he couldn't adjust as fast as he might have."

Gross' top lieutenant and girlfriend, Marcia Goodstein, acknowledged that many of Idealab's ventures over the last few years amounted to garbage and that the company's decline has cast serious doubt on Gross' fundamental premise: In the right setting, Internet start-ups can be hatched like eggs.

The incubator concept "is being torn apart, laughed at, degraded and derailed," she said. "We need to prove that this model works."

Indeed, after thriving in an era that scorned business fundamentals, Gross' survival now depends on his ability to do something he's never done before: create a sustainable, profitable enterprise.

None of this appears to discourage Gross, an incurable optimist who expresses no regret for leading his company into this trouble. True to form, he still believes he can pull Idealab to safety by doing what he does best: generate ideas.

"We have really, really great companies coming out," Gross, 42, said recently. "Very, very bold, world-changing."

As recently as a year ago, Gross appeared to be churning out successes at a record pace. EToys was his biggest hit, and many believed it could push Toys R Us out of business.

Instead, EToys will shut down its Web site today after it was unable to find a buyer or additional financing. The company, which lost $189 million last year, listed debts of $416.9 million and assets of $285 million. Its shares, which last traded for 9 cents on Feb. 26, will be delisted by Nasdaq today.

Entrepreneurial Bent

That is a far cry from 16 months ago, when Idealab's publicly traded offspring were worth a total of $10 billion and dozens more start-ups were in the pipeline.

It was all almost effortless for Gross, the son of an Encino orthodontist, who has been hatching moneymaking schemes since he was a child. His first venture came in middle school, when he discovered he could buy candy in bulk and resell it to classmates at a markup that still undercut the local drugstore.

As a student at Caltech, he built stereo speakers and sold them to classmates. He made his first real fortune when he started an educational software firm, Knowledge Adventure, and sold it in 1996 for $100 million.

Then he had what many thought was his best idea of all: Idealab.

The premise was simple: maintain a staff of entrepreneurs, programmers and managers who could swiftly convert Gross' inspirations into companies. His first hire was Goodstein, who is as pragmatic and tough-minded as Gross is starry-eyed. Though both were married at the time, their professional relationship evolved into a romantic one.

Gross' companies enter their larval stage in the "pen" just beyond the plexiglass wall of his office in the converted Old Pasadena warehouse that serves as Idealab's headquarters.

The payoff comes when ventures go public or are sold. For a while, the payoff was huge, as the stock values of EToys, CitySearch and other offspring soared.

Gross made $7.6 million to $10.2 million selling his personal shares in Idealab companies, according to First Call/Thomson Financial, a company that tracks insider trading. He bought a Ferrari and began work on a custom-built house overlooking the Rose Bowl, where he now lives with Goodstein. He bought his own airplane and told friends of his ambition to give Caltech such an enormous endowment that no student there would have to pay tuition again.

Idea Loop

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