Can Idealab’s “Mad Genius” Weather the Bear Market?

The fabulous Internet boom created virtual geniuses by the score. And it will be interesting to see what becomes of them all, now that the conventional wisdom has moved on to a new phase in which it is no longer enough simply to have “cool” ideas–now they actually have to include profits at some point.The person I’m most curious about is Bill Gross, the “mad genius” behind Idealab, which is a company that creates companies. Recently, an Idealab brainchild called filed for its initial public offering, and when it goes out some time in the weeks ahead, it will be scrutinized by those looking for clues about the health of the broader market for Internet and other tech stocks.

Gross has gotten pretty much a three-year standing ovation from the business press, starting with a 1997 Inc. cover story in which Steven Spielberg, among others, went on record praising Gross’ awesome creativity and brainpower. Gross founded Idealab in 1996, envisioning a kind of factory that cranked out startups based on his ideas. He had a good track record, although nothing particularly mind-boggling by 1990s standards–he had founded and sold two companies for lots of money. “We don’t really think of ourselves as venture capital,” he declared back then. “We’re creative capital.” Later, Business Week put Gross in “the front ranks of the Internet revolution.” More recently, one columnist suggested that Gross might be “the next Bill Gates.” (Of course, this was several months ago, when the idea of being the next Bill Gates still sounded great.) Even more recently, another observer, surveying the “Internet incubator” fad, counted Idealab as a “serious” outfit with “real infrastructure and experienced principals.”

Actually, that last observer was me, in a “Moneybox” last month. What I’m about to do isn’t quite reversing myself entirely on Gross, but it may seem close to that. Idealab has in fact created, or is creating, a lot of other companies–its Web site lists 32. Gross remains pretty much universally revered: Entrepreneurs are falling all over themselves to work with him, and big investors are throwing money his way. Whether individual investors should follow their lead, however, is another question entirely. Particularly in a market that is less forgiving of neat ideas that don’t earn a dime. 

Of the 32 Idealab progeny, five are now publicly traded, which is a decent track record. Like any incubator or venture capital firm, Idealab has seen some blowups and shutdowns, but these five would have to be considered its most compelling success stories.

None of the five makes any profit. Three are trading below their IPO prices, and the other two are only barely above water. CitySearch, which is one of those online listings services, merged with Ticketmaster Online and went public in December 1998, at an offering price of $14 a share. It closed its first day at a little over $40. Today it closed at about $17. It has earnings of -$1.91 a share. Etoys, an online toy seller, probably the most famous Idealab child, also had a triple-digit percentage gain its first day out, rising from $20 a share to more than $83 at the close of its first day of trading last May. Today it closed at about $5, with earnings of -$1.81 a share. Its net losses for the last nine months of 1999 totaled $141 million., which is a search engine, went public at $15, and now trades at around $16. Its net losses for the first three months of this year were $30 million. Netzero, a free Internet service provider, went public at $16 and now trades for $7.75 or so. Its net losses in the first three months of the year were about $64 million. And, which went public at $12.50, closed today at roughly $3.50, with net losses for the first quarter of 2000 at a bit more than $20 million. If you had invested $10,000 at the IPO price in each of these five Idealab creations, you would be in the hole to the tune of about $17,000. Of course, it’s hard to get in at the IPO price on a hot Internet deal, so here’s another calculation: If you’d invested your $10,000 in each at the first day’s closing price, your loss would be more like $33,700.

Meanwhile, some of the other startups in the Idealab pipeline might look a bit suspect to a market that is no longer entranced with every me-to Internet retailer–there’s Petsmart (selling pet supplies online), (cookware online), (jewelry). And, of course, there’s the soon-to-IPO, which is an online auto retailer

None of this is to say that some or even many of Gross’ ideas might not eventually turn into real success stories over time, and maybe even good long-term investments. And certainly none of this is to say that Gross isn’t a terribly smart guy. After all, since Idealab acquires ownership stakes in its companies at pennies per share, all five of its public offspring still represent massive payoffs for the incubator–even if they are losing tens of millions of dollars and have punished any individual investor who gets near them. I’m sure Gross himself is still worth a tremendous amount of money, and that, apparently, is still how we measure genius these days.