Case 6: idealab!
It was in a golf cart with Steven Spielberg, motoring around the set of the movie Casper, that Bill Gross decided he needed to explore a strange new world. The 38-year-old founder of Knowledge Adventure, a prominent maker of educational software, had been wrestling with a problem: his creative zeal, which had served him so well in his start-up days, seemed to have fewer and fewer outlets. Thus, idealab! was born.
Bill Gross's career has been a ladder of entrepreneurial zeal: a $350 million empire that had its beginnings in Encino, California, when he was 12 years old. Gross realized at that time that the drugstore on the corner was selling candy for a dime; but if he got it at the Sav-On down the street for 8 1/2 cents, he could undercut the pharmacy by a penny and still profit off the margin. Soon he was buying by the case for 7 cents, then from the manufacturer for 6 cents. By the time he reached high school, Gross had salesmen doing his legwork for him.
Then in March, 1996, Bill formed idealab! which currently has 26 businesses in various stages of incubation. The businesses range in size from teams of 3 or 4 individuals working on information visualization technology to the largest idealab! company, CitySearch, which employs over 1000 people in the CitySearch network spanning 14 cities in the U.S. and internationally. CitySearch, an on-line listing service for community information, was recently valued at just over $100 million in a Morgan Stanley private placement.
idealab! is a factory of sorts. But as the "floor plan" suggests, it is no ordinary manufacturing operation. It doesn't churn out toothpaste or sheet metal or software. idealab!–with Gross's preferred punctuation and capitalization, it's the frenetic idealab!–is in the business of creating businesses. It's a start-up factory. Since its inception, over a year ago, idealab! has been spinning Gross's raw ideas into independent companies. All are Internet-related start-ups, and most of them are based around Pasadena, California.
What is it?
The Internet is a global web of interconnected computers and computer networks. "Web" refers to the fact that the Internet is a network of networks. It integrates together local area networks (LANs), located in schools, libraries, businesses, hospitals, federal agencies, research institutes, and other entities into a single, large communication network that spans the globe. The underlying physical connections include: the dialup telephone network; satellite and ground-based microwave links; and fiber-optic networks like those running through metropolitan areas. The actual network cannot be mapped at any time since new computers and networks are constantly added, and the electronic pathways for information are constantly changing.
Who owns the Internet?
No one person, company, institution, or government organization owns the Internet. The Internet is truly a collaborative, collective enterprise. Historically, the Internet was conceived as a communication network for researchers, and relied on a backbone network funded by the National Science Foundation (NSFNET) that connected major supercomputing centers throughout the U.S.. In 1993, as an increasing number of private and commercial networks connected to this backbone, the National Science Foundation withdrew from the backbone business. Since then, the central infrastructure consists of a series of Network Access Points (NAPs) throughout the U.S., where a growing number of commercial backbone operators connect directly to each other, instead of to one central network (For a more detailed breakdown of the structure see Exhibit A).
The Transmission Control Protocol/Internet Protocol (TCP/IP) is the key to the interoperability on the Internet. It is a basic data protocol or communication format that allows different computers and operating systems to exchange information over the network through higher level applications such as FTP (File Transfer Protocol), and other applications (Gopher, Telnet, WWW). First, TCP breaks every piece of data into small chunks called packets, each of which is wrapped in an electronic envelope with addresses for both the sender and the recipient. The IP then figures out how the data is supposed to get from point A to point B.
The World Wide Web
Although the terms Web and Internet are often used interchangeably, they’re actually two different things. The Internet is the global association of computers that carries data and makes the exchange of information possible. The World Wide Web is a subset of the Net–a collection of inter-linked documents that work together using a specific Internet protocol called HTTP. The Web consists of a medley of individual "web pages" which are usually combined to make up Web sites. Web pages are written in HTML, or Hypertext Markup Language, which tells the Web browser how to display the page and its elements. The defining feature of the Web is its ability to connect pages to one another–as well as to audio, video, and image files–through the use of hyperlinks. Just click your mouse on a link, and suddenly you are at a Web site on the other side of the world.
Sun's Java is a programming language similar to the popular C++ language used to make applications like word processors and spreadsheets. It is commonly thought of as a way to make Web pages sexy–incorporating stock tickers, sound, or video into web pages. Because of Java’s "openness", and resulting capability of being read by any type of browser, it has evolved into much more than simply another "language". It is becoming known as a computing platform–the base upon which software developers can build applications. Developers can build a variety of applications using Java–traditional spreadsheet programs and word processors in addition to mission critical applications used by the biggest companies: accounting, asset management, databases, human resources and sales.
Java applications, or applets, are different from ordinary applications in that they reside on the network in centralized servers. The network delivers the applet to your system when you request them combined with the object data. This capability, combined with Java's platform independence, makes Java not only a great tool for creating sophisticated WWW applications, but also positions it as a direct threat to established computer applications like Microsoft Office or Lotus Suite. These applications traditionally have been operating system dependent, and have been located directly on desktop workstations where they are not easily transferable to another workstation.
ActiveX™ is Microsoft's answer to Sun's Java. However, where Java is a full-fledged cross-platform programming language, ActiveX™ is a proprietary Microsoft product that is closely linked to other Microsoft applications and Windows95, thereby limiting its general applicability (since it only works with Microsoft's Internet Explorer browser).
Due to encryption techniques, the risks involved in business transactions on the Net are no greater than those risks consumers face in any other arena in which they do business. While it is relatively safe to conduct business on the Internet right now, there are many companies continually working to develop, and improve, the technology required to make the Web secure.
Speed is one of the critical elements for the future of the Internet. As applications become more and more data intensive, and an increasing number of customers utilize the Internet’s central infrastructure, the data capacity (called bandwidth) of all connections involved will have to be improved drastically in order for the Net to be a viable medium for the graphically intensive applications of the future.
Business on the Internet
During the last four years, the Web and its underlying infrastructure has seen exponential growth. Fueled by a migration of proprietary information services to the Web, online subscribers reached 21.1 million in 1996, a 45% increase over the 14.5 million subscribers in 1995. The largest gain came in the area of consumer services (e.g. America Online–an Internet host) with a 51.3% increase to 17.1 million subscribers. At the same time, WWW advertising revenue will reach $446.2 million, up 160% from $171.5 million in 1996 (1995: $63.5 million). Total Web advertising revenue is projected to increase another 118% to $976 million in 1998 and up to $2.5 billion by 2000.
idealab!'s philosophy is to spin off ideas into individual, highly-focused businesses, and to provide shared services, support, and knowledge to help each of these businesses to succeed. Gross believes that to achieve speed of execution, it is essential to tap the shared knowledge of an organization that has extensive experience in starting Internet companies. By factoring out these shared resources and knowledge, idealab! combines the best of small, nimble, focused companies, and the resources, financial strength, and knowledge of a much larger organization.
The company provides various services to each Internet start-up company, particularly in the business conceptualization, planning, and launch phases. idealab! services are primarily in the creative area, and although the firm does provide seed capital to the start-ups as well, it considers itself a "Creative-Capital" firm as opposed to a Venture-Capital firm. The creative services provided include development and technology services, graphic design, business strategy, branding, corporate structure, marketing and competitive research. Each spin-off company is a fully separate entity controlled by the management of that company. idealab! specifically does not take a controlling interest in each of the companies, but does take an equity stake in return for its start-up capital, technology, and services.
Why so many ventures? Because no one knows what will, or will not, work on the Internet. "Some companies will be stillborn; others will go somewhere," says Charles Conn, CitySearch's chief executive and an old friend of Gross. Gross says the design of his incubator for companies was partly inspired by George Hatsopoulos, 70, founder of Thermo Electron Corp. in Waltham, Mass. Thermo Electron (http://www.thermo.com/) has started, and taken public, corporate offspring while keeping controlling interest in each. Thermo Electron's startups are not equally successful. Their present market capitalization range from $93 million up to $3.2 billion.
idealab!'s ventures cover three categories of Internet businesses: making markets more efficient, entertainment/education, and Internet tools. With the majority of idealab!'s ventures still in their infancy, most of them present only hollow structures. The most mature spin-off companies include CitySearch, eToys, and Wedding Channel.
CitySearch is a community guide, delivering up-to-date information on arts and entertainment events, community activities, and local businesses to consumers via the Internet. It may be personalized to assist people in planning entertainment and activities, and making purchases in their local communities. Unlike city sites that aggregate links to pre-existing content, CitySearch is built from the ground up in the community, in partnership with local government, community and volunteer associations, business and professional groups, educational institutions, and visitors’ bureaus.
The business model
The CitySearch service builds directories of Web sites for each city it tackles, selling pages in the directory to local businesses. The CitySearch company, which employs 450 people, creates the sites for free, then charges $50 to $100 a month to run them. CitySearch has signed up 150 of San Francisco's Italian restaurants. The company's sites already include 10,000 pages, but some of those have been given away free to drive demand and traffic.
CitySearch also has agreements with Los Angeles-based Times Mirror Co., publisher of The Los Angeles Times, and The Washington Post Co., publisher of The Washington Post, to develop content in their markets.
"There are a lot of companies that have decided to build their own Web site. The problem is it is very expensive because after you build it you have to maintain it. And even after you build and maintain it, people have to find it. I liken the Web to some bizarre world out of "1001 Arabian Nights." There are a lot of twists and turns and cul de sacs where you are searching for your wallet every five seconds. CitySearch is like a well-lit shopping mall. There is one entrance in and one entrance out."
There are many on-line directory services. There are also a fair number of services that provide fresh content, but in a fairly narrow area. Additionally, many services are just aggregators of existing hypertext links. CitySearch is different from all of these things. The company provides a service that is both very broad and very deep with a full-time editorial staff that is updating material on a daily basis.
Building strategic relationships with established groups of media companies and financial investors further validates CitySearch's business approach, and will contribute substantially to strengthening the company's position. This market continues to evolve, and the services that are able to achieve the greatest degree of critical mass will be in a much better position to achieve future economic success.
CitySearch is currently up and running in Austin, Melbourne, Nashville, New York, Pasadena, Portland, Raleigh-Durham/Chapel Hill, Salt Lake City, San Francisco, Sydney and Toronto, and will soon launch in Los Angeles and Washington, D.C and expects to be in 27 cities by the end of the next year.
The CitySearch Web service is continuing to expand and has launched new versions of its regional information services to Scandinavia. Now, users in Stockholm, Sweden, Oslo, Norway, and Copenhagen, Denmark, who got their own versions of Yahoo! recently, can now access the CitySearch service and find arts and entertainment, community, and merchant information together.
Most of the CitySearch markets share some common characteristics. One of the things CitySearch looks at is computer and Internet penetration. For example Portland certainly ranks very high in those categories, among the highest rankings in the United States. The high-tech presence contributes to the Internet presence.
"It also has some really excellent demographics. And it has a group of well-educated people that are very familiar with computers and technology and browsing the Internet. In addition to that, one of the things Portland is really blessed with is a remarkable downtown. You have people who will not only come from Lake Oswego or Beaverton or Tigard to work but after work will stick around and they will go to restaurants and brew pubs and go shopping. So from a sales perspective it is a very manageable kind of market. We look at things like per capita spending. Per capita spending in Portland is extremely high. We look at average education, which is extremely high there. We look at the number of government employees and median income."
CitySearch's first round of financing was $30 million. Investors were abundant and prominent institutions, as well as individuals, were willing to support Gross in his endeavor to churn out Internet start-ups. Because idealab! itself has no revenues, its operating cash comes from a $5 million stash put up by 10 investors, who include movie producer/director Steven Spielberg, actor Michael Douglas, Compaq Computer Chairman Ben Rosen, and Gross himself. Gross hopes idealab! will ultimately perpetuate itself in "venture-capital style": just a couple of smash hits from its portfolio–an initial public offering or an acquisition–"and that will fund us basically forever," he says. Additional financing came from Goldman Sachs, AT&T Ventures, Comcast and Compaq Computers. In a second round CitySearch has raised at least $34 million in new venture-capital from Barry Diller's Home Shopping Network Inc.. CitySearch's overall financing spree has now raised more than $75 million since its inception. Analysts are impressed by the amount of money CitySearch has raised in light of the fact that many of the Internet's early stars have failed to live up to their financial promise.
In the past five or six months this market has become very competitive. When CitySearch started looking at Portland, idealab! manager Steve Glenn saw no competitors for the kind of service CitySearch was offering. Now OregonLive has announced its service. US West's DiveIn is in Portland. CBS, NBC, and ABC have announced plans to offer affiliate services. Time Warner's CityWeb service has also been launched. Additionally, with their high brand equity, prominent Internet companies, such as Microsoft, Yahoo!, and AOL could provide similar services and pose a credible threat to CitySearch's early success.
Microsoft Sidewalk (http://www.microsoft.com/sidewalk/) will launch the Seattle version of Sidewalk. Guides for other cities are planned later this year. Sidewalk's database is not only vast, but also searchable and updated three times a day by about 12 full-time staffers and a crew of freelancers. The Sidewalk team takes its journalism seriously. New York's executive producer, the service's equivalent to an editor in chief, is Eric Etheridge, the former editor of George magazine. Seattle Sidewalk poached its top editor from the Seattle Weekly, where she was in charge of arts and entertainment coverage.
Sidewalk does have some innovative features. In the restaurant section it anticipates common questions. Can you smoke? Is the food kosher? How decent is the wine list? And, in Seattle, can I arrive by boat? Sidewalk will alert you by e-mail when your favorite jazz trio comes to town, or tell you how much scalpers are asking for tickets to tonight's playoff game. Company officials say Sidewalk has 10 to 12 national advertisers and more than 500 local advertisers in each of the four cities where it's available. Six cities will be added this year.
Yahoo! (http://yahoo.com/) creates city guides by providing visitors with the appropriate links to corresponding web pages. In this way they generate complete city guides without being involved in the maintenance and accuracy of the contents they provide. This approach allows Yahoo! to churn out new city guides quickly and simply by interconnecting existing content pages. This operational strategy also keeps Yahoo’s! costs to a minimum.
Digital City (http://digitalcity.com/) is co-owned by AOL and Chicago-based Tribune Co. It's available only through AOL in 14 cities, though the service is moving to the Web later this year. Industry sources say AOL plans to spin off Digital City into an independent company. They say the service lags other city directories and newspaper Web sites because it doesn’t offer as much local content. However, Digital City has the advantage of generating traffic from AOL's 9 million members.
In March, US West introduced its entrant into the market, DiveIn, (http://www3.divein.com/) in 10 cities. The company's strategy is to expand into cities where US West "has an established local presence". It's being bundled with US West's Internet access service. The DiveIn service packages content from local sources, such as magazines, rather than creating its own content.
Already dozens of companies, from newspapers to television stations to small Internet start-ups, are offering similar local entertainment listings, reviews, news, and other information on the Web. Nearly all of these ventures are fairly small-scale operations aimed at one specific area or city.
Advertisers spend an estimated $67 billion a year buying promotions in local markets, from Yellow Pages listings to newspaper ads to direct-mail coupons. Bill Bass, an analyst with Forrester Research Inc. (http://www.forrester.com/) of Cambridge, Massachusetts expects $ 1.5 billion of that to shift to locally based online sites within four years. Newspaper classified ads, in particular, are the envy of many hopeful Web publishers. Some say the safer and smarter approach is to produce online guides "on the cheap" by linking to other existing sites or partnering with local news outlets. "This is a bad market to be in," says Bass, "The city directories are not picking up enough revenue".
"Each service needs to grab a significant share of the local market," says Peter Krasilovsky of Arlen Communications, Bethesda, Maryland." Ultimately, no market can support more than two players."
"I started thinking about it last Christmas, when I had to buy some presents for my nieces and nephews in Atlanta. Toy stores are a really miserable
experience, you know. People don’t like bringing their kids. So I thought, let’s find a really compelling reason to keep people out of toy stores."
The speaker is Toby Lenk, 35, founder and chief executive officer of eToys, an electronic commerce start-up funded by idealab!. eToys just opened its virtual doors in October, 1997. It sells a range of 1000 different toys, books and software titles over the Web. Customers choose what they want by clicking on pictures and descriptions of specific toys. They pay with their credit cards and receive shipment of the products by United Parcel Service (UPS). The site allows customers to browse through the list of toys by child’s age, toy type, and what they hope the child will learn from using and playing with the toy.
eToys’ major selling point, according to Lenk, is that it is not a Toys R Us (http://www.toysrus.com/). Lenk’s research led him to the conclusion that parents hate being dragged around toy superstores by their children and eventually purchasing products that they would not have chosen themselves. In addition, like other electronic commerce ventures, the eToys site contains some informational content. This content includes advice to parents and children about what to buy. It also has a reminder service for adults who might otherwise forget a birthday or other special occasion. Hence, eToys targets parents based upon this philosophy. Buying on the Web, in the quiet of one’s home after the children have gone to bed, is eToys’ advantage over other mass-market toy stores.
This concept is what Lenk sees as a compelling financial imperative behind the venture. Stores such as Toys R Us generally have billions of dollars in assets, exclusive of inventory and working capital, in order to support hundreds of stores around the country. eToys can serve the world with one store. The company has a number of talented managers brought in from other businesses with the offer of stock options. Lenk himself is a Harvard Business School graduate with experience in management consulting and strategic planning for Disney. eToys owns only one 4000 square foot warehouse based in Oakland, California, with two staff and a computerized warehousing system. The whole venture required relatively little capital–Bill Gross injected $250,000 in seed capital, and the business recently closed a round of venture-capital from private investors that brings eToys’ bank balance to slightly more than $1 million.
The company has entered into direct buying relationships with more than 100 top toy manufacturers including Mattel, Lego, Little Tikes, Hasbro, BRIO, and Learning Curve. Most suppliers have given 30 to 60 days of credit and some have offered products on sale or return. Some products are drop-shipped straight from suppliers. Other products such as books and CDs are kept in one and twos and replenished overnight. The direct relationships give eToys a competitive advantage because they are able to offer consumers a quality range of toys on the Internet. eToys first month of business attracted more than 150,000 visitors to their Web site. By taking lower margins, eToys aims to meet or beat the prices charged by Toys R Us for the same products. Lenk hopes his strategy will counteract the economies of scale of the world’s biggest toy business.
Tim Gray, CEO of Wedding Channel, found that during the planning stages of his nuptials a few years earlier, there were few available outlets for aggregated and comprehensive wedding information–online or offline. Though he gives most of the planning credit to his wife, Gray was ultimately responsible for launching a site dedicated to providing brides-to-be with all the information they need to put together their special days.
With wedding spending upwards of $22,000 during the engagement and in the first years of marriage, this market is very enticing. Each year there are 2.4 million weddings in the United States that comprise over $32 billion in retail sales. Couples not only invest in the "big day", but spend considerably on filling a home and planning their future. Hence, Wedding Channel plans to take advantage of this large market through the Internet.
Wedding Channel was launched in July 1997 and boasts more than 1000 hits per day. Through the partnership with idealab!, Wedding Channel was formed by incorporating content from WeddingPlanner.com and Bridalnet–two sites that would have been competitors. The site generates its revenues from hosting regional wedding-related businesses ($59/month), hosting sub-sites for national companies, such as Black & Decker and Noritake china ($500/month), and from a percentage of sales made through the site.
Wedding Channel also accepts banner advertising and sponsorship of content pages. While he was searching for advertisers, Gray approached the bridal gown designer House of Bianchi http://www.weddingchannel.com/go/Gateway/Bridalnet/Bianchi/Home/), located in Medford, Massachusetts. Bianchi had launched its own site a year before the Wedding Channel and was eager to expand its reach over the Web. Hence, with Wedding Channel, Bianchi and Gray developed a giveaway of a "bridal party" of gowns, worth a total of $3,000. This was promoted on the front page of the Wedding Channel for two months. Through the link with Wedding Channel, Bianchi was able to capture more than 6000 names in the registration form. Each of these registrants received a catalog of 200 wedding and bridal party fashions available from Bianchi as well as a listing of retailers in the vicinity that carried the line.
Brides are not the traditional consumer in that the usual acquisition and retention techniques used in marketing do not apply. The key thing to a woman planning a wedding is that the process is tactile and it is usually a once-in-a-lifetime experience. Hence, suppliers attempt to provide the best, one-time experience possible by offering superior customer service. The Bianchi partnership illustrates how the Web site promotes the awareness of this particular line of dresses by providing information that customers could not access in any other way. The inclusion of retail locations provides women with information on which stores carry the product line, thus increasing the tactile knowledge for these women. The customers, Bianchi, and Wedding Channel all benefit in this scenario.
The site is planning to give away two trips next year and will begin to target the more traditional retailers for advertising dollars and potential content sponsorships.
Gross's Success Strategy
Creativity, Gross believes, matters most. In a typical business, he argues, even the most creative entrepreneur ends up squandering precious mental energy mulling over such mundane matters as compensation and financing. So Gross hands the incoming CEOs what he calls an "Internet start-up in a box": a template for a company structure, replete with stock options, benefits, and a system of open-book management. idealab! even provides a temporary chief financial officer to fill in for the first few months. Relieved of such drudgery, some CEOs have actually held focus groups on their second day of operations. Says Steve Damron, CEO of idealab!'s EntertainNet (http://www.entertainnet.com/):
"If I hadn't been with idealab!, I would have put in a lot more time working with lawyers, working on names and trademarks, working on incorporation papers, working on a logo."
As it was, he was working on the creative element–building a prototype of his Web interface, for instance–just a few weeks after his first discussion with Gross.
Gross's basic premise is that to nurture start-ups to adulthood better and faster, it takes a village–a village of interdependent, yet nominally independent companies, all built around a core base of knowledge. He believes a company strives to whisk its offspring through their infancy not by showering them with cash, but by leveraging the village's shared creative and technical know-how. "We really don't think of ourselves as venture-capital," says Gross. "We're creative-capital. The money we bring is incidental." idealab!'s structure resists simple categorization. Like a business incubator, it provides shared office space and administrative services for its brood. Like a venture-capital firm, it provides seed funding and takes a minority equity stake in the companies. Like a think tank, it brainstorms on technology applications that could form the basis for new products. And like a parent company, it takes a substantial role in overseeing the operations of its subsidiaries.
Yet its assembly line is actually quite simple. Gross keeps a voluminous inventory of one raw material, ideas, in his cranium. People, the other raw material, are shipped in from the outside: Gross recruits CEO-caliber executives and hands each of them a promising business idea. Then the factory–idealab!'s core staff of 15–helps them construct a business around the idea. It furnishes them with a little seed money (no more than $250,000 per company), the prefab company structure, and expert assistance with design, marketing, and just about everything else. Off the end of the assembly line roll dozens of small, fast-moving, "incredibly highly focused" enterprises, according to Gross. idealab! retains a minority equity stake ranging from 25% to 49% in each venture.
idealab! itself currently employs over 20 people, and idealab! companies employ more than 1000 people. Being located near Caltech in Pasadena, California, the company draws many of its creative people from Caltech, the Art Center College of Design, and Hollywood. Most of the programmers for idealab!'s Web startups are "entrepreneurial hotshots" from nearby Cal Tech. Gross maintains a pool of 20 programmers and Web site graphic designers to be on call for the startup companies.
Like so many off-the-shelf components, the members of this talent pool can be quickly assembled into what Gross calls "Internet startups in a box." This setup enables Gross to move very fast from idea to execution. It also gives very young people a shot at running their own shows. "I think people are motivated the most when they have unbelievable control of their destiny," Gross says.
In going about their entrepreneurial duties, Gross' associates can tap his wide range of acquaintances for advice. When Gross' longtime friend, Charles Conn, now 35, signed on as CitySearch's chief executive two years ago, one of the first things he did was sit down for lengthy brainstorming sessions with such luminaries as Nobel Prize-winning physicist Arno Penzias, the chief scientist of Bell Laboratories who won fame for confirming the Big Bang theory. Not many Web site entrepreneurs enjoy such access.
idealab's structure resists simple categorization. Like a business incubator, it provides shared office space and administrative services for its brood. Like a venture-capital firm, provides seed funding and takes a minority equity stake in the companies. Like a think tank, it brainstorms on technology applications that could form the basis for new products. And like a parent company, it takes a substantial role in overseeing the operations of its subsidiaries.
Each of idealab!'s businesses stands to benefit from its ability to focus on a specific mission. "The first few months of a start-up are analogous to the first few nanoseconds in the birth of a star," says Steve Glenn, CEO of PeopleLink (http://www.peoplelink.com/), an idealab! company that helps Web users link up. "Whatever happens during that short period will determine your permanent trajectory. So if you're freed up from the administrative stuff, you can focus on aiming that trajectory as high as possible."
That obsession with quickness rests at the core of Gross's theory about how companies will prevail in knowledge-based industries. His starting assumption is that the principle of economies of scale–that a company needs to get big to reduce its unit production costs–doesn't apply to Internet companies. That's because the incremental cost of distributing one more electronic page of information is always zero, or close to it. Without the need to achieve scale rapidly, as with the equipment-intensive manufacturing businesses of old, his argument goes, Internet companies don't require the same vast sums of start-up money. Rather, says Gross, "the key competitive weapons in this new era are intelligence and speed–not money. And intelligence and speed make a huge difference." By intelligence, Gross means the ability to assemble the right group of creative talents. Speed he defines as:
"not just the ability to move fast–although the ability to move fast is its end result. Speed is the ability to execute without making mistakes. And our infrastructure–the shared knowledge we have in idealab!–enables a start-up to avoid so many Internet mistakes that it can do in four and a half months what would take another Internet start-up nine months to do."
Besides swapping intelligence, idealab! companies share servers, high-speed digital phone lines, health plans, legal and accounting services, travel planning, and focus-group facilities. "I'm trying to factor out all the common business problems and put them in idealab!", says Gross, "and leave in the individual companies just those things that are uniquely related to their businesses."
Gross's genius lies in "the pursuit of the idea." as he puts it: the cognitive dissonance between razor-sharp corporate focus and his own intellectual wanderlust. "I'm the most unfocused person on the planet," he admits sheepishly. He reads 2,000 pages a week from radically disparate sources and pours the unlikely associations that result into a densely notated spreadsheet. He then distributes it throughout his organization so that others can benefit from his inspirations. With idealab!, Gross is thus reaching for that Holy Grail of modern business: an organization that harnesses both the power of a big company and the nimbleness of a small one.
But can this "idea lab" spawn successful companies? Thermo Electron's George Hatsopoulos isn't convinced Gross' variation on the Thermo model will work. He points out that Thermo started with a profitable parent company that was 27 years old before it hatched its first startup. By then it had plenty of cash flow to fund the new ventures. By contrast, only half of idealab!'s startups have revenues. None have profits.
But Gross seems convinced he needn't wait for a positive cash flow before launching additional companies. He knows that there is plenty of capital available for Internet start-ups with impressive sponsorship, and plans to take advantage of that with public offerings ahead of a positive cash flow.
Exhibit A – Internet structure
To form a rational image of the Internet, we can somewhat arbitrarily divide the structure into five levels:
1. Interconnect Level – NAPs: These are the currently 11 main interconnection points that provide points of data exchange between the main national backbone operators, sometimes referred to as National Service Providers (to be thought of as the nodes in a web).
2. National Backbone Level: National Service Providers with own national networks such as GTE, MCI, Sprint, UUNet and America Online's ANS that exchange data through the NAPs. Since all of these "backbone" Internet Service Providers (ISPs) are interconnected at several NAPs, a redundant network exists that allows the transmission of data even if a NAP fails.
3. Regional Networks: These are regional network operators that connect to one or several national backbone operators and operate networks within a state or among several adjoining states.
4. Internet Service Providers: These vary from small two or three person operations up to actually quite largish operations with over 100,000 dial-up customers. They do not usually operate a network of their own, but lease connections to a national or regional network provider (e.g. UofM).
5. Consumer and Business Market: These are basically customers that have an account with an Internet Service Provider (e.g. student at UofM).
Exhibit B – Internet Organizations
There are a handful of organizations that are truly influential and that taken together form a sort of checks-and-balances system:
? The World Wide Web Consortium (W3C) sets the standards for HTML and other specifics of the Web.
? The Internet Engineering Task Force (IETF) focuses on the evolution of the Internet with a specific eye toward keeping the Internet running smoothly as a whole.
? The Internet Engineering Steering Group (IESG) is a related organization responsible for managing IETF activities and the Internet standards process.
? The Internet Architecture Board (IAB) is responsible for defining the overall architecture of the Internet (the backbone and all the networks attached to it), providing guidance and broad direction to the IETF.
? The Internet Society (ISOC) is a supervisory organization made up of individuals, corporations, nonprofit organizations, and government agencies from the Internet community. The group comments on Internet policies and practices and oversees a number of other boards and task forces–including the IAB and IESG–dealing with Internet policy issues.
? The Internet Assigned Numbers Authority (IANA) and the Internet Network Information Center (InterNIC) lead the organizations responsible for assigning IP addresses and domain names, respectively.
Exhibit C – Bill Gross: Before idealab!
1977: As a college student, Bill Gross launches GNP, a loudspeaker maker that would become one of the country's fastest-growing companies.
1984: Gross and his brother start GNP Development. HAL, an early product, simplifies Lotus 1-2-3.
1986: Gross sells GNP to Lotus, where he works until founding Knowledge Adventure, in 1991.
1996: Bill Gross founds idealab!
Start-up steps: idealab!'s System for Building Businesses
1. The new company begins the development cycle. An idealab! project team is assembled.
2. Market research is done. A prototype is developed. A business plan is written. Seed money is given.
3. The CEO is in place. Start-up staffers are hired. Prototypes are refined. Market research continues.
4. The business goes "live." Staffers are hired according to growth. Financing is boosted as required.
5. The business may go public or be acquired. The business joins the idealab! family. The investors are rewarded. The new technology and the development experience benefit idealab!.
Exhibit D – idealab! Ventures
Making Markets More Efficient
CitySearch The complete and current guide to your local community.
ideaMarket The completely open market for intellectual property.
Wedding Channel The best way to have an effortless perfect wedding.
CareerLink The best way to match jobs and job seekers.
eToys.com Buy the best stuff for your kids in one place on-line.
HomeLink The best way to find a home on the Internet.
Shopping.com The ultimate shopper's source on the Internet.
Tickets.com The best way to buy tickets for any premium event in America.
EntertainNet The ultimate broadcast network for personalized entertainment.
PeopleLink Instant communications with friends, family, and colleagues on-line.
recoMentor Your personalized expert recommendation service.
Smart Games Puzzles, twisters, and brainteasers for the Internet and CD-ROM.
e-call The best way to safely connect with people you meet on the Internet.
E-Ticket Building communities around your favorite things.
DinnerandaMovie.com The best way to plan a night out for dinner and a movie.
Learning.Net The Internet LifeLong Learning Company.
Top10 The meter for popular culture with custom recommendations.
Visual Planet The complete visual database of the planet.
Worlds, Inc. Bringing social computing to the Internet and to the World.
Centra Collaborative software for on-line corporate training.
IntraNetics The "turn-key" Intranet in a box for small businesses.
Go2.com The evolution of the WWWWorm continues.
Bandwidth+ Technology to double the speed and the bandwidth of the Internet.
Bizlets, Inc. Small, fast business applets for the Internet.
Visual Search The ultimate way to communicate with groups in real time.
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