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MONEY

The Start-up Factory
 

The story of how Bill Gross has channeled his creative zeal into a business that generates start-ups and why.
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Cover Story

Bill Gross just needed to stop his brain from buzzing with business ideas. His solution, Idealab, may be his best idea yet

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.

Not an uncommon difficulty for CEOs of maturing companies. But for Bill Gross--a diminutive, charmingly geeky figure who spews ideas with an enthusiasm that borders on abrasiveness--the frustration was unusually acute. "He's kind of like a mad genius," offers Spielberg. "His brain works like a roundhouse in a train station, spinning off ideas in seven directions at once, yet not losing its focus on any one of them."

Indeed, Gross is a man who considers a great brainstorming session to be "a little bit like having sex" and feels emasculated by the tedium of daily management, whose skull gets so overloaded with ideas that he feels compelled to download them periodically, distributing a spreadsheet of factoids and random neural associations to his associates. "In many ways, we're very similar," says Spielberg, who invested both his money and his creative talents in Knowledge Adventure.

On the set of Casper, Gross couldn't help being dazzled by Spielberg's special effects: not the kind he produces on-screen, but the unusual impact he had on the set. The renowned director floated around it, dropping nuggets of creative wisdom, leaving it to a network of lieutenants to actually implement the niggling details. "He walks around all day using his brainpower to creatively enhance things around him," Gross says. "I'd always thought you had to take the good with the bad. How audacious to think that your job could be perfect all day long. But here was someone doing it."

It occurred to him that his own "core competency"--like that of E.T.'s creator--was bringing ideas to life. "I don't want to compare myself to Steven Spielberg," he says, "but in the same way he has this expertise about what things should ultimately look like on-screen, I have a very good vision for pure business concepts--for what a consumer experience is going to be like." The solution, therefore, wasn't to rein in his creativity to fit the organization; it was to build an organization that would let his creativity reign.

So in September 1995, Gross handed over the day-to-day operations of Knowledge Adventure to his younger brother, Larry, and embarked on a daring experiment to do just that.

"We're going to have a stream running through here," says Gross excitedly, hunched over a Styrofoam model of the building he's renovating for his new company. "Most of the walls and furniture will be on wheels. And the trees from this courtyard will extend indoors."

The company, 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, a year ago, Idealab has been spinning Gross's raw ideas into independent companies. All are Internet-related start-ups, most of them based around Pasadena. There are 19 of them so far. At last count they employed about 400.

The Styrofoam floor plan, which Gross displays with all the exuberance of an eight-year-old showing off his latest Lego creation, speaks volumes about Gross's ambitions. It's a radial hub-and-spoke structure, with each spoke intended to house an entire fledgling company. The hub is Gross's office--represented on the model by a large red dot--a round thinking chamber where he will sit like the captain of the mothership, radiating his wisdom to the periphery. "I'm going to have a round desk around me," he says, "so I can sort of sit in my chair and rotate."

Oh, and the stream--that will burble past a glass brainstorming room to encourage a steady flow of brilliant business ideas. "I've had good experiences meditating to the sounds of the Merced River at Yosemite," explains Gross, "and we want the sounds, the lights--everything--to be as conducive to freethinking creativity as possible."

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: "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.

If the whole concept seems a tad quixotic, if not outright flaky, consider Gross's track record. As an enterprising 12-year-old in Encino, Calif., he noticed that the corner drugstore sold candy for 9¢ while the Sav-On around the corner sold it for 7¢. Spotting a classic arbitrage opportunity, Gross soon had a network of salespeople wringing profit from the spread. Those proceeds he plowed right into his next venture, Solar Devices, which sold $25,000 worth of cardboard-and-tinfoil parabolic dishes and plans through ads in Popular Mechanics. That money, in turn, covered his first year's tuition at Caltech, where he promptly founded a stereo-equipment maker, GNP Inc., that grew fast enough to land on the Inc. 500 in 1982 and 1985. Next he and his brother started tinkering with Lotus 1-2-3 and invented a way to make the spreadsheet obey simple commands. So impressed was Lotus founder Mitchell Kapor that he bought their company for $10 million. In 1991 Gross founded Knowledge Adventure; he sold it three months ago to CUC International for approximately $100 million. Spielberg, the man whose 1993 dinosaur epic, Jurassic Park, remains the highest-grossing film of all time, calls him "my favorite investment." He adds, "I've also made a lot of money with him."

Still, who's to say that Gross can replicate the company-building process with machinelike regularity? Some venerated names are betting he can. "There are very few examples of entrepreneurs who have started more than one successful company--it's really hard to think of any that have had two big hits," says legendary venture capitalist Ben Rosen (think Lotus and Compaq). "Bill has a chance of having a dozen hits. I think in five years' time Bill Gross will be as much of a household name as any household name in technology, even though today he's barely known outside of a very small circle."

Idealab represents more than just Gross's quirky attempt to create his dream job. It's his effort to shape everything he's learned about company building--what he calls his "50,000 nuggets of business experience"--into a mold for stamping out new companies efficiently.

His 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. Idealab 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 businesses around the ideas. 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 them.

Because Idealab itself has no revenues, its operating cash comes from a $5-million stash put up by 10 investors, who include Spielberg, actor Michael ("Greed is good") Douglas, Rosen, and Gross himself. Gross hopes Idealab will ultimately perpetuate itself 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.

Obviously, the entire system hinges on Gross's ability to find enough good CEOs. This spring, he says, he'll make a blanket job offer to all 75 or so engineering students graduating from his alma mater, Caltech. Gross is also trying to systematize the generation of new business ideas. (See "Ideas by the Gross," below.) Every quarter, he summons the Idealab staff, the CEOs, and sundry Friends of Bill to a hotel conference room for a weekend-long brainstorming session. He sets some ground rules: for instance, no off-putting body language--such as arm crossing--that suggests resistance. The group, sitting in a semicircle, then goes about the task of "expanding and filtering" ideas. "What I pick up from Bill is a singular belief in his own ideas," says Spielberg. "Once he thinks he's got it, he doesn't listen to reason, he doesn't listen to abstraction. That's very similar to how film direction is. You throw out an idea for a new film, and people say, 'It's too expensive, it's too difficult.' But if you're truly resolved, you'll go ahead with the project anyway."

Some of those ideas come straight from Gross's everyday cravings. "One thing I'd love to be able to do is to watch on the Web a Seinfeld episode I missed," says Gross. The problem is, the Internet is currently too slow to deliver TV shows, so Gross set up a company, Bandwidth+, to find a way to speed up delivery. It's experimenting with a "dictionary lookup" solution, by which frequently used images--"like Seinfeld's refrigerator or Elaine looking sideways"--would be stored in a visual dictionary at the receiving end. Instead of actually sending the image of Elaine's face, the transmission would simply refer the receiving computer to the dictionary entry of Elaine's face and plug it in.

"I think it's going to work," predicts Gross.

Oddly enough, Gross would never have started Idealab had he been a better CEO. "I'm not a focused person," he explains, seated with one leg folded under him at Knowledge Adventure's brilliantly colored, playpen-like offices, "and a company needs to focus to succeed." At Knowledge Adventure, where he still serves as an adviser, Gross says his rapid-fire idea generation had the "horrendous" effect of distracting the company from its original mission of helping children do better in school. "This company was all over the map," he declares. "I was indulging my own desire to participate in so many different ideas, to the detriment of the company."

Then, in 1994, a 10-member team within Knowledge Adventure developed a technology for building three-dimensional environments on a computer screen. It was neat stuff: one application turned the standard text-based Internet chat room into a lush 3-D castle, where chatters could step into the bodies of animated characters and explore from room to room. But the team soon began fighting the rest of the company for resources. "It got to a point where there was dissonance between that group and the rest of the company," says Gross.

Some colleagues finally persuaded Gross to spin the unit off into a separate company, with Knowledge Adventure retaining a 20% equity stake and access to the 3-D technology. "I did it reluctantly," says Gross. " Very reluctantly. I thought the technology was so valuable that I wanted to have it internal to Knowledge Adventure."

Within a year the spin-off, Worlds Inc., grew almost as large as Knowledge Adventure itself. Instead of owning 100% of a $5-million business, Knowledge Adventure now owned 20% of a $77-million business. "There's no way that kind of exponential growth could have happened inside Knowledge Adventure," says Gross. Plus, spinning off Worlds allowed Knowledge Adventure to return to its original, narrower mission--a strategy that propelled it from the number 15 to the number 3 spot in the industry in just over a year. "It all came down to one thing: focus," says Gross, who now embraces the concept with almost fanatical devotion. "You can make an incredible product, but if you can't clearly communicate to the customers where the product's benefit is, it's not going to do any good."

Each of Idealab's businesses stands to benefit from its ability to focus on a specific mission. (For examples, see "The Freshman Class," below.) And Gross is set free, able to be as unfocused as he pleases. "I can run around like a hummingbird, plugging my ideas into multiple, highly focused companies," he says gleefully. "For me the clincher was this: I have ideas all the time. My satisfaction is gauged by the percentage of them that turn into reality. I found that by relinquishing control, a higher net percentage of what I visualize in my brain is seeing the light of day."

"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, 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," he continues, his words flying out as if someone had punched his fast-forward button. "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."

Much of the time savings stem from the fact that Idealab companies don't have to build everything from scratch. One group of engineers, for instance, is developing a compression technology that will make all the companies' Web sites load at twice the normal speed. "A single Internet start-up could not invest in technology like that," says Gross, "because aside from not having the skill, you wouldn't have the time or the money. But Idealab can afford it because it's going to be leveraged across 19 companies."

Another Idealab team spent two months and $50,000 comparing various databases, sparing subsequent start-ups that chore. "It's not even the cost that matters," adds Gross. "The $50,000 was nothing. It's the time. You can get more money, but you can't get more time." Echoes Glenn, "In a gold-rush market, where there are stakes to be claimed, one or two months can be the difference." The core Idealab staff thus serves as a sort of pit crew to put companies swiftly on track and get them accelerating toward the marketplace. "It's really a kick start," says Glenn.

And then, Idealab companies share talent--of a caliber that would be unaffordable to them as individual entities. There's input from such marquee names as Spielberg and Rosen (who is also chairman of Compaq). Tom Hughes, the former creative director of Apple Computer (his last three supervisors were Apple cofounder Steve Jobs, Kapor, and Polaroid's Edwin Land), designs all the logos and user interfaces. When tiny EntertainNet needed a logo, Hughes whipped off a dozen or so samples, which he posted on the Web for Gross and EntertainNet's Damron to review. After a vigorous E-mail exchange, Damron settled on a design that Gross claimed would bring EntertainNet a higher valuation. The total time elapsed: two weeks.

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."

Idealab also greases the skids for later-round funding: no sooner had PeopleLink taken corporeal form last April than Gross was working the venture-capital wires to rustle up interest. Not only does that free up the CEOs from begging for more money, but an Idealab affiliation helps assure venture capitalists that a company has its business fundamentals down pat. "If this were a stand-alone company," notes Savannah Brentnall, chief operating officer of Intranetics, a developer of off-the-shelf intranets, "venture capitalists would say, 'Who the hell are you, and why should we listen to you?' Instead they say, 'Tell us more.' "

Why, then, doesn't Gross just lump all 19 start-ups into one big entity? "Because I believe there's actually a diseconomy of scale when it comes to creativity," Gross responds. "It's worse to be bigger." The best way to motivate managers, he has preached since the success of the Worlds spin-off, is to give them control of an entrepreneurial venture and a stake in its upside. Mixing everything into one pot, he warns, blurs the focus and dulls the edge. "You just get so much more out of people when they come in to work each day feeling that they have a real effect on what happens," says Gross, who requires all employees to buy some stock. "The world is coming to believe that individual empowered entrepreneurs generate way more value per unit of time, for their investors and themselves, than people under a big corporate umbrella."

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.

It's likely that companies of all sizes will be watching carefully. Fortune 500 types regularly tromp through the headquarters of Thermo Electron Corp., the company that probably comes closest to Idealab's organizational model. The industrial giant, based in Waltham, Mass., has spun out a family of 18 distinct companies. All have gone public--their offerings are routinely oversubscribed--and consolidated sales have topped $2.2 billion. "It has worked way beyond our expectations," says John Hatsopoulos, whose brother George founded the company in 1956.

Hatsopoulos believes there's a simple reason that so few of his visitors have actually tried to replicate the model: in a corporate world that stresses hierarchy and predictability, giving ventures their independence "represents a tremendous threat to the CEO." Even Gross admits to feeling "weird pangs" of fear when he let go of operations at Knowledge Adventure, but in doing so he came to yet another insight about himself: he needed to move beyond the empire builder's lust for seeing more and more bodies working directly for him. "In the end, I'm relinquishing control and letting the marketplace take over," says Gross. "I argue vociferously for the things I believe in. But my viewpoint is not always upheld, and I'm thrilled that it isn't. The CEOs need complete freedom to shape their companies."

So far, anyway--the true test may come when there's more at stake--Gross seems as good as his word. "Bill has never been insistent or thought us idiots for not doing something," says Glenn of PeopleLink. "He totally understands that his role is to be at a very high altitude, unencumbered by the laws of gravity, while the people at the front lines of the individual businesses determine which of his suggestions seem most relevant and possible."

But as an earthbound entrepreneur, Gross has set a difficult challenge for himself: to be true to his doctrine of creativity, he must repeatedly let go of his creations. "The most important time is the first two years of life," Gross, who is the father of an eight-year-old boy, acknowledges. "After that, they're sleeping through the night." He claims he'll be content, however, to admire his offspring from afar as they make their way through the world. And, he adds, "I bet there will come a time when one of the companies wants to spin off a splinter group inside it. I'd like to think that Idealab could be the ideal starting ground."

Grandchildren. His eyes brighten at the very idea.

Jerry Useem is a staff writer at Inc.


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.


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.

    The freshman class

    Idealab's 19 companies will all graduate to lucrative careers in cyberspace--or so hopes founder Bill Gross. Here's a sampling of how some of them plan to do it:

    Answers.com
    Quick: What's the principal export of Botswana? For a fee, this Web site will answer any question within 24 hours.

    CitySearch
    Idealab's flagship operation, which provides Internet guides to local communities. Gross hopes it will go public this year.

    EntertainNet
    An Internet broadcaster like Pointcast--which delivers news and other information via a screen saver--but with an entertainment twist.

    Idea Market
    An on-line market for buying and selling intellectual property.

    I-map
    3-D technology for visualizing the results of search engines. "The results look like a galaxy, with articles clustered according to their proximity to one another," says Gross. "Oh, it's amazing."

    Intranetics
    Off-the-shelf "intranets in a box" for small and midsize companies.

    PeopleLink
    A suite of Internet communication tools. One application enables on-line chatters to switch to anonymous telephone discussions.

    Smart Games
    A library of nonviolent, intellectually challenging games "for people with brains."


    Q & A: Ideas by the Gross

    With Idealab, founder Bill Gross got his dream job: coming up with business ideas. Here he explains why he's the perfect man for it.

    Q: How do you come up with the ideas for these businesses?

    A: Just about every idea I've ever pursued has been something that I pretty passionately feel I would want in my life. One time I happened to talk to three billionaires in one day--a complete coincidence of timing. One was Ben Rosen, one was Steven Spielberg, and one was David Geffen. With each of them the conversation turned to how they pick the talent that they bet on. I asked Ben Rosen, "How did you pick Compaq and Lotus? You must have a great knack for knowing what other people would want." He goes, "Wait a minute, I have no idea what other people want. I only know what I want. With Compaq, I just knew that I needed a portable to carry around." Same thing with David Geffen: he said he knows what he likes, and he totally trusts it, and if he's wrong, he's wrong.

    Then Steven Spielberg and I were with our sons in a limo on the way to the Consumer Electronics Show. And my son, David, was asking Steven all sorts of questions about Jurassic Park: "Why did the dinosaur do this at the end? And how come you had them in the kitchen?"--and so on. So I said, "You know, Steven, you really have an incredible sense of what the public would be fascinated with; you can really get in their minds." And he said, "What are you talking about? All I know about is me. I know what I would love to see at that moment." So it finally clicked that everyone was telling me, "Use the force, Luke."

    Q: What happens when outsiders approach you with ideas? What criteria do you use to decide which ones Idealab should invest in?

    A: Our selectivity in picking a deal is not based on the economic return--although we'd like to make a good return. It's based more on whether we have unique skills that can really add value to the idea. Some ideas have come to us that normally would have been great venture deals, but we had nothing to add.

    Q: What are examples of ideas you've turned away?

    A: There was a company that had a tool to help corporations produce Java codes for their internal intranets faster. They showed me this tool where you could drag and drop objects, and it would spit out Java codes. It was totally awesome. It was gorgeous. And we had absolutely nothing we could do to improve it. We had no technology; we had no knowledge of that marketplace. We said, "We're not going to be giving you any value added except for money, and you might as well take money from someone else." There have been a few others like that. That one was the most painful.

    Q: Why not just give them some money, and if you don't add value, so be it, but there would be all the more return for Idealab's investors?

    A: Because for a given investment, we're going to get a much higher return when we can add value. We add value through shared knowledge and creativity. That's why we think we're going to build better companies. Obviously, we now have to prove that.


    Resources: Much of Bill Gross's dogma on a company's need to find--and dominate--a narrow niche comes from the book Focus: The Future of Your Company Depends on It, by Al Ries (HarperCollins, 800-331-3761, 1996, $25). The most successful businesses, contends Ries, are those that tie their product to a single concept in the customer's mind: Volvo and safety; Federal Express and overnight; Prego and thick. The more specific the focus, says Gross, "the more everybody in the company can have every blood vessel in their body thinking about that focus." Gross's devotion to Ries and his sometime collaborator Jack Trout verges on scary. "I worship them now," he declares. "They're my religion."

    ENTERTAINNET, Steve Damron, 7336 Santa Monica Blvd., #628, West Hollywood, CA 90046; 213-993-6565; http://www.entertainnet.com

    IDEALAB, Bill Gross, 790 E. Colorado Blvd., Suite 200, Pasadena, CA 91101; 888-IDEALAB; http://www.idealab.com

    INTRANETICS, Savannah Brentnall, 790 E. Colorado Blvd., Suite 200, Pasadena, CA 91101; 818-841-7307

    PEOPLELINK, Steve Glenn, 2950 31st St., Suite 386, Santa Monica, CA 90405; 310-581-4299; steveg@peoplelink.com

    THERMO ELECTRON, John Hatsopoulos, 81 Wyman St., Waltham, MA 02254; 617-622-1000

Last updated: Feb 1, 1997




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