__ Think small, think often. How Bill Gross turned lots of little brain waves into mega news. __
The floor is bare, discolored concrete. Electrical conduits and galvanized air ducts hang from exposed rafters. A receptionist in denim overalls sits behind a desk made of unfinished plywood; on it, a clunky, old-fashioned tensor lamp is clamped beside plastic in/out trays. Perfect decor, in other words, for one of the most successful, widely hyped wealth factories in the short history of the Web.
The company housed in this renovated warehouse in Pasadena is idealab!, a privately held outfit with one simple objective: forming other online enterprises that will generate monstrous payoffs. Launched in 1996 by Bill Gross, with investors like Steven Spielberg and Compaq chair Benjamin Rosen, idealab! seeks to quantify the rules of ecommerce so precisely that lucrative startups can be grown like hothouse tomatoes.
Gross spawns most of the concepts himself, and although he serves up his share of flops - like ideaMarket, a site for business reports and software that tanked in 1998 - he also scores well-publicized megahits. CitySearch was one, valued at around $260 million when it merged last year with Ticketmaster Online. CitySearch now runs head-to-head with Microsoft's Sidewalk as the leading site for local entertainment and restaurant listings. More recently, eToys, another Gross brainchild, was valued at more than $7 billion after one of Wall Street's biggest IPOs.
It's been a bonanza for Gross, since idealab! retains a big chunk of every company he creates, and Gross owns an undisclosed but healthy share of idealab! At this point his paper worth is probably $1 billion or more. Even bigger payoffs may lie ahead, if the recent deal between idealab! and Creative Artists Agency fulfills its apparent purpose: to form a new, jointly owned idealab!-style venture that will spit out showbiz corporations. Bob Kavner, Gross's general partner at idealab!, says the two outfits are already brainstorming. The plan is to prepare for the looming explosion in the development and distribution of Web-based programming. "At some point in the future," Kavner says, "there will be studios on the Internet."
Could Bill Gross become an Internet-era movie mogul? "Totally speculative," says Kavner - but he doesn't rule it out. So Gross may someday underwrite video productions for broadband distribution via the Web, again pocketing his share of the profits.
That is, if there are any profits. So far, Gross has been criticized for creating typical Web enterprises that are highly valued, to his benefit, but operate deeply in the red. (Only two, eToys and GoTo.com, now turn a profit.) Another rap is that idealab! doesn't create so much as replicate: watching what works, cloning it, adding a few distinctive twists to the DNA, and pitching another squalling newborn into the marketplace.
Still, there's no denying that Gross is unrivaled as an incubator of new businesses. Or that, with idealab!, he generated one of the best CEO jobs around. Bored with running Knowledge Adventure - a children's software company he sold to Cendant for $100 million - he set out to build a company that let him think creative thoughts while getting rich. Nice work if you can get it, so you have to wonder: How, exactly, did Gross pull this off?
At the far end of the lobby, an unimposing figure appears. He's thin, below average height, and peers through gold-rimmed glasses as he moves with a shambling walk - a nerd walk. It's the Idea Man himself, offering a mild handshake, a shy smile, a quiet greeting. His shoulders slope. He has the bad posture you get from leaning forward and staring into a video monitor 12 hours a day. He also seems genuinely unpretentious, projecting a sincere, childlike charm. You begin to see why his employees speak of him protectively, as if he belongs to them, rather than vice versa.
But when Gross walks into the small conference room at the far end of the lobby, his presence galvanizes the place. He nods briefly to the 13 people who have gathered - most in their twenties, dressed, like him, in polo shirts and dark pants. Skipping any chat, he gets down to it, in the style of an amiable schoolteacher giving a strong presentation while welcoming interruptions. This is a brainstorming session, a group-think to tweak the details of yet another startup that Gross hopes will become a billion-dollar business.
The firm on the table is HomePage.com. Gross purchased the domain name in 1997, in order to host Web pages for users who have no technical skills. Similar services already exist, but Gross has a new angle. First, he's going to auction URLs. If you're Jack Jones and want to be jackjones.homepage.com, you'll have to bid against every other Jack Jones in pursuit of the same online identity. The page is free, subsidized by banner ads, but you'll be able to place additional merchant links of your own choice, from a selection stored online. Then you'll keep a cut of the clickthrough revenue. In effect, you'll become a junior Web capitalist.
The people in the conference room watch intently as Gross sketches page layouts on a whiteboard and ponders variables. Can the ads be disguised as tools, like a button that calls up a search engine that just happens to be another idealab! creation?
"We have to grab some real estate from the screen," Gross says. "If we give people tools, they may give up those pixels with less resistance. If we can get a billion page views a month, we can monetize it into a billion-dollar company."
He suffers a moment's doubt about the whole thing. "This is a huge traffic generator, but I'm not sure where the revenue is going to come from." The doubt passes in an instant: "Maybe we shouldn't worry about revenue - just get 5 million people signed up." He looks around the room. "Does any other site share ad revenues with users?"
"I checked 45 sites, and none of them do it," says Mike Morrison, a tall, authoritative-sounding man. Gross mulls that for a second, then runs another riff on his be-your-own-entrepreneur angle.
"How about this: After people have bought their domain names, we could allow them to run their own auctions to resell the names. If they split the money with us, we might not even need advertising. Or we could set up a site that facilitates bidding for any domain name. Make a liquid market for domain name space, an eBay for domain names! That could be a billion-dollar business alone!"
Someone points out that with so many people bidding for names, there are bound to be "a lot of unhappy losers."
Gross shrugs this off. He's not interested in a giveaway where every kid gets a prize. "Names that no one wants will have a price of zero," he says. "We'll let people decide what they're willing to pay. We could allow them to input, say, mike*, and see all the variants of mike, and how much each one costs."
There's more discussion, but when the confab reaches 90 minutes - Gross's limit on a meeting's duration - he wraps it up.
"We're going to be up against very big competitors," he warns. "But we'll have a lower cost of customer acquisition, and a higher retention model by letting customers make money from their pages."
So this is gold dust? The selling points seem a bit mundane, hardly unique enough to satisfy such ambitious goals. The nagging sense persists that something more must be hidden here: the secret ingredient that differentiates idealab! from all the other startups that try to exploit the Web - and fail.
As a trained engineer - he graduated from Caltech in 1981 - Gross cares more about functionality than frills. As a financier, he's cheap. As for his color sense, it may reflect his mind-set: relentlessly positive. Gross's office is at the epicenter of an open-plan work space crowded with youngish people at desks made of plywood doors, which are separated by partitions painted taxicab yellow. From that vantage point he surveys his empire; a hole in one of his office walls, covered with clear acrylic sheeting, serves as a window.
Now, Gross dives into an explanation of how idealab! works. "This is a five-person business, where companies usually start," he says, pointing to the first section of desks. "After it grows beyond five people, it will move there, where we can hold 10 - and 15 over here, and then 20, and 25 over there, and we have room for a 30, a 50, and a 70. They usually get kicked out at that point."
Initially an idealab! startup is nurtured with basic services that include accounting, a health plan, conference rooms, janitors, phones, MIS, a T1 connection, Web servers, $35 doors (for desktops), and chairs. The company pays idealab! $500 per person per month. After the startup emerges from the idealab! womb, Gross's company retains ample equity and invests up to $250,000 in seed capital to help it along.
GoTo.com, eWallet, Free-PC: They all came off the assembly line. GoTo is a search engine that lets clients bid for placement; eWallet is an online payment aid; Free-PC gives away PCs to users who allow their surfing habits to be relentlessly monitored.
Opera music plays quietly from speakers on each side of a big video monitor at the center of Gross's desk, which also supports an ultra-high-end tube amplifier and turntable that look like they're worth more than all of idealab!'s spartan furnishings combined. Gross appreciates high-fidelity sound: He paid his way through college by running a business that manufactured loudspeakers he designed.
Before that, he sold plans for parabolic solar reflectors through a tiny ad in Popular Science. Before that, when he was in seventh grade, he bought bulk candy bars at a discount and sold them to other kids at school. This childhood arbitrage is such a familiar tale to Gross's fans that it has acquired mythic status, like a parable from a cult leader's life. And there is something cultish here in idealab! - not just in the exalted status Gross enjoys, but also in his dogmatic commandments.
First and most sacred is what might be called the One Percent Rule. According to Gross, employees in a startup not only need equity - they need at least 1 percent of it to keep them fully motivated.
He determined this at Knowledge Adventure, his former educational software business, where his employees developed a 3-D rendering technique with broad applications. Gross wanted to keep it in-house and take most of the licensing profits, but he was persuaded, as he puts it, to "let go" and "spin out" the 3-D programming as a separate company with generous equity sharing for the principals. The former employees were so psyched they made Knowledge Adventure a huge success, netting it 19.9 percent of a $77 million business instead of 80 percent of a $5 million business. Naturally, Gross wanted to repeat this pleasant process, and idealab! was his answer.
Of course, if each employee owns 1 percent of a company, there's a limit to the possible number of employees. This invokes Bill's Second Commandment: No business should be bigger than 100 people.
Really? One hundred - no more?
Gross resists the suggestion that exceptions might exist. "I think the principle is scalable to every business," he says with conviction. "Even manufacturing businesses. You unlock so much human dedication when you give people the equity upside that it dwarfs the penalties of breaking the company into smaller entities." He shifts restlessly in his chair, excited by his own concepts, even though he's thought them through a thousand times before. "It's like a chemical reaction!" he exclaims. "It unleashes new energy! I urge someone to do this in other industries. I think this is the new model for business in general, not just idealab! Every 10,000-person company should be broken up into 100-person companies."
Gross assumes that all employees will be motivated to try harder if they own stock. But what about people who prefer minimal responsibility, a 40-hour week?
"It's true," he agrees, "there are some who have not been exposed to the rewards of being an entrepreneur and don't know what they're missing. But they're starting to hear about it, and they're getting antsy for a taste of it. It's as if they're sitting on the other side of a one-way mirror, watching people make love and wanting to be part of it."
The joy of business - to Gross, it seems self-evident. Surely, though, there are people who prefer not to take risks, who just want a safe paycheck?
"Yes," he admits. "idealab! companies hired 2,000 people over the last five years, and I have to persuade CEOs to come and take this - to take the jump - but each new person we recruit gets easier, each new success gets easier."
Abruptly, he stands up. "I have to go to the bathroom," he says. "Excuse me."
Ten minutes later Gross returns, even more excited. He's come up with another idea. "This is a new thought," he says, "not fully formed, but ... Let's say you're employed. You may have two or three years of job security. But capital is so cheap right now, you can start your own business and raise enough capital to give yourself three years at the same amount you're earning today. You get the same security you would have had in an employed position. In fact, it's a greater security, because you have money in the bank." He grabs a pen and paper, imagining a three-person team, with each member making $75,000 a year.
"So they need $675,000 between them for three years - round it up to a million for other expenses. I think three intelligent people could raise a million right now for just about anything. But this advice is not perpetual! This window has only been here for the last three years and will exist, I predict, for at least six more months."
I ask how people in their twenties, far from Silicon Valley, would manage to locate any sympathetic high tech venture capitalists.
Gross shakes his head impatiently. He's not talking about VCs. He tells the story of Jump Networks, a company in upstate New York that produced a Web-based calendar and address book. Founded by three young guys who scrounged around and persuaded a group of angel investors to put up half a million to get their business running, Jump Networks was recently purchased by Microsoft for an undisclosed amount.
"The Internet itself has publicized the concept of putting money into a Net startup," Gross explains. "It promotes itself. So you can get a million dollars, to give you security to try out your idea. And why not? It's no downside and all upside! You have the wonderful excitement and learning and liberation."
Gross's cadence is relentless. He sounds like an infomercial peddling an instant-wealth plan. Indeed, he claims idealab! has probably created 150 millionaires in the past five years - on paper, at least. Not too many former electrical engineering students can cite such a record. What makes him different from the rest?
"I have thought about this a lot," he says. "As a kid, I was really interested in building things. But I couldn't afford the tools I needed. So I thought carefully about how I could earn the money to do that. I also thought very carefully about what made me want the things I wanted. I was always thinking about features and functionality, cost evaluations, and price trade-offs."
Gross has applied a similar procedure of relentless self-analysis to the process of generating ideas. The first, and most obvious, is to look around and ask, What do I want that I can't get online yet? That's why he started eToys: He wanted to buy toys without going to the store.
"The second source is even easier," he says. "If you have 20 companies working in a building, you mix one idea from column A, one from column B, one from column C. It's just mix and match!"
That's it? As simple as that? Yes, he says. As simple as that.
I guess it makes sense. After all, Hollywood generates movie ideas on a similar basis. The Matrix, for instance, looked like a cross between Blade Runner and Men in Black. Likewise, eToys merely mixed ecommerce with an existing class of consumer products. But dozens of other people must have had the same idea, so why was Gross the only one to turn it into a new company that became valued at more than $7 billion?
The conclusion seems inescapable: idealab! is a misnomer. Ideas themselves cannot be the main factor. Developing and marketing them must be at least as important. Maybe sellinglab! is more like it.
Here, perhaps, lies Gross's secret ingredient for online success: He bolsters conventional market research by prototyping each idea as if it were an actual business - for a day, or even a few hours. Sometimes he'll set up a site that appears to be stocked with inventory, although it actually has none. He accepts orders via credit card, though there's no merchant account. "We just throw away the credit card numbers," he says. "We don't charge the customers. Suppose we've set up a music site. We'll go to Tower Records, buy the CDs that people ordered, and send them for free."
His fakeout is, he says, quicker and cheaper than running a focus group, and the data is more reliable. By prototyping the business, Gross knows for sure whether consumers will buy the product - because they think they did. And he can vary parameters to find what works best. "For $5,000 you can check 20 different propositions and have absolute hard data on whether people come, how often they come, whether they buy, and what the average order size is."
Similarly, when Gross wanted to purchase a car online and was dissatisfied with existing services, he prototyped CarsDirect. "We gave the CEO a 90-day contract to work for us as a consultant, and his goal was to sell one car. I told him to complete the whole transaction, financing and everything, and then go buy the car at a dealership. I didn't care if we lost money. My focus was just delivering the car to the customer's house on a flatbed truck, just seeing what the experience is like - and if people love it."
The business sold four cars in one night, and Gross had to shut it down for fear of losing too much money. CarsDirect is now established on a formal basis. "It's doubling every month!" he exclaims happily. "Our marketing cost is only $65 per car. In fact, we've done virtually no marketing."
Life isn't just a series of exclamation points for idealab!, though. Out of 28 businesses started during the past three years, three failed completely: EntertainNet, FeatureCast, and ideaMarket. All attempted to make money off online content - the hardest sell of all.
Other companies have been marginal - like Answers.com, which offered "authoritative" answers to questions on any topic, for $1.79 to $11.99 apiece. After journalists publicized some not-very-good answers to relatively simple questions, the service was restructured to charge no fees at all. Recently sold to Net Shepherd in Calgary, Alberta, its future is uncertain.
I ask Gross what the Web is worst at.
He answers by listing what other media are best at. Print is good for details, he says, like comparative shopping, lists of prices, features, and specifications. Radio is very good for a call to action: Go to McDonald's, call this number, do it now.
And the Web? "The Web is really good for accountability - measurability. Who clicked? Did they click? How often did they click? Broadband will make the Web better at drama, but for the foreseeable future - the next year, or year and a half - it's not ideal."
Bill Gross seems like a classic businessman in one respect: He's obsessed, hyperactive. He maximizes every second, like a man on a high-speed treadmill. I tell him this doesn't look like much fun.
"There are two satisfactions that are huge," he responds. "The first is overcoming mathematical or business odds to make something work. I get an actual adrenaline buzz, an actual chemical reaction - a legal high! - when a new idea is formed out of the air, and then that new idea gets executed. I think genetically we're programmed to enjoy inventing things. We needed to invent tools, as a species, just as we needed to have sex - to survive. So, it has to feel good, in the same way that sex has to feel good, because if it didn't, we wouldn't be here."
In the longer term, he draws satisfaction from a deeper source. "What drives me to keep on doing this," he says, "is that I like having a positive impact on other people's lives." He sounds like he means it, but if Gross is serious about being a capitalist with a conscience, surely he has higher aspirations than charging for mouseclicks.
Indeed, he does. First, he's embarking on a mission most entrepreneurs might consider crazy: He wants other corporations to copy his concept and compete with him.
"It won't hurt us, because the market is so wide open," he says. "We have .001 percent market share. If someone else took 2 percent, we wouldn't even notice! So I would like people to copy us. And that is why I'm sharing with you everything I know about what works here. I think it's proprietary, but I don't care. I want people to use it!"
His ulterior motive is capitalism on a huge scale: Get as many companies as possible to use his 100-person model for corporate structure and leverage their efficiency, thus creating more wealth - which he believes will benefit the nation as a whole.
Since he's thinking in national terms, I ask if he's considered applying the principles of idealab! to government.
For the first time, he seems a little reluctant to reply. "I have thought," he says cautiously, "'What would be the right way to organize a new country?' It would be an awesome challenge."
He's trying to downplay it, but I suggest he must have explored the idea in detail.
"Well, I've done a SimCity kind of thing," he admits, "trying to figure out what an island should look like. How you organize the physical structure, to optimize where businesses are located, where homes are located, traffic flow, things like that. And I've also thought how you could screen the people you let into the country, so that they share similar intellectual values."
He's talking more rapidly now, as his habitual enthusiasm kicks in.
"What I can't figure out," he goes on, "is how you deal with the next generation. In the United States, our framers did a pretty incredible job creating something that could last for 10 or 20 generations. The fact that it has mutated as little as it has is impressive. So I don't have a better solution." He sounds embarrassed to admit it. "But I would love to come up with one," he adds quickly.
Just as a thought experiment?
"As a thought experiment - and potentially as a real experiment, too." Here's the absolute boundary of the idealab! paradigm. Beyond Internet startups, Gross's dream is to privatize an entire country, breaking it into worker tribes of no more than 100 people, all of them energized by the profit motive.
Some of us may feel a little uneasy about a perfectly planned environment. On the other hand, the concept would certainly answer critics who complain that Gross's ideas lack grandeur. Test marketing and launching Bill's Island might be a bit of a challenge. But if he can spin off a few more billion-dollar startups, 10 years from now he may be wealthy enough to buy his own country.
Now there's an idea.
