Idealab! Hatchling Comes Home to Roost

Idealab!’s founder Bill Gross is a
visionary. He’s also a dynamite businessman. So on the heels of Estee
land grab of beauty e-tailer,
Gross hatched plans to up his minority stake in his own beauty supplies
incubatee,, to a controlling
interest. In a twist, he’ll also take the reigns as chairman of Eve.

According to official statements, the move is intended to accelerate Eve’s
expansion into other product categories. Well I’ve got another guess. It
goes something like this. There are two common exit strategies that exist
for Net start-up companies. Take your show on the road and shake the public
markets money tree for IPO dough. Or find a bigger fish to consummate an
all-stock swap acquisition.

The latter of the two has become rampant because quite simply, it’s getting
tougher to hit the new issues market up for cash. Instead, rely on those
bigger fish to wade through full disclosure, an IPO road-show, quarterly
earnings reports, and impatient investors. Getting acquired is easily the
exit strategy of choice for most Net newcomers.

is one Internet incubator that wisely uses its zaibatsu family to take
advantage of the most lucrative exit strategy. Bound to have a number of
struggling companies in its vast network, CMGI uses its portfolio
thoroughbreds to acquire its weaker start-ups.

Flavor-of-the-month investors have turned sour on financial news portals.
Just look toward the performances of (TSCM)
and (MKTW)
as recent examples. So, CMGI’s Raging
saw the handwriting on the wall and in a whirlwind courtship
swapped its stock for an arguably stronger Altavista currency. Since CMGI has
investments in both, it’s a win-win strategy to take both companies public
under the stronger market position of the two.

In this case, Bill Gross sees an opportunity to bring his 1998 investment
in to fruition. There’s little question doesn’t have a warm
welcome waiting for it in the public markets. Investors have openly flogged
e-tailers in the Nasdaq market square for nearly a year now.

Now’s the time to strike while the iron’s hot. With a speedy makeover, Bill
Gross can turn into an attractive take-over target and marry off
one of his longstanding hatchlings to a handsome suitor. But why all the
fuss? Because the days of minting money from nearly any bright idea are a
distant memory.

Keep in mind that Gross single-handedly started this Internet incubator
craze. And few me-too competitors had the Midas touch that he’s had. But
through no fault of his own, the bulletproof idealab! portfolio has fallen
on lean times.

Launched with tremendous bells and whistles, Etoys (ETYS)
soared 283% on its first day of trade last May, fortunate to have been
smack dab in the middle of the greatest Web boom the market has ever seen.
Following eToys’ heady IPO performance, idealab! released
to the public in June.

The pay-per-view search engine reached an enviable high of $114 per share
six months after its offering, despite a sluggish start. NetZero (NZRO)
and (TIXX)
quickly followed suit, debuting in September and November, respectively,
to a public that was beginning to show signs of weariness with dot-com IPOs.

Still, it seemed idealab! could do no wrong. Whatever upstart idealab!
piggy-backed its name to was naturally heralded an instant success. And
then the winds changed. Cash-guzzling Net plays took a beating from
investors impatient with balance sheets bathed in red. E-tailers and pure
content dot-coms fell out of favor and many idealab! backed public
companies fell on hard times.

Despite eToys’ impressive first day gains, the online toy store now hangs
tenuously to 6 1/2 bucks a share. Free ISP NetZero currently trades under
$9. risks falling into the $5-and-under bargain bin, following
an intraday brush with its $3 1/2 52-week low earlier this week. Ouch!

Yet another portfolio company, eMachines (EEEE)
spiked to just $10 before falling to its current $5 a share shellacking.
Its latest IPO hopeful (proposed symbol PSCM), filed in
February of this year, will likely never see the public markets since its
road show would be a bitter pill to swallow. Its closest rival, (IPET)
currently treads water at a paltry $3 a pop.

The list goes on and on, but ever the entrepreneur, Bill Gross is rolling
up his sleeves and getting back to basics. Perhaps ahead of the curve, he
understands that in these turbulent times, VCs have to work harder for
their supper. And with idealab! gearing up for an IPO of its own sometime
later this year, padding the bottom line can only help.

After this roller coaster week in the market, I’d like to wish everyone a
terrific and well-deserved holiday weekend!

Any questions or comments, love letters or hate mail? As always, feel free
to forward them to [email protected].

DealTracker scorecard: idealab!/

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