Idealab: a case history of entrepreneurship

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  • Graham BeaverProfessor of Business Development,Nottingham Business School,Nottingham Trent University,Burton Street, Nottingham NG1 4BU

    Idealab: a casehistory ofentrepreneurship

    Much has been written about the impact ofinformation technology on the fortunes andoperating practices of business and organiza-tions in their seemingly relentless quest forcompetitive advantage. Information aboutcustomer trends, buying behaviour and pay-ment methods together with the response ofenlightened management to cater for suchchanges in a pro-active, strategic manner,has taken Tesco to a 15% market share andrecord protability in an industry which asone commentator put it `does not take anyprisoners'.

    There appear to be many examples wherecorporate management has embraced informa-tion technology systems to its strategic advant-age and as a consequence has improved itsoperating context through, for example, raisingentry barriers or improving the value chain toenhance a differentiation strategy (Porter, 1979and 1985). Who would have thought though,that four years ago the development of theInternet (or World Wide Web) would radicallytransform business practices in many indus-tries and create whole new opportunities forintellectual property development and entre-preneurial creation. This case history examinesthe formation and development of Idealab,( by Bill Gross,described in the popular press as a `high techentrepreneur'. It seems tting to begin thisaccount with an introduction from the Decem-ber/January issue of Fast Company magazine(1997) that states,

    Bill Gross, Chief Executive Ofcer ofIdealab, has started 18 companies in nine

    months. On the Net, he says `time is moreimportant than money'. Gross has beenstarting companies since he was sixteen butit was not until he met Steven Spielberg thathe came up with his ultimate entrepreneur-ial idea . . . a company dedicated to ideasthemselves.

    Thus was born Idealab, a Pasadena-basedthink tank that conceives and funds newventures on the Internet. Unlike many of thenew Web enterprises, Idealab is more than anindulgence for its 38-year-old founder. Itrepresents a radical new model for starting

    and developing new companies that reectsboth the volume and potential of ideas on theInternet and the challenges of doing businessthere. Gross launched the new company inMarch 1996, with the stated objective todevelop ten new businesses with a marketcapitalization of some $100 million each, thatwas capable of going public or to be sold by theend of the decade. At the time of writing,Idealab has started 18 different ventures, six ofwhich are now fully operational. One of thesecompanies, CitySearch, already appears to beenjoying considerable success, havingachieved a strong market position against theformidable competition from Microsoft and

    A radical new model forstarting and developing

    new companies

    # 1998 John Wiley & Sons, Ltd. Strategic Change, May 1998

    Strategic ChangeStrat. Change 7, 163165 (1998)

  • America Online in the creation of onlineinformation services for urban communities.

    The creation of new companies wouldappear to be a process that comes naturallyto Gross. He paid for his American collegeeducation (California Institute of Technology)by selling patented stereo speakers that hedesigned himself. Probably his best knownstart-up is Knowledge Adventure, which isnow placed as the fourth largest educationalsoftware company in the United States. Im-pressive though his business developmenttrack record may be, Gross is on record asstating that it does not really count for muchwhen it comes to starting companies on theInternet, which is an entrepreneurial mediumlike no other. When asked what is the funda-mental key to success on the Internet, Grosswas in no doubt of his reply:

    Speed, is of the essence here; time is moreimportant than money. If a company cannot go from concept to launch in ninemonths, it's not going to make it. This is thetoughest business in the world.

    For readers of this journal keen to know ofnew ways and methods of achieving competi-tive advantage, the formula embraced byIdealab is constructed on four principles.The first principle is to evaluate new ideasquickly. . . and thoroughly, time is not wasted if

    a promising new idea is found to have no realcommercial viability. The timetable set byGross for Idealab, is to say the least, ambitious.Over the next ve years, he aims to identify onenew and potentially protable idea per monthand to launch one new company every quarter.The evaluation process is both professionaland comprehensive with very little left tochance. Idealab has assembled a panel often Internet luminaries as its commercial

    evaluation advisors. They include MITProfessor Sherry Turkle, an expert on thesociology of the Internet; Richard Wurman,creator of the very inuential TED confer-ences; and Bob Kavner, the successful AT&Texecutive who now runs the On CommandCorporation. To again quote Gross:

    These advisors don't just provide commer-cial insight, they also provide credibility . . .We have some amazing people workingwith and funding us; Once we persuadedBob Kavner to become Chairman of ourboard of directors, we got Goldman Sachsand AT&T as investors. Once you get thoserst few breaks, the rest is like a chainreaction.

    The second principle is based aroundpeople, or rather the acquisition of a balancedmanagerial team that is capable of turning thenew ideas into commercial and viable enter-prises. Idealab companies, according to Gross,are fanatical about recruiting.

    The biggest difference between success andfailure on the Internet is the selection andrecruitment of the right people. We haveeighteen companies in various stages ofdevelopment and the only thing that isholding us back from having all eighteencompanies fully operational is people. Ourbiggest challenge every day is where we aregoing to nd really talented people toexecute the ideas.

    The third principle to promote speed inthe selection and execution of new ideas, is toprovide the necessary support infrastructurethat is so often missing in the new entre-preneurial venture and may well delay, orfrustrate commercial viability. Idealab has acentral support staff that undertakes all the vitalactivities such as, negotiating for ofce space,creating the required corporate identity andprotecting intellectual property. For example,graphic designer Tom Hughes, who created theMacintosh logo for Steve Jobs, is responsiblefor creating the individual corporate identity

    Evaluate new ideas quickly. . . and thoroughly

    # 1998 John Wiley & Sons, Ltd. Strategic Change, May 1998

    164 Idealab

  • and supporting marketing collateral for all ofthe companies in the Idealab portfolio.

    With the provision of these excellent anddedicated shared resources, I can reckonbeing at least three times faster than some-one starting a company in the `normal way'.

    The fourth and last principle, is to havean enlightened approach to ownership andcontrol of corporate assets. Idealab does nottake a controlling interest in its portfolio ofcompanies. In return for the start-up capitalthat it negotiates, Idealab receives a 49% equityholding, the remainder being reserved formanagerial investment and subsequent invest-ors that may be needed to fund future businessexpansion. Gross puts this very succinctly:`The way to create wealth quickly on theInternet, is to spread it around.'

    There is no doubt that the Internet willcontinue to provide the medium for future newventure creation but the rate of commercialsuccess is likely to be far outstripped by therate of failure. Speed, as an essential ingredientfor both idea generation and exploitation mustbe matched with strategic thinking, which asMoss-Kanter (1989 and 1995) reminds us `is ascarce resource'. Of the many ingredientsthat constitute Idealab's success to date, and letus hope in the future also, strategic thinking isembracing the concept of value chain man-agement (Porter 1979, 1985 and 1996).Gross, not surprisingly does not use the

    strategic management vocabulary that readersof this Journal are familiar with, but if the lastcomment on corporate success is left to him, itdoes seem to have a familiar ring to it!

    The way to get speed . . . and a successfulbusiness, is to create shared knowledgeabout this medium as quickly as possible . . .Your competitors won't share what theyknow, so you have to nd long term alliesand form lasting reciprocal relationshipsthat improve the quality of business foreveryone. I am trying to create a family ofcompanies that are allied with one anotherin a commitment to increase the speed atwhich we do and enjoy doing business.


    Fast Company (1997) DecemberJanuary, NewYork.

    Gary Hamel and C. K. Prahalad (1994). Competingfor the Future, Harvard Business School, Boston,MA.

    Porter, M. (1979). Competitive Strategy, Free Press,New York.

    Porter, M. (1985). Competitive Advantage, FreePress, New York.

    Porter, M. (1996). `What is strategy', Harvard Bus-iness Review, NovemberDecember, pp. 6178.

    Rosabeth Moss-Kanter (1989). When Giants Learnto Dance, Unwin Hyman, London.

    Rosabeth Moss-Kanter (1995). EntrepreneurialOrganisations, BBC `In-Business', ScreenedNovember 1995. London.

    CCC 10861718/98/03016303$17.50 Strategic Change, May 1998# 1998 John Wiley & Sons, Ltd.

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