The startup king's new gig

(Business 2.0 Magazine) -- Some people can't stop thinking about food. Bill Gross can't stop thinking about new businesses. One of the world's great serial entrepreneurs, he's launched more than 50 startups through Idealab, his incubator in Pasadena, Calif. His track record includes both winners (CitySearch, Cooking.com, NetZero/United Online) and losers (eToys, Eve.com, Free-PC). But he's best known for inventing the pay-per-click advertising model behind Overture Services (formerly GoTo.com), the pioneering search engine he sold to Yahoo! in 2003 for $1.6 billion.

Now, after more than a decade of launching dotcoms, Gross has rediscovered the pleasures - and profitability - of the physical world. Idealab's current lineup is crowded with companies that make actual products: robots, 3-D printers, electric cars, rooftop solar collectors. As Gross puts it, he's much more interested today in "atoms businesses" than "bits businesses." He recently sat down with Business 2.0 Editor-at-large Erick Schonfeld to talk about why.

Atoms and bits: Gross sees robotics as a growing field with dotcom-type profit margins.

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Q. What do you look for when you start a company?

We like to challenge the status quo, to take on something that other people wouldn't do to solve a big problem. So when we look for a disruptive opportunity, we're really looking for a big problem and a way to solve it that no one else was willing to try.

Q. Do you go after industry incumbents, or are you looking for white space where customers aren't being served?

I would say we're going much more after white space. There are opportunities in both areas, and looking for a big industry gives you a lot of confidence that there will be customers there. But we prefer to look for a big itch that isn't being scratched.

Q. What are the drawbacks to going straight after a big industry incumbent?

The main drawback is that they are actually quite powerful. I think people underestimate big companies when they think of them as dinosaurs, as if they didn't have the power to fight back. For me, personally, if a customer is already being served, but just a little bit less efficiently, that's not as exciting as a customer with a problem that no one is trying to solve.

Q. Of all the companies you've started, which one was the most disruptive?

Probably GoTo. That company was designed to scratch an itch that wasn't being met. We had a whole bunch of small companies in the building that were all trying to buy advertising, but small advertisers were not being well served online. We thought the small advertiser needed some voice, some way to do business on a more cost-effective basis than cutting big deals with AOL. We had no idea that cost-per-click would have such a big impact - that it would change the economics of the Web. It was a disruptive thing that went beyond what we were hoping for.

Q. Didn't it become the basis for paid search, the economic driver for Google and Yahoo?

Yes, paid search has had an impact for Google (Charts, Fortune 500) and Yahoo (Charts, Fortune 500). But it's had an impact as well on many small publishers. Just as eBay (Charts, Fortune 500) empowers people to make a business online, so many publishers use AdSense and the price-per-click model to earn money online.

Q. How are you bringing search into the next phase?

Cost-per-click judges how many visitors you get, but it doesn't measure how effective those visitors are. Do they actually complete a transaction at the end? Do they become a customer of your Web site? We started Snap with the explicit purpose of introducing cost-per-action into search. An action could be anything the Web site cares about: a visitor signing up for a subscription or buying a book or deciding to become one of your customers. Since we introduced Snap, other search engines are starting to blend measurable actions into their final results.

Q. Is it frustrating that everyone copies you?

Well, we start these new companies for multiple reasons. Of course we're looking for economic gain; we have shareholders. But we are also looking to have an impact - and that's what makes us most proud.

Q. Was there a company you thought would be disruptive that turned out not to be?

Well, we felt sure Free-PC would be very disruptive - and it was, in fact. We were giving away free computers solely based on advertising. We started this in 1999. With today's economic model of online advertising, we might have been able to sustain it. We were just too far ahead of our time.

Q. What were some of Idealab's early successes?

We had a very big success with our first company, called CitySearch. It was doing local search way before it was popular. That was 1995 to 1996, and that company eventually grew up, merged with Ticketmaster Online, went public, and is now part of the IAC/InterActiveCorp family. We wanted to show that you could find local merchants much more powerfully and efficiently online, and I think we did. Of course, today everybody accepts that.

Q. Was eToys your biggest bomb?

We started eToys with a very small amount of money - $200,000 - and it grew very fast. It was building out warehouses and had huge customer satisfaction. It was a great company, but the fundamental gross margin was only 23 percent. That's how much money you can make when you buy the toys from the manufacturer and mark them up to the customer. With a top-line gross margin of 23 percent, your bottom line can't be higher than 23 percent.

Q. So what killed it?

It was a combination of incumbents squeezing the margins and the fact that there wasn't any protectable barrier to prevent other people from entering that same business. It's not a matter of how cheap you can start the company. You also need to have a way to stop other people from doing the same thing once they see that your idea is taking off.

Q. How do you figure out whether the market is ready to accept some of these disruptive services?

Well, one of the things we learned is that you definitely want to have first-mover advantage. It's always great to be first when you have a new idea that is a potential game-changer. But you also want to have the "last mover living" benefit - meaning that if you just go first, if you're way too early, you're not going to make it until the market catches up to you.

So I think the biggest lesson we've learned is that you need to find a way to raise enough money and spend it slowly enough that you can stick around until everybody catches on to your idea. The race is not to run out of your money first - it's to be there at the finish line.

Q. Why did you move away from pure Internet companies?

We started making only Internet companies because we felt this was an incredible new medium that had unbelievably high gross margins. If you could make a Web site, you could sell something online and you could make margins of 90 percent or higher. When we looked back at the ones that were most and least successful, we realized it had nothing to do with their margins. It had to do with how protectable the idea was. Was there a core intellectual property with which you could differentiate yourself and earn sustainable margins? Because you can make good margins online, but if you can't sustain them, it doesn't mean anything.

So that led us to take another look at all businesses - even companies that make physical products. We had shied away from making anything with atoms; we were all caught up in doing only things with bits. But you can make things with atoms and still have a huge amount of intellectual property in them, where you can earn good margins and protectable margins.

Q. For example?

A good example is robotics. That's going to require making some physical things, but that doesn't mean we can't earn protectable margins over time. So we felt our real screen for companies shouldn't just be only bits and no atoms. It should be good atoms and atoms where we have some differentiation. And that led us to start Evolution Robotics. That led us to start Energy Innovations, the solar company. And it led us to start ClearMesh Networks, doing wireless optimum communications.

Q. Tell me about Energy Innovations. How is it disrupting the utility companies? Well, I feel that the biggest disruption that will happen in this century is distributed energy generation. In the past, there was an economy of scale, so you had to build a 1-gigawatt nuclear or coal plant somewhere, and you had to do it far away from people because no one wanted it in their backyard. That was possible because of copper. Only copper could keep that plant far enough away that we wouldn't see it or smell it, and copper could bring those electrons magically into our house. But there's a huge loss by the time the power gets to us - with copper, it's up to 15 percent.

When you can build distributed energy generation on your roof with 10 feet instead of hundreds of miles of copper, you can avoid those huge losses. If you can get lower-cost solar, which we're working on very hard, and if you have the subsidies, all of a sudden it makes sense to have your own power plant on your own roof. Having your own power plant on your roof is just an unbelievable concept that wasn't even possible in the 20th century. It is going to be possible - and necessary - this century if we're going to solve the climate problem.

Q. Why solar?

We have to do all of them, but solar is the only distributable resource. Wind is very concentrated; there are very few locations where the wind is above 17 mph on average. Geothermal is unbelievably cost-effective but only in a few locations. Solar is the most uniformly distributed natural resource on the entire planet. Every day, 10,000 times as much energy strikes the earth as we use. Not to take advantage of it is a crime.

Q. How did you come up with the idea for Desktop Factory?

Desktop Factory is a 3-D printer - a device that takes a drawing from a graphics program and, rather than producing a piece of paper, outputs a physical object. It actually grows an object out of plastic. This is unbelievable. You can go from concept visualization to having a physical part in your hand in an hour. We have a 3-D printer for our own rapid prototyping at Idealab. It's amazing technology, but it costs between $50,000 and $500,000.

Q. You want to make this available to everyone, like a regular printer? Right, so my dream was to take this $500,000 machine and make it available for less than $1,000. If you have one of these on your desk, then anytime you want to make an object, you just send it to the printer.

I thought that would be incredible. Not just for visualizing things but also for downloading things. It's a form of transporting, almost like faxing an object. It's not cost-effective for manufacturing, but it's very cost-effective for replacement parts.

Q. What is this going to disrupt?

We think this technology will certainly disrupt the way people deal with replacement parts. But it will also disrupt the way people use their imagination and prototype objects. We think it'll make 3-D creators out of people who are used to only working with 2-D, only printing on paper. Kids today think very visually and very interactively, and this new technology is going to have a big impact on the way they think.

Q. And down the road?

I think we could disrupt manufacturing. So much of our life is supported by cheap oil transporting stuff around. If you could make devices locally when they're needed, on demand, you save on packaging costs and you save on transportation costs. I think for a sustainable future, the idea of making just what you need is very, very powerful. People are thinking about doing it for books right now; people are thinking about maybe not cutting down trees to make print runs and only printing books on demand. I'd like to bring the same mentality to the printing of actual objects.

Q. Can you make metal objects?

Right now it's plastic, but it's possible that some day we could be able to make metal objects.

Atoms and bits are becoming interchangeable ... It's really exciting that you could send someone bits and let them print out their own atoms.

Many things have to go right for disruption to succeed. You have to have the right management team. You need an idea that customers actually care about. And the timing needs to be right.