Some of idealab's biggest
investors, including Dell USA, T. Rowe Price Science and Technology Fund
and entertainment mogul Jeff Berg have filed a lawsuit against the
Pasadena-based incubator and its top executives and board members,
claiming mismanagement is cheating them out of the approximately $1
billion they poured into it.
Specifically, this high-profile group of investors from idealab's
series B, which took place just six months before the company had planned
for an IPO, are alleging "abuse of authority and self-dealing" and asking
for $1 billion in damages, as well as for idealab's court-ordered
The suit claims that idealab's "'incubator' business is, for all
practical purposes, non-existent" and alleges that founder and CEO bill
gross and his fiancée, company President Marcia Goodstein, are keeping the
operation intact only to benefit financially from salaries and perks. The
best course of action for idealab's minority shareholders, it claims,
would be for the company to dissolve and distribute the approximately $500
million it has remaining to shareholders.
"They have told us they plan on taking the cash proceeds from idealab
and simply operating for the next few years," said Skip Miller of law firm
Christensen, Miller, et al, which is representing the plaintiffs. "The
whole company has really run its course. It's time to fold."
whole company has really run its course. It's time to
-Skip Miller, Attorney for Plaintiffs
In a statement, idealab called the allegations "baseless" and blamed
the decline in value of idealab shares on the overall market, saying,
"These sophisticated investors made an investment two years ago, and now,
after a market collapse that has affected millions of Americans, they are
attempting to use litigation to rewrite the terms of their private
idealab spokesperson Teresa Bridwell also responded to a number of
allegations, including that Gross used the company to collateralize
personal loans and the firm did not fully disclose its financial status to
investors. She noted that Gross invested most of the personal loan into
idealab's series B on the same terms as the plaintiffs and vigorously
disputed the claims of non-disclosure, stating, "We take our fiduciary
responsibilities very seriously and have sent out quarterly mailings with
financial statements as well as having meetings last march in L.A. and
April in New York with preferred shareholders."
Miller described the information provided as "a little bit" and "very
Angry investors, including many of the plaintiffs, had previously asked
idealab for a portion of their cash back and the incubator recently offered
10 cents on the dollar to those who participated in the series B.
Bridwell said approximately 10 percent of investors took advantage of the
offer, which closed last week.
sophisticated investors ... are attempting to use litigation to rewrite
the terms of their private investment."
Once the poster child for quick Internet riches, idealab has
unsurprisingly suffered in the past year, seeing many of its high-profile
companies, like eToys and eMachines, falter. Unlike some of its
competitors, however, idealab has had one huge hit, Overture (Nasdaq:
OVER), with a few other companies still in operation, including
CarsDirect, the Vendare Group, and NetZero (now United Online).
idealab has had only one high profile launch in the past year: New.net.
Contrary to claims in the suit that the company has few remaining ventures
in development and they require little of its remaining cash, Bridwell
said idealab has been focused on incubating technology companies not
related to the Internet recently, and plans to launch a number in the
coming months. "They will have qualities our earlier companies didn't,
like patentable technologies and higher margins," she stated. "But those
take longer to develop. We acknowledge that the days of creating companies
in a few months are over."