The Battle Over HomePage.com - Company Business and Marketing

Executives at the startup have been struggling with incubator Idealab over the direction of the company. it's getting ugly.

IN THEORY, A VENTURE CAPITALIST shepherds a startup into success. In reality, a VC may put his own success above the startup's. The latter scenario is playing out at HomePage.com, a startup backed by Bill Gross' incubator Idealab.

HomePage.com has shifted its focus in recent months from setting up consumer homepages to helping companies offer Web sites customized to individual clients. During the change, top executives at privately held HomePage have been locked in a tug-of-war with Gross, who owns 56 percent of HomePage's stock, over the control and direction of the company. The tiff may offer bad publicity as Idealab fumbles toward its own IPO.

But as Gross has prevailed, executives have left the startup: HomePage CFO Janine Bushman and president and COO Mary Lou Fulton quit in recent weeks. Joining them is board member Steve Hanson, who served as CFO of GeoCities before it was bought by Yahoo.

And Tim Cahill, HomePage's chief executive, had considered leaving the company as well, according to two sources close to him. Cahill, while admitting to some disagreements with Gross, says he doesn't plan to resign. Gross founded HomePage in May 1999, making Cahill, a new-media attorney, the CEO six months later. Gross remained chairman.

Three sources close to the company say the departing HomePage executives blame Gross for making decisions that would benefit Idealab more than HomePage or its shareholders, which include investment bank Robertson Stephens and angel firm Jump Investors. The sources say the situation is causing a rift between Gross and Cahill.

"There is little ability for management to influence HomePage's direction," says one former executive who asked not to be identified. Gross, the exec says, was "essentially running the show as a subsidiary of Idealab." Gross declined to comment.

Bob Kavner, who sits on the boards of both Idealab and HomePage, says the departures are tied to the change in HomePage's focus from a consumer retail offering to a business-to-business service. "People were brought into the company who really knew that consumer business, and when we changed to more of a b-to-b focus that was not their strength," he adds.

Idealab's plans for HomePage went further. Its majority stake in HomePage gives it a controlling interest, which raises complications under decades-old securities laws. A high regulatory hurdle Idealab had to clear was compliance with the Investment Act of 1940, which says that no more than 40 percent of a public holding company's assets can be noncontrolling securities in other firms.

If Idealab surpasses that 40 percent mark, it effectively becomes an investment firm, triggering a variety of onerous reporting, accounting and tax consequences. Excluded from the calculation are investments above 50 percent, or those of more than 25 percent in which the holding company is the single largest investor.

The 60-year-old investment act has caused headaches for the new class of incubator-cum-venture firms that emerged from the heady days of the late '90s, and Idealab was not spared. The act effectively made Idealab change its business midstream. Where once it was a given that the firm's incubated companies would some day spin off and go public, now Idealab has to make sure it holds majority stakes in enough of its companies to comply with the regulations.

"Idealab represents that it does not provide capital to the network companies with a view to profit from the sale of securities," Idealab wrote in a recent filing to the Securities and Exchange Commission. "All or substantially all of the controlled companies will be 'controlled primarily' by Idealab in the future."

HomePage, like most of Idealab's companies, was founded in hopes of going public or of being sold to a larger company at a high valuation. But that has changed as Idealab's focus forced a change in its own strategy.

The change became apparent last spring, when HomePage was negotiating a sale to AltaVista, the Internet portal owned by Internet holding company CMGI. The deal was valued at $250 million, an impressive price for a company that was less than a year old.

Gross nixed the sale at a time when he was haggling with regulators over Idealab's compliance with the Investment Act of 1940. Cahill, according to two people familiar with the proposed sale, was upset when it didn't go through. Relations between HomePage management and Gross have been tense ever since.

For Idealab, the threat of a public dispute and potentially negative publicity are coming at a bad time. The online advertising and Net retail sectors, in which Idealab has many of its key investments, were darlings of Wall Street until this spring. But during the five months after Idealab filed for its IPO, many stocks in those sectors took a dive. Shares in companies such as retailer eToys and free ISP NetZero were trading below $5 a share last week.

Even more ominous, the stocks of other incubators have taken beatings amid concern over their investments. Internet Capital Group is down 91 percent from its high of $200 in January; CMGI has fallen 82 percent since January, and b-to-b incubator Divine InterVentures is down 56 percent since it went public in July. All three stocks hit 52-week lows last week.

"The incubator is a wonderful stock to own in a bull market, but it's tough to own in a bear market or even a more demanding one," says Merrill Lynch analyst Henry Blodget.

Nevertheless, Idealab wants to join the fray. Investment bankers at three firms that are participating in Idealab's planned offering say the reception among large investors has been cold enough to delay the IPO into next year.

"There is no institutional interest in Idealab right now," says one banker who has worked on its offering. "Everything in its portfolio is on the wrong side of the market. Mention eToys and the institutions run the other way.

Luckily for Gross, Idealab isn't in immediate need of cash. In March, a group of investors plugged $1 billion into the incubator at a valuation of about $8 billion. Late last year, Gross also sold 3.8 million shares of eToys for $193 million.

One banker working with Idealab's planned offering says it's been difficult to convince Gross that the best thing might be to wait until market conditions become more favorable. After all, Gross has so much of himself tied up in the company -- including his prepublic stake of about 40 percent.

"Expectations are out of whack with reality, and when you have to explain that to a guy with a not only a visionary mind but also an ego like Bill's, it's difficult to get it across," says the banker.

For now, HomePage.com will need to grapple with Gross' formidable vision and personality - something that Cahill himself admits isn't always so easy. "Do we always see eye to eye? No," says Cahill. "But have we ever not gotten through the rough patches? No."

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