Return to the Little Kingdom

by Michael Moritz

  Boich continued to play with the machine, looked at Hertzfeld, and mentioned the Xerox computer that bore some similarities to Lisa. “It’s still as fast as the Star.”

  “The Star is an incredible pig. It’s a disaster. It’s unusable,” Hertzfeld said. He pointed at the Lisa and added, “To see how slow it is you should try opening another application.”

  “I’m almost afraid to do it.” Boich grinned.

  “It’s a tribute to three years of programming when it works,” Hertzfeld said.

  THE BEST SALESMEN

  The custodians of Apple quickly learned the art of making friends and influencing people. Markkula, who guided Apple’s early contacts with outsiders, used precisely the same technique that Scott employed to manage the internal affairs of the company. Markkula made others help Apple grow. More than any of his colleagues Markkula understood the importance of appearance. The tone of his strategy was summed up in the way he kept prodding Jobs to spruce up his dress. “You judge a book,” Markkula kept repeating to his younger partner, “by its cover.” He recognized the power of gilt-edged associations. He knew that it was more important to lavish attention on a few people rather than many. He understood that reputable investors lent a sheen to a business that was difficult to acquire in any other way and the Regis McKenna Agency demonstrated that a magazine story was cheaper and far more influential than a splashy, multicolored gatefold.

  Apple was more a production of the whispering grapevine that linked investors and reporters in a gossipy circle than any great marketing triumph. In the ugly jargon of the trade, Apple concentrated on opinion makers. They sensed that others without the time, inclination, or wit to investigate the odd assembly that made the Apple II would rely on the judgment of people who were already wealthy or knew a thing or two about computers. For investors and reporters share at least one trait: Both money men and scribblers usually behave like sheep.

  Off the bat Markkula knew that alliances with a couple of experienced financiers were worth far more than the weight of their investments. Though his personal investments had been successful enough, Markkula had no direct experience dealing with any of the 237 or so firms that made up the venture-capital industry and which, in exchange for stock, provided financing to young companies. Originally, Markkula had wanted to wait until Apple had proved that it could produce its computer before turning to the venture capitalists, knowing that he would get a better price for the company stock if he could demonstrate that Apple wasn’t in desperate need of money. In the fall of 1977, the troubles with the quality of the case threatened to exhaust Apple’s credit line and left Markkula with no choice. Even the profit from sales of the computer were barely sufficient to keep Apple in business. The company’s needs were so dire that Markkula and Scott supplied an injection of almost two hundred thousand dollars to bind things over until negotiations for more money could be formally concluded.

  Once again Apple turned to familiar faces. Hank Smith had been one of Markkula’s colleagues at both Fairchild and Intel. He was an exuberant man with bouncy ginger hair who had left Intel and moved to New York to become a general partner of Venrock the venture-capital arm of the Rockefeller family. In the informal hierarchy of venture funds, Venrock, ranked among the best, and there was the additional advantage that it had not yet financed any microcomputer companies. Markkula first approached Smith in the spring of 1977 and for several months Venrock monitored Apple’s progress. John Hall, who had helped write the business plan, called on Venrock and discussed Apple’s prospects with two of the partners. When Smith was on the West Coast, visiting other Venrock investments, he made a point of dropping by Apple’s Cupertino office. The venture-capital firm made about seven investments a year, but there was nothing apart from a personal relationship that drew its people toward Apple. Hank Smith said, “We probably wouldn’t have looked at Apple had I not known Mike Markkula.” Eventually, in the fall of 1977, Markkula was invited, along with Jobs and Scott, to meet Venrock’s other partners and present their projections for Apple.

  Though the earlier plan had been considered aggressive, Apple, despite all the problems with the quality of the case, had been beating its projections. The presentation concealed much of the rush that had preceded it. Though Markkula had written a prospectus and based much of his forecast on financial projections supplied by Gary Martin, touch rather than science carried the day. Sherry Livingston watched while the forecasts were made. “It was a joke the way they came up with projections. There were so many projections they’d almost flip a coin.”

  Nevertheless, the business plan reflected the semblance of order and sense of focus that Markkula and Scott brought to Apple. The night before the presentation to the Venrock partners in New York, Scott remained in Cupertino with most of the rest of the company munching slices of pizza and helping to copy, staple, collate, and bind the prospectus. Clutching a dozen copies he caught a red-eye flight to New York, took an early morning nap at the Hilton, and then accompanied Hank Smith, Markkula, and Jobs to the Venrock offices. With the arrangement tentatively closed, the trio made for the airport. Scott saw some former colleagues from National Semiconductor queuing for standby tickets and decided to treat himself and his companions to first-class seats.

  While dealing with the Venrock partners, Markkula had also been talking to Andrew Grove, executive vice-president of Intel. Grove, a wiry Hungarian refugee with an expressive face and curly hair, had earned a reputation for being as noisy and remorseless as a steam hammer. (At Intel he had insisted that all late arrivals enter their names in a sign-up book and was notorious for dispatching “Grove-Grams”—bullet-sized reprimands.) Markkula hoped that Grove would lend Apple some of the experience he had acquired building Intel’s factories. Grove swallowed the bait and bought fifteen thousand of the twenty-five thousand shares that Markkula offered but decided not to become a director, feeling that he had enough to worry about at Intel without becoming involved with another young company. In later months Scott recalled, “Grove kept calling. He’d say, ‘I’d like you to stop stealing my people,’ and then he’d say, ‘Do you want to sell some Apple stock?”

  Another member of Intel’s board of directors, Arthur Rock, happened to see a demonstration of the Apple II given by Markkula. As a result, a few days before Apple was due to sign its agreement with Venrock, Rock telephoned Hank Smith at Venrock and Mike Scott at Apple expressing his interest in the offering. In the mid-seventies a telephone call from Arthur Rock was viewed by other venture capitalists, underwriters, commercial bankers, and stockbrokers as the financial equivalent of white smoke emerging from a Vatican chimney. Rock, who was in his early fifties, had made investments in companies that bridged the years between the disappearance of the vacuum tube and the arrival of the integrated circuit. As a New York financier, he had helped arrange the financing for the start of Fairchild Semiconductor. Along with a partner, he participated in the rise of the minicomputer industry by investing in Scientific Data Systems which was sold to Xerox Corporation in a 1969 exchange of stock for $918 million. Rock’s stake was worth $60 million. In 1968 when a couple of senior managers left Fairchild to form Intel, they turned to Arthur Rock for advice and money. Rock invested $300,000 of his own money, arranged for another $2.2 million and became the company’s first chairman. He had offered critical advice at several points, and when Intel’s management was dithering about whether to try to develop markets for its first microprocessor, Rock’s advice proved decisive.

  Rock shunned publicity, had never been the subject of a long newspaper or magazine profile, hardly ever appeared at meetings of venture-capital associations, was formidably discreet about his investments, and conducted most of his business either from an office on San Francisco’s Montgomery Street or from a $450,000 three-story condominium in Aspen. He had an austere look and the neat physique of a man who spent an hour exercising every morning. He was an avid baseball fan and frequently braved the winds of San Francisco’s Candlestick Park w
here he had a front-row seat seventy feet from home plate. He was also an enthusiastic supporter of San Francisco’s ballet and opera and a collector of works by, among others, the modernists Robert Motherwell and Hans Hoffman. He was quite old-fashioned, believing that television was the curse of modern society, that marijuana addled the mind, and that there had been no significant developments in literature or art for a couple of decades. A fellow venture capitalist said, “He can be charming and endearing and a cold sonuvabitch.”

  Provided they could lure Rock away from his office in San Francisco or his ski lodge in Aspen, the managers of young companies took great pains with their presentations to him. Like most experienced venture capitalists, Arthur Rock was not a gambler. He usually made only three or four investments a year and generally supplied only a small amount of money until he was convinced that the company would succeed or that he would get along with the management. He had a reputation for being easily bored, had little patience with corporate contributions to charities like the United Way, and was also known for saying little during board meetings. He would frequently cut short suggestions with the question: “What purpose would it serve?” Tommy Davis, Rock’s investment partner for much of the sixties, said, “He only wants the right answer.” Andrew Grove thought Rock was “like the pilot of a plane who sees the geography far better than the people who are driving around in it.” So when Rock called Apple he gained admission on the strength of a gilt-lined reputation.

  The investment of Don Valentine, the venture capitalist who first allied Markkula with Apple, was partially a result of coincidence. When Valentine spotted Markkula, Jobs, and Hank Smith dining together one evening at Monterey’s Chez Felice Restaurant, he sensed what was being discussed. He dispatched a bottle of wine to the trio with a note reading “Don’t lose sight of the fact that I’m planning on investing in Apple.”

  When the financing was eventually completed in Janaury 1978, and all the papers signed and notarized and share certificates swapped, Apple was valued at $3 million. The financing brought Apple $517,500 of which Venrock invested $288,000, Valentine, $150,000 Arthur Rock, $57,600. In return Markkula and Scott asked for an informal agreement from their investors that their financial commitments last at least five years.

  Within six months word of Apple had begun to seep out and when Michael Scott and the others appeared at the Consumer Electronics show in the summer of 1978, they were buttonholed by investors from Chicago’s Continental Illinois Bank who wanted to invest $500,000 in Apple. The price of the shares was about three times what it had been six months earlier. The Venrock partners grumbled about the increase in the price of the stock but eventually made an additional investment and wound up owning 7.9 percent of the company while Valentine complained the price was far too steep and refused to add to his original stake.

  Some months after the initial financing Scott took another call but this time from a close friend of Rock’s, Henry Singleton, chairman of Teledyne Inc., one of the companies that had helped make conglomerate a fashionable word during the sixties. Rock had helped start Teledyne and served on the company’s six-member board of directors. Scott was astonished that the chairman of a two-billion-dollar company which sold life insurance, made tank engines, shower massages, oil drilling equipment, and an ill-starred electronic device for measuring a dieter’s bites was calling Apple Computer to find out about the internal quirks of the Apple II.

  Like Rock, Singleton had not gained a reputation for sentimentality. He was reputed to manage Teledyne’s subsidiaries as if they were items in his personal stock portfolio, was said to have a head for detail, a devotion to cash, and no problem with ordering summary closures. Scott patiently answered Singleton’s questions and later asked Rock whether he thought that his investment partner would be interested in becoming an Apple director. Rock thought it impossible, saying that Singleton served on only one other board and was trying to rid himself of that obligation. He told Scott, “If I ask, the answer will only be no.”

  Scott persisted and when Apple announced its disk drive he arranged to hand deliver one at Singleton’s Century City office. He found that Singleton not only had an Apple in his office but also had one at home and was busy programming in assembly language. The appointment turned from half an hour into the whole day, with a lunch at the Beverly Hills Country Club where Singleton impressed Scott by paying in cash rather than resorting to credit cards. When Rock discovered that Scott had been invited to Singleton’s home, he knew the knot was tied: “You’ve got him nailed.” Singleton bought $100,800 worth of Apple stock and in October 1978 became a director.

  As Venrock, Arthur Rock, and Henry Singleton were recruited, Markkula showed that he wasn’t squeamish about selling parts of the company to properly qualified people. Unlike some of the other microcomputer companies who were wary that investors or directors would grab control or turn into bullies, the men at Apple recognized the help they could offer. More important than the injections of cash were the intangible benefits of the financier’s experience and reputation. They had monitored the growth of other small companies, had lived through dark days, were aware of some of the likely pitfalls, and could lend some weathered perspective to the pellmell pace of life in a start-up. They could offer advice about limiting the company’s tax liability, help sort out a distribution strategy, provide connections to people who could be helpful and help lure experienced managers. Recognizing this, Apple was careful to make life easy for its investors. It arranged board meetings to coincide with the day Rock traveled down the Peninsula to attend Intel’s board meetings while Scott often chauffeured Henry Singleton to and from the San Jose airport.

  Though Apple’s early stock sales were wreathed in anonymity, the reputations of the early investors were too large to hide. Their interest in Apple was precisely the sort of thing that provided snippets of gossip for venture capitalists. It was just the stuff that would make the rounds at the monthly lunches of the Western Association of Venture Capitalists, or be shared among bankers in the first-class section of the wide-bodied jets plying between San Francisco and New York, or for others who would breakfast at Rickey’s Hyatt House on EI Camino Real in Palo Alto. The more industrious could ferret out the information by sorting through the files in the meanly furnished lobby of the California Department of Corporations office in San Francisco.

  Investors who laid their money on the table were one sign of confidence. Stock analysts who put their opinions on paper were another. In the late seventies one of the most influential Wall Street electronics analysts was Ben Rosen. Rosen had followed the electronics industry for years. He was fond of gadgets. He spent several weeks a year industriously traipsing around trade shows, kept an eye on new products, wasn’t swept away by the accounts of senior managers, and would patiently solicit opinions of middle and junior managers.

  Markkula and Scott were just two of the younger managers Rosen had run across. He had known them both while they were still at Fairchild and on one of his inspection tours of Intel had taught Markkula how to operate a programmable calculator. Apple’s managers took care of Rosen, who started using an Apple in April 1978. Rosen was given the sort of customer service reserved for sheikhs and princes. When he didn’t understand some feature of the Apple and couldn’t find an adequate explanation in the manual, he called Jobs or Markkula at home. Markkula even offered to sell Rosen some Apple stock but was politely rebuffed. However, he would visit Apple and was almost always given straight answers to straight questions. Scott said,“Ben always had the data two or three years in advance of what was actually going on.” The attention paid off.

  Many of the journalists who followed the early years of the microcomputer industry were the people who had monitored the semiconductor industry and they had learned to trust Rosen. Among a crowd of men who made it their business to boost companies and tout stocks, Rosen they considered impartial. He always returned telephone calls, offered comprehensive reports on companies, and would provide pi
thy quotes based on shrewd observations which often wound up in The Wall Street Journal, The New York Times, Business Week, Fortune, Forbes,and the news-weeklies. The reporters who trooped through Rosen’s New York office found that he was using an Apple. So Rosen became, in some ways, Apple’s most influential sponsor. Regis McKenna, Apple’s publicist, who was given an introduction to Time at a luncheon organized by Rosen, thought “Ben gave Apple real credibility,” while the venture-capitalist Hank Smith felt he was “one of Apple’s best salesmen.”

  Apple’s select financial following was important and started to feed off itself. When Rosen and another Morgan Stanley analyst, Barton Biggs, lunched with Arthur Rock in San Francisco, their conversation was summarized in a two-page memo circulated around the New York banking house. Written by Biggs, it had a breathless tone: “Arthur Rock is a Legend with a capital ‘L’ like Ted Williams or Fran Tarkenton, Leonard Bernstein and Nureyev. . . . In his line of business he is a player who is several orders of magnitude better than anyone else who has ever been in the game.” Biggs dutifully reported Rock’s comments about Apple to his colleagues at Morgan Stanley. “The people running this company . . . are very bright, very creative and very driven.” Words like those were guaranteed to make readers (and investors) froth at the mouth.

  The early descriptions of Apple’s marketing campaign were hardly guaranteed to have the same effect as tips from one of the country’s most experienced venture capitalists. In set speeches and formal presentations, Markkula was given to describing Apple’s grand plan in three words: “Empathy. Focus. Impute.” The muddle of nouns and verbs provoked giggles among the advertising account executives but Markkula was expressing, in a peculiarly modern way, an old idea. In the 1940s, for example, IBM had used a similar strategy when it opened a lavish showroom on New York’s Fifth Avenue, and the company founder, Tom Watson, had later explained. “We were carrying the corporate image far out in front of the size and reputation of the corporation.”