Sonja was now thirty-three years old. She was dating a writer, and the two were getting serious. But the southern belle continued to love her Silicon Valley job, telling her friends, “I get to talk on the phone all day and spend money!”
A group of high-society ladies soon invited her to lunch to welcome her to the tony neighborhood. She was amused when the questions began, a reminder that San Francisco, for all its progressiveness, was still a place where old money looked down at the new economy. First, the Chanel-clad inquisitors wanted to know what her father’s line of work was; surely he had bought the mansion.
“My dad is a professor of civil engineering,” she said. So they asked what her husband did for work. “I’m not married,” she said. This was met with dead silence. There had to be a trust fund, they figured. Sonja smiled; she told them she had a job and had purchased the house herself.
Leaving lunch to walk back home, Sonja paused to behold the breathtaking view of San Francisco Bay. She had begun to feel like nothing bad could possibly happen to her.
PART
FOUR
Survival of the Fittest
1999–2002
MJ
MJ, in a somber-looking suit, arrived at the IVP offices and quickly disappeared behind closed doors with partners Reid Dennis and Norm Fogelsong. IVP was losing its way. The vaunted venture capital firm was slowly but surely breaking up.
Andi Heintz, leader of the VVCAs—the Vivacious Venture Capital Assistants—could sense the concern: the whispers, the closed doors, the hours away from the office, off calendar. She knew a company divorce was coming. What she didn’t know was that the divorce wouldn’t involve just one of the partners; it would involve them all.
The crisis had started quietly months back, when VC whiz Geoff Yang, hired by MJ and Reid Dennis twelve years earlier, had come to see an inverse relationship between the “fun factor” and efficiency at work and the number of people in the room. The more people at the conference table, the less fun and less efficient. And for him, IVP was no longer fun.
In Yang’s view, the IVP family had grown up and grown apart. There were no knockdown fights and no slammed doors. But IVP now had three divisions: tech start-ups, led by Yang; late-stage tech, led by Dennis, MJ, and Fogelsong; and life sciences, led by Sam Colella and Beckie Robertson. A multitude of partners with different specialties, objectives, skills, interests, and returns—and all needed to agree on deals.
Yang had come to dread Monday partners’ meetings, where he had to reduce his explanation of tech companies to the lowest common denominator because the life sciences folks didn’t understand the nuances of information technology. The life sciences people had to do the same with the tech team. And there was a disparity in returns: Late-stage tech had an internal rate of return of 68 percent between 1994 and 1999, while life sciences was returning 12 percent. Yang was consistently hitting home runs with investments in tech start-ups.
“Life sciences is not my basis of knowledge,” he told MJ. “I can understand medical devices, but when it comes to biotech, that’s very specialized. They’re talking down to me. I’m talking down to them. There is no added value. I can’t add partners to my team of new tech because the next thing you know, we’re in a general partners’ meeting, and we may as well rent out an arena.”
Yang had decided it was time to start a new firm, to be called Redpoint Ventures. He recruited three partners from Brentwood Venture Capital—all guys, all around the same age. Yang said that they were continuing the legacies forged at IVP and Brentwood rather than starting a firm from scratch. The tech start-up space was on fire, and investors were throwing money at him. Yang talked up Redpoint as a merger of two old-line gold standard firms, IVP and Brentwood.
Similarly, the life sciences people could form their own specialized firm. “Each specialized team can have its own firm,” Yang said. “No one has to carry the other.”
MJ and the other partners went along with Yang’s idea at first and even invested in Redpoint. But it eventually became apparent that veterans MJ, Dennis, and Fogelsong—leaders of the late-stage tech investments—were the odd people out. Soon Yang was joined at Redpoint by former IVP partners Tom Dyal, Allen Beasley, and Tim Haley and by former Brentwood partners Jeff Brody, Brad Jones, and John Walecka. Late-stage investing—in companies that had at least $10 million in revenue but still needed growth capital—was out of favor, even if it was showing strong returns for IVP.
Yang, a TV and movie buff, loved quoting from the film Top Gun: “You’re not going to be happy unless you’re going Mach 2 with your hair on fire.” But MJ and her allies were now becoming increasingly unhappy; they felt as if they were on the outside looking in.
As MJ’s administrative assistant watched MJ, Dennis, and Fogelsong enter yet another closed-door session, she wondered if this marriage had run its course. It’s time for everyone to be honest with where they’re at, she thought. The dot-com boom had been good to Silicon Valley, including the venture capital admins. When Heintz started at IVP in 1984, entrepreneurs arrived in suits and ties, handed out copies of thick presentations, and returned for multiple meetings over a period of weeks. In more recent years, IVP practically wrote checks to entrepreneurs as they walked out the door. It was exciting. She and other VVCAs had cocktails while talking about the IPOs they’d got in on and the stock they’d been able to buy before the company went public. They’d gush to one another, “I paid fifteen dollars a share and now it’s two hundred a share!” And at the next get-together someone would say, “Now the stock is splitting!”
But now IVP was splitting up, and her boss Yang, whom she liked and respected, was taking charge. Yang and his other partners quickly raised hundreds of millions of dollars, while reiterating that Redpoint was a continuation of the best of IVP and Brentwood. Yang’s action in forming Redpoint prompted Beckie Robertson and Sam Colella on the life sciences side to start their own health care firm, Versant Ventures.
IVP had rapidly become the child no one wanted. After months of everyone tiptoeing around the issue, it was becoming clear that once IVP’s current Fund VIII was invested, Dennis would pretty much be out of the game, along with Fogelsong and MJ.
That did not sit well with MJ. Though she had cut down on her IVP hours in recent years to spend more time with her family, this was not the way she wanted to end her career.
THERESIA
In early 2000 Theresia was in the basement of the Four Seasons Hotel in New York for all-day meetings with Accel team members. They were raising money for their next fund, Accel VIII. Lunch was brought in; there was no Wi-Fi. At the end of the day, as the team headed upstairs, phones buzzed with messages. Wives, assistants, entrepreneurs, executives, colleagues, and investors had been trying to reach them.
“The market has gone crazy!” one of Theresia’s partners exclaimed.
* * *
In March 2000 the stock market, which in recent years had only gone up, plummeted. In February, Alan Greenspan announced plans to aggressively raise interest rates, leading to some instability. Barron’s followed with an ominous cover story: “Burning Up: Internet companies are running out of cash—fast.” Although some market analysts brushed off the downturn as a blip, nearly a trillion dollars’ worth of stock value evaporated in a month. As spring turned to summer, the darlings of the Internet boom—the dot-com companies—became pariahs. Fortunes were devastated, or lost entirely. Even stalwart companies like Intel and Cisco were the walking wounded, their valuations reduced by 90 percent; Amazon faced possible bankruptcy.
Theresia and her partners triaged in emergency meetings around the conference table at Accel. She was no longer fielding calls and researching companies. Instead, she was picking which of her investments would live, and which would die. She had two things in mind: Keep your moneymakers and Cut the burn—meaning, “cut the companies that are rapidly burning through their availa
ble cash.” A company needed to get to profitability with what it had, or be sold for its asset value, or it would quietly be closed.
Theresia studied the financials on an investment she’d made in Sameday, the Bill Gross–incubated company that did same-day delivery of e-commerce packages. She had invested in 1999, but now, as e-commerce companies closed their doors, Sameday was in trouble. It would need to be sold.
* * *
Theresia dragged herself home every night, telling her husband, Tim, “It’s Armageddon out there.” She felt stuck in the lowest point of a J-curve, where losses dipped below the initial value. A year and a half into her venture career, she still couldn’t shake her fear of failure. She wasn’t afraid of missing a mortgage payment or being out of a job; she could always find another job. Rather, she was afraid she wouldn’t prove to be smart enough, agile enough, for this job. She’d heard of other VCs being ominously “disappeared”—parked in a firm’s portfolio company. A VC who was not going to make it to the next level would just be nudged out of venture and into doing marketing for a faltering start-up.
Theresia had another dot-com company, PeopleSupport, that could go either way: fall into the rubble or rise from the ashes. Co-founded in 1998 by Lance Rosenzweig, PeopleSupport was the first company to provide outsourced Web-based customer service by way of online chat and e-mail. It had caught on immediately, growing from thirty employees to more than four hundred in its first six months. Theresia invested in 1999, along with Bob Kagle at Benchmark. By early 2000, PeopleSupport had more than one hundred dot-com companies as clients. Revenues soared from $500,000 in 1999 to $6 million in 2000.
Rosenzweig had a great sense of humor and was a strong communicator—he was a debate champion in college. Before co-founding PeopleSupport, he owned a company that sold plastic checkout bags to chain stores, including Wal-Mart and Kmart. In the mid-1990s, just as he was losing customers to Chinese companies that could sell bags to U.S. retailers for a fraction of his price, Rosenzweig watched the rise of online shopping. He studied how e-commerce worked and found a breakdown between retailers and shoppers that ended with what the retailers called “shopping cart abandonment.” In those days people accessed the Internet via home phones using dial-up modems. Most Americans had only one home phone. A customer with a question about a product—delivery time, the color, shipping, a return—had to disconnect from the Internet to use the phone to call customer service.
Rosenzweig and PeopleSupport co-founder David Nash created the first outsourced chat service for online retailers. They opened a call center in Los Angeles and ran offbeat recruitment ads, such as “I dare you to send us your résumé. Hell, we’re only the hottest dot-com start-up in town,” and “Stock options are better than a knee to the shorts.” The call center was located in Westwood, Los Angeles, and most of their employees were UCLA students or graduates. Dot-com companies signed up in droves to outsource their customer support, sending their own employees to Westwood to train the PeopleSupport team.
But suddenly PeopleSupport was losing clients in droves. The darlings of the dot-com boom were going under. Pets.com, begun in February 1999, closed after buying a $1.2 million Super Bowl ad and burning through $300 million in investment capital. Webvan, a grocery home-delivery service that attracted funding from Sequoia Capital, Goldman Sachs, Benchmark, and others, filed for bankruptcy after burning through hundreds of millions of dollars.
Theresia got an e-mail from Rosenzweig titled, “What to do now,” prompting a meeting. “Everything is crashing, and all our clients are going out of business,” he said to Theresia. He’d had a similar come-to-Jesus talk with Benchmark VC Bob Kagle, who told him, “The people who are saying that this is just a blip are wrong. This is not a blip. This is a permanent shift. Just assume you can never raise more money.”
Theresia and Rosenzweig strategized over how to keep PeopleSupport alive. It helped that she was a board observer, not a board member. A board member had the authority to hire and fire, while a board observer was more ally than boss. In Theresia’s experience, entrepreneurs were often more candid with board observers.
Fortuitously, in the weeks before the downturn began, Theresia and Rosenzweig had been working on securing a new round of funding with Paul Madera, of the late-stage VC firm Meritech. As markets declined, Rosenzweig worked frantically to close quickly. The deal was signed on April 14. The next day brought another savage drop in the markets, with the Dow down 616 points and the NASDAQ down 10 percent. The NASDAQ lost a quarter of its value in a week. Rosenzweig was convinced that had the deal been delayed by a day, PeopleSupport would have teetered into bankruptcy.
At the “what to do now” meeting, Theresia told Rosenzweig, “First, we need to start by winning some non-dot-com companies. You need big companies that aren’t going away and can pay their bills.”
He nodded. He had an idea as well—to add phone support to chat and e-mail services. “However our customer wants to interact, we want to interact,” he said.
Theresia liked the idea of adding phone support but was concerned about rising costs amid plummeting revenue.
But Rosenzweig was one step ahead. He wanted to move customer support from Westwood to a low-cost international location. “I learned an important lesson in the shopping bag industry,” he said. “If you get a cost advantage in Asia, you can defeat anyone. Once we add phone support, we’ll become a full CRM outsourcer.”
PeopleSupport became the first outsourcer to set up shop in the Philippines to support American clients. Rosenzweig chose the Philippines because the culture was like America’s, the Filipinos’ English was excellent, and an infrastructure was in place to handle calls cheaply. The telecommunications company Global Crossing had spent billions of dollars laying undersea fiber-optic cables, which—with a compressing technology developed by Lucent—enabled calls to be routed cost-effectively to the Philippines. The savings were immediate and compelling. PeopleSupport could offer its services at much lower costs than any of its competitors.
Theresia knew that PeopleSupport still faced giant struggles, yet it felt like one of the few dot-com companies that at least had a chance. Moving forward, her survival strategy would be to eke out a combination of “saves” and new deals. But in this economic drought, water would remain hard to come by.
SONJA
With the dot-com bubble bursting around her, Sonja held on to her optimism. She believed the deal Bill Gross had made to buy the beauty start-up Eve would go through. The offer had come together before the bubble burst, and the deal hadn’t yet closed. She refused to listen to colleagues and pessimists who said all bets were now effectively off.
Sonja reassured her entrepreneurs, Mariam Naficy and Varsha Rao, that Gross’s offer for Eve would move ahead. “We have an offer, and we’re proceeding,” she said. “If you think it’s going to fail, it’s going to fail. If you believe it won’t fail, it won’t.”
Bill Gross was also an optimist. Months earlier, in January 2000, he had raised $1 billion in private financing. In April, Idealab filed a registration statement with the SEC, announcing its intention to go public. General Electric chairman John Welch Jr. joined the Idealab board. Gross believed that e-companies could go in only one direction: up. The downturn was but an annoying anomaly.
As the economic decline deepened, though, Gross, the energetic run-don’t-walk start-up king, was forced to deal with this unwelcome reality. He needed to start selling, closing, and restructuring his companies. Even as he did this, though, he kept the faith that he could move Eve toward profitability.
As Sonja predicted, Gross closed the deal with Naficy and Rao. He bought Eve for more than $100 million. Menlo Ventures made millions on the deal, and Naficy and Rao each walked away with their promised $17.5 million.
Around the same time, the beauty giant Estée Lauder announced it was buying an Eve competitor for a reported $20 milli
on. Beautyjungle, another online cosmetics retailer, laid off 60 percent of its staff. Another competitor, Beauty.com, was sold to Drugstore.com.
Gross brought in retail specialists who suggested turning Eve into a giant e-commerce portal. He later tried folding two of his smaller e-commerce companies that sold jewelry and furniture into Eve to create one big department store, when he realized that the company would not reach “acceptable levels of profitable growth in cosmetics alone.”
By October 2000, the NASDAQ had plunged to another low. Gross’s crown jewel was no longer worth anywhere near what Idealab had paid for it. Eve was losing money on every customer purchase, because of the high costs of acquiring customers. Not only that, in the heady dot-com days, Gross had guaranteed that the stock options held by Eve employees would be worth a minimum of $50 million within eighteen months.
Meanwhile Naficy and Rao did what they could to keep Eve alive. In mid-October, Rao arrived at Eve’s San Francisco headquarters for another day of brainstorming. But instead, she was met by a steady stream of employees who had been let go and were carrying boxes out of their seventh-floor office overlooking Market Street. Workers carted off equipment. Rao and Naficy were among the 164 employees told they were being let go that day. Bill Gross had sold Eve to rival Sephora, owned by LVMH, the company that had twice tried to buy Eve. LVMH had offered $100 million only months earlier. Today, for an undisclosed sum, Sephora would get Eve’s customer database, its name, and its URL.
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