I passed around the first handout, a single sheet of paper. “In order to help structure our discussion today, I put together a short agenda.”
Mitchell grinned. “Let’s cut the bullshit and get to the demo.”
“Yeah!” Robert seconded the motion.
I glanced around the room to assess the group’s sentiment. They looked like fraternity brothers waiting for the treasurer to end his report so they could start the porn flick. John bolted toward the door, which of course was blocked by Mitchell’s chair. Everyone stood up as Mitchell and John struggled to lift the chair out of the way, banging it loudly back and forth between the door and the girder.
Several engineers were hovering outside, curious about the proceedings and wondering how long it would be before the demo. I had told them that the meeting would probably go on for about an hour before the board moved to the demo room. The crowd grew when the door flew open, attracted by the commotion. It sounded as though a brawl had broken out the moment the meeting started.
We trooped down the hall to the hardware lab, with Robert leading the way. He sat down on a high stool in front of a workbench. On the bench, an electronic tablet was fastened to an angled lectern, with a flat-panel display carefully taped down on top of it. Wires ran behind the bench to where the computer was hidden. The board members gathered in a semicircle behind Robert; the rest of the office—by now following the crowd—flowed into the room to watch the show.
Robert was renowned for giving good demos. This stemmed from an unusual skill: he could deliver a relaxed and articulate exposition while he surreptitiously carried out a complex sequence of operations with his hands. He held your attention with his words as he deftly recovered from problems that would normally require total concentration. If it weren’t for his interest in computers, he probably would have become a magician.
He described the setup, then explained how it could be fitted into a package about an inch thick. He weaved a tale about a traveling salesperson, chronicling his day and illustrating how the pen computer could improve his productivity at every turn. Although the assembled crowd was familiar with the details, they had never heard them expressed so eloquently. When Robert finished, they broke into spontaneous applause.
Ecstatic at seeing this progress, the board members returned to the meeting room and engaged in a spirited discussion about the next steps. “How quickly can you build a portable model?” John asked.
Robert, Kevin, and I exchanged glances. We were becoming adept at the type of silent communication that develops between long-married couples. “I’d guess we could have it by next June—about a year,” I said. Robert and Kevin nodded.
Vinod challenged us. “What can you do to speed that up?”
I turned it around. “Help us to raise capital. At our current rate, we have about four months of funds in the bank—six, tops. Then it’s ‘game over.’”
“Financing won’t be a problem,” John said. “Everyone will want in on the deal.”
“At the right price,” Vinod cautioned.
Then Mitchell spoke up. “We shouldn’t let a shortage of cash stand in the way of this remarkable project. Jerry, what was the price of the last round?”
In addition to the original investment of $1.5 million, we had done a smaller round of $500,000 three months later from the same investors, after we had a chance to get our budgets in order. “The original investment was at forty cents a share, the next was at sixty,” I said.
“And with the shares issued to employees since then, what’s the current valuation?”
“Let’s see . . . Sixty cents times about ten million shares . . . About six million.”
Mitchell thought for a moment. Then he said, “I think we should go for twice that. Twelve million.”
Robert and I looked at each other in disbelief. Was the demo so compelling that it doubled the value of the company? We turned to John, expecting him to calm Mitchell down. John slumped forward, putting his head down into his cupped hands on the table. I assumed he was composing a polite way to tell Mitchell he was full of shit. John sat still for several seconds, then started to bounce his left leg on the floor like a fidgety schoolboy. He abruptly shot upright.
“I think we should ask for sixteen million.” John had tremendous respect for Mitchell’s judgment, but he was accustomed to having the most extreme view. He was not about to be out-enthused.
Mitchell and John now engaged in a staring contest, as though one card sharp had just called and raised the other’s high bid. Kevin began to slide lower in his chair, as if to get out of the way.
I thought I should do something to cut the tension. “Who do you think we ought to approach?”
Mitchell answered. “Look, we need the support of the major ISVs, and they’re all flush with cash. Let’s approach them.” These were the independent software vendors, companies that write applications that run on other companies’ operating systems. He was talking about Lotus, Microsoft, and Ashton-Tate—the big three.
John frowned. “You’re not considering talking to Microsoft, are you?”
Knowing Mitchell’s long-time rivalry with Bill Gates, I wanted to derail this line of thinking as quickly as possible. I responded directly to John. “We have to clue them in eventually, since we want our platform to be open to all applications developers.”
“He’ll just start a project right away to compete with us!” John said.
“Not if we get him to invest,” I said. “And besides, this way I can get him to sign an NDA”—a non-disclosure agreement, a legal document that restricts what the recipient can do with information that he learns from you. It allows you to disclose confidential information on a limited basis while still protecting your intellectual property.
John’s frown slowly changed to a smile. “That might make sense if the price is right. After all, we’re giving them early access to our stuff.” He rubbed his hands together briskly. “How about twenty million?”
Kevin looked seasick. He leaned his head back against the wall, his mouth ajar.
“OK with me,” Mitchell said.
Vinod, who had listened impassively to the proceedings, decided it was time to offer his opinion. “Look, there’s no harm in asking, but this is a dangerous game. Pricing of these intermediate rounds is highly unstable. If they think you’re close to running out of cash, they’ll wait you out. If the price starts to crack, everyone gets cold feet.”
John bristled at Vinod’s gloomy tone. “Hey, there’s no right price. It’s willing buyer meets willing seller!”
“I’m not saying don’t do it,” Vinod said. “I’m just saying it’s dangerous to start too high.”
After the meeting broke up, Robert, Kevin, and I assembled in my office for a post-mortem. “I guess that went well,” I said.
Kevin still looked queasy. “Too well. These sky-high valuations give me a nosebleed.” He tapped the side of his nose.
“Hey, these guys are the experts,” Robert said. “Who are we to judge? They do financings all the time.”
“True,” said Kevin. “But it isn’t necessarily in our best interest to overprice. Remember what Vinod said.”
I shrugged. “What have we got to lose? I’ll call Manzi, Gates, and Esber first thing in the morning.” These were the CEOs of the Big Three software companies. Within a few days, I had appointments set up to meet with Manzi in Boston and Esber in L.A. But Gates wanted to come visit us personally to see the demo.
Robert and I took to the road. On the strength of my prior relationship with Lotus, Jim Manzi, its chief executive, assembled the bulk of his senior technical staff for our presentation. They were always alert for an opportunity to play in a new sandbox, and this sure looked like a big one. Manzi was all too aware of this tendency on the part of his staff, and so was understandably skeptical. He promised to get back to us after caucusing with his team.
In contrast, our meeting with Ed Esber of Ashton-Tate went quite smoothly. When we finished our p
itch, Esber was visibly impressed. “I never realized I was a PC bigot,” he said. “This really is different. We need to figure out how to get with it.”
The next step was to host a visit from Bill Gates of Microsoft. He showed up promptly with an associate in tow. They were both dressed informally: slacks and white button-down shirts, open at the neck. Gates’s sandy hair dusted the back of his collar and kept falling over his glasses. They looked like prep school boys exploring the city after college orientation. Although they had just walked in, Gates immediately slouched in front of a new Macintosh that sat unattended on the receptionist’s desk, to see what software was loaded.
Robert cornered me before we went out to greet them. “Did he sign a non-disclosure? How much can we tell him?”
“I cleared the NDA with his attorneys, and he’s supposed to be bringing a signed copy. It says in no uncertain terms that what we tell him is to be used only in considering a business relationship with us. He can’t use what he learns for other purposes. Let’s explain what we’re doing, show him the demo, and pitch him on being an ISV.”
Despite my reassurances, Robert looked concerned. “He’s not going to like the fact that we aren’t using DOS.”
More than in most companies, Microsoft’s culture reflected the personality of its founder. Gates had visions of dominating the PC software industry, banishing all competitors to a meager existence on barren, unfamiliar territory. He took the quick success of companies like Lotus as a personal challenge.
By any measure Gates was brilliant, yet he had never graduated from college nor accumulated the advanced degrees and academic accolades that he so richly deserved. Perhaps because of this lack of formal recognition, he seemed to have an itch that no single victory could scratch. Gates always seemed to be trying to prove that he was smarter than everyone else, and this competitiveness pervaded the entire company.
A shy technocrat with a squeaky voice, Gates found himself thrust into the public eye after the company’s IPO in 1986. At first he did not take well to his success, fearing that it might soften his brutal work ethic and perpetual technical edge. As an improbable survival strategy, he seemed to cling to a view of himself as an underdog. Gates’s newfound wealth, which was approaching the billion-dollar mark, had the unfortunate effect of making him a stereotype for the media, a money-culture symbol of the revenge of the nerds. He lived in a Spartan world of self-imposed austerity, flying coach class and parking his own car. As the wife of one of my colleagues once observed, “Bill is still trying to win the science fair.”
Despite all this, I liked him. In most respects he seemed like a normal guy, albeit a bit awkward, with a knack for turning any discussion into a contest. I had mainly talked to him on social occasions, and found that it was a simple matter to put him at ease: defer to him on some point and he would open up. I respected his passion for work, his unmatched intelligence, and his genuine interest in mastering new ideas. When he wasn’t feeling threatened, he was capable of discussing a wide range of topics, from politics to music, but he was most comfortable when talking about computer technology and gossiping about industry executives.
Gates seemed unusually relaxed that day during his visit to our offices. He greeted Robert and me with a broad smile and a firm handshake. I briefly wondered if he was more comfortable in business settings than social ones. He treated us as peers, avoiding the subtle social signals of higher rank. He helped himself to a can of soda from the refrigerator and followed us to the meeting room.
Robert described the concept of a pen computer, our approach, our product, and our desire for Microsoft to build applications for our system. Gates’s eyes narrowed, and he leaned forward, folding his arms across his lap and staring at the table. At first I thought his stomach hurt. I looked at his associate for guidance, but he didn’t appear the least bit concerned about Gates’s condition.
“Go on,” Gates said. As Robert continued, Gates started to rock back and forth like a davening Hasidic rabbi. This was his way of concentrating.
When Robert finished, Gates summarized the presentation in his own words, as though to ensure that he understood it completely, which he did. “This is something different, like the Mac,” he said. “And that means we have a choice. We can start to work with you now or play catch-up if it succeeds.”
Robert sighed, visibly relieved to hear this.
Gates then asked what application areas we would most want Microsoft to tackle. Robert made several suggestions, which he explained in some detail.
The two visitors spent a long time examining the demo, after which they had to rush to their next appointment. As we hurried to the door, Gates’s competitive instincts, which had been conspicuously absent, reemerged. “You know, Kay Nishi and I talked about a machine like this some time ago.” Nishi’s company, ASCII Corporation, was Microsoft’s marketing partner in Japan. “But the technology just wasn’t ready. Maybe it’s time now. I think you’ve got the right approach here.”
“Thanks,” I said. “I hope you’ll work with us.”
“When I get back to Seattle, I’ll have someone call you to follow up,” he said as the elevator doors snapped shut.
Several years later, Gates and I exchanged a series of letters regarding our recollections of this visit. He included a copy of an e-mail message he had sent to his senior staff following our meeting. Among other things, it said:
Basically they are building a machine that Kay and I talked about building a long time ago—a machine with no keyboard and no disk . . . using a writing stylus with handwriting recognition for input . . . There are a few other people building things like this—in fact there was one discussed in the WSJ this week . . .
. . . All the old ideas like using gestures for various commands they have “rediscovered” . . .
ANALYSIS: This machine should be built as an open standard by a bunch of Japanese makers. The software layers should be more compatible with desktop stuff. Kaplan isn’t the best CEO. They have some OK ideas but I don’t think this thing will be big. We do need to think about note taking and the fact that small machines can be used everywhere especially with this input approach but I don’t think we should be an ISV for them. [The full text of Gates’s e-mail message is reprinted at his request in the Appendix.]
Two weeks later I called Manzi, Esber, and Gates to find out if they were interested in investing.
“No, but this is an area we should know more about,” Manzi said. “We’d like to continue discussions about doing applications.”
“It’d present a conflict in working with other hardware companies,” said Esber. “But I’d like to start a project with you.”
“Not interested in the investment side,” Gates said, “but I’ve assigned Jeff Raikes from our applications group to follow up. He’ll contact you shortly.”
Soon after these calls, Robert wandered into my office. “So where are we on the financing?”
“Nowhere. And we just killed a month to find out. Now we really have to get our asses in gear.”
Kevin joined us, sporting his best “I told you so” look.
“OK guys,” I said, “we have to split up the work. You two watch the shop. I’ll put together a more formal business plan. I’ll call John so we can start making appointments with the VCs. I’ll need each of you to write up your areas, and then we have to put together a standard dog-and-pony show. Remember, these guys are mostly number crunchers, not visionaries. We need graphics, tables, what-ifs, and pictures. Let’s review our budgets and figure out how much time we’ve got left.”
Robert and Kevin went back to their offices and e-mailed me revised budgets, then rushed back in for the final count. Robert was a real spreadsheet jock, so he took over my computer, consolidating the various departments. “It looks pretty good. Seems like we can go until January if we watch it.” January was six months away.
“That’s a relief,” Kevin said.
“Wait a minute,” I said. “That doesn’t sound
right.”
Robert reexamined some of the spreadsheet formulas. “Damn. These rows aren’t included in the total.”
I crouched at Robert’s left side. “Oh shit!”
Now Kevin jostled his way in to read the tiny numbers on the screen. We looked as though we were playing a desperate game of musical chairs. “September,” I said. “End of October at the latest. You guys have to give me more room than that. We’ll get creamed.”
They massaged the numbers until we could just make the mid-November payroll.
“OK,” I said. “That’s the plan.”
When I got John Doerr on the phone, he started rattling off the names of venture investment firms for me to contact. “Merrill-Pickard, Sequoia, Sevin-Rosen, TVI, Accel, Mayfield, IVP, Oak—they’re all great venture groups.” John was at his best when talking finance.
“Slow down, man, I can’t type that fast!”
He paused only briefly. “No, wait. You can also contact our limiteds.” He was referring to the organizations that put their money into Kleiner Perkins’s investment funds as limited partners. He started right in again. “Chancellor Capital—that’s Citibank; Aneas—they’re the investment arm of Harvard University; General Motors Pension . . .” He was speaking so fast he could barely catch his breath.
“Hold it a minute, John.” Every time I asked him to wait, he seemed to charge off in a new direction.
“We could also approach some corporate partners. Sun may be interested, Xerox has a venture group, Olivetti is looking for new technologies, Altos has some money to spare, I could call Andy Grove at Intel, Kyocera . . .” The problem was that each contact meant a series of dog-and-pony shows, partners’ visits, and possibly one or more trips out of town. But the consequences of firing up more interest than we could handle wasn’t John’s top concern. “. . . and there are some investment banks we have relationships with that do venture stuff as well—Morgan Stanley, Warburg Pincus, Robertson Coleman, Hambrecht and Quist.”
Startup: A Silicon Valley Adventure Page 8
