Startup: A Silicon Valley Adventure

by S. Jerrold Kaplan

  Try as we might, no one could come up with a counterexample. David’s insight was startling in its simplicity and evident truth. This was the reason virtually all of the “corporate partnering” arrangements between small companies and large ones don’t work out. Either they separate—usually wounding the small company fatally—or the smaller one gets absorbed.

  I was the first to speak. “You’re implying that if we’re important enough to AT&T, they’ll insist on owning us?”

  “That’s right,” David said. “Just wait and see.”

  It was a sobering prediction that no one in the room could easily accept. Still, it was clear that the right path was to turn down the Reg D and take the AT&T money if they offered it, which they soon did.

  13

  The Reversal

  THROUGHOUT the winter of 1993, relations with EO deteriorated. Rather than work with GO to help build the overall Penpoint market, Alain Rossmann continued to pursue his own company’s independent interests. He chartered his software group to develop additional APIs for Penpoint, a prerogative that most operating-system vendors guarded jealously.

  According to the EO-Penpoint license agreement that Randy had negotiated at the company’s founding, EO was expected to send several engineers over to GO, to help port Penpoint to the Hobbit chip. A final $3 million was also due to GO, portioned out at various milestones during the development. Despite regular requests from Robert, Mike Ouye never sent over the promised help, claiming that his engineers were tied up with other matters, and insisting that if they did come, they would work only on projects of immediate value to EO. Since GO had borne all of the costs of the port, and both companies had agreed to certain revisions in the development plan, Bill and Randy believed that the $3 million was now due and payable.

  Rossmann disagreed, of course, and a protracted negotiation began. It was still in full swing when the time came to deliver the final Penpoint code to EO, so Randy naturally suggested that he might not send over the software until EO paid up. Although Rossmann had agreed in principle to the settlement, he was badly irritated by Randy’s tactic. This, in turn, fed Bill’s suspicions that Rossmann might not follow through.

  John Zeisler, who had recently replaced Michael Baum at Pensoft, decided to play peacemaker by taking both CEOs to dinner, at a trendy sushi bar in Palo Alto one evening in February. As long as Zeisler was present, things were civil enough. Unfortunately, the other two men had parked their cars near each other a few blocks from the restaurant. After dinner, they chatted tensely as they walked down a quiet side street.

  Bill described the following scene at the estaff meeting the next day: “Rossmann’s about to get into his car. I tell him it’s obvious that he owes us the money, and I want him to know that we’re not going to deliver the source code until he pays us what he owes us. Then he blows his stack.”

  Bill gestured in the air with his hands, imitating Rossmann. “You’re threatening me! Don’t you threaten me! I’ll destroy Penpoint! It won’t be worth a shit.”

  Bill returned to his own voice. “I couldn’t believe that Rossmann would throw a fit right there on the street. So I figure I better take the high road.” Bill looked toward the window as though staring right at Rossmann, and repeated his words from the night before. “It sounds like you’re the one that’s doing the threatening, Alain. I have no intention of threatening you. This is a business deal. You violated the business deal, you owe us the money. I’m not going to stand here listening to you scream your fuckin’ lungs out.”

  The story finished, Bill looked at each of us and chuckled nervously. We all knew that as GO’s primary hardware developer, and with EO’s close relationship with AT&T, Rossmann was in a position to make good on his threat to destroy Penpoint—if he was crazy enough to do it. And it was starting to look as if he just might be.

  The dispute with EO was only one of our emerging problems. By early spring, it was evident that the sales projections for 1993 were a pipe dream. Virtually all of the sales had been slated for the fourth quarter, which had now slipped into 1994. State Farm accounted for a substantial portion of the shipments, but Norm Vincent had called and reluctantly explained that owing to internal politics, he had to put the auto claims estimating project on hold for a year. As a result, the new $10 million investment from AT&T, which was still being negotiated, would stretch only until September 1993—assuming that EO accelerated the payment of the final $3 million. As a show of good faith, Bill released the Penpoint code to EO, but was still waiting for the money.

  To our surprise, IBM had formed another task force to determine its strategy for pen computers. Our salespeople happily flew to New York to explore this revitalized opportunity, but were disappointed to learn that IBM’s new approach was to promote only software to which it had exclusive marketing rights. All the worse, members of the new group were ignorant of Penpoint, and even inquired as to where they might get a demo of their own pen product.

  IBM had also managed to destroy what little brand identification it had managed to create around the Thinkpad by co-opting the name for its new line of laptops. This created no end of confusion in the press, which had been following IBM’s progress in pen computing only to find the company implicitly declaring a return to keyboard-based machines.

  The euphoria of the post-COMDEX publicity for Penpoint had faded considerably, particularly after General Magic had pushed the limits of hype into uncharted territory. It staged a major press announcement in early February with its corporate partners—AT&T, Sony, Motorola, Matsushita, and Phillips—without showing a product and without promising any firm time frames for delivering one. Asked about when General Magic’s technology would have a real impact, Marc Porat, the company’s visionary CEO, made the strategic mistake of predicting that it could take ten or twenty years. For reporters who lived and died by daily deadlines, this was tantamount to promising salvation in the afterlife. The announcement confused the press about GO’s prospects once again, because General Magic proposed to build a new operating system called Magic Cap to host their communications software, and so AT&T appeared, to the casual observer, to be supporting two competing Silicon Valley startups in the personal communicator market.

  Not all our problems were external, however. GO’s product schedules had slipped as well, raising the ominous possibility that we would need to seek out even more money, at a time when we had nothing to show but a bagful of promises and missed schedules. What was supposed to be a midyear release for the next version of Penpoint—which was to occupy substantially less memory and be much easier to use—began to slide inexorably toward the dead of winter. Most of the engineers were occupied with simplifying portions of the program, to reduce its size. But in the course of rewriting, everyone was proposing improvements that would tend to increase its size. Penpoint was succumbing to a disease known as feature creep—the irresistible temptation for engineers to load a product down with their favorite special features. Before unnecessary additions hardened around their feet like concrete, the senior technical managers staged meetings called Feature Court, with “Judge Wapner” presiding. Each side would argue its case, and a binding decision was made on the spot. Despite these efforts, the system seemed to grow like a cancer. No sooner were we able to save some space than a new, indispensable requirement would emerge. Bill’s confidence in Robert’s ability to manage the process began to erode.

  To make matters worse, Intel came in to pitch us on porting Penpoint to its new chip family, code-named Polar, a hastily planned response to the Hobbit and ARM chips. It emerged that Polar had been designed in conjunction with Microsoft, which wanted a RISC chip for a stripped-down version of Pen Windows that Lloyd Frink was developing, called Winpad. As Robert put it, “The good news is that we have Microsoft: on the run. The bad news is that they’re running in our direction.”

  As the depth of these problems became increasingly clear, Bill reacted by stepping up his already breakneck pace. He spun faster and faster,
dashing from meeting to airport to conference call to presentation, until he seemed ready to drop. He had personally supervised the launch of Penpoint J and the opening of GO’s new office in Japan, often shuttling back and forth across the Pacific twice a week. Randy had warned me that Bill might get seriously ill from all the stress.

  But what seemed to finally break Bill’s spirit was an incident with Compaq Computer Corporation, a major manufacturer of IBM-compatible personal computers, which had decided to get serious about selling a pen computer. Our sales people worked for months to educate Compaq’s executives on the market and our product, bidding against Microsoft for the business. After a formal proposal and presentation to senior Compaq officials, they let us know informally that we were the leading contender. The final step was for the evaluation committee to make their recommendation to the company’s CEO. Suddenly our staff’s phone calls to Compaq went unreturned. Bill learned shortly afterward that Microsoft, and possibly Bill Gates himself, allegedly countered by proposing to Compaq’s CEO a special relationship giving Compaq an edge over other personal computer manufacturers—on the condition that Microsoft get the pen project as well. To protect the company’s main business, the CEO agreed.

  Knowing he would be in Foster City late in the afternoon on March 1, Bill requested an emergency meeting with Robert, Randy, and me in his office at six. Somehow we all knew he had something important to discuss.

  Bill looked like hell. His eyes were bloodshot and his head shook periodically to ward off the desire to fall asleep. “Sit down, gentlemen,” he said solemnly. “I’ve come to a difficult conclusion. Since last August, we’ve been living a lie. There’s no way we’re going to pull this through. We’re spending over two million a month with no revenue in sight. Only the copy-center people really know what their job is. Everyone’s stretched to their limit.” As he spoke, he flexed a rubber band between his fingers ever more vigorously, until it snapped. “I want you guys to know that I don’t care what happens to me. The important thing is to save the project and the organization—to protect what we’ve built.” While Bill often emphasized his points with strong language, he was doing just the opposite now. His restrained wording carried special weight, especially in this private setting. We weren’t sure where he was heading, but it didn’t sound good. “Robert, Jerry, I think we’re going to have to put the company up for adoption—to find it a good home.”

  We were momentarily stunned into silence. “You’re saying we should sell the company,” I offered in clarification.

  He couldn’t bring himself to use the words, so he just nodded. “Can you guys get comfortable with that?”

  Robert and I looked at each other. Robert’s eyes said it all. For years, he had been the trouper, ready to go just one more mile. But this time he looked weary in a way he never had before, as though he wanted to say “enough is enough.” Perhaps under the wing of a larger, influential company with a long-term perspective and deep pockets, we could rekindle the sense of optimism and purpose that was so essential. We both knew this meant Bill would likely be leaving.

  I spoke for both of us. “We won’t be a problem. Do what you have to do. We’ll back you up all the way.”

  Bill turned to Randy. “How about you?”

  For once, there wasn’t a hint of a smile on Randy’s face. He spoke slowly and philosophically. “You know what? The problem is simple. We have a great product that doesn’t sell. It seems to me that GO is like Gone with the Wind, a labor of love with no real possibility of a return. Did you know that Selznick was so obsessed with making the movie that he gave away the first seven years of its profits to another studio just to get Clark Gable? We’ve built something really special here, and I agree with you guys—the first priority is to preserve the project and our people. I can survive losing my job, but it’d kill me if after all the hard work, brilliant engineering, and money, the product died before it had a real shot in the marketplace.”

  “We’re all in agreement, then,” Bill said. “I’ll talk to the other estaff. Until I say so, everything’s business as usual, OK?” Everyone nodded. “OK, then. We need some runway while I work up some candidate buyers. The most obvious is AT&T, but we should also contact Novell and Lotus, maybe even IBM. Randy, what’s the latest on the AT&T investment?”

  Randy wasn’t expecting to be asked an operational question at a time like this. He had to pause for a moment to get his bearings. “We’re just about to close. The problem is the shelf full of interlocking IBM agreements in my office. AT&T discovered that IBM has a right of first refusal on future financings, and now they want the same thing, which is impossible. So our lawyers have worked out a formula they call the ‘shootout scenario.’ Essentially, each of them gets to bid against each other until one of them wins, but the winner has to buy out the loser’s interest in the company. It’s crazy, but it works. If I can get IBM to go along, we’ll get the money in the next week or so. Beyond that—should we need it—is the Taiwan money.”

  Even though the AT&T financing had yet to close, Dave Atkinson had taken Randy to Taiwan—where AT&T was in the middle of negotiating a major agreement with the government there—to pitch them on investing in GO. We took this as a show of good faith, and it looked as if it was going to pay off. The Taiwan government’s representatives expressed a strong interest in buying 10 percent of GO, alongside AT&T’s investment. For once, we had excellent prospects for future financing.

  In light of this, it seemed peculiar that we were talking about selling off the company. But as I looked around the room, I realized for the first time that money wasn’t the problem. It was a loss of faith: Randy’s misgivings about the viability of our business; Robert’s doubts about our development schedules; Bill’s skepticism that we could develop the market momentum required to succeed as an independent company; and my concern that the new management team might not stick it out for however long it took. Despite the expanding bubble of hype about portable computers and mobile communications, our dream seemed as elusive and distant now as it ever had. Besides, Bill was right. When push came to shove, what mattered most was the project itself, the inexplicable imperative that no matter what, the organization had to survive and carry it on. We sat in silence for a while, each of us considering the gravity of the decision we had just made.

  “OK, then,” Bill said again. “Jerry, you go and see what kind of grass-roots interest there might be at AT&T. Find whoever you can and tee this thing up for me. I’ll talk to the outside directors, and Bernie Lacroute. Robert, find a way to keep us on track for an end-of-year product delivery, no matter what. Randy, close on the AT&T money, and start figuring out what pitfalls there might be in our legal agreements for an acquisition.”

  “There is one,” Randy said. “I mean, one that’s especially important to us. In the event of an acquisition, the preferred investors get a double dip.”

  “How’s that?” Bill asked.

  “It’s in the stock purchase agreements. In case of a ‘change-of-control transaction—which this is—preferred shareholders get their original investments back, then they convert to common stock and take their pro rata share.”

  We all knew what that meant. It was one thing for AT&T to feed us a few million at a generous price, but quite another to find a partner willing to swallow the company whole at our current size and burn rate. At the price we could fetch in an acquisition, there might be little or nothing for the common shareholders after the investors got their $50 million back, and the bulk of what was left. As we discussed a possible acquisition, each of us had in the back of our minds that in some fashion we would get a reasonable payoff for all the years of hard work. It might not be a fortune, but it was something for the value we had built.

  Robert looked annoyed. “Christ, that really sucks.” This was an understatement. At the latest valuation, my shares were worth over $10 million, and with Robert’s latest stock options, his were worth around $5 million. “How the hell did that happen?”

/>   I thought back through our negotiations with various investors over the years. Somewhere, in order to close one deal or another, we had acceded to investors’ demands for this condition, which is called a “participating preferred.” At the time, it had seemed a minor concession, unlikely ever to make a difference if we became successful. But now it meant the difference between a respectable payoff and nothing at all. We were faced with a real-life moral dilemma: either we protected our personal fortunes or gave up our stakes in the service of a dream.

  Bill heaved a deep sigh. “I want you guys to know that I don’t care if I make a dime out of this.”

  The three of us swallowed hard, almost in unison, and nodded in agreement. As we walked out, Robert leaned over to me and whispered, “Joyride to hell.”

  In the next few months I made a grueling series of trips to New Jersey, chasing down whoever would listen to my pitch. Like most native New Yorkers, I had rarely ventured off the New Jersey Turnpike, and so thought of “The Garden State” as a bunch of smelly refineries surrounded by a mass of dull, generic tract houses. To my surprise, behind the ugliness lining the turnpike lay charming hamlets and inns, like some Potemkin village in reverse. South Jersey contained tidy seaside communities alive with salt air; to the north, bucolic colonial manors dotted the countryside, surrounded by flocks of gentle mallards. Even the roadside diners, with their shiny steel siding, had an authentic feel.

  It seemed as if AT&T had an office complex unobrusively tucked away in every town. Decades of experience at camouflaging switching stations had spilled over into the siting and design of its corporate facilities—in most cases, you can’t find your destination without a guide. Once inside these undistinguished structures, a visitor soon becomes aware of their enormous scale. At the larger complexes, within a sprawling labyrinth of aisles and culs-de-sac, thousands of people labor away in modest offices with obscure designations like “4342K2.” With 50,000 workers in New Jersey alone, AT&T employs a significant percentage of the state’s workforce. Strictly speaking, AT&T’s offices, like its phone networks, aren’t really located anywhere—they’re everywhere.