September 29, 2004
Warning: this post contains no educational material whatsoever. It's merely me, at the office late working on the new company and feeling punchy, telling a story about meeting Bill Gates at a urinal.
Microsoft made a buyout offer for Excite (corporate name: Architext) in December of 1995. That was two months after we had launched.
Cost of Excite in December 1995: $70 million.
Meeting Bill Gates at a urinal: priceless.
I said above that there was no valuable experience to draw upon here, but I was wrong. Here it is. Much of the early team was quite tempted to take the money. Others of us wanted to go for it on our own. It was Vinod who had some good perspective. He said that the hardest thing for a startup to do is get momentum. Gain some momentum and it becomes quite hard to stop the trajectory of the company. Said through an analogy, "once the rocket is off the pad and reaches escape velocity, it's very difficult to stop." Sure, but how do you know when you've hit escape velocity? That's the tricky question and while Vinod certainly maintained that we had (given the winning of the Netscape deal (see Persistence Pays, pt II)) I was uncertain.
So, off to Microsoft we went to negotiate.
Microsoft received us with the usual parade of good cops and bad cops. The good cops were tough but engaging. Yes, they wanted to buy the company. No, we're not paying more than $70 million. The bad cops were just plain hostile. I remember Nathan Myhrvold nearly yelling that search was not a business; that users would find their favorite site, bookmark them and then never go to search again. You honestly had to have that debate in 1995. Bookmarks? Sheesh.
During one of the negotiating sessions (with the good cops), Vinod and I took a break to hit the bathroom. Vinod pushes open the bathroom door and there, standing slightly hunched at the urinal, was a small man dressed in a sweater. "Holy shit" I said to myself. "It's Bill Gates."
Image you're facing three urinals. Bill taken the right-most. Vinod takes centerfield and I'm out in left.
Vinod looks over at Bill.
Bill looks back at Vinod "Hey Vinod, who are you here with today?" (today? now is that a telling question or what.).
"I'm here with the Architext guys. This is Joe Kraus".
Let me pause this dialog to say two things right now.
1. what is the appropriate bathroom etiquette? I had a massive internal struggle. Do I reach over the urinal barriers to extend a handshake to Bill? What would he do if I did?
2. I had complete urinal performance anxiety. I had not been able to pee up to this point. Nothing was happening in the presence of the man who brought us greatness like Microsoft Decathlon and the Blue Screen of Death.
What did I do? I said hello and then stood there silently not knowing what to do or say.
Shortly thereafter, Bill finished up, backed away from the urinal, washed his hands and left.
I should have shaken his hand.
September 26, 2004
Take a Cookie
"Take a cookie when they're passed." -- my wife's grandmother.
My wife's grandmother used to say that. Or, at least that's what my wife told me this weekend. Of course, that started me thinking; in that simple bit of wisdom is an extraordinary lesson for entrepreneurs.
"Opportunity creates opportunity". It's a big belief of mine. Events are connected in ways that you cannot anticipate. If event A leads to event B which leads to event C, it is rare that you can see directly from A to C. But, without doing A, you never get to C. What does it mean? Take a cookie when they're passed. Take opportunities when they are presented. You never know where they will lead.
The circuitous path to Excite's funding is a perfect example of this seredipity in action. This long chain of events took roughly 18 months to complete.
In the book Bob writes, "Here's a tip for entrepreneurs. Call me, I'm a cheap date."
Bob and I we were soon eating lunch together.
During the meeting I described what we (then called Architext) were doing. Cutting a long story short, he got excited and said he wanted to help.
By "helping", he meant "connecting us with his bosses." He introduced us to InfoWorld, the magazine he wrote for. Specifically, he connected us with a woman named Amanda Hixson.
I never knew what Amanda Hixson did at InfoWorld. All I knew was that she liked our search technology and she wanted to help. Plus she drove a sweet car. Thank you Amanda.
Amanda gave us our first contract - $100,000 to create a searchable web-based repository of all of InfoWorld's archives.
$100,000? We had struck it rich.
She told us that if we did a good job, she (and Stuart Alsop, then editor-in-chief of InfoWorld) would recommend us to InfoWorld's parent company, IDG.
The gods smiled on us. Within a month of completing the project, we found ourselves presenting to IDG's board of directors.
IDG was based in Boston. Graham Spencer and I flew back to give a presentation. The basic idea was to try and convince them to invest in Architext and to use our search technology across all their magazines.
I had my best suit on (that's not saying much) and I think Graham actually tucked his shirt in that day just to mix things up. We were called into the board room.
We presented. We were ushered out. We waited.
When the board meeting was over, we got introduced to a board member. His name was Steve Coit. Steve was a venture capitalist with Charles River Ventures based in Boston. He was the first VC I had ever met.
Steve mentioned that he'd like to talk to us. Perhaps there was an opportunity to do something together?
We went over to Steve's offices and there we met one of the smartest people we had ever encountered, Andy Rappaport. Andy said a lot of smart things. I don't remember a single one of them. In fact, I don't have the slightest idea what we talked about. I just remember being excited and wanting to keep this VC interested.
We got a call from Steve the following week. If Charles River Ventures was going to be interested, they were going to need venture capital partner on the west coast.
"Joe, I'd like to introduce you to Geoff Yang of Institutional Venture Partners"
Years later, Geoff told me a story about the first time that he and his partner, MJ Elmore, had come to visit us in our home office.
Upon arriving, MJ had asked where the bathroom was. When she got there, she was so terrified at the state of it that she merely waited inside the bathroom for a not-too-embarrassingly-short period of time and returned unrelieved.
The meeting with Geoff and MJ was inconclusive. In fact, this meeting began our general slogging through the VC world that I partly described last week.
But somehow, about 3 months after our first meeting with him, Geoff said, "Joe, I'd like to introduce you to Vinod Khosla at Kleiner Perkins."
If you happened to read the two part piece on persistence from last week, you know that the rest is history. Vinod and Geoff ended up funding the company.
So, here's the 18 month chain
1. Accidental Empires
2. Bob Cringely
3. Amanda Higgins, Infoworld
4. IDG board meeting
5. Steve Coit
6. Geoff Yang
7. Vinof Khosla - funding.
Could I have possibly predicted that reading Accidental Empires and making a phone call to Bob Cringely would result in Kleiner Perkins funding the company? Of course not.
Yet, one event led to another. Opportunity created opportunity in a way that was at once unpredictable and beneficial.
It's a lesson that has stuck with me and one that I adhere to today. Take a cookie when they're passed.
September 22, 2004
Persistence Pays, Part 2
I thought I knew about persistence from the funding process (see yesterday's post). In reality, I didn't know squat. I was bush league. But, I was about to learn from the master, Vinod Khosla.
Vinod and Geoff Yang funded Excite in January of 1995. And, pretty quickly we ran into a bet-the-company scenario where a real persistence lesson was learned.
Back in those days, the Netscape browser had two buttons in the chrome that don't exist today. They were called NetSearch and NetDirectory (NetSearch, of course, became Search but NetDirectory disappeared into the ether). That summer, Netscape let it be known that they were going to put the destinations of those buttons up for bid. Previously they had given, for free, the NetDirectory button to Yahoo and the NetSearch button to Infoseek.
This was the premier beachfront real estate on the web up for bid. We were terrified. We needed to get it.
Here's were the facts as we knew them:
Fact 1: There were at least three bidders for the two buttons: us, Infoseek and MCI (they had a yet-to-be-launched web search and directory product that, I think, was going to be called Genuine).
Fact 2: We had a little less than $1,000,000 in the bank.
Fact 3: We were screwed.
We were screwed because we didn't have enough money to compete. How were we going to outbid MCI? A freaking phone company? Infoseek had more money and more users.
We gathered the troops and I distinctly remember sitting on the floor of my office with a big chunk of our small company and Vinod. And suddenly the right answer appeared.
We were going to bid $3,000,000.
It was Vinod who suggested it. Forced us into really. We had $1M in the bank and we were bidding $3M. How was that going to fly?
Vinod made a critical point. If we don't get this deal we're nowhere. If we do get the deal, we can probably raise the money on this victory alone.
Strangely enough it felt right. A bit irresponsible perhaps, but in reflection it was truly a bet-the-company moment and we bet big. It was appropriate.
We did all the things you'd associate with trying to win a deal once we decided. We submitted our bid. We took people out to dinner. We made our case constantly. And in the end...
I was heart broken. We lost. Honestly, I thought we were dead.
Then, Vinod told me a story. It was a story about the early days of Sun Microsystems which Vinod started in 1982 along with Scott McNealy, Bill Joy, and Andy Bechtolsheim.
Sun was a fledgling company, 40 people perhaps, and a deal of critical importance was being bid. Computervision was the name of the company and Sun was fighting for the deal with the 100 pound gorilla of the day, Apollo. Sun had pulled out all the stops to win the deal. They knew it was a bet-the-company opportunity -- all or nothing.
The deal was worked for months. Then, one day in July a phone call came in to Vinod. As Vinod tells it
"It was from a purchasing guy from Computervision and that was terrible. You never want to hear from a purchasing guy, because that means you are getting a rejection. He thanked us very much for bidding on the contract but said they had chosen another vendor."
By the time Vinod got this call, the decision was baked.
"Apparently, Computervision had made the decision long ago. By now, there were Computervision technical people from Europe who had arrived here for technical training, at Apollo. It had gone that far. They were on crossing the Ts and dotting the Is on the contract."
It was over.
But, here's what Vinod did.
"I took over. By 6:00 p.m. I had sent off a letter, Federal Express, to about 30 or 40 people at Computervision. I said we would do anything for their business.
I didn't go home; I had my wife bring my clothes to the office, and I caught a red- eye to Boston.
The next morning, I was in the Computervision lobby, making phone calls, trying to see someone. Nobody would talk to me."
Turns out, after 50 phone calls, he got through to the VP of Sales and Marketing and through a chain of events and two days of non-stop work where no-one was let out of the hotel room in which they were meeting, Vinod threw out Apollo and signed the deal with Computervision. The rest, for Sun, is history.
It truly is an amazing story. If you ever get the chance to hear Vinod tell it, take the opportunity. Cancel whatever it is you have planned and hear it.
Back to the Netscape deal... We had gotten a similar call. We had lost. Infoseek and MCI had won. But, taking a lesson from Vinod's, we continued to press on as if the bidding was still open. We called everyone we knew at Netscape, we sat in their lobby asking for meetings, we persuaded others to call on our behalf. We begged. In general, we made a total pain in the ass of ourselves.
And you know what? It worked.
About 20 days after we were told that we had lost, the door opened just a crack. MCI had a hiccup. Their product wasn't ready.
Within 24 hours, we had the deal.
I can honestly say that if we hadn't persisted, hadn't pushed through when it looked hopeless, hadn't let Netscape know that at the slightest opportunity we were ready to go, that deal would have never happened and Excite would never have had the run it had.
I became a true believer in persistence and it's the #1 lesson I try to bring to the companies I work with. Things are NEVER over. The deal you're working may look closed or the candidate you're trying to recruit may have said 'no', but that's when the real negotiating starts.
September 21, 2004
Persistence Pays. Part 1
My mentor in business is a guy named Vinod Khosla. He funded Excite and believed in us when no one else did and we knew from the beginning he was a different kind of guy.
While we were still in the garage (literally), we met with at least 15 different venture capital firms. The meetings we're all the same. We showed them our search technology, showed them "concept-based" search, and showed them targeted advertising. To a firm, the first question they asked was a very reasonable one: 'great stuff guys, but what's your business plan? how are you going to make money?' Of course, being 22 years old and fresh out of college we replied, 'we thought you could help us out with that.' Apparently, that's the wrong answer. Who knew?
Rinse, lather, repeat.
Then we met Vinod...
By then, our deal had developed a certain "smell" -- smart guys with interesting technology but an uncertain business plan. The demo to Vinod started off like they all did, but about 10 minutes into the meeting things got very different. He interrupted
"Can the technology scale? can you search a large database?"
Big Pause. It's not the money question. No one has ever asked us this before. Ummm.
"We don't know, we can't afford a hard drive big enough to test."
Then, an amazing thing happened. Ten minutes into this meeting, his first introduction to the company and us, he pulls out his his cell phone, dials his assistant and buys us a $10,000, 10Gb hard drive.
He had me at hello...
This story had a happy ending. Vinod, along with the venture capitalist who introduced us to him, Geoff Yang, invested in the company's first round of financing.
Happy ending notwithstanding, the funding process was my first glimpse into the power of persistence. We had lots of opportunities to give up. We were told by many smart people that we didn't have a fundable idea. In retrospect, I think the fact that we didn't give up had little to do with smarts and everything to do with sheer denial and belief.
We had a slogan in the early days. We were "unencumbered by reality". To us it meant, we didn't know we could fail, therefore we had to succeed. When I look back on those days and even look on what I'm doing today, a lot of what allows me to persist, in the face of many people who don't believe, is this feeling of being unencumbered by reality. I think all entrepreneurs need to be able to step into this realm for a time. Otherwise, there are too many opportunities to stop.
Tomorrow (or the next day if the stuff really hits the fan at the new startup), I want to tell a story or two about how Vinod showed me the real meaning of persistence. I thought I knew what persistence meant, but I realized that I knew nothing when I encountered the master...
September 19, 2004
Hiring: Sabermetrics for startups?
If you pitch a venture capitalist for money, be prepared to hear sports analogies. "When are you going to put the puck on the ice" (when are you going to launch). "You need to move the ball downfield" (self explanatory). So, when I saw boxes and boxes of Michael Lewis' book Moneyball stacked up in Accel Partners' offices, I figured it was merely an attempt to brush up on new baseball analogies for their next crop of startups.
However, when I read the book, I was fascinated. On the surface, Lewis' book is a baseball book. But, the more I read, the more I was convinced that there was a great startup lesson contained in its pages. And that's when I understood why Accel was distributing the book.
As I mentioned, the book on its surface, is about baseball. Specifically, it asks the question of how the Oakland As, with the second lowest payroll in baseball can consistently make the playoffs against competition that is far better funded. (Poor entity competing against a rich entity? Sounds like a startup problem to me.)
To set the stage, Lewis explains just how great a discrepency exists between the highest and lowest payrolls in baseball by contrasting baseball with other sports. In football, the ratio of highest to lowest payroll is 3 to 2. This means that the highest paid team pays out 1.5 times what the lowest paid team does. In basketball, that ratio is 1.75 to 1. In baseball, it's 4 to 1. 4 to 1!? I couldn't believe it. Talk about an inherent disadvantage.
So, how could such a financially poor team like the As fare so well? The answer, it turns out is by exploiting a baseball market inefficiency. According to Moneyball, most baseball scouts, the guys who pick talent, look for the same things; things that "feel" right. How fast a player can run? How powerfully can they hit? How fast can they throw? How well can they field? How much do they have the "look" of a baseball player? It's an old game, with lots of traditions and common wisdom. Everyone just "knows" that these things matter.
With all the scouts looking for the same thing, those players who exhibit the commonly looked-for traits are (of course) highly priced. No poor team could afford them, including the As.
But, what if everyone was looking for, and pricing highly, the wrong characteristics? As it turns out, in baseball, the scouts were doing just that. They were highly *overvaluing* players based on a set of "common knowledge" that had very little correlation with winning. Turns out, if you do the math and run the stats, how well you run the bases, how fast you throw and how hard you hit have very little impact on winning baseball games. In fact, the math (apparently) shows that fielding doesn't matter in the slightest.
So, did the scouts believe the math? Of course not. They had tradition and years of experience and wisdom on their sides. They continued to value the players that "felt" right or looked right. The only teams that did believe the math were the teams that couldn't afford not to believe it.
The As were one of those teams. They couldn't afford to pay what the market was highly valuing. So, they set about doing a fact-based statistical analysis and picked players that no one else wanted, but which the math suggested would highly influence the team's ability to win games.
And win they did.
So, what does this have to do with anything startup related? Well, I started to wonder if there was a similar market inefficiency in the people market for technology startups. Were certain characteristics in people highly overvalued relative to their impact on a company's success? Conversely, were there characteristics undervalued in the people marketplace -- hidden gems waiting to be found that could have a radically positive impact on a company's trajectory? If this was the case, how could I identify these so that I could avoid the overvalued people and zero in on the undervalued people?
Well, I don't have an answer just yet, but I'm thinking a lot about it. In general, I think that the technology people market overvalues certain VP-level jobs, typically in marketing and business development relative to these positions impact on a company's success (how often have you seen the "killer" VP of marketing get brought in with some huge salary and equity package to save a company and end up not having much effect?) On the other side, I think the market generally undervalues key engineering hires relative to their contributions.
Why does this happen? For a few reasons, I think. First, most CEOs are not technical (I'm not either). So, they tend to highly value the things they understand (marketing, business dev, sales) and undervalue the things they don't (engineering). Second, people are more attracted to people like themselves. Come from marketing and you'll probably pay more for marketing people. Third, and perhaps most importantly, is the fact that there are no identified fact-based metrics that help CEOs understand how to value engineers. Let me see if I can explain.
In Moneyball, Lewis describes the search for the statistics that matter - those that are highly correlated with scoring runs and thus winning games. And, it turns out that there are two in baseball -- slugging percentage and on-base percentage. Find these characteristics and you've got a strong likelihood that the player will contribute positively to the team.
What are those stats for evaluating a potential engineering hire? People might be willing to pay more for a great engineer (pay what they're actually worth for example) if they could believe with a high degree of confidence that this person will actually make the difference they are paid to make.
I've been wondering if there are such engineering "stats" that are likely indicators of significant future contribution to a startup. Anyone out there got any ideas? For example, does being a commiter to a large open source project have a strong correlation with likely success inside a company? How about a MS degree in Computer science from a top 20 school. Is that a leading indicator? What about coding for fun? If someone codes for fun (as opposed to just for work) is that person more likely to make an unusual positive contribution to the success of a startup?
I'm really curious if there are items that correlate. I'm tired of guessing...
The study of baseball statistics is called Sabermetrics. Has anyone done Sabermetrics for startups?
September 17, 2004
Oh, the difference a decade makes
I've been reflecting on how different it is to start a company in 2004 vs. 1993. While I still break out like a nervous teenager, which looks awfully strange with graying hair, at a professional level, there are three substantial cost differences that make it much easier to start a business on much less capital. I think this is a great trend for entrepreneurs and has a not-so-clear impact on the venture business.
Cost Difference #1. The tools to develop software cost nothing now.
This isn't a new or radical point, but it makes a difference. When we (me and my partners) started Excite we were buying compilers, development environments, web servers, etc. The software infrastructure costs were real. Now, the open source community has done such a good job of making rock-solid infrastructure that this cost is all but gone.
Cost Difference #2. Hardware costs are approaching 0.
Also, this isn't a new point, but when combined with #1, it's powerful. One of the biggest problems we had at Excite was that we could not afford to increase the size of our search index. Why? Because we ran on Sun hardware and EMC disk arrays and the revenue we'd likely generate from an increase in index size was dwarfed by the hardware cost needed to support it. This burned a lesson in my brain: focus on lowering your operational costs -- it is one of the most significant barriers to scaling your business and it can be a serious competitive advantage. Google certainly learned that lesson early...
Now, with Intel hardware and cheap RAM operational costs are an order of magnitude (if not more) lower.
Cost Difference #3. Start-ups have access to global labor.
This is the biggest difference and one that I think is perhaps most revolutionary yet most untapped. Today, I've got folks in Romania, Russia, Germany and India. I reached them through Craig's List, eLance and various open source projects. Ten years ago, a start-up accessing labor in far-away places was unheard of. Today, it's simple.
Here's the good news: you can save money and get very specialized skills.
Here's the bad news: most start ups are filled with people who do things. Management skills have never been highly valued or utilized in small companies. When you're working with 10 other people, it's just not that needed. Also, entrepreneurs tend to get excited by doing -- coding, writing, designing, etc; Not by managing people who code, write and design. But, with today's ability to work with people all across the world comes the the great responsibility of needing to manage them to get what you want. It's going to change the required skills for successful entrepreneurs. Successful management ability early on, not just great drive and persistence, is going to become an absolute must.
What's it all mean? More done on less money. Sounds good to me.
September 15, 2004
Hiring. No False Positives
Other than fundraising, nothing I do as an entrepreneur is as important as hiring. But, hiring is tricky because it's so easy to loosen standards, especially when you're feeling in a pinch for people. But, I always keep two things in mind when hiring, no matter how desperate I feel.
1. a bad employee does far more damage than no employee, no matter the issue.
2. A players hire A players, B players hire C players, and C players hire losers. Let your standards slip once and you're only two generations away from death.
I recently finished How Would You Move Mt Fuji. It's about the role of the Microsoft-style puzzle interview (you know, 'how many manhole covers are there in the US'...). In the book, they mention that Microsoft
"seeks to avoid hiring the wrong person, even if this occasionally means missing out on some good people. The justification is that never before has it cost so much to recruit, maintain, and -- heaven forbid -- discharge an employee"
I like the way David Pritchard, director of recruiting for Microsoft says it.
"The best thing we can do for our competitors is hire poorly. If I hire a bunch of bozos, it will hurt us, because it takes time to get rid of them. They start infiltrating the organization and then they themselves start hiring people of lower quality"
Ding ding ding. We have a winner! Any hiring process should focus on never letting in a bad fit. Even if that means accidentally rejecting a lot of people that would be good fits. Said another way, it optimizes for no false positives, even at the expense of false negatives.
The Google hiring process is notoriously long and complicated. Internally, it's kind of a Liberum veto thing - a single no-vote of the hiring committee means you're not in. Why? Because they put the principle of 'no false positives' to work. They assume that there is a huge talent pool of great people and that they can afford to pass on people that would be great fits in order to make sure they never let someone through who doesn't fit.
Trust me. It's so hard to do. Especially in a startup where you've got much more to do than you have people to do it. But, slip up, even once and it's trouble fast.
September 14, 2004
Great article, if a bit old, in Fast Company on Whole Foods Market. It describes how John Mackey built a winning company and a culture of openess, or what he calls "no secrets management".
Personally, I think openess is something folks pay a lot of lipservice to, but don't really do anything about because it's hard to do meaningfully. Are you ready to, as Whole Foods did, publish everyone's salary on your Intranet?
Each store had a book in the office that listed the pay of every employee for the previous year. The book was available to anyone -- and was especially valuable if you were promoted or if you relocated, and wanted to see how your pay compared with your colleagues'. The pay book, surprisingly little used, set a tone of what Mackey called "no secrets management."
Sure, people think it's a crazy idea, but I think it does something important. It keeps people honest. Too often, some VP of such-and-such gets hired in a desperate situation and the CEO or someone high up in the company offers the guy a sweetheart deal. Big salary, big bonus, big stock options, guaranteed severance, the works... Deals are never secrets for long. This information spreads rapidly. And, usually the guy fails because he was hired in desperation and wasn't really a good fit in the first place. Then, all the folks in engineering and other make-it-happen disciplines are bitter and angry. How did this happen? Why does he fail and get rich and I work hard and don't get 1/10th as much?
Putting everyone's salary in the open forces:
1. decision makers to be able to openly defend why they paid so much for the person. It's not wrong to pay incredibly talented people extraordinarily well. You just need to be able to explain it to others.
2. the person hired to know that he better perform. The pressure is on.
3. the person hired to consider compensation equality going into the negotation because he knows his salary, options, bonus and severance are going to be public immediately. It actually gives the company more negotiating leverage in salary discussions.
Despite the fact that everyone tends to know everyone else's comp package anyway, people are afraid to make it truly open. Instead most prefer it to be an open secret. Bummer.
Allow myself to introduce... myself. My name is Joe Kraus and Bnoopy is a blog about entrepreneurship -- thoughts, lessons learned, open questions. It's all stuff I'm thinking about right now in the midst of starting a new company. My background is that I was one of the founders of Excite. Then I co-founded DigitalConsumer.org and now, I've got a new project still in stealth mode.
Bnoopy, pronouced like Snoopy, was the code-name of Excite when we started the company in the garage of a Palo Alto house right out of Stanford. Bob Cringely told us a story in 1993 about a Korean company that came out with a doll that looked exactly like Snoopy. They came up with the brilliant idea of evading the trademark police by calling it Bnoopy. Sneaky. Needless to say, we liberated the name from the doll manufacturer and took it for our own. Thus, Excite was born.
In Bnoopy I want to explore some of the issues I'm facing in starting a new company. I also want to reflect on some of the lessons learned from Excite and see how they apply the second time around. Hopefully in the process this will be useful to someone other than just me. Here goes...