From: Adam Rifkin -4K (adam@XeNT.ics.uci.edu)
Date: Fri May 05 2000 - 20:57:31 PDT
A trifecta of new books for the "I Can't Get Enough About
Venture Capitalists" genre...
http://www.cs.caltech.edu/~adam/local/fork-books.html#vc
First, there's Charles Ferguson's inside account of Vermeer:
http://www.amazon.com/exec/obidos/ASIN/0812931432/forkrecommendedrA
Then, there's Randy Komisar's _The Monk and the Riddle: The Education
of a Silicon Valley Entrepreneur_:
http://www.amazon.com/exec/obidos/ASIN/1578511402/forkrecommendedrA
Finally, coming out on May 30 after months of hype is Randall Stross'
inside account of the horrifying stuff that goes on at Benchmark:
http://www.amazon.com/exec/obidos/ASIN/0812930959/forkrecommendedrA
From stories like the following, Benchmark really does seem more like a
fraternity than a VC firm in the blatant disregard for due diligence...
I love the line about the CTO:
> "Smart guy. He's not someone I would fight for, except that all the
> engineers are there because of this guy, and he's got all the
> knowledge in his head."
Bruce Schneier makes a cameo, too...
> When the Money Goes Down the Drain
> by Randall E. Stross, excerpted from the new book _eBoys_
> Benchmark Capital is one of Silicon Valley's top venture firms. But
> when partner David Beirne bet millions on TriStrata--instead of a
> startup called Priceline--he had made a mistake he couldn't rectify.
> No matter how he tried.
> Randall E. Stross
> In 1998, during David Beirne's rookie year as a partner in the
> Silicon Valley venture capital firm Benchmark Capital, he fell in
> love for the right reasons with the right deal. His more experienced
> partners, for reasons that were almost as good but not quite, held
> back. Ex-romantics who had been burned by big, risky investments in
> the past, they couldn't help but emphasize the shortcomings of
> Priceline, the you-name-your-price airline-ticket service that had
> just been launched. To them it smelled like a "promote," an unproven
> concept play with no clear prospect of making money. They fought
> Beirne with a sharpness that was not commonly seen in the conference
> room, and yet love was love, and Beirne would not let go of it.
> Beirne had been wooed to Benchmark because he was the most successful
> headhunter in the tech business, having placed the likes of Jim
> Barksdale at Netscape and Richard Thoman at Xerox. He liked the idea
> of joining the young partners who had founded Benchmark in 1995. With
> smart investments in startups like eBay and Ariba, Benchmark had
> already developed a reputation as a top venture capital firm. And now
> here was this rookie, who was quickly proving that he could smoke out
> and haul in the biggest venture deals out there. Beirne had a nose
> for winners: Kana Communications, Webvan, and Scient, his first three
> companies, now have a combined market cap of $16 billion.
> But in hindsight, Beirne made one really big mistake in his first
> year: He gambled that he could persuade his partners to pay big for
> both Priceline and a company called TriStrata. When they asked him to
> declare a favorite between the two, he balked; he would not take the
> time to step back, look hard at both deals, and compare the relative
> risks and likely rewards. As a result, the firm put out only a
> lukewarm offer to Priceline, which was declined. The partnership then
> found itself at an impasse, with Beirne pushing a counteroffer of $15
> million for 15% of the company, and his partners insisting that it be
> only $5 million for 5%. Without agreement among themselves, a second
> offer was never made.
> At the time the partners could stomach just one highly aggressive
> offer. They made it to TriStrata, which accepted. This is the story
> of that offer, and its bloody aftermath.
> When Beirne introduced TriStrata to his Benchmark partners, it was a
> tiny, two-year-old Silicon Valley company that developed encryption
> software and had yet to release a product. Yet it sought from
> Benchmark a $15 million investment, which would have valued the
> company at $85 million.
> TriStrata was the type of deal Dave Beirne loved. First, it carved
> out a large business opportunity--its software, if it delivered on
> what the company promised, would safely protect from unauthorized
> eyes all data and messages that traveled within a corporation's
> computer network. Conceivably, the software would one day be
> installed on every personal computer in every office. Second, it
> featured brand-name people, who in this case included its wealthy
> founder, John Atalla, the father of PINs, which had made bank ATM
> networks secure two decades earlier, and Tom Perkins of Kleiner
> Perkins fame, who had already invested his own money. Third, the
> company was "a make"--it needed a CEO and a senior management team.
> Beirne was a recruiter, the person who could bring in the people who
> would ensure that Atalla, a man in his 70s and more Mitteleuropa than
> Silicon Valley, could leave a legacy. Fourth (though Beirne may not
> have been conscious of this pull), TriStrata was not actively
> pursuing capital from venture firms--no company looks better than the
> one that professes it does not need your money.
> When John Atalla came to the Benchmark office to meet a few of the
> partners, it was Beirne who knew what Atalla wanted: extremely
> patient listeners who would show interest in a meandering discourse
> on Europe and his background and his philosophy of life. Beirne
> composed himself into a sculpture titled Rapt: leaning toward Atalla,
> both elbows on the table, fists supporting his head, eyes
> unwaveringly focused on the speaker. Bruce Dunlevie, too, wore an
> attentive mien. To Beirne's distress, however, Kevin Harvey
> repeatedly hopped out of the meeting to take phone calls. Didn't
> Harvey understand? Atalla wanted to build a relationship with the
> firm. (Harvey's view was quite different: In his three-hour
> presentation, the old man evaded all specific questions about the
> business and the technology, clear evidence that he was "full of it.")
> Another partner, Bob Kagle, and the others were leery because even
> though Perkins was on the board, along with John Young, a retired CEO
> of Hewlett-Packard, and Bill Zuendt, former president of Wells
> Fargo--hitters all--the company lacked a business plan. Atalla
> promised profits of $10 million in the first year of sales but had no
> idea of what revenue to expect; two years after its founding,
> TriStrata had yet to hire a single marketer or salesperson.
> Even worse, the partners had to rely heavily on the professional
> judgment of others. TriStrata's core security technology was by its
> nature impenetrable to all but an elite among cryptographic experts.
> The TriStrata Secure Information Management System, involving
> installation of its own computers and proprietary software in a
> corporate network, encrypted and decrypted all data with code that
> was purported to be virtually unbreakable. Atalla claimed that he had
> figured out how to implement an arcane algorithm called "a one-time
> pad," a desideratum that was based on a long-known cryptographic
> theory but whose practical realization had eluded everyone else. Was
> there independent corroboration that he had achieved the
> cryptographic equivalent of converting lead into gold? Only if one
> accepted indirect evidence. Price Waterhouse had its best people try
> to break it. "It could not be broken," TriStrata said they had
> reported. And there were other encouraging signs: Price Waterhouse
> had already installed the pilot system at a few of its offices and
> appeared close to signing clients like General Motors, Cigna, and
> Shell.
> "Close to signing," however, was not "signed." If ever there were a
> deal that screamed for due diligence, investigating claims, and
> consulting disinterested third parties, this was the one--and all the
> more so given it would be Benchmark's all-time largest investment and
> at the all-time highest valuation. The Benchmark tradition was to do
> the due diligence before a commitment to invest was made, but the
> TriStrata board was pressing for an immediate answer. Beirne proposed
> to his partners that Benchmark commit to invest, subject to 30 days
> of due diligence.
> "It's chicken shit," Andy Rachleff spat out, upset at the proposed
> break with Benchmark tradition. If a commitment is to be meaningful,
> you must do your homework before, not after.
> Bob Kagle gently cautioned Beirne: "We all have our blind spots,
> right? Our greatest strength is our greatest weakness. And I think in
> this case, Dave, we're all conscious of the fact that there's a lot
> of marquee players around this thing. You're all about marquee
> players. So we need to make sure that you're not getting too colored
> by that relative to all the other stuff."
> "Salesmen are more likely to be sold," Rachleff added.
> "I think I can get one of the best CEOs ever to go run this company
> and build one of the best senior management teams in the business,"
> Beirne said. "I've watched what that does to companies. Now, I've
> marketed a lot of things that people said were stupid--Netscape was
> one of them. All I want is to have an open mind from all you guys to
> do the due diligence. People like Zuendt and Young aren't stupid.
> They don't put their money in and spend their time on things that
> they think aren't real."
> Shaking his head at the prospect of an investment at a record-setting
> price with fundamental questions still unanswered, Rachleff, who had
> just turned 40, muttered aloud, "I'm a relic. I must be a relic."
> The due-diligence issue prevented a partnership decision that day.
> But Beirne pressed ahead, and the partners soon agreed to a deal.
> Benchmark invested $6.5 million in TriStrata, whose valuation was
> pegged at $97.4 million, a partnership record and an even higher
> valuation than initially proposed. The partners gave Beirne their
> support for a clean deal--without asking for 30 days of due
> diligence. TriStrata accepted without delay, and the deal was done.
> It marked a milestone: a $100 million valuation for a company that
> had yet to collect a penny of revenue. The deal closed in July 1998.
> For Benchmark, the primary corroboration of Atalla's cryptographic
> claims had come from the former chief technology officer of Price
> Waterhouse, who had positively raved about TriStrata's technology.
> And Beirne had accompanied Andersen Consulting's best cryptographic
> expert on his first visit to the company, and his report had been
> positive too. The better the technology looked, the easier it was to
> explain the company's undeveloped business plans and financial models.
> In Beirne's view, the primary risk in the deal was in finding the
> world-class CEO ("world-class" was the adjective that always preceded
> "CEO"). He knew just the person: Paul Wahl of SAP, the giant software
> firm based in Germany. Since 1995, Wahl had worked out of
> Philadelphia as CEO of SAP America, a subsidiary whose revenues had
> grown from $650 million in 1995 to $2.2 billion in 1998. He knew how
> to build large organizations, sell to large organizations, and
> oversee complex software technology. (And as a German national with
> experience on two continents, Wahl was literally world-class.)
> Beirne's relationship with Paul Wahl had begun three years
> previously, when Beirne called the up-and-coming SAP executive with
> one of his
> I-have-nothing-to-sell-just-want-to-develop-the-relationship calls.
> Wahl granted him a half-hour meeting at a New York hotel--at 6:30
> a.m. They had a chat, and Beirne's face and personality were
> registered in Wahl's mind; that's all that was needed. Beirne didn't
> need to keep the tie alive with periodic hellos--in fact, sparing
> Wahl such calls was part of the Dave Beirne method. When Beirne
> called next, 12 months later, it was because he had an open position
> that he thought would be of interest--CEO of Healtheon, a company
> funded by Kleiner Perkins. Wahl passed, but the experience gave him
> an opportunity to get to know Beirne better.
> "Paul, I've invested in a project," Beirne told Wahl the next time,
> when he called from Benchmark in June 1998. "I want you to trust me.
> I just want you to come out and meet the founder of this company.
> Hear what we have to say. Worst-case scenario: investment of time on
> your end with another great person in the world, and no strings
> attached."
> When Wahl flew in, Beirne met him for breakfast to brief him on the
> company, then took him over to TriStrata's office in Redwood Shores,
> Calif., to introduce him to John Atalla. Afterward, Beirne called
> Wahl and extracted from him a commitment to make a second visit to
> TriStrata in three weeks: "Paul, put it on your calendar right now."
> This was the visit that Beirne called "the selling situation." He,
> John Atalla, and board members John Young and Bill Zuendt all spent
> time with Wahl, selling. Beirne knew that everyone possesses
> something he calls "the driver," the basic seat of motivation, and
> Wahl, the reserved German, had come around when alone with Beirne to
> revealing his own interior hopes. An offer was presented, and Wahl
> flew home that Friday to Philadelphia to discuss it with his wife. He
> promised Beirne an answer by Sunday.
> When he called, though, it was to turn down the offer. "I have to let
> you know that the relationship with SAP is too important to me. I'm
> going to stay. The terms of the offer that we outlined? I didn't talk
> to my wife about them."
> "Oh, my God!" Recovering, Beirne asked, "What do you mean? What
> you're telling me right now--is it equity-related? Is it
> cash-related? What are the issues?"
> "I've learned more about what my needs are. I don't want to embarrass
> anyone, I don't want to negotiate, I don't want to get in a bad
> situation."
> "Okay, let's assume we're not negotiating. 'Cause we're not. What we
> talked about originally is what we thought your needs were. So we
> framed an offer that met those needs. Now what we're saying is, What
> we outlined was inaccurate. So let's outline what it is we think you
> need. And then let me see if I can go get that done before we even
> get into negotiations."
> Wahl thought for a moment. "Okay. What I've learned is, I have a tax
> issue." A foreign national CEO facing a large visa-related income-tax
> liability and a move to an expensive area needed reassurance that he
> would have the means to live well. Beirne listened, then went back to
> the TriStrata board and obtained better terms.
> He called Wahl. "I'd like to formally extend the following offer to
> you." Beirne proffered 10% of the company (up from 7%), $300,000 in
> cash compensation (half in salary, half in bonus), and a
> million-dollar loan so Wahl could pay off the tax liability he'd
> incur by leaving his current German employer for an American one. The
> loan was for five years and was secured by Wahl's TriStrata stock. It
> was to be repaid if the company went public; if the company did not
> go public, the loan would be forgiven. It was a sign-on bonus in
> everything but name.
> "Great! I'm going to go talk to my wife. We're basically done. Let me
> get past this part." The next day he called Beirne back.
> "Dave, I regret to say I've got to stay at SAP. I talked to my wife.
> I cannot believe the negative reaction I got from her. She almost
> cried. She's so upset that we're going to have a massive life change
> again. She spends a ton of her time in Germany now, 'cause I travel
> 80% of the time anyway. Going to California vs. Philadelphia--it's
> even farther away. I've been married for too long, my family is too
> important. I just have to walk away."
> "I thought your wife wasn't an issue."
> "David, I didn't think it was."
> "You know, Paul, I hear that. But I can't accept it. 'Cause I think
> you're saying no for the wrong reasons. You're saying no because
> she's afraid 'cause she doesn't have the data. I'd really like to
> invite her to meet us, to learn, so she'll understand why you were so
> excited about it."
> "I'll ask her if she wants to do that. But I don't think that's the issue."
> "You've got to balance some things here. The question I have for you
> is, Are you going to change your work habits at all if you stay at SAP?"
> "No. I do what I do--it makes me happy. My wife has married me, knows
> what makes me happy, and I'll continue to do what I do."
> "I'm not asking you to work a minute longer than you do right now.
> But just to do it in a situation where you can actually get the
> psychic reward that you deserve for building a great company. Plus
> the financial reward that will give you the ability to set yourselves
> for life. You can retire whenever you want to spend your time with
> your wife."
> Wahl's resistance weakened. "Okay. Let me talk to her." At that
> moment Wahl's wife was in Germany.
> "Don't do this over the phone," Beirne said. "Fly to Germany. If SAP
> won't pay for it, send me the bill. Go see her face to face. Tell her
> you love her. Tell her this is what you need to do to be happy. And
> that it won't be worse than what you're doing now. But only better
> for you and your family down the road."
> Wahl did as Beirne suggested. He flew to Germany and got his wife to
> agree to the move to California. That Saturday Beirne faxed to
> Germany the offer letter. Wahl called him and agreed verbally, then
> resigned from SAP on Monday. He had to fly back to the U.S.
> immediately for a visit to a large SAP account in Memphis, and he set
> off without having signed the offer letter. This was in deference to
> the SAP board's request that he give them 48 hours to draft a
> counteroffer.
> Wahl zipped from Germany to Memphis, then back to Germany, where a
> counteroffer was waiting for him at his hotel. He conferred with
> Beirne, who persuaded him not only to reject SAP's offer but to do so
> face to face. Beirne thought that it was the only way Wahl could
> convincingly convey to SAP that his mind was made up. But Beirne's
> tactic was a calculated risk: Wahl was ambivalent.
> "Before you leave," Beirne said, "I'd like you to sign the offer
> letter I sent you and fax it back."
> "I don't have a copy with me."
> "Well, I just happen to have one with me." This was another gambit:
> Beirne was at home and did not have a copy of the letter there. "I'm
> going to send it right now. I'd like you to authorize it and send it
> right back to me."
> "I'm leaving for the airport in ten minutes."
> "Give me 15 minutes."
> Beirne drove quickly the half-mile to the Benchmark office, faxed the
> letter, and got it back signed. First the oral commitment, now the
> written.
> Wahl's resignation was effective immediately, but SAP was begging him
> to work for four weeks to provide transition. Four weeks, Beirne
> thought. In Germany. Totally exposed. I've got to get him out of
> there. So as soon as he got the signed offer letter, Beirne called
> Wahl one more time: "The other thing is," he said, "the board would
> like to invite you to the board meeting next week. We have so many
> strategy discussions. I'd like you there. It's important for you to
> be a part of it, and I'd also like you to bring your wife." If Wahl
> was in California, he would not be in Germany, prey to SAP's
> unceasing blandishments. The dinner was a success, the tactic worked,
> and Paul Wahl was part of TriStrata. Beirne had his man.
> The first squall that besmirched this newly sunny picture arose a
> couple of months later, in October, when TriStrata's chief technology
> officer announced that he was resigning. At a partners' meeting,
> Beirne explained that the departing CTO was "basically the guy with
> all the knowledge in his head. I spent my whole weekend trying to
> turn him around."
> Why had the guy resigned? Kevin Harvey wondered.
> "Just finished his Ph.D. at Stanford. Working for Dr. A. has been a bitch."
> "Does he like Paul?"
> "He likes Paul. We have maybe about a 25% chance of keeping the guy.
> He thinks the technology is terrific. He thinks that John has hyped
> too much. In the crypto community, we're going to get crushed because
> we don't have exactly what Atalla says we have. I think part of this
> guy's issue is he's wondering, Do I want to be part of this?"
> "What's the background of the CTO?" Dunlevie asked.
> "He was at Sun Microsystems doing encryption stuff and getting his
> Ph.D. in cryptography at Stanford. Smart guy. He's not someone I
> would fight for, except that all the engineers are there because of
> this guy, and he's got all the knowledge in his head. Atalla's the
> vision, but John couldn't read code now to save his life."
> "Seems like this would hinge on how much he likes Paul. If he really
> likes him a whole lot, he wouldn't have resigned."
> "Well," Beirne said, "Paul went out to dinner with the guy and his
> wife Saturday night. Spent time with him again yesterday. Wahl is all
> over it. Atalla has not paid the people well--no increase in
> compensation for anybody, shares are really limited. They don't
> communicate, so the guys up in the back don't even know. Paul's
> learning what's really going on in the business."
> Despite the efforts of Wahl and Beirne, the CTO resigned. Clearly,
> things were not as they had seemed at TriStrata. This was just the
> first of a series of discoveries that Beirne found disquieting, then
> exasperating, and eventually infuriating.
> The next sign of trouble came in late November 1998. Explained Beirne
> to his partners: "I'm working very hard to make sure Paul Wahl stays
> as the CEO of TriStrata. Very interesting game."
> Andy Rachleff had not heard about Wahl's unhappiness: "What happened?"
> "He's in it now; he's not threatened to leave or anything, but I'm
> spending a lot of time with him to make sure he's happy." With a
> tightness in his voice, Beirne continued, "There's just a lot that
> isn't what it was made out to be."
> "Any other people leave besides the CTO?"
> Beirne shook his head silently. "And they're building a great team.
> Building a great sales organization. I've got to decide how
> aggressive we need to be with Young and Atalla. I'm damn close to
> angry. Over the price." He paused, then continued. "You know, we
> don't even have a deal with Price Waterhouse, what we thought was $7
> million to $14 million of revenue. We had a deal, kind of, but we
> don't. They're not obligated to do anything."
> Kevin Harvey recalled that the Price Waterhouse guy he had spoken
> with when Benchmark was considering the investment had alluded to the
> deal not being complete.
> "Said they had a deal," Beirne insisted.
> "No."
> "Yes, he did. I asked him. He signed the agreements. The addendums
> never got signed, as to what we really had to do to produce. No, I
> asked him the question."
> "Where is John Young on all this?" Bruce Dunlevie asked. The former
> CEO of Hewlett-Packard was TriStrata's chairman of the board.
> "I don't think these guys know. I informed the board at the last
> meeting that we don't have a one-time pad implementation, we have a
> 'pseudo one-time pad implementation.' Perkins got pissed off."
> "At that fact?"
> "At that fact. Started with the messenger, which I didn't take, and
> then got pissed off at the fact. He said, 'Oh, what's the
> difference?' Well, the difference is we have every cryptographer on
> the planet up in arms, every one."
> Prospective corporate customers did not care whether TriStrata had a
> genuine one-time pad technology or not. "If you say to Shell, Our
> technology is ten times better than anyone else's, gives you ten
> times faster management capability than anyone else's, and you may
> get broken into five times over the next 12 months, can you live with
> that? All of them would say, hands down, no problem, great-- where do
> I sign?
> "But we have not said that. We've said, It's theoretically
> unbreakable. Can never be broken." Beirne was so agitated that his
> sentences turned into fragments. "All these red flags are all over
> the place. And this guy Bruce Schneier. Whose book I was reading on
> cryptography? The guy who is the guru on cryptography? His Website is
> all about TriStrata. He is just ripping this company apart. So every
> time [a prospective customer] goes to do due diligence, the first
> thing they find is this guy, the god of all cryptographers, saying,
> 'It's bullshit. And if it's real, release it so all the
> cryptographers can look at it.' "
> TriStrata had yet to release its software because Atalla wanted to
> continue to tinker with it. "Paul is all over Atalla, saying, 'We're
> going to release this fucking thing.' And Atalla has not agreed to do
> it yet. But I think it's going to come down to Paul's going to say,
> 'Either release it or I walk.' That's where I think this has to go."
> "I don't understand," Bruce Dunlevie said, "why he has to ask
> Atalla's permission to do that, while he's the CEO."
> "He can do it, Bruce. He's trying to maintain some harmony, keep the
> guy engaged. He doesn't want Atalla gone."
> "Why not?"
> "Why not? Because the guy's a legend in security. He is ..."
> "He's going to be a pain in the ass forever."
> "Yeah. Well, I'll keep you up-to-date. I don't feel like going to the
> company right now and saying we want to pull our investment back out,
> but I've thought about it."
> "If Wahl leaves," Harvey began, "you should--"
> "I'll give him my fuckin' office, that's how bad I feel. And I'll
> either make a company for him or we'll get him involved in another
> one. This guy's a good man. And he is working his ass off. He's there
> at seven o'clock in the morning, he's there till 11 o'clock at night,
> he's working on the weekends."
> No one spoke for a long time.
> At best, Wahl would have to orchestrate a public relaunch of the
> company, with much more modest technical claims. "It's going to have
> to be brilliant," Beirne said. "We have the product ready to release,
> but it's never been tested by the world of cryptographers."
> Kagle offered his sympathy to Beirne. "It sounds like a tough
> situation, but sounds like you're doing all the right stuff."
> "I feel bad I got Wahl in it."
> "Won't be the last one," Kagle said.
> Andy Rachleff laughed ruefully and repeated the line. Harvey said to
> Beirne, "We'll be nice to you if you're nice to us when it happens to
> us."
> Beirne had to work daily to keep Wahl and TriStrata from flying
> apart. He finally got Atalla to permit Bruce Schneier, the
> cryptography expert, to come in and take a look. Three other
> cryptographers were hired as consultants as well. Their opinion:
> TriStrata had a decent cipher but not the breakthrough that Atalla
> had led Beirne and Wahl to believe they had. Even if it was
> comparable with DES (Data Encryption Standard), the prevailing
> cryptographic standard, it had not been open to public review and
> pounded on for five years by the crypto community, as DES had.
> If the news on the technical front was not dispiriting enough, John
> Young, the chairman of the board, had expressed misgivings about Wahl
> as the CEO. When Beirne expressed his surprise at this sentiment,
> Young had said, "Hey, Dave, John Atalla told me that if you weren't
> happy with the way things are going, he'd be happy to give you your
> money back. He'll personally buy you out of the company."
> "I'll take your bet. I want to implement it today. I'll call John
> Atalla immediately."
> He'd called Atalla and told him he would meet with him that day. Then
> he called Wahl to tell him that he'd keep Benchmark's money in if
> Wahl were to stay, but if he wanted to leave, Beirne would pull the
> investment. Then Beirne called Perkins to let him know what was
> unfolding. Horrified at the prospect of a showdown that would
> irreparably cripple the company, Perkins got Beirne to agree to call
> off his meeting with Atalla; Perkins went instead and told Atalla
> that driving Benchmark out was tantamount to committing corporate
> suicide. More calls, more negotiating, and by the time everyone went
> to bed that night, Wahl had agreed to stay on as CEO.
> When TriStrata finally released its software in March 1999--seven
> long months after Wahl had joined--it downplayed the cipher that had
> attracted the attention of the press the previous year. "I think
> maybe we got a little too excited about our algorithm," Wahl told PC
> Week.
> Soon after this, however, Beirne learned that newly hired consultants
> discovered problems when they dug into the tests that TriStrata used
> to measure the speed of its encryption and decryption software. When
> Wahl heard that the one thing that had kept him from bolting--the
> encryption technology--seemed to be unmarketable, he succumbed to the
> long-standing courting of Siebel Systems, a hot developer of business
> software, and resigned. Beirne thought he had successfully coaxed him
> back to TriStrata, but two weeks later Wahl was gone for good, moving
> to Siebel in nearby San Mateo as its chief operating officer (and
> leaving not only TriStrata but the world of startups, having gone to
> a company that had $400 million worth of paying customers the
> previous fiscal year).
> At the same time, there were a few corporate customers that seemed
> tantalizingly close to buying. At a critical meeting in June, Beirne
> listed for his partners three customer prospects that all showed
> signs of being excited. "There's a technology here. The question is,
> Do you feed this company a little bit or just kill it?"
> The other partners remained silent.
> Beirne went on, in a voice that was barely audible. "I'd love to kill
> it and I'd hate to kill it."
> "That emotion is exactly the emotion you feel when it's time to shut
> it down," said Andy Rachleff. He and Beirne's other partners all had
> faced similar junctures before; this was Beirne's first.
> Beirne said that all the other TriStrata board members had looked to
> him to vow that he would single-handedly keep the company solvent,
> and he had demurred. "We had a brutal board call the other day. John
> Atalla basically saying, 'David, I can't believe you'd do this to
> this company.' I said to each of them, 'Hey, guys, we own only 6% of
> the company. We've a ton of money in it.' " Beirne had passed the
> challenge back to Atalla, saying, "You're worth $20 million, you own
> your home outright, you're 75 years old. I don't know what you're
> planning on doing with your money the rest of your life. But if you
> believe in this company, with the amount that you own in it, I'd put
> a couple million dollars in to see if it will live. If you don't
> believe in it, I understand that. But don't ask us to put more money
> in. I can't get my partners to do that." Tom Perkins, who had
> invested as an individual, not as a partner of Kleiner Perkins, had
> begun to respond, but Beirne held him off. "Tom, don't go there, if
> you can't get Kleiner to invest in this company either."
> The Benchmark partners tried to find a glimmer of long-term hope.
> "Have they sold anything to anybody? Do they have a revenue
> customer?" asked Dunlevie.
> Beirne silently shook his head no. "Next version of the product comes
> out in July. All kinds of pilots set up. Really big customers that
> are really excited about it. But ..." He paused for a long time. He
> said he'd spoken with the TriStrata sales team about precisely this
> problem, which of course gravely jeopardized the company's ability to
> attract new investors. "I said, 'Guys, help yourself.' " He
> whispered: " 'Get a purchase order.' " Loudly: " 'Show something!' "
> Andy Rachleff judged TriStrata hopeless: a company that had to rely
> entirely upon the next version of its sole product when no one was
> buying the current one seemed headed for death.
> "Tom [Perkins] said, 'Why don't you have them come in and present to
> your partners?' " said Beirne. "I said, 'Tom, it's not about
> demoware. We know it's the best demo on the planet. Everyone gets
> excited. But no one buys it.' "
> "I'd shoot it in the head," Dunlevie said. "You've got better things to do."
> Rachleff agreed. "You'd be amazed how much better you'd feel."
> "I'm worried about the reputation hit for us," Beirne said.
> "Companies go out of business," Dunlevie said. "Part of your
> reputation is, companies fail."
> "The market's talking. The dogs aren't eating," said Rachleff. "When
> did we invest? Last June?"
> "Yes."
> "A number of customers were imminent back then?"
> "Ten-million-dollar supposed order from Price Waterhouse."
> "Right."
> "There sure are a lot of signs," Rachleff repeated. He wasn't
> concerned about Benchmark's overall reputation being badly damaged.
> "The amazing thing about our business is, everyone forgets the
> losers. They remember the winners."
> "Part of hitting home runs, you strike out. Babe Ruth struck out,"
> offered another partner.
> "You know how many strikeouts John Doerr has had?" Rachleff asked
> Beirne. "Does anyone care? No."
> "That's not the issue," Dunlevie broke in. "The issue is that it's
> hard. It's really hard. The only person who cares is you. I've been
> there. And you're going to care forever. You've got to let it go.
> That's the best advice I can give you."
> The room was quiet.
> "'Kay," said Beirne, bringing the discussion to a close.
> The next month, when Beirne learned that John Atalla had dismissed
> the interim chief the board had appointed after Wahl's resignation,
> Beirne, Perkins, and the rest of the board of directors all arrived
> at the same conclusion: Atalla would not permit a role for outside
> directors. The investments remained in place, but the board resigned
> en masse. Game over.
> TriStrata still exists. Atalla, who now holds the title of CEO, says
> that by the end of June, TriStrata will announce deals with major
> global corporations, including some applications service providers.
> He points out that the majority of the company's directors are
> outsiders and insists that they are active in planning company
> strategy. He also says he hopes to take the company public within a
> year. Still, as of now, four-year-old TriStrata has yet to record any
> revenues.
> In Priceline's last quarter of operations, it announced sales of $170
> million. Priceline went public in March 1999, the same month that
> TriStrata released its software. The shares were priced at $16 and
> ended the first day at $69. A month later it reached $120, which
> could have made Benchmark's stake worth more than a billion dollars.
> And every time Dave Beirne heard one of those ubiquitous Priceline
> commercials on the radio, he would have to grip the wheel hard so as
> not to run off the road...
> ------------------------------------------------------------------------
> Excerpted from eBoys: The First Inside Account of Venture Capitalists
> at Work, by Randall E. Stross, to be published in May 2000 by Crown
> Publishers, a division of Random House Inc. Copyright (c) by Randall
> E. Stross.
---- Adam@4K-Associates.comI'm a modern Edison, patenting everything that moves! -- Rohit Khare imitating Jay Walker
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