The Hard Thing About Hard Things, page 23
At this point, it became clear that BMC was going to buy either Opsware or BladeLogic. As a result, the calculus, or whether Opsware was going to be number one in the market, needed to be redefined as follows:
1. We had to be number one in the systems and network management market rather than the data center automation market, because like the word processor market, the data center automation market was going to be subsumed by a larger market that contained it.
2. In order to be number one, we had to beat BMC and BladeLogic together, which was a significantly more difficult opponent than either company stand-alone.
Finally, the market itself was transforming due to an underlying technological shift: virtualization. Virtualization meant that the entire market needed to be retooled, so we were embarking on a new R&D race to build the best management for virtualized environments. This meant deferring earnings for a very long time.
Based on all these factors, it made sense for us to at least consider the possibility of acquisition and run a short process to understand the interest in the M&A market.
Through that process, eleven companies made acquisition offers of some form. This told me that we were at a local maxima in terms of the market price for Opsware. In other words, the set of potential buyers was convinced that the market was very important, and there was no extra premium that we could hope to achieve through better awareness. In the end, based on a lot of analysis and soul-searching, I determined that the current local maxima was higher than we could expect to achieve in the next three to five years and I sold the company to Hewlett-Packard for $1.65 billion. I think and hope that was the right decision.
THE EMOTIONAL
The funny thing about the emotional part of the decision is that it’s so schizophrenic.
How can you ever sell your company after you’ve personally recruited every employee and sold them on your spectacular vision of a thriving, stand-alone business? How can you ever sell out your dream?
How can you walk away from total financial independence for yourself and every member of your close and distant family? Aren’t you in business to make money? How much money does one person need?
How can you reconcile Dr. Stay-the-Course and Mr. Sell-the-Thing? Clearly they are irreconcilable, but the key is to mute them both.
A few keys on muting the emotions:
Get paid (a salary). Most venture capitalists like entrepreneurs that are “all in,” meaning the entrepreneur has everything invested in the company and will have very little to show for her efforts if it does not succeed. As part of this, they prefer the founding CEO to have a very low salary. In general, this is a good idea, because the temptation to walk away when things go poorly is intense and total financial commitment helps him to keep his other commitments. However, once the company starts to become a company rather than an idea it makes sense to pay the CEO at market. More specifically, once the company has a business (as defined above) and becomes an attractive acquisition target, it makes sense to pay the CEO, so that the decision to keep or sell the company isn’t a direct response to the CEO’s personal financial situation, as in “I don’t think that we should sell the company, but I live in an eight-hundred-fifty-square-foot apartment with my husband and two kids and it’s that or divorce.”
Be clear with the company. One question that every startup CEO gets from her employees is “Are you selling the company?” This is an incredibly difficult question. If she says nothing, the employee will likely interpret this to mean the company is for sale. If she says “at the right price,” the employee will wonder what that price is and may even ask. If the company ever reaches that price, the employee will assume the company will be sold. If she dodges the question with the standard “the company is not for sale,” the employee may feel betrayed if the company is ever sold. More important, the CEO may feel like she is betraying the employee and that feeling will influence her decision-making process. One way to avoid these traps is to describe the analysis in the prior section: If the company achieves product-market fit in a very large market and has an excellent chance to be number one, then the company will likely remain independent. If not, it will likely be sold. This is one good method to describe the interests of the investors in a way that’s not at odds with the interests of the employees, and it is true.
FINAL THOUGHT
When faced with the decision of whether to sell your company, there is no easy answer. However, preparing yourself intellectually and emotionally will help.
— CHAPTER 9 —
THE END OF THE BEGINNING
“We walk the same path, but got on different shoes
Live in the same building, but we got different views.”
—DRAKE, “RIGHT ABOVE IT”
After selling Opsware, I spent a year at HP running the bulk of their software business. And then I tried to figure out what to do next. Should I start another company? Should I be CEO of someone else’s company? Should I retire? Should I do something completely different?
The more I thought about my future, the more I thought about my past. What would have happened if I’d never met Bill Campbell? How would I have possibly worked my way through all the challenges I’d faced? Why was entrepreneurship such a black art? Did everybody have the same problems I’d had? If they did, why didn’t anybody write anything down? Why did so few startup advisers and venture capitalists have any experience starting companies?
As these thoughts rolled around in my head, I sent Marc Andreessen an instant message: “We ought to start a venture capital firm. Our motto for general partners would be ‘some experience required’ as in some experience in founding and running companies is required to advise people who are founding and running companies.” To my surprise, he replied, “I was thinking the same thing.”
SOME EXPERIENCE NECESSARY
Further contemplation took me back to one of my first serious encounters with venture capital.
Back in 1999, after raising our first round of funding for Loudcloud, my cofounders and I went to visit our new venture capital firm and meet their full team. As founding CEO, I remember being excited to meet our financial backers and to talk about how we could partner to build a great company. The conversation took a sharp downhill turn when one of the senior partners, David Beirne, asked me, in front of my cofounders, “When are you going to get a real CEO?”
The comment knocked the wind out of me. Our largest investor had basically called me a fake CEO in front of my team. I asked, “What do you mean?”—hoping he would revise his statement and enable me to save face. Instead he pressed on: “Someone who has designed a large organization, someone who knows great senior executives and brings prebuilt customer relationships, someone who knows what they are doing.”
I could hardly breathe. It was bad enough that he had undermined my standing as CEO, but to make matters worse, I knew that at some level he was right. I didn’t have those skills. I had never done those things. And I did not know those people. I was the founding CEO, not a professional CEO. I could almost hear the clock ticking in the background as my time running the company quickly ran out. Could I learn the job and build my network fast enough or would I lose the company? That question tortured me for months.
In the years that followed, I remained CEO, for better or worse. I worked incredibly hard to become the kind of CEO that everyone expected. Thanks to a lot of effort and help from friends and mentors, especially Bill Campbell, the company survived and became successful and valuable.
Not a day went by, however, when I didn’t think about that interaction with David Beirne. I always wondered how long I had to grow up and how I could find help to build my skills and make the necessary connections along the way.
Marc and I discussed this paradox often. We wondered aloud why as founders we had to prove to our investors beyond a shadow of a doubt that we could run the company, rather than our investors assuming that we would run the company we’d created. This conversation ultimately became the inspiration for Andreessen Horowitz.
To get started, we studied the venture capital industry and we came across a potential problem with our approach. Historically, all the returns in venture capital had been concentrated in a tiny number of firms and consistently by a small number of the same firms. Of the more than eight hundred venture capital firms of the day, only about six had delivered great returns for their investors. As we dug deeper, we uncovered an excellent reason for this: The best entrepreneurs will only work with the best venture capital firms. Since venture capital firms were notoriously secretive about their methods and beliefs—most firms did almost no PR and stated very little about what they did—the firms competed on their investing track records. Therefore, the firms with the best track records continued to have the best track records, thus making it nearly impossible for a new firm, with no track record, to crack into the top tier.
We needed some way to break through to become the firm that great entrepreneurs wanted to work with. But how?
We needed to change the rules by which entrepreneurs evaluated VCs. We thought there was an opening to do this, because times had changed. When Marc and I first became entrepreneurs back in the mid-1990s, we did not know many other entrepreneurs. We just did what we did, without really seeing ourselves as part of a larger “movement” or a community. We were entrepreneurs at the beginning of the Internet and before Facebook, Twitter, and the other social networking platforms were built. We did not talk to other entrepreneurs, because there was no entrepreneurial community. We were completely heads down on the business. All that has changed in the last ten years. Entrepreneurs are now socializing, friending each other, meeting up, and hanging out. There is a real community. Once we realized this, we figured that if we had a better offering, word-of-mouth marketing would work now where it hadn’t before.
We needed to be better, but we also needed to be different. As we thought about what would make us both better and different, two core ideas greatly influenced our thinking: First, technical founders are the best people to run technology companies. All of the long-lasting technology companies that we admired—Hewlett-Packard, Intel, Amazon, Apple, Google, Facebook—had been run by their founders. More specifically, the innovator was running the company. Second, it was incredibly difficult for technical founders to learn to become CEOs while building their companies. I was a testament to that. But, most venture capital firms were better designed to replace the founder than to help the founder grow and succeed.
Marc and I thought that if we created a firm specifically designed to help technical founders run their own companies, we could develop a reputation and a brand that might vault us into the top tier of venture capital firms despite having no track record. We identified two key deficits that a founder CEO had when compared with a professional CEO:
1. The CEO skill set Managing executives, organizational design, running sales organizations and the like were all important skills that technical founders lacked.
2. The CEO network Professional CEOs knew lots of executives, potential customers and partners, people in the press, investors, and other important business connections. Technical founders, on the other hand, knew some good engineers and how to program.
Next, we asked, “How might a venture capital firm help founder CEOs close those gaps?”
Addressing the skill set issue proved to be difficult because, sadly, the only way to learn how to be a CEO is to be a CEO. Sure, we might try to teach some skills, but learning to be a CEO through classroom training would be like learning to be an NFL quarterback through classroom training. Even if Peyton Manning and Tom Brady were your instructors, in the absence of hands-on experience, you’d get killed the moment you took the field.
We decided that while we would not be able to give a founder CEO all the skills she needed, we would be able to provide the kind of mentorship that would accelerate the learning process. As a result, we decided that all of our general partners would need to be effective mentors for a founder striving to be a CEO. (Of course, not all founders want to be CEO. For some companies, the right thing is to bring in a professional CEO. For those companies, we would focus on helping the founders identify the right CEO, and then helping the CEO successfully integrate into the company and partner with the founders to retain their unique strengths.) This is why so many of the general partners we choose are former founders or CEOs or both, and they are all highly focused on helping founders become outstanding CEOs. The idea seemed so simple and obvious that it had to work.
Next, we decided to systematize and professionalize the network. For this we drew both the inspiration and the formula from my friend and Opsware board member Michael Ovitz. Thirty-four years earlier, Michael had founded Creative Artists Agency (CAA), the powerhouse of Hollywood talent agencies. When Michael started CAA, it was not an obvious idea. The talent agency business had existed since vaudeville and had changed very little in the ensuing seventy-five years. Michael was a rising star at the William Morris Agency, the most important agency in the industry at the time. Quitting that job to pursue what must have looked like a windmill tilt made no sense to anybody. But Michael had a clear vision: If he could build a firm so good that it attracted all the top talent in the world, then he would shift the economics of the industry from the corporations to the talent, where he felt that it belonged.
The firms of the day were essentially collections of loosely affiliated talent agents. Agents worked under the same umbrella, but acted largely alone, each agent tapping into her own network on behalf of her own clients. For example, Agent A might introduce Dustin Hoffman to the head of Warner Bros., but both the relationship with Dustin Hoffman and the relationship with Warner Bros. were controlled entirely by the agent; other William Morris agents and clients didn’t automatically get access to either. This traditional model sounded a lot like the traditional venture capital business, where VCs worked in the same firm but managed their own networks and their own portfolios.
Ovitz’s breakthrough idea was to build an integrated network that would allow any of the firm’s agents to connect their clients to a firm-wide grid of new opportunities. As a result, the firm would be a hundred times more powerful than any one agent at any other agency. To implement the idea, Ovitz and his founding partners agreed to defer their salaries for several years and invest their commissions into building what Ovitz referred to as “The Franchise.” The Franchise consisted of specialists running networks and portfolios in each relevant area: book publishing, international, music, and more. His theory worked, and within fifteen years, CAA represented 90 percent of the top talent in Hollywood and had rewritten the rules—giving talent more say in deals and a bigger piece of the financial pie.
We decided to copy CAA’s operating model nearly exactly—in fact, Andreessen Horowitz employees have the same titles as the original CAA employees: partner. Michael thought it was a great idea, but he was the only one. Everyone else offered some variation of the following: “This is Silicon Valley, not Hollywood. You guys don’t understand the business.” Still, with Michael’s endorsement and enthusiastic support, we pushed forward with the idea. As we applied it to venture capital, we decided to build the following networks:
Large companies Every new company needs to either sell something to or partner with a larger company.
Executives If you succeed, at some point you need to hire executives.
Engineers In the technology business, you can never know enough great engineers.
Press and analysts We have a saying around the firm: Show it, sell it; hide it, keep it.
Investors and acquirers Being venture capitalists, providing access to money was obvious.
Once we designed the firm, we needed to help entrepreneurs understand how we were different. This seemed tricky, because no major venture capital firm did any marketing of any kind. We figured there must be a good explanation for this, but struggled to find one. Finally, Marc discovered that the original venture capital firms in the late 1940s and early ’50s were modeled after the original investment banks such as J.P. Morgan and Rothschild. Those banks also did not do PR for a very specific reason: The banks funded wars—and sometimes both sides of the same war—so publicity was not a good idea. This insight, combined with our general instinct to counterprogram whatever the big guys were doing, led us to launch Andreessen Horowitz with great fanfare. When deciding on the name, the biggest problem we faced was that, as a firm, we were nobodies. No track record, no portfolio companies, no nothing. But people knew us and they especially knew Marc. So I said, “Rather than trying to create a totally new brand from scratch, why not just use your brand?” Marc thought that made sense, but nobody would ever be able to spell “Andreessen Horowitz” when typing in the URL. Thinking back to old-time computer programming in the days before programming languages supported internationalization, we used to have to “internationalize” our code. We called this internationalization process “I18N” for short (localization was L10N), which meant I followed by eighteen letters followed by N. We decided that the firm’s nickname would be “a16z,” as in a followed by sixteen letters followed by z.
We hired the Outcast marketing agency, headed up by its formidable founder, Margit Wennmachers, to generate media interest. We needed people to know what we were about as we had decided to defy the conventional venture capital theory of no PR. The daughter of a German pig farmer, Margit was the furthest thing from a swine wrangler imaginable. Smart and sophisticated, she was the Babe Ruth of PR. She worked her contacts, landing a cover story in Fortune in 2009 that featured Marc posing as Uncle Sam. Andreessen Horowitz was an overnight sensation, and yet Marc and I were still the only two people in the firm.
After eight years of running Loudcloud and Opsware, I had learned so many hard lessons that building the team was easy. I understood the importance of hiring for strength rather than for lack of weakness, and I understood the meaning of “fit.” There are lots of smart people in the world, but smart is not good enough. I needed people who were great where I needed greatness. I needed people who really wanted to do the jobs they were hired for. And I needed people who believed in the mission—to make Silicon Valley a better place to build a company.
