The Hard Thing About Hard Things, page 6
“I have some bad news. We are getting our asses kicked by BladeLogic and it’s a product problem. If this continues, I am going to have to sell the company for cheap. There is no way for us to survive if we don’t have the winning product. So, I am going to need every one of you to do something. I need you to go home tonight and have a serious conversation with your wife, husband, significant other, or whoever cares most about you and tell them, ‘Ben needs me for the next six months.’ I need you to come in early and stay late. I will buy you dinner, and I will stay here with you. Make no mistake, we have one bullet left in the gun and we must hit the target.”
At the time, I felt horrible asking the team to make yet another big sacrifice. Amazingly, I found out while writing this book that I probably should have felt good about it. Here’s what Ted Crossman, one of my best engineers, said about that time and the launch of the aptly named Darwin Project many years later:
Of all the times I think of at Loudcloud and Opsware, the Darwin Project was the most fun and the most hard. I worked seven days a week 8 a.m.–10 p.m. for six months straight. It was full on. Once a week I had a date night with my wife where I gave her my undivided attention from 6 p.m. until midnight. And the next day, even if it was Saturday, I’d be back in the office at 8 a.m. and stay through dinner. I would come home between 10–11 p.m. Every night. And it wasn’t just me. It was everybody in the office.
The technical things asked of us were great. We had to brainstorm how to do things and translate those things into an actual product.
It was hard, but fun. I don’t remember losing anyone during that time. It was like, “Hey, we gotta get this done, or we will not be here, we’ll have to get another job.” It was a tight-knit group of people. A lot of the really junior people really stepped up. It was a great growing experience for them to be thrown into the middle of the ocean and told, “Okay, swim.”
Six months later we suddenly started winning proofs of concepts we hadn’t before. Ben did a great job, he’d give us feedback, and pat people on the back when we were done.
Eight years later, when I read what Ted had written, I cried. I cried because I didn’t know. I thought I did, but I really didn’t. I thought that I was asking too much of everybody. I thought that after barely surviving Loudcloud, nobody was ready for another do-or-die mission. I wish I knew then what I know now.
After the speech came the hard work of defining the product. The product plan was weighed down with hundreds of requirements from our existing customers. The product management team had an allergic reaction to prioritizing potentially good features above features that might hypothetically beat BladeLogic. They would say, “How can we walk away from requirements that we know to be true to pursue something that we think will help?”
It turns out that is exactly what product strategy is all about—figuring out the right product is the innovator’s job, not the customer’s job. The customer only knows what she thinks she wants based on her experience with the current product. The innovator can take into account everything that’s possible, but often must go against what she knows to be true. As a result, innovation requires a combination of knowledge, skill, and courage. Sometimes only the founder has the courage to ignore the data; we were running out of time, so I had to step in:
“I don’t care about any of the existing requirements; I need you to reinvent the product and we need to win.” Nine months later, when we released our new product we could now win any deal. Armed with the new product, Mark Cranney, head of sales, went to war.
After assembling a top-end sales force, he completely revamped the sales process and sent every salesperson through a rigorous and unforgiving training program. He demanded mastery. Any slip-up in technique, skill, or knowledge would be met with total intolerance from Mark.
We held a weekly forecast call where Mark reviewed every deal in front of the entire 150 person sales force. On one such call, a salesperson described an account that he’d forecast in detail: “I have buy-in from my champion, the vice president that he reports to, and the head of purchasing. My champion assures me that they’ll be able to complete the deal by the end of the fiscal quarter.”
Mark quickly replied, “Have you spoken to the vice president’s peer in the networking group?”
Sales rep: “Um, no I haven’t.”
Mark: “Have you spoken to the vice president yourself?”
Sales rep: “No.”
Mark: “Okay, listen carefully. Here’s what I’d like you to do. First, reach up to your face and take off your rose-colored glasses. Then get a Q-tip and clean the wax out of your ears. Finally, take off your pink panties and call the fucking vice president right now, because you do not have a deal.”
Mark was right. It turned out that we did not have a deal, as the vice president’s peer in networking was blocking it. We eventually got a meeting with him and won the deal. More important, Mark set the tone: Sloppiness would not be tolerated.
Now that we’d improved our competitive position, we went on the offensive. In my weekly staff meeting, I inserted an agenda item titled “What Are We Not Doing?” Ordinarily in a staff meeting, you spend lots of time reviewing, evaluating, and improving all of the things that you do: build products, sell products, support customers, hire employees, and the like. Sometimes, however, the things you’re not doing are the things you should actually be focused on.
In one such meeting, after asking the question, every person on my staff agreed: “We are not automating the network.” Although the original version of Opsware that we used in Loudcloud automated our network, the software was not robust and, of course, featured the purple-pimp-hat user interface. As a result, when we switched over to being a software company, we narrowed our focus to server automation and never revisited the decision. This worked well for the first several years of Opsware, but now we had an opportunity to bring back our network automation product.
Unfortunately, the Jive was not a good code base and could not be turned into a commercial product. My choices were: (a) start a new project or (b) buy one of the four existing network automation companies. Early in my career as an engineer, I’d learned that all decisions were objective until the first line of code was written. After that, all decisions were emotional. In addition, I had John O’Farrell, the industry’s greatest M&A negotiator, on my team so I decided to investigate the other companies before sizing the internal effort.
Surprisingly, among the four existing network automation players, the company that we thought had the best product architecture, Rendition Networks, had the lowest revenues. This made some of our businesspeople skeptical of our technical evaluation. However, if I’d learned anything it was that conventional wisdom had nothing to do with the truth and the efficient market hypothesis was deceptive. How else could one explain Opsware trading at half of the cash we had in the bank when we had a $20 million a year contract and fifty of the smartest engineers in the world? No, markets weren’t “efficient” at finding the truth; they were just very efficient at converging on a conclusion—often the wrong conclusion.
After confirming that acquiring would be superior to building, we negotiated a deal to buy Rendition Networks for $33 million. Within three months of completing the acquisition, John negotiated a deal with Cisco Systems—the world’s largest networking company—to resell our product. The deal included an agreement to prepay us $30 million for advanced licenses. As a result, the Cisco deal alone paid more than 90 percent of the acquisition costs.
Note to self: It’s a good idea to ask, “What am I not doing?”
THE ULTIMATE DECISION
As we fielded the broader product line, our momentum steadily grew. From the ashes, we’d built a software business that approached a $150 million revenue run rate. Along with our revenue, our stock price rose from its floor of $0.35 per share as well as we traded between $6 per share and $8 per share, sometimes trading at a market capitalization of more than $800 million.
Still, everything was not rosy. Every quarter was tough, and the competitive and the technology landscapes changed rapidly. A technology called virtualization was taking the market by storm and changing the way customers thought about automating their environments. In fact, it looked to me like virtualization might be the technological breakthrough that finally enabled the cloud computing business model to work. Beyond that, being a public company was still never going to get easy. At one point, a shareholder activist named Rachel Hyman decided that my ego was out of control, and she demanded that the board remove me and sell the company immediately. This was despite the fact that we were trading at $7 per share, which was ten times the original price of her shares.
Nonetheless, I was not looking for the exits. Whenever a potential acquirer approached us, I would always reply, “We are not for sale.” It was a great answer in that I wasn’t ready to sell and it conveyed that, but it also left the door open to a particularly aggressive buyer. “Not for sale” didn’t mean that we wouldn’t listen to offers—it just meant that we weren’t trying to sell the company. So, when EMC implied that it wanted to buy us, I thought nothing of it. We were trading at about $6.50 per share and I wasn’t planning to sell at anything close to that price. But this time the news of the offer leaked to the press and the stock shot up to $9.50 per share, changing the economic equation, especially since the stock was going up for all the wrong reasons.
Ironically, the higher the stock price went up, the more companies wanted to buy us. Over the course of the next month, eleven companies expressed interest. Given the uncertainty in the business and the implied earnings multiple, their interest was too much to ignore.
To get things started, John and I called Michael Ovitz to get some advice. We felt one of the potential bidders, Oracle, would be the least likely to bid high, because it was extremely disciplined in its financial analysis. We conveyed this to Michael and questioned whether we should pursue Oracle at all. His reply was priceless: “Well, boys, if you are going to have a dog race, then you are going to need a rabbit. And Oracle will be one hell of a rabbit.”
With that strategy in hand, we generated a broad set of bids, all between $10 and $11 per share, with the highest bids representing a 38 percent premium over the current stock price. Although this was considered a good premium, I did not feel right selling the company for $11 per share. The team had worked too hard, we’d accomplished too much, and we were too good a company. The risks of staying stand-alone were substantial, but I still wanted to bet on the team. I recommended to the board that we not sell.
The board was surprised, but supportive. Still, they had a fiduciary responsibility to shareholders to ask the tough questions. “If you’re unwilling to sell at eleven dollars per share, is there a price at which you would sell?” I had to think about that one. I had promised the team that if we got to be the number-one company in a big market, we would not sell. We were number one, but how big was the market? Did the team really want to continue or was it just me who wanted to continue? How could I know without panicking the company? And thus began a series of very long talks with myself.
It was an argument to the death, and it was me against me. On the one hand, I argued that virtualization created an explosion of virtual server instances, making what we did more essential than ever. In the next breath, I retorted that while that may have been true, the architectural changes would make our market position vulnerable. I battled myself for weeks before concluding that things were changing fast enough that we’d need to make major changes to our product architecture in order to stay on top. The key to answering the ultimate question was knowing the state of the team. Were they up for yet another giant challenge or were they at the end of a very long road? I decided to bring my direct reports into the loop and ask them what they thought. The answers came back clear: Everyone, with the exception of one person who felt that the opportunity in front of us was still quite large, opted for the sale. Now it was just a matter of price. But what price?
After a long discussion with John O’Farrell, I decided that the right price to sell the company would be $14 per share, or about $1.6 billion. I took that number back to the board. They thought the number was extremely high and that it was unlikely we’d be able to generate a bid at that level, but they were supportive nonetheless. I called back all the potential acquirers and let them know that we would only entertain bids of $14 or more. There were no takers.
More than a month passed without a word, and I figured the M&A talks had ended. I began refocusing on how to make the necessary changes to keep us competitive. And then I received a call from Bob Beauchamp, the CEO of BMC Software. He offered $13.25 per share. I held firm: “Bob, that’s great, but the number is fourteen dollars per share.” Bob said that he’d have to think about it. He called back two days later and offered $14 per share. Wow. The dog had caught the bus.
John and I immediately called back all the other suitors to let them know that we had an offer that we planned to take. Hewlett-Packard was still interested and offered $13.50 per share in an effort to make sure that I wasn’t bluffing. I responded that as a public company CEO, I couldn’t take a lower offer. HP eventually offered $14.25 or $1.65 billion in cash. We had a deal.
When it finally ended—the long road from Loudcloud to Opsware—I couldn’t believe that I’d sold what it took eight years and all of my life force to build. How could I have done that? I was sick. I couldn’t sleep, I had cold sweats, I threw up, and I cried. And then I realized that it was the smartest thing that I’d ever done in my career. We’d built something from nothing, saw it go back to nothing again, and then rebuilt it into a $1.65 billion franchise.
At that point, it felt like my business life was kind of over. I had hired all the best people that I knew or could find, and I had gone through every step from founding to going public to sale. I definitely did not feel like doing any of that again. But I had learned so much. It seemed like such a waste to do something completely different. And then I got an idea to build a new kind of venture capital firm.
We will explore this idea in chapter 9, but first, chapters 4 through 8 will take you through most everything I learned to this point plus a few new war stories from my experiences running Loudcloud and Opsware.
— CHAPTER 4 —
WHEN THINGS FALL APART
“There are several different frameworks one could use to get a handle on the indeterminate vs. determinate question. The math version is calculus vs. statistics. In a determinate world, calculus dominates. You can calculate specific things precisely and deterministically. When you send a rocket to the moon, you have to calculate precisely where it is at all times. It’s not like some iterative startup where you launch the rocket and figure things out step by step. Do you make it to the moon? To Jupiter? Do you just get lost in space? There were lots of companies in the ’90s that had launch parties but no landing parties.
“But the indeterminate future is somehow one in which probability and statistics are the dominant modality for making sense of the world. Bell curves and random walks define what the future is going to look like. The standard pedagogical argument is that high schools should get rid of calculus and replace it with statistics, which is really important and actually useful. There has been a powerful shift toward the idea that statistical ways of thinking are going to drive the future.”
—PETER THIEL
When I was attempting to sell the cloud computing services part of the Loudcloud business, I met with Bill Campbell to update him on where I was with the deal. The deal was critical, because without it, the company would almost certainly go bankrupt.
After I carefully briefed him on where we were with both interested parties, IBM and EDS, Bill paused for a moment. He looked me in the eyes and said, “Ben, you need to do something in addition to working on this deal. You need to do it alone with your general counsel. You need to prepare the company for bankruptcy.” To an objective observer, this might sound like Bill was prudently advising me to build my contingency plan. But something in his voice and his eyes said something different. They said that he believed the contingency plan was going to be the plan.
The conversation brought to mind a story that a friend told me about his brother, a young doctor. A thirty-five-year-old man came to see my friend’s brother. The man looked awful. His eyes were hollow and his skin was ashen. The young doctor knew something was wrong, but he could not figure out what, so he brought in an elder colleague to help with the diagnosis. The more experienced doctor examined the man and then sent him on his way. The old doctor then turned to the young doctor and said, “He’s dead.” The young doctor was flabbergasted: “What are you talking about? He just walked out of here alive!” The older doctor replied, “He doesn’t know it yet, but he’s dead. He’s had a heart attack and when people that young have heart attacks their bodies are not yet pliable enough to recover. He won’t recover. He’s dead.” Three weeks later the patient died.
I felt that Bill was telling me, although I was walking around trying to get the deal done, that I was already dead and that I did not know it. It was a very hard thing for him to say and only the best of friends will muster the courage to break news that horrible. It was an even harder thing for me to hear. He told me so that I could emotionally prepare myself and financially prepare the company for the inevitable funeral. The odds of landing a company-saving deal during the technology industry’s nuclear winter were close to nil. Chances were, I was dead.
I never built that contingency plan. Through the seemingly impossible Loudcloud series C and IPO processes, I learned one important lesson: Startup CEOs should not play the odds. When you are building a company, you must believe there is an answer and you cannot pay attention to your odds of finding it. You just have to find it. It matters not whether your chances are nine in ten or one in a thousand; your task is the same.
In the end, I did find the answer, we completed the deal with EDS, and the company did not go bankrupt. I was not mad at Bill. To this day, I sincerely appreciate his telling me the truth about the odds. But I don’t believe in statistics. I believe in calculus.
