by Jean-Louis Gassée
Sneering at venture investors, calling them names such as Vulture Capitalists, is a long-standing Valley pub topic. But, as we’ll see today, cynical pros are less dangerous than a naive entrepreneur taking money from friends.
Summer 1991. Be, the company that Steve Sakoman and I had started the year before, is ramping up, but I’m merely the CEO writing checks, not code, so I take a short family vacation to Arcachon in southwest France.
I’m daydreaming past the seaside shop fronts when something catches my eye. I back up, peer in the window of the antique store, and there they are: Two ceramic pigs, about a foot tall, dressed as butchers. The perfect avatars of my disdain for the Venture Capital profession. Unsubtly, I christen them Victor and Charles:
After all these years — and even after becoming a member of the VC brotherhood — they’re still on my desk. If only they could talk…
I wanted to keep Be out of the vulture capitalists’ talons, so to fund the company in its early years, I put my own money into the venture. That was the first of a series of fundraising mistakes.
My first excuse is that I used to be French, from a distrustful culture. In France, the entrepreneur were often viewed as a kind of mountebank who is keen to take advantage of investors’ funds. To prove their good faith, French entrepreneurs were expected to put their own money on the line. (It’s better now.)
So I thought I was doing the right thing, but, as I found out, professional investors in the US are suspicious of self-funding. They prefer a clean division of labor: The entrepreneur provides the idea, the psychic energy, the leadership; the pros supply the financial fuel.
When my personal coffers began to run low, I accepted investment money from friends and business acquaintances. I’m still moved by the memory of a friend signing a second check on the trunk of his rental car after visiting Sakoman’s lab in Scott’s Valley. But taking money from friends can be lethal: The money always runs out, friends don’t have the pros’ deep pockets and the company becomes vulnerable in a way I’ll explain a bit later.
But, first, the Law of Professional Venture Investing.
A Pro invests as much money, as many times, for as long as required for the situation to attain Clarity. This Clarity allows only two outcomes, Dead or Liquid. When a Pro declines the invitation to invest in a follow-on round, it means they’ve reached Clarity: In the eyes of the Pro who declines to invest, the company is Dead, their initial stake is worthless. Write it off and move on, no tears, no recriminations.
But if another Pro is willing to keep the company alive by putting more money at stake, they do so seeing an elevated risk, they pay less, often much less for the new shares they buy. As a result, original investors will be diluted by the new money: 10% share in a previous round might now be worth 2% or less.
This might seem counterintuitive and unfair: Shouldn’t the original investment, the one that meant taking a risk on an unknown, be worth more than those of the newcomers? This is another part of The Law: If a company needs additional rounds of funding because it’s not growing as well or as fast as anticipated, it is now seen as a riskier play. As a reward for taking a risk on a venture that is now shown to be foundering, new investments get a higher percentage ownership per dollar. (None of the current discussion applies to follow-on rounds for a happily growing entity.)
Back to Be.
A good friend introduced me to the COO of Crédit Lyonnais, France’s largest bank at the time. The meeting went very well and the senior exec told the bank’s venture arm to invest in Be.
I was thrilled, we had deep, friendly pockets, and the deal struck a high valuation that I was proud of…for a while. I didn’t realize that it would discourage other potential investors who couldn’t see a way to a significantly higher multiple of the Crédit Lyonnais terms. Another misstep.
But wait, there’s more…
In 1993, Crédit Lyonnais went belly up right at the time when we needed more money to move beyond the end of Sakoman’s Hobbit-based design (see Part 15 of this series). Crédit Lyonnais couldn’t put more money into the company. In effect, our lead investor was dead and its failure almost killed us.
Seeing the bottom of the cash drawer I once again went on a fundraising campaign, this time in a weakened position. Thankfully, friends extended help; my spouse, Brigitte, felt we couldn’t let the product die and agreed we could put more money at stake. Desperate to keep the company going, I even gave a presentation to a French investor three days after I was released from Stanford Hospital, unshaven and with metal clips on my neck where the neurosurgeon had patched my carotide artery. We kept the company alive, barely, with a motley crew of backers.
Then an Apple alumna saved us.
In the Summer of 1995, I had lunch at Menlo Park’s Cafe Borrone with Lia Lorenzano (now Lorenzano-Kennett), the logistics director of a now deceased industry conference called Agenda. Although I protested that Be wasn’t ready for the limelight, she wouldn’t let me go until she had convinced me to present at the next Agenda a couple of months later.
I went back to the Be offices across the street and confessed my just committed sin to the horrified engineers. “We’re not ready!”. It didn’t matter. We were on the Agenda.
I flew down to Scottsdale a weekend days before the conference in order to prepare…but I was blocked, paralyzed with stress. Fortunately, my good friend Jean Calmon, the Apple France Sales Manager who had joined Be to help us with the European side of our business, put together a slide presentation. Be employees and my spouse flew in right before the conference started. On the day, Steve Horowitz, one of our earliest engineers, gave a masterful demo while I stumbled through Jean’s slides. (Later, Horowitz would give the first video demo of Android.)
The response was astonishing: We got a standing ovation, only the second one in the conference’s nine years. I was left close to tears and (almost) speechless. The multimedia performance we had dreamed of when starting Be stunned the crowd. We got good press, including a nice NY Times article. And, at long last, we felt actual interest from the Silicon Valley professional investors who were to give us a new lease on life.
The lead venture investor in the next round was August Capital’s David Marquardt, the only VC who had invested in Microsoft prior to its 1986 IPO. (He was also a Microsoft Board member, a position that would make life “interesting” from day one of the relationship.)
The friends and acquaintances who had invested in Be were thrilled to see support from Valley VCs…but then they saw the terms. I had the humiliating task of telling them that Marquardt wanted a “clean” capital investment that would dilute previous ownership by 300! If they refused to sign off on the terms, there would be no more money, Be would be dead. (I was also told the money I had lent the company “stayed”, meaning it was gone with the other investors’ money.)
To add to our investors’ hurt feelings, the Be team, yours truly included, would receive fresh, undiluted stock options. In a way, this was an application of The Law: We kept investing (ourselves) in the venture and would be treated as “new money”. But it left a sour taste in the mouths of some earlier investors, included Crédit Lyonnais’ venture arm that should have known better: “We supported you and now we’re left with nothing while you go off with glorious new money, fresh stock options, and media attention!”
Everyone reluctantly but helpfully signed off, but any one of them could have killed the deal — and Be. To this day, I’m grateful and embarrassed for the consequences of my naiveté.
Victor and Charles might be difficult, greedy, and whatever other negatives you might want to throw at them, but they’re deep-pocket pros who serve a purpose. And there are many to choose from in the Valley. The trick is to choose wisely.
In the next part of this series, we’ll look the last part of Be’s life.