November 22, 2016
Ep. #1, The Fandom Menace
In the debut of Data Science Storytime, Kevin Wofsy and Kyle Wild brainstorm the concept of the show, debate the difference between data sci...
Thanks, everybody. Good to be back at Heavybit. It's been a while. Point of this talk was to try to give some perspective about how we, as a infrastructure, and in some ways a developer-focused company, managed to weather what was an epic shit storm, for lack of a better term, that happened in 2008 in this sort of global financial crisis.
Anybody remember seeing this slide deck? Anybody seen this tombstone thing? This was a slide deck prepared by, I think it was an analyst at Sequoia Capital and was sent around in October, I think, of 2008, to all of Sequoia's portfolio companies. I believe this was the cover slide.
The second slide was a picture of a slaughtered pig, and it was referred to affectionately either as the "R.I.P. Good Times" deck or the "slaughtered pig presentation," by Sequoia.
Anyway, the point of that deck was Sequoia sounding the alarm of the impending doom and destruction. It was actually like 78 slides long. It was hysterically long, and among the insights that were in this deck included things like "mobile is not immune."
Basically, they were anticipating that the entire world was going to fall apart, and that startups were all doomed, that you had to cut, you know, 40% of your head count and basically go through all these different drastic things to survive what was an already blooming financial disaster around the world.
It turned out that most of the things that this deck heralded turned out to be spectacularly wrong, which was great for all of us. But, at the same time, the experience that I had as a first-time CEO, building a company during the time when this deck was floating around, was probably the most informative time for me as an entrepreneur, and it's somewhat of a merit badge.
One day I'll make the 2008-2009 financial crisis merit badge, and it'll be handed out to people who actually, you know, went through that. It was really, really, really just all around bad and really challenging. So, point was how can we sort of revisit this, and what did I learn? How can I tell, quickly, a story about how things worked out?
So, all right, thank you for the introduction. This is me in 2008. I don't know what was going on with my hair. I'm sure that hasn't gotten much better. At least this was me with shorter hair.
There was a period there where I had thought that it was okay to have long hair, and I'm not really a long-hair person. I started as an engineer at Netscape. I've been in Silicon Valley and in San Francisco for a very, very long time, approximately 20 years. I went from a developer to becoming an entrepreneur somewhat sort of accidentally.
We worked at a startup that was doing developer-focused things around Apache. That company was in the process of failing after raising money, among other people, from Sequoia Capital, and as the company was about to fall apart, it occurred to me and four other very awesome people that we had built this great product that was going to be thrown in the garbage, and that the better idea would be to offer a dollar to our investors who had plunked in approximately 32 million bucks to build it, and take over the product and start our own company.
So that's actually how I got into this mess to begin with, and then there was this sort of period of bootstrapping the company for a year and a half, growing sales. Actually, one of the previous talks I've given here at Heavybit was how we got to our first million in sales, and it was a really interesting experience.
We got funded and became a real company, and actually, in becoming sort of a real company with proper institutional venture funds and so forth, which back then seemed like a big deal, but now would be considered a pretty sweet seed round. I think our Series A round was a $3.25 million Series A round on an $8 million, pre-money valuation.
For perspective, this is a company that was making approximately two million in bookings at the time, so I guess that would have made Hyperic a unicorn in its day, or at least something close to it.
But we grew the company, became a real company with up to 70 people, and then things got really, really weird. The company was very successful in the end, despite the story that you're going to hear.
I went to VMware, which is the company that required Hyperic, and spent three and a half years abroad. I was trying to figure out a way to better describe that, and then after leaving VMware, thoroughly soured on the topic of infrastructure and plumbing and developer-focused things, which all of you are hopefully really, really excited about.
I decided that I wanted to do something different and wound up partnering with a couple of awesome cofounders in pursuit of building a new kind of mobile email app. So I went from being somebody that had been very focused for almost 15 years in infrastructure, to building a user-focused product which we literally built right in this building.
In fact, two days ago, on April 24th, was the two-year anniversary for when we first shipped to the App Store, which happened directly above me, on the second floor of Heavybit, a moment that I still am very nostalgic about, because it was the beginning of something that turned out to be extraordinarily amazing for all of us.
After launching the app officially on April 24th, 2014, in late November, we had been acquired by Microsoft for a lot of money. And now I work there, and I'm the sort of the email guy.
The product Acompli is now called Outlook for iPhone and Android. I hope you all use it. It is awesome, and you know, I've been promoted to be in charge of all of the things that are called Outlook, which makes me the person that everybody says, "Hey, guy, I have a problem with my email. Can you help?" So that's super fun.
Actually, it's a great experience, and Microsoft is a very interesting company and a company that's in a very different place. The last thing I would have imagined when I was sitting upstairs would be that we would wind up at Microsoft.
Okay, so, yeah, 2008 was terrible. The whole mess started in late 2007; there was already a realization that there was something that was not right about the way the financial markets were operating. And then what happened was that in 2008, right as my company Hyperic was continuing to grow, and we were an open-source company and sort of a disruptive, price-point-having company in the system's management space.
We weren't seeing real signals that suggest that we were doomed, but the climate around us certainly was souring very, very quickly, culminating with this headline, which is from September 14, 2008. I remember this day because on this day I was actually out of the office. I was about to get married, which is a great year to get married. Like, talk about a great memory. Like, "Hey, yeah, you got married."
We got married October 4, 2008, a few weeks after Lehman Brothers crashed and took the entire world's financial system with it. And so, on this day, I got a call at home from our CFO who said, "Have you read the newspaper?" And I said, "Well, no."
"Lehman Brothers failed. The two largest mortgage lenders in the country backed by the federal government had to be rescued, and the financial world is falling apart.""I'm like, "Well, that sounds great." And she said, "I sent you something via email. I need you to print it and fax it."
This is the real interesting, anachronistic technology part of it, "I need you to fax these documents to the bank. We need to draw down our money on a line of credit, that we had from the bank, from Silicon Valley Bank, today."
That line of credit was meant for equipment. You know the kind of financial instruments that the bank offers today even for venture-backed startups: they'll lend you money, and you can use that money for whatever purpose. Back then, the extent to which you'd get the money loaned to you by the bank, most of the time, it was used for capital equipment, capital expenses, servers, that kind of stuff.
So that day, I had to fax these documents to draw the entirety of a loan because we were worried, and these were my CFO's words, that the bank would not have money the next day, right? That was the moment when it really hit home for me that there was something going on that was quite unique and shitty.
What I did was I put together five lessons, and I'll tell you a little bit about the story along the way, but the point is to make this somewhat useful for all of you. Story time is great and all, but...
So, the first lesson, it's pretty obvious. You have to be prepared, and it's one thing to be prepared when you're hearing headlines constantly about, "Oh, there's a crisis coming." After 2008, it's become somewhat of a parlor game to call the bottom, or call the crisis. "Oh, yeah, yeah, yeah, definitely. We're toast now."
Everybody's taking turns at trying to nail the time of when things really got bad, and this next upcoming downturn of whatever scale, or correction, or whatever. But the reality is that, and I didn't know this at the time because of the type of company that we had created, and even the investors that we managed to get to back us, we were actually uniquely set up to deal with what turned out to be an epic mess, before it happened.
One of the most defining aspects of the culture we had kind of stumbled into at Hyperic. I was a first-time CEO. We had bootstrapped this company for two years. We then got funding. We started growing. I was honestly feeling my way through it. There wasn't a lot of preconceived, "Hey, let's sit here and think about culture," and "Hey, let's plan," and "Who are we?" A lot of that introspection was just not us.
What we did have was a culture that celebrated customer wins. You know, I was an engineer, obviously, and I wrote a lot of the code for Hyperic along with a lot of very smart people. But because of the experience of having to bootstrap the company as five engineers, I ended up having to do all the early sales. So that first million or so dollars came from me having to uncomfortably call up a bunch of IT people and be like, "Hey, hi, this is Javier from Hyperic, blah, blah, blah."
As a result, when the company grew, we became very, very focused on getting paid and on winning customers, and that was a really awesome thing. I mean, people were really tuned into winning deals.
This idea that the quarterly number that the company was supposed to make, which is ostensibly the responsibility of the sales team, was understood by everybody.
Even the receptionist would be like, "Hey, did we make the number?" That somehow just wound up being a thing. That kind of customer-win mentality helped create an attachment from all the employees to not just the customers themselves, but the source of revenue.
There was this clear sense that we were actually getting paid, so unlike many other startups of the day, and back then, it was really hot for consumer-type stuff, and we were sort of bucking the trend there. There was no Heavybit. There was no real focus on infrastructure or even developer-focused companies.
We were getting paid, and in many cases, we were getting paid lots of money, and it was very cool. And there was a moment through that sort of early part of probably late 2007, early 2008 where I started to notice that this sense of customer wins as a celebrative thing for the company was getting a little out of hand in that people were feeling like they had lost touch with the fragile nature of our company.
They think, "We have customers. We're getting paid hundreds of thousands of dollars in deals and all this stuff. We must be doing great." And I started seeing some really unusual behavior.
Specifically, one day, somebody came into my office and said, "Hey, somebody just bitched at me because we ran out of Diet Coke." And I was like, "What?" And, "Yeah, yeah, somebody was just really upset and yelled at me because we ran out of Diet Coke."
That was a sign for me at the time that I was like, man, if that's where we're at, then people have a very skewed understanding of how this all works, right? And frankly, everybody here at this company gets paid well enough to go buy their own Diet Coke, and frankly, go buy some for the rest of the team. So that was a real sort of warning sign.
Anyway, that week at our weekly all-hands, it occurred to me to start asking people to guess what percentage of their salary was paid for by customer dollars versus VC dollars, and it was actually the most awesome and most effectively improvised game that I could have come up with to hammer in the point that the company was not going to exist for a day longer than the investors allowed us to exist.
It became something that was very important, because what was going to happen next, and we didn't know it, was that things were going to get really, really, really ugly. And so if you walk into that storm, or any storm, even a mild correction with a culture that says every startup gets craft beer and kombucha and free lunch and all these, you know, pour-over coffee and all the amenities that were such awesome parts of our experience here at Heavybit, well, you're confused.
And by the way, that can go "woosh," and frankly, if people are joining your company and basing that decision on that, or on how nice this place is, for that matter, they're also confused. Because while this place is amazing, and is a great part of how we were able to do such good work early on at Acompli many years later, this is not the real world, right? You lose sight of that, you will not be prepared, never mind for a cataclysmic shit storm like 2008, but even a mild, you know, bump in the road will throw you off balance.
The people that you hired will be like, "Oh hey, no more, you know..." I keep picking on kombucha. It's because I think it's nasty. Some people like it, I guess.
Anyway, the other two things about being prepared for this correction or financial calamity, one was the recurring conversation that we had as a team about what success actually meant. It's amazing with all the talk that happens in early-stage companies, how little time is spent really trying to answer that very simple question.
What does it mean for us to win? What are we really chasing after? And that changes over time. It's certainly one thing early on and becomes something else as you grow and become more viable, but having people have that conversation constantly is helpful because you never know when things get a little uglier, whether you'll be in a position to go either continue to ruthlessly pursue that or at least adapt and change course and do the right thing in time.
Then the second thing was the caliber of our investors. See, the one thing that was happening throughout 2008 and really even before that was we had been lucky, extremely lucky to have investors back us whose expectations were extraordinarily high. Even as we kept delivering growth in revenue and hiring and all the key metrics of the company, I got no love. There was not a single "Atta boy. Hey, great, oh yeah. This guy, he's our guy." Like, never, never.
We'd beaten our plan for the first time. I think I talked about this in the previous presentation. We beat the plan number the first or the second quarter that we were actually running as a venture-backed company, and I walk into that board meeting. I'm like, "Yeah, what's up?" And tell them that we beat the number, and they literally laughed in my face, and were like, "What was the number?"
I remember. The plan number was $350,000 in the quarter in bookings, and we hit 384, and I was like, "We rule!" And they were like, "Dude, that is, like, chump change." So that culture of investors having high expectations, and investors being smart enough in many cases to anticipate and read a lot of the tea leaves not for the sake of drama.
Keep in mind, at the time everybody was like, "Hey, treasure bath. Everything is awesome." And then all of a sudden, it became like, "Oh my God, the whole world is falling apart." To have investors at your side who were actually setting up the company to endure that kind of crisis, and also training the management team, especially a first-time CEO, to not ever be comfortable, and say, "That's right. We've got it all figured out." That's super, super helpful, and it's, to me, the sign of a very good investor and the difference between one that's good and one that's just there giving you money.
Lesson number two: everyone wants to be a VP, and the truth is that when you get into real messes is when you realize what it really means to be a VP. It's only when people see the accountability side of what it truly means to be an executive at a company, no matter how big, that they become acquainted with the expectation of what that really entails.
It basically means you can be fired. It means you can be fired, and likely for very unexplained and undetailed reasons. So, in this case, right as the financial crisis was starting to gain strength, a couple of things had happened. Well, we were growing to the point where we needed to build out the management team of the company a little better.
I had managed to hire a new VP of marketing from Salesforce.com who was excellent and was very focused on demand generation and top of the funnel, and he was very machine-oriented. He wasn't a brand guy, still isn't, super bright guy. He wanted to set up our machine of how people find us, and how do, ultimately, they become customers?
The other thing that happened was that there was an existing sales leader that we had hired very early in the company, VP of sales, who basically had been operating in this mode of winning customers at any cost. There was this sort of "Just get them to sign." Whatever discounting, there was no pricing discipline, that the guy, the mission we gave him, mission I gave him, was to go sign up customers. And there is a time and a place for that, and as you, early with an offering, and you don't know exactly what the right price of something should be, and all these things. You can set that kind of direction.
You can say, "Yeah, let's just go win the accounts. We'll figure it out, right?" Right around this time, we had started the process of interrogating the business and asking ourselves, well, what does it really mean? What is a good deal for Hyperic? What is the per-unit price point? What is the size? Who is the really successful customer?
Of the thousands of customers that we had at the time, what is the one that we want to repeat more? And that effort was actually led by a finance person that I had just brought in as a CFO. The VP of sales that was in the company at the time, who was very talented and super driven dude and a guy that had a heart of gold and very effective at winning over customers, was not able to adjust and really kind of survive the process of us looking back at all the deals that we had done collectively without feeling like, somehow, he was being judged. It ultimately meant that he was not going to continue with the company, right?
We had to get to this point where we realize that the sales leadership we had in place was not only not able to introspect enough to arrive at the right conclusions about what future deals should look like, but also so inwardly focused on his own survival and his own existence within the company that that was becoming sort of a damaging thing. And so, it was my first experience in having to let go of an executive, which is never a fun thing to do, but it was the right thing to do.
The person we replaced him with was already in the company. He had been hired as a VP also, but originally for business development, and he was in charge of our channel business, basically, our partner side revenue which was a considerable amount of money for Hyperic. And this guy was the very definition of what you want out of a VP at any company, or really an executive.
Not only did he have the aptitude to introspect on the business and arrive at the right conclusion, but he had the leadership to round up this team of formerly coddled and mostly lazy sales reps who were like, "I'm not phoning for leads. We got a lead team over there that's got to bring me qualified stuff, and then I just close."
This thing had gotten very much confused, our business even as it continued to grow. And what this guy did was he stepped up without even me really asking him, took over both the revenue-generating responsibilities of the company, did an amazing job at right-siding the expectations of the team and got us in a position as we sailed into what again was increasingly dark and shitty terrain, to continue to drive customer wins.
We were signing deals. Things were still working. It wasn't until very, very late in 2008 that things got really, really scary and really ugly. After I came back from a very brief, my honeymoon was great, but it's really weird to be out sort of trying to relax and chill while the whole world is falling apart and you have a company of 60 people on the other side of the world that are like, "Hey, where the hell's Javier? What happened?"
What I found was a leadership team that was extraordinarily committed to me and to the business and to keeping the small set of priorities that we had set for the company and the commitments we had made to existing customers, completely sort of rock steady, right?
Additionally, the other part was they managed to protect the rest of the team. Having an engineer sitting there worrying about the Dow Jones or the S&P 500, and whether Lehman failed, and whether we're going to be... that's not helpful. I mean, sometimes you can't prevent this stuff, but being honest with them and yet keeping them engaged in the business moving forward is incredibly important, and that's what a VP and an executive leader is supposed to do.
Anything less of that, and they should just be an individual contributor or a regular manager. The commitment from one of our executives was so great that he pulled me aside as things got super, super, super ugly, and said, "Javier, if we have to bring this thing down, this entire company down to 10 people or less, and have you and I be the only two people selling, count me in. This, we have to survive this. We have a great product. We have a great team, and we absolutely must continue."
For, again, a first-time CEO who was really coming to grips with some epically terrible things, it was an extraordinarily humbling and yet encouraging thing to hear. So your leadership team is really important, and this idea that everybody gets to be a VP and everybody gets to be a leader no matter what the scale of the company is. These kinds of situations are what make you earn that title.
The third lesson I alluded to previously. We brought in a CFO right before the financial crisis hit. Initially, it was to introspect on the business, bring in some pricing discipline, try to figure out how we continue to scale this business, which at that time was at a six-plus million dollar run rate, so we were doing actually a fair amount of business on a subscription business model in a category that wasn't used to buying in subscription, all this stuff.
I bring on this woman, extraordinarily talented woman, who initially just starts grappling with the, "Okay, well, this is a growing company. Let's make sure that we have all the right controls in place."She immediately upsets the sales team because she starts turning around deals and saying, "No, that discount's too aggressive. You can't do that." And then as the clouds darken, and they darkened very quickly, she became even more important.
Every company, every one of you, I'm sure, has a spreadsheet that has the overall P&L, a financial plan for your business, right? That financial plan, particularly for venture-backed businesses that, again, will not live for a day longer than the investors decide that they will, contains all the major variables and sources of cost and income for the company. And it's the cost part that's most important because it's head count. It's people. It's facilities. It's rent. These are the big items that consume and drive up your burn rate.
Every company, when they're very small, starts by outsourcing that function to an accountant or what I jokingly call a "rent-a-CFO," basically these large and small agencies, which are great, that provide you with financial management early on in the company.
People who are working in that capacity, as a contractor helping you with your plan, they're not going to feel the sting nearly as bad of the company really going south in a crisis, right? So the decisions they make, the recommendations that they make, are usually good, especially if they're good people, but they're not quite the same that they would be if they were in the boat. And by that I mean they have to be an employee of the company.
There comes a time in the size of any company where either it's a direct person that is hired for that purpose, or it's an explicit responsibility of one of the members of the leadership team, where financial planning has to be done by somebody who will own the accountability for success or failure there. And it becomes extra important because, well, there's always a cash-out date, and you need that person to know what that date is and to have that date be owned collectively by the team.
That's the game-over time, right? But more importantly, it's this idea of scenario planning, something that I didn't really understand until I found myself in the middle of that situation. You're there. You have enough money. You have money coming in, but it's not enough. You have customer obligations. You have commitments to keep growing the company. You have employees. You have headcount that you're hiring against, and the world is sort of falling apart. Well, you need to very quickly be able to make changes in that plan and see whether they produce the right results, right?
If I stop hiring right away, how does that extend my runway? If I stop hiring, and I kill or sort of whack 30% of my headcount, how does that extend our runway?
There ends up being multiple scenarios that you have to work through, some optimistic, some pessimistic, and most right in the middle, that help you make better decisions.
Turning those around quickly is really, really, really important, especially in days where the world gets worse and worse literally in 24 hours. What happened is, Monday: bad news. Tuesday: worse news. Wednesday: Great Depression. Thursday: Maybe we're going to get bailed out. Friday: no bail out happening. Weekend of uncertainty and bad headlines. Monday: lather, rinse, and repeat.
That happened for a very long time or what felt like a freaking eternity. And so through that process, to be able to do this kind of scenario planning and understand what options you had was unbelievably important.
Lastly, the creativity that only a finance professional has around figuring out how to draw blood from a stone. Basically, find money in the couch, under the rug, in every possible corner where there could be money. Pay us early, pay vendors a little bit later, figure out a way to work the system so that you manage your cash more effectively. This is best done when there is cash to manage, I guess, pretty obvious statement, but certainly something that your options continue to dwindle as time goes on.
The fourth is something that I also talked about here at Heavybit in a previous talk, which is to have a good board. The board process of even a small company is one of the most important and game-changing elements of any aspiringly awesome startup.
If your board meeting is you and your cofounders and one investor or whatever, high-fiving each other, saying what great a job you're doing, you're not getting a good return from your board. Because what makes a board really great are the decisions that they make in really, really, really challenging situations.
When everything is working fine, the board is either going to be disinterested and bored or just pushing harder and saying, "Hey, more, faster, larger," whatever. When things start getting not so good, whether it's because of a macro-economic calamity or even because your company is just not in the right place, it's these people that are going to make a lot of the difference around how long you get to live, what options you end up developing that could lead to an extended runway or a strategic exit for the company, all of those scenarios.
It's important to note that in this scenario and really in any scenario, your investors, for however friendly they may be, aren't your pals. It's important to have a great relationship with the people that gave you money, large investors or even small ones. But they're not your friends, and that's actually perfectly fine. These people gave you money in expectation of a return, right? Whether that return happens tomorrow or 10 years from now, that's great.
But know that when things are very, very bad, and I keep saying that, but believe me, they were bad, they instantly and understandably retreat to being way more of your investor and way less of your pal. Every company, every startup, large and small, went through a "should continue to exist" type exercise with their investors during this period.
That exercise was painful. We had to go to the partners of both of our lead investor firms, and basically walk them through the strategy, and it was very interesting, because what used to be meetings that were very cordial and very like, "Hey, great job," and very encouraging and proud to be part of the portfolio and all this, these were intense and really, really, really unfun meetings. Because what we were doing there was asserting our right to continue to exist.
And so for that reason, it's really important that you understand the nature of the relationship with the investor in good times and in bad, and that you, frankly, that you have good ones. It's okay that they're not your friends, that they're not giving you "atta boys." Frankly, you just need to embrace their greedy self-interest, and ride it. You want to deliver them lots of money. That's what they need to hear in order for them to help support you navigating whatever kind of crisis.
Additionally, and this was important for us, the make-up of a board of directors is extraordinarily important. There was a board meeting that I had in November 2008 that involved us describing the financial picture of the company, and as part of that conversation, it was my job in the board meeting to ask our CFO, who was also present, to draw up the plans for the graceful wind-down of the company.
Now, that was very, very, very painful for me because this was a company that me and four other guys had basically rescued from the Sequoia Capital trash heap, nurtured for two years when there was no outside funding and no real market for early stage companies and no Heavybits and none of the amazing facilities that we now have to grow things.
And now, five years later, I was sitting there having to tell this near stranger who was my finance executive to please draw up plans and present those plans to the board about when would be the last moment that we could actually shut down the company cleanly, pay off our creditors and fulfill whatever financial obligations we had. Having to say that is tough. Having to say that in a room filled of unsupportive people, nearly impossible.
Lucky for us, while our investors did their part of being investors, we had built a board, a much larger board than a company of this size would merit. I think we had seven people on the board, or six, some very large number. But we had outside directors. Outside directors were well respected people in the industry and who lent a very good counter balance to the potentially rash behavior of the investors who were like, "Well, fuck it. Just wrap this thing up and close it. Didn't work."
It was important to have an outside director, respected chairman and CEO of a bunch of other companies, say, "What are you talking about? This company is producing millions of dollars in bookings, has defined a category in its space and has an enviable customer list. You can't just decide that it's going to be out of cash in April, and so end of story."
That conversation, uncomfortable as it is, is best had with a mix of people that have, at a minimum, some perspective on what it means to be an entrepreneur and to be in a sort of growth-driven company.
Last but not least, things look really, really, really, really bad before, all of a sudden, magically, they turn better. The last part of the chapter of the story was we go through 2008. Things are very ugly. We do our reduction in head count. We kill off all the positions that we were hiring for. We reduced the company by about 20 people. We did that at a time when there were still more jobs available in the market.
All the people we let go, which was by and large one of the shittiest days of my life, these were all people I had personally convinced to join the company, as I'm sure many of you have. To have to let them go is, in this situation where it was for no reason other than the world is sort of falling apart, like, we've got to make some changes here, was terrible.
Luckily, they all landed quickly in other jobs. This is the wisdom of not waiting until the last minute to make tough calls, right? Like, you kind of owe that to some of the people that are in your team.
We get past 2008, and we were talking to potential new investors. We were talking to potential acquirers, and we were able to, with lots and lots of hard effort, create multiple options for the company. And that's really what you're looking for in this or any situation, whether it's a financing round in great times or a financing round or a liquidity event in a bad time.
The most important thing that you have to do is to develop more than one alternative, because without that, you're basically stuck.
In our case, we were fortunate enough to have developed three separate alternatives, two investment alternatives, and one acquisition. We ended up opting for the acquisition, which, while strategically absolutely the right thing to do, was what we ultimately did, merge with a company called SpringSource.
The actual transaction that consummated the merger of these two relatively small companies was extraordinarily painful. And it was painful in part because the overall climate that we were operating in was one just filled with such uncertainty, that any type of discussion about contracts and so forth had to consider the possibility that the entire financial system could vanish the next day. It was that kind of climate.
As a result, we had this very extended and very painful merger process with SpringSource. For perspective, we signed the term sheet in February 13. We actually closed the deal on the 5th of May. That is an extraordinarily long amount of time for two small companies to actually marry up and get together in what made all the strategic sense in the world.
In fact, it made so much strategic sense that literally, and this is the dawn part, 90 days after that, we were already in discussions with VMware as a joint company to sell them the entire thing for what turned out to be $420 million.
All of the pain and the uncertainty and the long nights and scenarios and all these things wound up in this magical and amazing way that can only happen in this industry and in this town. And I say town meaning the greater Bay Area. It's only possible here, and it is really one of those things that when it happened, the moment where I knew that we had not only made it through the process of this tenuous merger, but that there was actually a real exit as, I think, the second largest technology transaction, or even M&A transaction, of the year.
It was incredible and super humbling, and you really learn to savor those things when they happen, when they're not supposed to happen. Too often you read about these sort of exits that people achieve, even the one that we witnessed with Acompli in 2014. I mean, that is absolutely not the norm. It was incredibly smooth and perfect in every possible way, and it worked out for everybody, but there was more to learn, frankly, on this.
I think the last thing that I'll leave you with before I take questions, I'm a big believer that the fuel that powers this entire industry in this startup world that we all live in, and that I so desperately miss now that I work at a much larger company, is karma.
The lesson of having endured this very difficult merger and all this strife and all the difficulty leading up to and through 2008 and to then get to this amazing exit and have everything just be, all of a sudden, everything was fine. That was the craziest thing. You go from like getting really comfortable with "shit sucks," and you just sort of learn to operate in that world, and you kind of get comfortable with it, to "I can't believe this happened, and I can't believe that we don't have to worry about this any more, and I can't believe that we're now part of this much larger thing and that we're this sort of amazing addition to a storied company," and all this stuff.
Karma plays a part in every dealing that you have with each other as fellow entrepreneurs and what you ask of and give of each other in terms of time or connections to other people or advice or whatever.
It helps and affects tremendously, in my opinion, how relationships work out with investors. It's a two-way street. It's great. It's one thing to not believe in an entrepreneur and not be a fan of their strategy or their story or even the way they dress, I don't really care, but it's a whole other thing to waste their time, actually. That is the most criminal offense that anybody can make on an entrepreneur that's really working hard to build a company, especially in the early stages, is to waste their time.
And so, karmically, those time-wasting meetings that I endured, which went nowhere fast, and even in many cases, conversations I had with people who had no intention of actually backing us but just wanted to take an opportunity to score points against our two very good and very well-regarded investors. Well, they got to enjoy the delicious fruit of seeing us be one of the best exits of the year, and a humongous outcome for shareholders and employees and even for VMware as a company.
Keep that in mind as you go through this process; enjoy it. Know that these kinds of things are rare, but they do happen. Don't sit there and try and time it or predict it. Just basically run your company in a sound manner. Don't take anything for granted.
We wound up in this office starting another company, and the lessons that we, that I, learned from having lived through this were so informative that, as much as I loved every aspect of all the benefits of being in a place like Heavybit, the reality is that the most important thing you could do is prepare yourself for life after Heavybit and life after being in an environment that's as supportive as this. Because things get real very quickly.
This is where I went as my "redo honeymoon." This is in the British Virgin Islands, and yes, after completing the merger with VMware, it was time to take at least a few weeks off and chill out on a beach, so I highly recommend that. I'm happy to take questions, and thank you again for your time.
This was one of the things that our finance executive did, just the payables, basically looking through who owes us money. How can we get it sooner? Can we provide incentives for that money to come sooner?
I mean, this is the "leave no stone unturned." It's a delicate balance because you don't want to set bad precedents, but the uniqueness of this situation, which, it's one thing for there to be a crisis in technology and have tech companies struggling because they're over-capitalized or whatever. Buyers know that. But in this case, we're trying to call on Goldman Sachs to pay us, and they're sort of like, "Hey, wait a minute, like, uh..."
They certainly have the money, but they're using it, as any of these large customers who are also enduring their own thing. It was effective, but it didn't move the needle quite as much. It was actually a combination, and this is why the planning thing is so important.
It's not one thing that you fix, or one line item that you remove from your budget. It's the combo move of three or four or five things that provide also more than just a shot in the arm.
I mean, one way of doing it is, obviously, you gut out a bunch of cost up front. But if that cost was not an ongoing cost that was factored in the plan, you didn't really do anything except for that month, you're not spending that money.
The real impactful things are expenses that are projected to last for a long time: salaries. We cut down bonuses. We removed bonuses all together from the compensation plan, and a lot of things like that.
Yeah, I think I would never choose to save money on junior people. Junior people require investment in time and effort to develop them into great senior people, and so it winds up costing you significantly more in lost time and energy to either have to fix their mistakes or to develop them so they can do better work.
By comparison, for example, when we started Acompli, we were well-capitalized. We had raised five million bucks as our A round, and we were lucky enough to do lots of subsequent investment rounds.
We built a team of experienced people. Fewer, more experienced people turned out to be definitely the right move. In fact, we invested in things like a better benefits package, because the calculus of a more experienced and likely older person is very different, and they value things very differently.
It turned out that, for Acompli, us providing and paying for coverage for spouses and families as part of our benefits arrangement turned out to be pretty attractive. You have people who want to take the risk of joining a startup, but you want to somehow manage that and not put out your spouse or your kids' health, and it turned out that it wasn't like a willing thing that we went out and recruited people that had families or whatever, but a lot of us did. Maybe about half, would you say? I mean, not everybody.
We had some young people, as well. This was our youngest guy right here, Andreas, who joined us when we were still here. But I think you hire great people, and you don't make the decision about a less than capable person based on cost. You're better off either not hiring that person at all or hiring the person that you really want and waiting.
It's a good question, and one that is not exactly obvious, but certainly in development, that's actually like a straight up, easy answer. Don't hire junior people. Startups are lousy at talent development, right? And it's on the list of things that you want to be good at doing. Developing people comes much later.
There's sort of this lack of existence proof that you need to embrace and say, "We haven't really proven that we have a right to exist here, so we can't afford to act in any way other than one that says, 'Hey, we got to own it.'"
You'd be surprised. That was not our experience, and I'm actually glad that you brought that up. I think what you see in that setting, if you see a lot of people bailing, those people are not valuing the equity they have in the company and the potential of the company appropriately.
What that says is, "I think the only thing that's good about this place is my salary." And frankly, if you're making decisions in those terms, then you probably shouldn't be here. Ideally, and in some situations, it may not be that way, but we didn't see any of that. In fact, we saw the exact opposite both in executives and in everybody else.
The worst part of it was actually the fact that we had built a team that was pretty open about most topics, and so for a long time there, particularly in the early period of 2009, as it became abundantly clear that the broader world was suffering and that there was no scenario in which we were somehow immune from, all this bad stuff, that people were asking me, "What's going to happen?"
You'd have these all-hands meetings, and you'd say, "Hey, Javier, have we raised money yet?" or "What's going to happen? Are we going to sell the company?" Until something is done, the worst thing you can do is set expectations of, "Oh yeah, absolutely, we're almost finished."
You can't lie, and in some cases, until something is concrete and signed, you can't tell the truth either. You can say, "Hey, we're working on it." You can tell people that you're on it, and it's going to be a real test for you and the team as a leader to have people, frankly, believe you.
If they don't, and they say, "Oh yeah, actually, I think he's not telling the truth," then you're going to see people leave. Frankly, that's actually more a statement on the credibility of the person delivering that message than it is necessarily on the people.
If you make a habit out of sunshine and rainbows, it's all you talk about as a team and everything is super awesome, then people are going to really freak out at the moment, the first bump in the road, regardless of the scale.
It could very well be just something that's isolated to that company, and they're not going to necessarily rise to the challenge. They're just going to be like, "Okay, this looks like it's not working," this kind of mercenary-ish culture.
There's ways to spot that up front. Actually, when we were here, we used this place as the ultimate test, because everybody brought it up. You come in here, and people are like, "Man." Keep in mind, we were here when this place was also just opened, so the furniture smelled new. And everybody was like, "This place is so sweet. It is awesome."
We had them for lunch, and there was this great vibe here. And the conversation was always, "Know that we are not going to be here forever, and that the next place we move to is going to be significantly less awesome, and are you okay with that?"
We built a culture that, to this day, remembers our time here extremely fondly. You know, I went upstairs just a minute ago, and it was good. There were some magical things that happened here for us. And yet, that galvanizing... You know what we took from here? We took the coffee setup. We built our own version of the pour-over. We still have the same water boiler. We had different grinders, because we broke a bunch of them, but the coffee culture survived.
In fact, one of the interesting cultural elements of Acompli was this thing we used to do every Friday. We called it "Feelings Friday." We're all a team of older people that have been at various startups. Actually, just about every one of the people on the team, other than the three founders, had never had a successful exit or been part of a company that was acquired. So there were a lot of people that knew startups, but knew a lot of failure too, which is good.
Actually, that's really, really good, it turns out. We observed the teams that were in here along with us, all great companies, and how often they would gather together in corners in different places, and all these things that they held as super, super, super important.
The third floor was the quiet floor, and Javier was not allowed up there ever, right? Remember? You got kicked out, too? Yeah, a lot of people got kicked out of the third floor because it was the quiet floor. And we saw that there was one team in particular that would get together, and they would actually sit around, and every Tuesday talk in a circle. They'd grab beers and kombuchas and whatever, and they'd be down there just gathered together and talking. And we're like, what are they doing over there? Like, aren't they supposed to be working? What's going on here?
We're just very cynical, crusty, bitter people, I guess. We realized that what they were doing was some particular version of a post mortem where they were talking a lot about their feelings, and we thought that was pretty hysterical. We're like, "Okay, that's cool."
In our world, we just said, well, that seems like a great idea. On Fridays, right before we push the build out to the App Store, let's all get together and grab beers, and while we're doing the release we'll call it Feelings Friday, right? And Feelings Friday became a thing. What started as a joke became part of our culture, and we were very honest about what was actually going on.
This sort of idea, of what's going well and what isn't, became a regular part of our weekly sprint process. It started off as a joke, and in part, it was kind of a statement on our part about, "Man, these folks."
If the first place you've ever worked at as a startup is in here, lucky you, I guess. This place is awesome, right? It's like getting to build a company at Disneyland, in many ways, and that's amazing and super helpful.
Done wrong, it can set the wrong expectations. People would be like, "Wait, so, what do you mean we're going to move to some place that isn't as nice?" or whatever. Really something to keep an eye on, especially with the very real possibility that those options are fewer and far between. Thank you, super fun. Hope it helped.