September 23, 2004

The Vinod Khosla difference

Some extracts from Joe Kraus, co-founder of search engine company Excite, recent 2-part blog post -
here and
here - on the importance of persistence gives a good idea about why Vinod Khosla of Kleiner Perkin's is concered "an entrepreneur's dream VC":

While we were still in the garage (literally), we met with at least 15 different venture capital firms. The meetings we're all the same. We showed them our search technology, showed them "concept-based" search, and showed them targeted advertising. To a firm, the first question they asked was a very reasonable one: 'great stuff guys, but what's your business plan? how are you going to make money?' Of course, being 22 years old and fresh out of college we replied, 'we thought you could help us out with that.' Apparently, that's the wrong answer. Who knew?

Rinse, lather, repeat.

Then we met Vinod...

By then, our deal had developed a certain "smell" -- smart guys with interesting technology but an uncertain business plan. The demo to Vinod started off like they all did, but about 10 minutes into the meeting things got very different. He interrupted

"Can the technology scale? can you search a large database?"

Big Pause. It's not the money question. No one has ever asked us this before. Ummm.

"We don't know, we can't afford a hard drive big enough to test."

Then, an amazing thing happened. Ten minutes into this meeting, his first introduction to the company and us, he pulls out his his cell phone, dials his assistant and buys us a $10,000, 10Gb hard drive.

Another instance (post funding):

Back in those days, the Netscape browser had two buttons in the chrome that don't exist today. They were called NetSearch and NetDirectory (NetSearch, of course, became Search but NetDirectory disappeared into the ether). That summer, Netscape let it be known that they were going to put the destinations of those buttons up for bid. Previously they had given, for free, the NetDirectory button to Yahoo and the NetSearch button to Infoseek.

This was the premier beachfront real estate on the web up for bid. We were terrified. We needed to get it...

...We were screwed because we didn't have enough money to compete. How were we going to outbid MCI? A freaking phone company? Infoseek had more money and more users.

We gathered the troops and I distinctly remember sitting on the floor of my office with a big chunk of our small company and Vinod (Arun's emphasis and note: He was there when Excite needed him). And suddenly the right answer appeared.

We were going to bid $3,000,000.

It was Vinod who suggested it. Forced us into really. (Arun's emphasis). We had $1M in the bank and we were bidding $3M. How was that going to fly?

Vinod made a critical point. If we don't get this deal we're nowhere. If we do get the deal, we can probably raise the money on this victory alone.

Strangely enough it felt right. A bit irresponsible perhaps, but in reflection it was truly a bet-the-company moment and we bet big. It was appropriate.

How Vinod Khosla created Sun Microsystems

While I knew the one line description "Vinod Khosla was the founding CEO of Sun Microsystems and was earlier part of the founding team at Daisy Systems", I hadn't come across a more detailed version of Khosla's pre-KPCB exploits before Joe Kraus talked about it on his blog.

Here are some extracts from the Harvard Business School case study (by Dr. Amir Bhide) that I found interesting:

How a Stanford secretary "linked up" SUN's co-founders:

I'm probably more of a conceptual engineer, and I can draw block diagrams for almost anything I can think of, but I can almost never implement them. So I started looking for someone who had done this kind of stuff before. I heard of a project at Stanford called the Stanford University Network, or Sun.workstation project. I called the computer science department, and some secretary who did not want to bother a professor gave me the uame of a graduate student from Germany, Andy Bechtolsheim.

Apparently, Andy, who was also at Carnegie at the same time I was, but I did not know him there, had come to Stanford to do his Ph.D. in CAD tools. I think he realized there was no appropriate machine to develop CAD tools, following the same discovery process I had gone through, so he decided to build one himself. His specs fit mine almost to a T.

Andy had developed the workstation concept in a fair amount of detail and had a prototype implementation of lt. Stanford had assigned the technology to him because, in their great wisdom, and after calling DEC and Prime, they had decided it had no value.

So, for over a year he had been licensing the technology to six or seven companies. He had invested $25,000 of his own money into building prototypes, and as a grad student licensing it at $10,000 a pop, he thought that was just wonderful.

Bechtolsheim offered Khosla his usual $10,000 license. Instead, Khosla tried to persuade Bechtolsheim to join forces to start a company to build workstations based on his designs.

I said to him, "I want the goose that laid the golden egg, and I don't want the golden egg." I thought that kind of resource is very rare to get. So I would rather have him than any one design he would come up with. I had nothing very concrete to offer. I told him we could build a big company, that we could raise a few million dollars. He would be a founder of the company.

As an entrepreneur, VCs were good to VK.

Andy Bechtolsheim agreed to participate by late January 1982. The two started working out of Andy's office at Stanford and in a couple of weeks had produced a brief plan.

It was a real concise statement of the reasons for making an investment: how the economics had changed, what the product would be, when it would be out, and how big it could be and why the market made sense.

The next day, February 12, we met with two venture capitalists, one of whom, Bob Sackman, had helped me write the Daisy business plan. Within three or four days, they agreed to give us $300,000 in equity. They gave us a $100,000 check right away and said, "You can get going and let's work on the paperwork." On February 22, we formally incorporated the company and received the remaining $200,000. The price of the stock was $2.75 a share. We also gave them an option to put an additional $2.2 million for a total of $2.5 million at $5.60 a share, that option to expire on June 30, 1982. By that date we were supposed to hire a marketing person, write a business plan, and demonstrate a prototype.

Bob Sackman led the thing, and he trusted me. It was really on trust. There was very little due diligence on their part- - they just believed in the concept and said, "Yes, we think you can do it.

Importance of containing burn:

We were unlike most start- ups. Most start- ups have everything- - marketing, sales, support, advertising, and PR- - in place even before they have a product to sell. They get up to $600,000 to $800,000 a month of expenses before they've really started selling anything. In that range, given you're starting out with low gross margins because your product costs are high, you've got to start selling $1.5 million worth just to break even in 8 month.

Click Here to read the full case study.

The importance of persistence

Joe Kraus, co-founder of search engine company Excite, has a very interesting 2-part blog post -
here and
here - on the importance of persistence for entrepreneurs.

He provides examples from Excite's experience as well as that of its investor, Vinod Khosla of Kleiner Perkins (during his Sun Microsystems days).

Do read.

September 20, 2004

"Bad employees do more damage than no employee"

"I always keep two things in mind when hiring, no matter how desperate I feel: 1. a bad employee does far more damage than no employee, no matter the issue, and 2. A players hire A players, B players hire C players, and C players hire losers," says Joe Kraus, a co-founder of Internet search engine firm Excite in his new blog. "Let your standards slip once and you're only two generations away from death," he adds.

Quoting from the book How Would You Move Mt Fuji, Kraus points out how Microsoft "seeks to avoid hiring the wrong person, even if this occasionally means missing out on some good people."

Google, the other great tech company of our times, has a similar hiring policy. The company's "hiring process is notoriously long and complicated". "A single no-vote of the hiring committee means you're not in. Why? Because they put the principle of 'no false positives' to work. They assume that there is a huge talent pool of great people and that they can afford to pass on people that would be great fits in order to make sure they never let someone through who doesn't fit."

Kraus acknowledges that such stringent policies are very hard to adhere to - especially in a start-up where "you've got much more to do than you have people to do it". Despite this, he advises entrepreneurs not to compromise. "Slip up even once and it's trouble fast."