Lispian Random meanderings on whatever catches my fancy

Riding the Rollercoaster

Luna Park Melbourne. (Stevage)

In 1998 I graduated with another degree in Computer Science, this time a Master’s degree. If nothing else it proved I had enough perseverance to get to the end game. Even so it was only the start of my intentions. My wife and I wanted to take the technology I had developed and take it mainstream — we wanted to start a company.

That spring we had spoken with a slew of investment bankers. We finally settled on a group of four dynamic individuals at Thorington, a boutique investment banking firm. We finalized the paper work through the spring of 1998 and began hunting for cash in earnest shortly after graduation. It would be an interesting period in my life. Working with Bob, John, Kevin, and Rick would be an event in and of itself as we created the business plan, the presentations, and got onto the lists for presentations with various VCs and other investors. We started in May and ended up working together for nearly a year. It was a giddy time. It was all on Internet time. Damn it was fun. I had no idea what to expect when the real work of getting funding began but I was having fun doing the warm-up.

At that time I was totally unprepared for dealing with Venture Capitalists, Angel Investors, Institutional Investors, etc. I had a view of them garnered from magazines and books. Reality would be totally different. Some were better than the books led me to believe, others worse. But on average they were the sort that truly wanted to help young entrepreneurs succeed. The only problem was many weren’t that technical and, being a nerd at heart, meant trying to learn to speak to these money men and women on their own terms and in a language they’d understand. The fact they truly wanted to help make great companies assisted to no end. But everyone, even the various investors, kept saying the match has to be right. People, Product, Plan! It was like a mantra. They invest in people, not ideas. People first. Product second. Plan last. I was told again and again plans were easy to create, but getting good people on board was crucial. I would learn this both the easy and hard way in the coming years.

I began to move in circles that I’d only read about. I spoke with Michael Potter, who founded Cognos,  Antoine Paquin, who founded Skystone,  Anne Winblad of Hummer-Winblad and Tim Draper of Draper-Fisher-Jurvetson. I met various Angel investors who had made their fortunes from a variety of high-tech start-ups in Ottawa, Silicon Valley and elsewhere. I met with Institutional investors and with those parts of the local, provincial, and federal government that were there to help link entrepreneurs with “those with money”.

We met countless people and had interest from a number of them. Michael Potter introduced us to his investment arm. We sat down and explained what we were going to do, and why we were different than so many other companies. Michael and I met a number of times, each time more positive than the last. It was so close I could taste it. Michael got it, but he wanted validation from his investment arm. I understood, we all did. Michael is way too busy with life, business, charity, what-have-you. Still is, in fact. Although I had the nod from Michael I needed one from his investment arm as well. I began to focus on them. Antoine was figuring out what he wanted to do next. He liked what we presented, but was it in an area he wanted to get into? Only way to find out was to hold more discussions. Anne was interested, but was focusing on Internet startups and wanted us to refocus our security product to that end. Tim was interested in “real estate”, by which he meant how big a landscape can you slice out and call your own in this new arena called the Internet, or in my case, in computer security. But all the talks were similar, explaining why anyone would want to granularly control their information and effectively control the flow of information within an organization. Back then few understood what I was on about, but some did. Some saw the problems inter-connectivity was going to cause. They understood what was going to happen when everyone could connect with everyone else. But most were just looking at the near term and the riches to be earned. I was to find out that focusing on the long-term problems wasn’t as sexy as focusing on the near term returns.

Security was new for many in 1998 and few understood the vagaries of it and I was left in the position of explaining, in a few minutes, what had taken me years to create. I had to explain the differences between cryptography, Virtual Private Networks, authorization, authentication, accountability, availability, trusted systems, reference monitors, privacy, confidentiality, trustworthiness, and on and on. What I found was that I was educating the investors and, at the same time, confusing them. I had to find some way in which I could explain what it was that I had invented that they would immediately understand. If I spent my twenty minutes explaining the history of computer security I had lost before I’d started. I looked for an alternative plan. I needed what was colloquially called an “elevator pitch”. Thirty to sixty seconds to explain a life’s work. This was getting harder, not easier.

In 1998 it was pretty safe to assume investors didn’t know much about security — hell, it’s pretty safe to assume that now! So, what I did was try to find a suitable analogy that would facilitate my elevator pitch, and the subsequent twenty minutes I hoped to land with interested investors. I found that analogy in banks.

Banks are something everyone is familiar with. They may not understand how they operate internally but they understand how they utilize a bank. I quickly realized that I could explain what an information-flow policy engine was and what policies can do in terms of a normal bank’s operation. Quite simply, I explained that the security systems should operate in a simple manner. There was no security typically found at the public entrance to a bank. The public could enter, perform their transactions, and leave. However, if they wished to access more sensitive areas they would have to request access to that area and prove they have a reason to enter said areas. The example I chose was safety deposit boxes stored in bank vaults. Once a customer had sufficiently identified and authenticated themselves to the teller who guarded the vault the customer was allowed into the vault to fetch their private information. The difference in what we offered over current authentication systems was that the authentication system allowed you into the vault but the policy technology went one step further ensuring you only accessed the particular safety deposit box that was yours. Furthermore, you could specify rules ensuring that the box could only be accessed and opened from, say, 9am – 5pm Monday to Friday. Or, that there were two owners of the box and that they both had to be present for the box to be properly opened. This was quickly understood by many investors and I thought we were on our way.

In late summer 1998 the whole family plus my mom packed ourselves up and headed to Alberta, British Columbia, and Montana for a long overdue vacation. We had saved enough points to get the whole family to Calgary Business Class on Air Canada. We had decided to go for a few weeks and see “Big Sky Country”. It was one of the most enjoyable vacations I have ever had and was, in fact, a graduation gift from my wife. I discovered why they call it Big Sky Country, and we all had a blast. In a matter of days we saw Calgary, Drumheller (Royal Tyrrell Museum), the Badlands, Banff & Banff National Park, Lake Louise, glaciers galore, Montana’s Glacier National Park, the Continental Divide, and a slew of parks in BC, Alberta, and Montana. We did 2500 kms. It was fun but while we were staying at Big Tree Hotel (Glacier Park Lodge) the stock markets crashed. When we returned to Ottawa the investors were more preoccupied trying to preserve their capital than investing it in a start-up, regardless of how promising it may have appeared a few weeks before. I had learned that old adage was true: timing is everything.

To say this was a letdown would be an understatement. My wife and I had five people (including ourselves) on staff. All had to be paid salary and the company didn’t have much money left even though it had a lot of outstanding accounts receivable. People have mortgages and loans to pay and the banks always want their money. We had hoped that the cheques would have arrived while we were away but such was not the case. Even chasing them down now wouldn’t result in a cheque for at least two or three weeks. We had another crisis on our hands and the letdown on the funding side was put aside as we scraped together payroll. The August and September payrolls were met but we ended up personally lending more capital to the company than we’d intended. We’d even gotten some investment from friends and family to tide us over, but still the markets languished — until October.

Suddenly everything picked up again. Two of the most promising were no longer interested. Antoine Paquin had just joined another local start-up and was fully occupied. Michael Potter had investment bankers handling his seed stage capital and thought our technology too close to others they’d already invested in. It wasn’t true, but it’s hard to argue with people that think otherwise to say nothing of it not being that wise to argue with someone who may be useful in the future. Best to move on.

But we got calls from other prior interested investors and from some we hadn’t heard about before. Two of the most promising were Skypoint and Centara, both Canadian VCs. Skypoint was a local VC firm founded by ex-Newbridge managers with backing from local high-tech firms and by local high-tech millionaires. The other, Centara, was out of Winnipeg and was created by the founder of Broadband Networks, a company purchased earlier in the year by Nortel for a whack load of cash. Both were on solid footing money-wise and well connected, but both were from the networking world. Finding someone who understood security and had made their fortunes there was highly unlikely — most probably impossible. We scheduled meetings and freshened up the presentations. In November and December I had multiple meetings with both firms. The meetings were short, shorter than the time alloted. I was asked to leave from meetings at times and felt that that was that. No money would be forthcoming. It was December, snow was forecast, the nights drew longer, and Christmas beckoned. I resigned myself to the fact that I wasn’t going to get any funding and would have to start all over again in the new year. Or maybe just abandon the dream and focus on security consulting, which seemed to have more legs than what I was attempting on the product side.

Then the verbal term sheets came: one from Skypoint the other from Centara. They were very similar in scope, nearly identical in cash value ($1.5M vs. $2M). The biggest difference was in how the deals were structured. Skypoint’s was structured by milestone, with only a small amount initially deposited up front until we could prove certain aspects of the technology. Centara’s deal was structured differently: $2M upfront, with a slew of what our investment bankers saw as normal provisions for fair and honest use of the capital. The difference was the cash structure. The percentage that we’d have to give up was around 35%, slightly more for Skypoint’s deal, slightly less for Centara’s. To me a much more minor point than being able to focus on the business with an adequate cash supply.

Both wanted an answer, Centara called me on my cell as I maneuvered my way along Hunt Club Bridge in rush hour late in December — this was before talking on your cell phone while driving was banned. They wanted to know if I was interested in working with them and if I was, was I willing to put off any other investors until January 6th, 1999? My first instinct said I should concur. I agreed to the condition. Christmas was an interesting wait.

On January 6th I sat in my basement office, The Dungeon. Working on a deliverable for a consulting contract the phone rang. It was Centara. They wanted to “do it”. I was dumbstruck on the phone and asked what he meant. “We want to invest in Texar”. I stammered out that I would like that as well and he asked for my lawyer’s coordinates, my fax number, and a few other pieces of information. The next day a term sheet, identical in all respects to the verbal term sheet’s conditions, appeared on my fax, the fax of my investment bankers, and at my lawyers.

The whole process had begun totally opposite to what I had expected. I thought I’d be called into the VC firm to get the offer, with lawyers in tow. This was so anticlimactic that it didn’t sink in for days. When it finally did sink in I realized that I had just committed the next few years of my life to changing the world of computer security. My days in the wilderness had paid off, I was about to embark on a start-up. One of my old US friends, Ravi Sandhu, later commented upon seeing my work at Texar that I hadn’t wasted my time since my departure from government labs. I felt vindicated. The company was valued at $5M pre-money, $7M post. I began learning a new lexicon, a new vernacular. Everyone at Texar or involved with Texar found out. There was a lot of smiling faces in January. I began making phone calls to people I wanted in the company, telling them that money might actually be imminent. I began making plans and then reality hit me square in the jaw.

This was going to be an intense ordeal, and the books and articles I’d read never mentioned what the negotiations were going to be like. Furthermore, no one ever told me what was considered normal or abnormal in the various documents in terms of clauses, conditions, etc. My lawyers were great but I felt outclassed and struggled to understand all the documents and legalese sent my way. But, with a lot of help and even more reading, I figured things out and began negotiating the last few items that were open for discussion and even attempted to negotiate some that were obviously “verboten”. I figured out body language pretty quickly and became reasonable at negotiating contract stipulations. I quickly learned that trying to recoup any of the substantial amounts my wife and I had invested or loaned to Texar over the years wasn’t going to happen. All that money got converted into shares. I owned a huge part of Texar, but was out big time personally. It was my sweat equity. To me it was more like blood equity. I had every incentive to make this thing work. I wanted to see my money again, and that was just the attitude the investors wanted.?? In the end I had agreed to, with my lawyers, dozens of documents from employee contracts through to the actual investment. I learned all about USAs (not the country but Unanimous Shareholder Agreements), proxies, debentures, rights of first refusal, drag along rights, claw backs, liabilities and limitations, reps and warrants, and so on. I became quite adept at reading a legal document and knowing what I was actually promising. In fact, I’ve become quite good at writing them as well. I ended up with a profound respect for Ron Sabourin of Centara, who, as a certified accountant, was able to deal with the lawyers on par, which even my lawyers said was amazing.

Then, after nearly three months of back and forth with lawyers, and to a lesser extend accountants, the final paperwork was ready to go. I thought it was a long time. It wasn’t, in today’s terms. Today you’d be lucky to close such a deal in six months. But at that time everything felt too long, the world was changing. We’d miss the revolution. Someone with a half-assed version would beat us to market. I pushed as hard as I could, but to no avail. The deal had to take a certain length of time. No more, no less. Now I realize it was done quickly, but then all I wanted was to get started. The arduous road to financing had a few kilometres to go and I wished I could be at the end already. It came soon enough, but when it came it was again so different than i expected.

One day after the last of the revisions had flown back and forth between Ottawa, Toronto, and Winnipeg I was called into my lawyers’ offices. The papers were ready to sign. I guess I expected to see the VCs at the table but instead was greeted only with a huge table full of the legal documents we had worked on. In this day and age it shouldn’t have been a surprise but to me at the time $2M was a lot of money, still is in fact. I thought they’d be there in person. But, to them the deal was all but done. I, my wife, and the original team members, only had to sign-up and we were ready to go. The lawyers already had the $2M in their possession, we only had to finalize the deal with our signatures. For them to be there for the signing was pointless as they could do that from the comfort of their own offices in Winnipeg. We, the Texar Team, all looked at each other and began signing. There were a few minor screw ups in the documents. It took time to rectify the occasional error. The entire affair didn’t end until after 5pm, longer than I could have believed. My hand had begun to cramp when I slid the last document to my lawyer.

After signing my name more times than I can really remember, handshakes went all around. We were officially funded. We were now a true-blue high-tech start-up. We took a photo to commemorate the occasion. We were all flying pretty high that evening. In fact, although we didn’t know it, we were considered an Internet start-up since we were one of the many companies in Canada and the US being funded for advanced ideas that solved problems in highly networked organizations. We had caught the wave and now we had to ride it in.

Only one problem remained: it was after 5pm! The banks were all closed! We couldn’t deposit the cheque until the following day. Still in high spirits we went home to celebrate. The cheque was in safe hands, I’d pick it up the following day from the legal firm and deposit it. We had waited this long, what was a few more hours.

At home I broke open a case of Highland Park Scotch I’d purchased for just such an occasion. Our “Friends and Family” investors came over to toast our success. I presented the team, the lawyers, and our friends and family with a bottle. We cracked one open and had a toast to a new era in our existence. Tomorrow would definitely be a different day. But it would start with me picking up that cheque and depositing it into the corporate account.

The following day I went back to the lawyers’ offices and picked up the cheque. The whole team was at home in the Dungeon, our basement offices, awaiting my return. When I arrived they all wanted to see the cheque, to touch it, to prove to themselves that it was real. We photocopied the cheque as proof to later frame and then hopped into our cars and drove over to the bank to make the deposit.

As usual Lesley was there at the business wicket. I walked up grinning from ear to ear and she asked what was new. She noticed the entourage and asked again what was up. I smiled at her and said that I had a small deposit to make. I presented my deposit book and the cheque. She looked at it and her eyes grew bigger. I filled her in and she congratulated us. She made the transaction and ensured the money was immediately transfered to our account — the cheque was drawn against the same bank — and provided us with a printed copy of the corporate balance. We looked at our first seven figure value. We said goodbye to Lesley and headed back to the Dungeon. Next up was getting the company to look like a real company, which meant leaving the Dungeon. But first I had a call with the VCs to start my new life as CEO of a high-tech start-up! I was about to learn what I had to do next, and when our first meetings would be.

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