Lispian Random meanderings on whatever catches my fancy

The First Year from Hell

Continuing on with the saga that was my life as an entrepreneur, we come to the end of 1999 and the dreaded Year 2000 (Y2K).

Suddenly it was nearing Christmas in 1999 and Y2K hype was everywhere. According to analysts and experts the world was about to end. I had my doubts, but it was fun listening to everyone think on January 1st everything computerized would just stop. Sigh.

But we were busy in our own little world. We had product to finish and problems to resolve. We had a company to grow and, most of all, customers to hunt down and satisfy.

Growing the company during the dot com mania wasn’t difficult. It was trying to convince everyone we shouldn’t that got you no where.

Our VCs, like all VCs, were saying we had to grow big; grow big and grow fast. The bigger the better. And money was thrown around to assist in this. We were told to grow to 100 people in 2000 or else we’d miss out. We couldn’t and wouldn’t be a player if we didn’t have a fully staffed professional services, a marketing department pushing our wares, sales offices here, there, and everywhere. We needed exposure that only money could bring. And, of course, we needed it now.

And this was the crazy time. People buying techies BMWs to entice them on-board. Dot coms that spent millions monthly plastering their names all over the place. In Ottawa it was saner, but we had to go down to Silicon Valley — Silly Com Valley as some were calling it. Everywhere you turned there were ads. There were ads on the taxis, even though no one had ever heard of the companies that were being advertised and fewer still had use for whatever it was those companies were selling. All that mattered not! Exposure was paramount. Get your name out there if you didn’t want to lose out on the gold rush! If you missed out you’d not be able to stake your claim in the digital wild west.

It was scary. It was nuts. It was insane. And it was all rather fun, too.

It was also a time of trying to partner with other start-ups since that was a great way to get exposure to more customers. Many companies we tried to partner with and some we did had marketing budgets that were larger than our valuation! We talked to one firm that spent $10M a month on advertising, although I didn’t really grasp what it was they sold. But no matter, that was assuredly because I was a hick from Ottawa. The guys in the know lived in the Valley. And, by the way, when was I moving down?

That was one of the funnier aspects. You’d get a lot of folks looking down on you because you were from Ottawa and then turning around trying to recruit you to come work in the Valley. The mixed signals were just everywhere and constant. It’s amazing anything got done in that chaos. But looking back, it’s not surprising everything imploded.

Our VCs thought the marketing hype and excess was insane, and rightly so. We needed marketing and started to hire in that department. We also needed sales expertise. And, we had to fill out our R&D and QA teams. There was work ahead but we were fortunate. Between the three head technical leads, Tony, Alberto, and myself, we knew loads of people. And the first ones we brought on knew even more highly skilled people. we ramped up to 25 people by the end of 1999. 100 in 2000 looked like a piece of cake.

Now, one of the things people tend to forget is just how little infrastructure technology there was back in the late 90s. If you wanted an internet presence you had to set it up yourself. There weren’t the inexpensive and reliable services you see today. You personally had to spend tens of thousands of dollars to keep your web site up, ensure your email systems were operational, etc. We had 2 full time system administrators handling all the server, notebooks and other computers that littered the establishment. Today, instead of spending $20k a month you can get by spending a few hundred a month and outsourcing email, site backup, web site, etc. to 3rd party providers such as Blue Host, Amazon, etc. Hell, if you just looked at R&D and QA you can offload all the systems to Amazon instances and fire them up only when you need them instead of having to kit out R&D and QA labs. Is it any wonder so many modern software-based startups are disinterested in VC money? If you can stand up your company for a couple of thousand and then leverage Amazon’s EC2 and S3 products for data processing and storage you win. You need less space and less equipment which equates to less outlay. Instead of needing millions to get going you need tens of thousands, and that’s something that many people can attain personally. It’s more akin to what it was like to write software in the 70s and early 80s when the cost was just the price of a computer for yourself and maybe 2 or 3 of your best buds. If I were starting a company I’d rather be starting one today, it’s cheaper and you can focus on the problem at hand as opposed to writing infrastructure software to hold up your software.

Companies live and die based on how many customers they land. And so, we forged ahead looking for customers. First questions asked wasn’t price but rather availability. Could we assure the customer that the product wouldn’t fail. We couldn’t, but we were working on a solution. Unfortunately, it wouldn’t be ready for the initial release but would be ready shortly thereafter. It was a show stopper for some, or so we thought.

We were constantly told that money was effectively free. It was the wild west! Money was flowing everywhere — except, it seemed, to us.

We seemed to have enough funding but we weren’t closing any easy sales. This didn’t seem right, so we pushed ahead with sales and marketing hires that we were told and believed would rectify the situation. We also staffed up our professional services awaiting the deluge of work. In fact, we modeled our growth on other security companies. We followed in their footsteps. We couldn’t be wrong because they weren’t wrong. That’s how they ran their firms. We would follow. After all, we were constantly being told by security experts that we were the next big thing. What could go wrong?

But in all that pumping up there was a lone voice that sounded an alarm: Cisco. We’d talked to an endless parade of industry experts. But our VCs wanted us to talk to Cisco and Cisco’s CTO was kind enough to do a conference call with us. Cisco’s CTO talked to us at length about our product. He thought it brilliant. He said it truly was the future. The problem is he felt we were just way too early to the party. He commented that people just couldn’t comprehend the full problem and so were focused on trivial problems they did understand — well, they were trivial for us but not to the customers. It’s a sorry lesson we learned the hard way: focus on the immediate need, not the larger but longer term one.

Our technology was too complex, solved too much of the real problem but not one that people immediately understood. Cisco’s CTO stated flatly that people wouldn’t “get it” until at least 2005, maybe 2010! At the time we had no idea just how prescient the Cisco CTO was. So, like everyone else enamoured with their own brilliance, we just poo-pooed the whole discussion. What did Cisco know about policy-driven security? It turned out, more than we could have believed. Acceptance of innovation follows a strict pattern. A sad lesson a lot of us entrepreneurs have learned over the years.

Looking back the general problem is one of evolution versus revolution. Vince Taylor, a good friend and retired senior scientist with National Defence, long held that consumers understood evolutionary problems but rarely revolutionary ones. His take was similar to The Crossing the Chasm problem as described by Geoffrey Moore. Early adopters would get it, but the vast mass of potential customers simply would not. They were not immersed in computer security and so focused primarily on the problems that were biting them in the ass today, not ones that would bite their asses off in a few years if they didn’t install the necessary protection today. It was like that Fram commercial: you can pay me now or pay me later. They mostly opted for later.

Vince pointed out that a revolutionary product was at least three evolutions away. Each evolution he believed represented 12 – 18 months. Thus, we were at least 3 – 5 years out. Hmm. That lined up with what the Cisco CTO was saying. But again, considering the favourable comments from IT security experts we figured we could cross the chasm with our revolutionary product, mostly because we believed there were enough revolutionaries out there to act as early adopters.

But we’d forgotten something else, something we should have known: the sales cycle. Most companies survive because their sales cycle is short. Ours was 16 months or so. That means that from initial contact until a sale it took us 16 months. The cost of each sale was quite high, too. Looking back the math just didn’t work out. Weaving those two values (18 month evolution cycles and 16 month sales cycles) meant we were fighting forthcoming evolutionary products all the way through our sales cycle.

Obviously, we had to deal with competition. And this was the sad part, we really didn’t have any. But many companies that were selling in the IT security market space figured any other security company was competition and proceeded to ensure they didn’t achieve a sale and thus steal potential revenues from them. We even watched as certain firms would show up at a customer just before us and sow doubt whereupon we had to spend our entire time with the customer proving our software did work. With one large bank in New York it was so bad they demanded we show it running on something other than our hardware. It took all the time we had to get it moved to their hardware to prove it functional that by the time we accomplished that our time was up and we had to schedule a follow-on meeting. And the most irritating thing is that the customers never started to doubt the veracity of these competitors, instead still demanding that we prove ourselves. The typical line that we’d hear was: “We hear that what you’re selling is impossible.” One bank in Toronto went so far as to bring in a team that had worked with other IT security firms to “prove” it was impossible. It took us weeks to convince them otherwise. Interestingly enough, they did ultimately become our strongest supporter and customer, but it was a year of constant doubt, even while the system was up and operational in their data centre and saving them money! It was nuts.

Friends from MITRE said it was probably partially due to the fact we were so small. They knew of many large firms that had spent tens of millions and not accomplished what we had done. And there were a lot of people who simply couldn’t believe that Entrust or VeriSign hadn’t been able to do this. It was a frustrating process and has turned me off of enterprise-style security solutions ever since.

One ironic bit of news is that in 2006, pretty much like Cisco’s CTO indicated, I was told by many peers that they finally understood what I was on about back in 2000.  Some were surprised I “hadn’t waited it out” as if you can keep a firm up and running without a lot of paying customers. As I said, it was exasperating and still is whenever someone tells me they wish the technology was still around. I just wish we’d open sourced it at the end as it might still be in use today.

Back to what was now the year 2000. We were growing and thus planned to move into new digs. From our 3000 sq. ft. in the west end we moved slightly east, just off the Experimental Farm. We had leased 12,000 sq. ft. of new space with an option for another 12,000. We had it fitted up to our specs, but we remained frugal. The fit up didn’t cost that much. We wanted it to look nice, but we weren’t about to waste millions on furnishings and plaster when we could hire people with it, or promote sales. At least in that regard we had our heads on straight.

We built a nice lunch room and installed Pepsi and Coke machines. We had a stove put in as well as a microwave. We had a television installed, especially as 2000 was World Cup year! We had a library built in the middle of the offices and we had offices ringing the entire floor with cubes, built out of drywall, in the middle. The cubes were designed to be for our transient employees — i.e., our sales staff. R&D, QA, etc. were to be staffed in offices. We built additional meeting rooms and had them fitted up with floor-to-ceiling whiteboards. All was well.

And barely a year after we moved into our original office space we moved again, but this time into our new digs. It was glorious. And it went smoothly. We were quite pleased.

But as mentioned above, our message wasn’t getting out in the real world. Sales weren’t materializing. Marketing seemed stagnant. Nothing much seemed to be going on. The VCs had opted to bring in a CEO from the US with industry experience. They wanted a sales and a marketing VP. They wanted me to go from CEO to CTO. I agreed. I simply wanted to do whatever was thought to be best for the company. I wanted this to work out. In hindsight it was a serious mistake. Technology companies should be run by technologists. Anyone else will simply drive it into the ground because they won’t appreciate the technology nor the people that are spilling blood, sweat and tears building it.

As I stepped aside the VCs hired an old security hat from the US, Paul Gates. He had experience in security but hadn’t run a start-up and wasn’t technologically deep. He was personable and everyone liked him. He believed in what we believed in. He was a great cheerleader and said we needed to bring in some serious hitters for sales and marketing. But the goal isn’t to get a cheerleader but someone who could bring in sales. The goal for any start-up is sales. Sales first, sales last, sales always. Revenue is key. Everything else is secondary, and that includes marketing.

Then again, at the time, the rule was to staff up marketing and sales. And that’s what was going to happen. We  interviewed a guy from IBM. He seemed to be a good fit but I wanted Paul to decide. I wasn’t going to use my experience to decide whether or not this guy could do the work. So Paul interviewed him and said he’d be a go. We figured he was the one that would take us places. He had a pedigree: he was from IBM and a successful salesman. And he knew about marketing. We had scored! One guy could do both jobs. Perfect. We’d save some cash.

Ted joined in the Spring and there was trouble right away. The VCs were irritated that we’d hired Ted without first getting their approval. Foolishly we thought that if we were supposed to run the show we could hire who we wanted. Not so. That only worked for techies, and maybe professional services and some support staff. But to hire a VP? Hell no. But Paul argued his case and Ted was brought on board.

At the time my wife was doing a lot of the senior (read: chief) operational and administrative duties. She was also fighting the battles to get our marketing and sales going. There was friction at times within Texar as people assumed that she had preferential treatment. She didn’t, but perceptions are hard to change. Paul reluctantly asked her to leave and the Board agreed. They set her last day to be in late May or early June. There’d be a party, but it wasn’t a happy time. Nearly everyone at Texar loved Jogi and most people understood that she was the heart of the company. People feared that we were about to lose something vital. Tearing the heart out of a firm is stupid at all times. In our case it was doubly bad because she also had a instinct for what was the right thing to do, the right person to hire, etc. And losing that would be costly.

So Jogi’s last day was set, a party planned, and the VCs flew in. It was both a happy and sad day. We had delivered version 1.0 of SecureRealms and Jogi was having her last day. The VCs gave her a beautiful present and told everyone how important she was to the initial financing deal. But they said the company had to move on, other VCs didn’t want to invest in a husband-and-wife team. One of us had to leave, and as I was the CTO and the guy with the idea, they thought it best that she leave. And she did. She left proudly, although she would have loved to stay.

Now Ted had full control of Marketing & Sales. Paul had the reigns of the company and I was the CTO. And Paul pulled favours so we could meet contacts in industry. It felt as though we were going someplace. We hired some sales staff in the US and began to move forward briskly. We started developing a marketing plan, a sales plan, we had initial customers doing pilots and betas. We even had a trickle of revenue. And the VCs had approved us expanding to the second floor. We were approaching 80 people by summer and they said we’d be 250 by mid-2001. We needed space. So we arranged to lease the 2nd floor. And another round of financing came in. Things appeared good. But the sales were slow. Painfully slow.

At the quarterly Board Meeting that summer we had to have plans for the next 6 quarters. Paul and Ted had to come up with marketing and sales plans, including names of potential customers that we’d be meeting with. Tony, Will, Alberto, and I would come up with technical plans for version 2 and onward of the product. Everything would be presented at an extended board meeting.

When the meeting came the VCs appeared in a great mood but David was hard edged. He listened to the presentations but obviously he was seeing that sales were not aligning quickly enough. He therefore wanted justifications for the numbers, the estimates, and the sales figures we were proposing. He wanted to know what Ted was doing, where all the marketing dollars were going. They wanted justifications for the R&D and QA budgets, equipment purchased, etc. They hammered at the plans. It was brutal to witness but it was pretty much what we’d gone through from the first. I still recall the stress of the due diligence. I knew if you put numbers forward you better be able to back them up.

Because I was used to this, I was partially immune to it. I found it made you think more sharply. You realized it was their money and they wanted to ensure it wasn’t being wasted. They wanted you to stand behind your numbers, your claims, your plan. As the VCs began reviewing the marketing plan and sales plan I tried to come to its defence. I was told that it wasn’t the author of those plans. It was up to Ted and Paul to defend those plans. I sat in silence. And then a dreadful thing happened. Paul exploded, raging against the VCs. He said they didn’t appreciate what we’d all been through, what we were trying to do. He hammered home his point, at a very high volume, that everyone was working very hard and that they, the VCs, had to appreciate that this was complex technology but that it was truly the next big thing in security. He had experts who would attest to this. He was angry that they’d demean the individuals that did the work.

It was a big no-no. The VCs had never demeaned anyone. They had questioned the documents, not the integrity or professionalism of the individuals. Paul had crossed the line and claimed that the VCs were doing something they weren’t: making a personal attack. The VCs wanted figures backed by facts. They wanted to know what led to the conclusions being presented. If X sales were to be done in the forthcoming year where would they come from? Where was the sales funnel? Where was the proof that the provided conversions would actually occur? Furthermore, considering monies already spent, they rightly demanded to know where those monies had gone. In R&D and QA we documented where every dime went. The sales and marketing numbers weren’t so clear, and that clearly riled the VCs.

David called a recess so we could all cool down. He pulled me aside and said he wanted time for Paul to calm down, and retract what he said. He was certain it was not intentional. David wanted Paul to be emotionally committed, but he didn’t like how this had panned out. He hoped things would calm down after we had a coffee or soft drink. I talked to Paul hoping he’d understand what had to happen. He wouldn’t lose face by apologizing for making it personal, for misconstruing what the VCs had implied and said. But Paul wouldn’t back down. And because he wouldn’t back down I knew he was toast. The Board had lost faith in him, and I knew that once that happened it was over. We had a CEO and now we didn’t.

The VCs agreed that the chairman would be interim CEO and that I’d assist in running the shop when he wasn’t there.

Paul and the VCs came to an agreement and parted company. I’m still undecided as to whether he could have made a difference. Maybe he could have, but maybe the technology was just too early. But our burn rate was going up and the VCs still had faith. We got more money in late 2000, another $10M. Our valuation was pegged as high as $100M. But we were short a CEO and soon we’d be short a VP Sales & Marketing.

Once the Chairman took over he re-examined our marketing and sales plans. He didn’t like what he saw. He came down every other week and demanded that the quality of the sales and marketing plans equal that of the R&D and QA plans. As I became more involved in the CEO office again I examined the marketing plan and sales plan and didn’t like what I saw, either. But something else much bigger bugged me.

The VCs were now a regular presence. They flew in additional help to fix up our marketing plan, our sales plan, our business plan, etc. We had free help all over the place and I’m still not sure how Ted was taking it. Our interim CEO was talking to Ted regularly wanting to know what was going on. I was asked what I thought and stated, bluntly, that it was odd that we had less marketing material now with a sales and marketing team and a VP Sales & Marketing than when we were 20 people and Jogi and I did everything ourselves.

Ted wanted to bring on more sales staff, but the VCs couldn’t accept that more staff would solve the problem of next to no sales and barely any marketing material. In short, it was obvious they’d lost faith in him and discussions were getting more and more curt. There were few smiles at the meetings and many ended abruptly. Then one day it happened. The Chairman and Ted had a major disagreement. I can’t remember what caused the disagreement but the next thing I knew voices were raised and the Chairman stated that the VP was “lucky he had a job”. It didn’t look good as the Chairman stormed out of the office. I followed but was told curtly, “I need to go for a walk.” And he was gone.

An hour or so later the Chairman came back. For sure I assumed there’d be more fireworks but there weren’t. Ted had gone to his office looking glum and remained there. But the Chairman simply scowled, talked to me a bit, and then said they were going home early. All I could think was “Oh shit! This is not going to end well.”

It was obvious they’d now lost faith in Ted and I thought I was next. There weren’t any other executives, I was last man standing. I was also one of the guys who thought we should bring Ted aboard. I thought I’d get axed for that alone, especially as Paul had already left.

The next few weeks were bizarre. I worked my ass off trying to get things organized. I traveled more than usual and worked on marketing and sales plans. But Ted didn’t participate all that much. He looked glum and finally approached me about the entire affair and asked for me to honestly appraise his performance. I told him that I found it hard to believe that after six months on the job we had less marketing material and sales collateral than we did when he had started. I further stated that had he only delivered half of what he had originally promised the Board he’d have done a superlative job. But he hadn’t delivered, and in a start-up, delivering is everything. He wondered if I was going to fire him. I told him honestly that that wasn’t up to me. It was up to the CEO and the Board. He nodded and walked back to his office.

A short while later he came into my office and said he was taking some time off, he had some vacation due. I nodded and he left. I never saw him again. The VCs came to an agreement with him through our legal team and I wasn’t made privy to what went on. I believe Ted saw the writing on the wall and figured he might as well get out of Dodge. Now I was where I had started off more than six months earlier: no CEO, no VP Sales, no VP Marketing. We’d have to write those 6 months off. It was brutal.

Were this to happen today I’d strongly take over the reins of the firm and move it forward. But I was inexperienced and probably rather frightened that I wouldn’t be allowed on as CEO. I also thought that I didn’t have the experience, which was rather stupid. The purpose of a CEO is to nurture customers, be the public face of the firm, and encourage the employees to move forward with the difficult task of writing software. I was doing that quite well, hell, I was doing that all the time. In fact, all the sales we ever garnered at Texar were because of me. But I didn’t understand how important that was at the time.

Even though I wasn’t officially CEO I ran the company day-to-day when David wasn’t in town. My gut was telling me that marketing was pretty much unnecessary for a start-up. Thus we didn’t really need to have a full-on marketing department. What was required was more word of mouth advertising, schmoozing/networking, and overall glad-handing with media, movers and shakers, and especially potential customers. Gobs of marketing material didn’t make sales, people make sales, relationships make sales. We needed to get the word out on Texar. And to do that we needed to focus on what it was we did and find champions who’d bring the technology into their companies and departments. We had to make it personal. We had to sit across from potential customers and talk to them, get them to believe in our vision. We had to get them to partake of the KookAid, to want to live the life of a start-up vicariously through us. And that’s the direction I started to move the company in in the Fall of 2000.

And then the VCs called and said they’d hired a professional head hunter and were looking for a new CEO, and then new VPs of Marketing and Sales. I didn’t know what to say so I just kept doing what I was doing — moving the company forward. Interviews, I was told, would start soon enough. I was bummed. Would all the work be unraveled? Would we lose an entire year? Talk about a depressing situation.

The entire year was turbulent. Or, to put it more casually, Y2K sucked big time and not because of why all the pundits believed it would suck. Sadly, we weren’t alone. Friends of mine in Ottawa and Silicon Valley had experienced similar turbulence. And the stock market was getting jittery. Things didn’t look all that good.

I contacted the VCs and recommended we halt our growth and get that $20M on the $100M valuation we’d been quoted. I figured $20M plus what we had in the bank would give us 3+ years of runway; we could outlast the turbulence. The VCs looked at the situation and thought it was temporary. My gut screamed otherwise, but I was less experienced and was overruled. No one expected 2001 to be what it turned out to be. No one could have predicted the whammy after whammy we’d all experience from all quarters. 2001 would make 2000 look like a charmed year. But at the time 2000 looked pretty brutal as we optimistically planned on more office space, additional financing, more hires, version 2, and a search for new executives all while I felt more sidelined, marginalized and ignored.

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