Founders at Work.pdf

Philip Greenspun 329
But due to a couple forces—customers and recruiting—we began to think,
“Well, maybe we should hand out stock options and tell people this is going to
be part of their compensation and try to go public.” We did have more revenue
and profits ($20 million and $3–$4 million, respectively) than almost any technology
company that was then going public. Despite all of our growth, we were
cash-flow positive, and we had all this profit that we had to pay taxes on. I think
once we prepaid a year of rent just so we wouldn’t have to pay tax. The company
was growing 500 percent a year and generating so much cash that we had to
find ways to spend it before the IRS got it.
So we talked to some underwriters—we were big enough that we were
actually able to get meetings. They were very candid with us and said, “Look,
we’re not going to take you public.”
We said, “Why? We’ve got more revenue than any company you’ve taken
public in the last 6 months.”
They said, “We get paid a percentage of the deal. The more deals we do, the
more money we get paid. If we want to take you public, we’d have to waste a lot
of time doing due diligence. We would have to look at your accounting and talk
to your customers. We would have to convince ourselves that you were a good
company.”
“So what? You have to do that with any company.”
“No, with all the other companies, we just look at the names of the venture
capitalists who’ve backed them, and if it’s a big name like Kleiner Perkins, we
just take the company public without doing any research. We have no idea what
these companies do, we have no idea who their customers are or if they’re satisfied.
We don’t do any research. We just take them public and take our fee. So
in the same time it would take to take you public, we could do five or six of
these VC-backed companies. Sorry, we’re not interested.”
That was a wake-up call, and I think in retrospect it shows why so many of
these companies that were taken public couldn’t survive. They had no profit
and no possibility of making it, but the underwriters never looked at them
carefully.
I had brought in Cesar and another business guy who was a Harvard MBA,
and we had all these VC firms knocking on our door. I was an engineer. The
MIT way of doing things is that you delegate to the experts. If you are riding in
a car with five guys and it breaks down and you are a math major, you don’t get
out and start poking around with the engine if there’s a mechanical engineering
major on board. So I felt like, “OK, these VC firms are all claiming they are
going to provide added value and that their money is different, but it’s hard for
me to evaluate these things, so I’ll just delegate it to these two guys who are
MBAs. That’s what they’re supposed to know about.”
Probably the VC firm that we should have picked was called Summit. They
were very humble; they said, “Look, we don’t know how to run your company.
We know how to go to institutional investors and get their money, and then we
invest it in management teams with a track record of profitability, like yours.
We’re not going to tell you what to do and tell you that we’re going to recruit
everybody for you because we don’t know how to do that. We know how to get