The Kingmakers: Venture Capital and the Money Behind the Net

The Kingmakers: Venture Capital and the Money Behind the Net

by Karen Southwick

". . . as the Internet Age transforms our institutions the way the Industrial Age did 150 years ago, venture capital transforms the Internet Age. Venture Capitalists-with their access to huge and growing sums of money, their knowledge, their strategic advice, and their choices-literally determine what new companies will live or die."-Karen Southwick

Columbus had


". . . as the Internet Age transforms our institutions the way the Industrial Age did 150 years ago, venture capital transforms the Internet Age. Venture Capitalists-with their access to huge and growing sums of money, their knowledge, their strategic advice, and their choices-literally determine what new companies will live or die."-Karen Southwick

Columbus had his Isabella. The Renaissance had its Medici. So, too, the New Economy has its venture capitalists-that select group of high-powered financiers with the vision to recognize the value of a new idea or breakthrough technology and the courage, tenacity, and wherewithal to transform entrepreneurial dreams into business realities. Without them, there would have been no PC industry, no Internet Age, no biotech revolution, and no e-commerce. Yet, despite the inestimable influence they've had on the course of contemporary history and everyday life, their identities and modus operandi remain shrouded in mystery.

In The Kingmakers, Karen Southwick, noted journalist and the Executive Editor of Forbes ASAP, strips away the veil of secrecy surrounding the venture capital industry to offer the first behind-the-scenes look at the individuals who populate it and the nitty-gritty details of how they work-and to profile some of their most spectacular successes and failures of recent years. She also doesn't hesitate to examine how venture capital excesses contributed to the dot-com demise and suggests ways the industry could reform itself.

Southwick traces the evolution of the industry, explaining why and how it got started, what it has been, what it is now, and what it is likely to become in the years ahead. Through a series of sharply drawn profiles and vignettes, she takes us into the thick of the action, where we observe, firsthand, VCs as they interview hopeful entrepreneurs, select boards for funded companies, shepherd companies toward IPOs, and decide which start-ups to fund and which to cut off. She brings us in for a close view of industry superstars such as John Doerr, Don Valentine, and Vinod Khosla, as well as a number of lesser lights, newcomers, and wanna-bes who are transforming the nature of the venture capital industry. And she takes us inside several struggling start-ups where we hear directly from the company executives themselves about the complex, often rocky relationships that exist between them and their VC handlers.

Offering an unparalleled look into the inner workings of the venture capital industry, The Kingmakers is exciting and important reading for entrepreneurs, businesspeople, and literally anyone wanting to acquire a better understanding of the forces driving the monumental changes in business and society wrought by the high-tech revolution.

Editorial Reviews

Well, nerdmakers perhaps. Without investors taking great risks with their money, says Southwick, a journalist and executive editor of , the big high-tech companies in the headlines would never have arisen. She shines light into the shadowy world of partnership meetings and entrepreneurial pitches. Annotation c. Book News, Inc., Portland, OR (

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Chapter One

The Grand Ritual

(Please note: Figures and any other illustrations cited in the following text refer to the print edition of this work, and are not reproduced here.)

In the year 2000, a D day of sorts for the stock market came five days early: June 1, to be exact. On that day, San Jose, California-based ONI Systems, an optical networking company, was scheduled to offer its stock to the public for the first time in an initial public offering (IPO). Certainly, IPOs by technology companies were by then commonplace. In fact, both the previous year and the previous quarter had set records for numbers of IPOs and for the market valuations the companies had achieved (see Figure 1.1). But the markets, particularly Nasdaq, had been struggling for a couple of months. Nasdaq, where most technology issues are traded, had lost 25 percent of its value in a single week in April and was still seesawing in June, at a level far below its high. Many companies had been forced to cancel or delay their IPOs--only 23 companies went public in May, compared with 65 in March. The situation was grim, and investors were counting on ONI's sector, fiber optics, for salvation.

"If they can't go out then no one can," Roger McNamee, a general partner at Integral Capital Partners, and one of the savviest market observers around, confided to me. "ONI is the perfect company at the perfect time." From the VC capital of Sand Hill Road in Menlo Park, California, where Integral and dozens of other private investment firms were headquartered, to Wall Street and other investment centers, people held their breath, waiting for the market's reaction to ONI's IPO.

Like an old-fashioned coming-out party for a young debutante, an IPO represents an entrepreneurial company's emergence as a public entity. The company has reached a certain maturity level and is ready to start existence on its own. The venture capitalists who invested in and nurtured the company from the time it was two or three people peddling a business plan detailed on PowerPoint slides are ready to let go. The company has navigated all the pitfalls that can befall fledgling start-ups and is supposedly on the road to sustainability, generation of revenues, a positive cash flow, and, ultimately, profitability.

That, at least, is the ideal. Subsequent chapters detail how the ravenous public appetite for entrepreneurial technology companies, particularly dot-coms, caused many to go public much earlier in their life cycles than ever before. That trend reached its peak in 1999 and early 2000 before subsiding later in the year. Meanwhile, though, the venture capitalists and start-up companies examined in this book had built a new model of entrepreneurialism--involving speed, branding, and market share--that is transforming the old, even as values such as a clear path to profitability have also reasserted themselves. Give or take a few glitches, the new model worked well enough to make public entities of ONI and many other companies. In this book we also learn about the symbiotic relationship of entrepreneurs and venture capitalists, a relationship that reaches its highest fulfillment in the grand ritual of a successful IPO. "An IPO is part of the lore and the legend of Silicon Valley," sums up Jon Feiber, one of ONI's VC investors. "Nothing else is quite the same."

Getting Started

During Christmas break of 1996 a young engineer who worked for Optivision of Palo Alto, California, decided to play around with some technology for optical switching buried deep within the 15-year-old company that did photonics work for the government. Infected by the entrepreneurial fervor of Silicon Valley, Rohit Sharma, a slight, intense man who had recently received his doctorate in electrical engineering, figured that there might be gold in this unharnessed technology immersed within an obscure little company. In February 1997, with the blessing of Optivision's management, he applied for patents on a metropolitan optical network that could deliver much faster access to the newly burgeoning Internet than could existing copper telephone lines. That summer he and a small team created a working prototype of the technology to demonstrate to long-distance provider Sprint.

"Optivision did not have the resources or understanding to go after the telecom area," Sharma recalls. Fortunately, he was in the right place at the right time. Not far away was Silicon Valley's famed Sand Hill Road, home to VC firms with interests in just about every emerging technology. Sharma began making presentations up and down Sand Hill. It didn't take the sharp-eyed venture capitalists long to spot an opportunity that would basically boost Internet bandwidth by some order of magnitude. "Everyone we talked to offered to fund us," says Sharma, including, as he notes, all the top firms. He narrowed it down to two, both of whom had extensive experience funding entrepreneurial companies: big kahuna Kleiner Perkins Caufield & Byers, "because of the muscle they bring to the table," and Mohr Davidow Ventures, another highly regarded firm with a personal tie to Optivision. Cofounder Bill Davidow had gone to school with Optivision chairman Joe Goodman. The two venerable VC firms happen to sit across the street from each other on Sand Hill Road.

At Kleiner, Sharma met with the three partners who specialized in the Internet and networking: Will Hearst, who had recently joined from his family publishing firm; Vinod Khosla, cofounder of Sun Microsystems; and Kevin Compton, a former tech executive focused on telecom and software. "They were interested because we were in the right space and the ideas we had were not just incremental," says Sharma. With optical networking he could build a huge new market, huge and new being terms that elicit a Pavlovian response from venture capitalists. Later that same week Sharma went out to dinner with Mohr Davidow's partners, including Davidow, an early Silicon Valley executive turned venture capitalist, and Jon Feiber, like Khosla a former Sun executive. "We had a handshake deal [with Mohr Davidow] at the end of the meal," Sharma says.

Meanwhile, Kleiner was doing its own research into the company's prospects, a process known as due diligence. Khosla and Hearst came down to the Optivision facilities to watch a demonstration of an early optical switching prototype. Hugh Martin, who had been through the start-up experience several times and was now Kleiner's entrepreneur-in-residence, studied Sharma's business plan and talked to potential customers. The next Monday Sharma was invited to attend Kleiner's regular partners' meeting to pitch to everyone. After the presentation, one partner, an energetic, bespectacled guy named John Doerr (today the most famous venture capitalist on the planet), came out to talk to Sharma while the rest of the partners were thrashing over the deal. "I didn't really know who he was," Sharma confesses, "but he told me that even though he's not involved [in this networking space] he believes infrastructure will take off." Like Mohr Davidow, Kleiner was quick to offer a term sheet specifying how much it would invest for what percent of the company. Representing their respective firms, Feiber and Compton took seats on the new company's board of directors.

As a "very green entrepreneur," Sharma was excited to get two of the Valley's highest-quality VC firms. At the time, they each put in $4.5 million, for which they together received about a 30 percent stake in the as-yet unnamed company. "We had patents and a $500,000 contract with Sprint," says Sharma. "We had proven the basic technology with an early working prototype." All of that, combined with the "huge new market," made his venture capital foray a pleasant experience. For while venture capitalists are like sharks to blood in the water when they sense a big opportunity, they pass on probably 99 percent of the deals they're offered. When Sharma was pitching his idea in 1997, Kleiner looked at 50 business plans a day and might fund one of those. Today the ratio is worse, thanks both to the widespread availability of e-mail, which allows more entrepreneurial pitches to pour in, and to the increasing numbers of wanna-be entrepreneurs. In a survey of 12 big VC firms, the ratio of deals funded to business plans received ranged from 1 in 100 to 1 in 444.

The IPO Experience

On the morning of June 1, 2000, Hugh Martin, now ONI's chief executive officer (CEO), got up early at his Silicon Valley home to scan the financial news channels and chat on the phone with Dan Deese in New York. Deese was the head of equity capital markets at Goldman Sachs & Company, ONI's lead investment banker, and would follow the IPO throughout the day. Everything looked promising, he told Martin, although ONI's stock had not yet begun trading. The night before, anticipated heavy demand from institutional buyers had caused Goldman to raise the ante on the 8 million ONI shares to $25 apiece, up from the previous range of $21 to $23 a share. Originally, the offering had been filed with the Securities and Exchange Commission (SEC) at $14 to $16 a share. This was all part of the elaborate staging that led to a hot IPO: In the first SEC filing, typically about 60 days before the offering, you set a modest price. Then you bump it up as the company goes through the "road show" and meets with prospective investors, fanning demand to a fever pitch. It was a tried-and-true formula perfected by entrepreneurial companies and their bankers over the last two decades of the technology revolution.

Martin was watching CNBC for the announcement that ONI had started trading when the phone rang. He picked it up. It was his wife Moira, who told him that their eight-year-old son Ryan had left his retainer on the kitchen table. He was supposed to wear it all day. Could Hugh take it over to the elementary school and find Ryan? The CEO obliged, driving to the nearby school and walking up and down the halls until he located the classroom where his son was. "Hi. How're you doing today?" the teacher asked casually. Martin was speechless.

"I didn't know what to tell her," he told me later that day. "But it sure put things back into perspective."

Martin drove down to ONI's headquarters in San Jose, just around the corner from one of the most valuable technology companies in the world--Cisco Systems, whose spectacular rise had become the symbolic target for ONI and a host of other entrepreneurial ventures. As Martin soon found out, ONI was on the right track: It had opened trading at $78, $53 above its offering price. It would close the day at $82.56, a 230 percent surge and the largest first-day gain for a new issue in more than two months, since the stock market's April doldrums (see Figure 1.2). ONI had a total market capitalization of $10.2 billion, roughly equal to Federal Express, a company with $18.3 billion in annual revenues. And Martin, who owned nearly 6 million ONI shares, was worth about half a billion dollars, on paper at least. By late June the stock was above $120. Another Silicon Valley shooting star was born, and at a most opportune time!

Party Time!

ONI scheduled an IPO party for 4 P.M. Pacific Daylight Time, three hours after the official close of its first day of trading. It was an exclusive affair: Only ONI's four hundred employees were invited. Press were not allowed because the SEC's "quiet period" restrictions limit the amount of publicity leading up to and immediately following an IPO. In an attempt to keep a lid on stories that might unduly influence investor interest, the federal agency's policies often unwittingly spawn rumors that lead to even more excitement. For instance, the day before ONI's scheduled IPO, one of the biggest players in the networking arena, Lucent Technologies, had purchased a small Israel-based competitor of ONI's, Chromatis, for $4.5 billion in stock. Now Chromatis, unlike ONI, was what is termed in industry parlance a prerevenue company; that is, it had not yet shipped a single product, although it did have at least a couple of "firm" orders. That price tag for a zero-revenue competitor who had maybe two customers definitely didn't hurt ONI's chances, nor did a published report that ONI itself was being eyed as takeover bait by Juniper Networks. In fact, ONI's offering had been delayed for more than a week because of minor snags in dealing with the SEC--time enough to fuel widespread speculation as to the cause, ranging from the stock market's lukewarm response on new offerings to concerns that ONI had not properly accounted for all the shares it handed out to customers and partners.

I'm able to attend the party because I signed a nondisclosure agreement (NDA) stating that this book would not be published until 2001. On a warm spring day, I drive down Highway 101 to ONI's headquarters, arriving a few minutes early. The receptionist, a heavyset African American woman, is giggling on the phone with a friend: "I've been tracking this since last night. I've had the calculator out." Neither she nor any other employee will be able to sell stock until after the six-month "lockup" period that prevents insiders from flooding the market with shares and precipitately driving down the price. And employees will also have to wait until they're "vested"--that is, take ownership-- in their shares, which depends on the length of time they've been with the company. Still, the receptionist's anticipatory calculation on the day of her company's IPO is typical and entirely understandable.

The lobby is cool and spacious, decorated in aqua and maroon. I sink into one of the black leather chairs, watching the blurry reflections of people walking through as they appear in the ceiling of mirrored tiles. There's a Robotron video game in the corner behind me. As I wait, one young, red-headed guy tries his hand. "You feel lucky today?" I ask him. "After the IPO anything else would be gravy," he responds.

Larry Loper, ONI's corporate communications guru, bounds down the stairs and offers to give me a tour of ONI's new facility across the street, which will be filled as soon as it's ready. In Silicon Valley, space, like time and people, is a resource in short supply. ONI is currently subleasing from neighboring JDS Uniphase, but that company wants the space back for its own growing workforce. The hallway of the new facility has curvy sculptured walls and decorative black lights, Martin's idea of how to represent optical networking, Loper tells me. "He better keep his day job," I reply. Part of the facility is already occupied by an engineering division. The adjoining kitchen is stocked with boxes of breakfast cereal, loaves of bread, and other snack foods, delivered by Webvan, the struggling online grocery service that is a surefire hit with Silicon Valley engineers, who work all sorts of crazy hours and don't have time to run to the grocery store. Actually, the new facility won't last long. Martin has just agreed to move ONI further south, to far cheaper land in South San Jose, although the employees don't officially know this yet.

ONI doesn't have a room big enough to house all its employees, so it has rented space for the party in a temporarily empty building down the street. To get there, I drive by Cisco's imposing stretch of buildings and then past a lemon grove and processing plant:the new and old Silicon Valley, cheek by jowl. Within the building is a large open room where folding chairs have been set up in front of a podium. The food, catered by the ubiquitous Webvan, includes shrimp platters, cold cuts, strawberries, beer, and champagne. A couple of Loper's assistants hand out blue T-shirts emblazoned with "Team ONI" on the front and "GET LIT!" on the back. The mood is festive, yet restrained. There is still much to do; this is, as Martin emphasizes, not an end but a step along the way. Technology officer Hon Wah Chin is talking on his cell phone as he gets ready to leave for an important trade show the next day. I overhear three workers discuss their stock-vesting schedules: One receives ownership of the first set of his shares in November, the others the following March. One of the latter comments, "You'll have a very happy Christmas; we'll have a very tense Christmas."

As Martin enters, wearing a "GET LIT!" T-shirt and his customary jeans, employees surround him, slapping him on the back and getting their photos taken with him. One photo grouping sandwiches Martin, who is tall and imposing, with short curly brown hair, between a guy with green hair and another with a long purple ponytail. One thing not much in evidence is gray hair. Like much of Silicon Valley, ONI's employees are young, mostly in their twenties and thirties. Martin and other members of the management team are past 40, but they look like just about the only ones.

At 4:30 P.M. Martin starts asking people to sit down and steps behind the podium as the clapping and cheering swells up. It surges as the CEO holds up a hand-scrawled sign, "82+," and sets it down in front of the podium. The CEO puts on his glasses, blue eyes peering over the top of the gold frames: "I have an important announcement to make," he says solemnly, as the room quiets down. "Two-for-one split" comes from the back of the room. Martin waits for another burst of cheering to subside, and continues: "The last time we were in this building I was getting hoarse from giving the first version of the roadshow pitch. Since then we've given 86 of those around the world. From those meetings we had a hit rate of 100 percent. Every single buyer we met with put in an order for our stock."

ONI sold 8 million shares, raising $200 million at the initial $25 price, but generated demand from institutional investors for 165 million shares, Martin reports. From the individual investor side came another 40 million shares of demand, in large part from Silicon Valley itself, a testament that insiders know when a stock will be hot. The ONI offering was roughly 25 times oversubscribed, in a market that had recently been cool to IPOs. One mutual fund, Janus, had declined to invest in any more IPOs for about two months, but temporarily suspended that decision when it came to ONI, he says: "For us they made an exception." And despite the 230 percent increase, Janus is sitting tight on its shares. "It's really congratulations to all of us," the CEO tells his crew. "There are so many nights and weekends when our parking lot is full. I feel like I'm the front man you trot out every once in a while."

The casual, jeans-clad audience is a far cry from Hollywood and the elegant Academy Awards, yet Martin's thank-you list is long enough that it could have come from an Oscar acceptance speech. He praises ONI's lawyer and accountant for putting up with the SEC accounting guys, "who spend their lives torturing entrepreneurs." Goldman Sachs' bankers get to take a bow, including a 26-year-old team member whose youth and competence earned him the nickname "Doogie Banker." Martin also singles out Andy Page, the young vice president of corporate development who had to double as chief financial officer (CFO) for about a month while ONI did a frenzied search to fill that critical position. Martin recalls meeting a very enthusiastic investor in Boston who pumped his hand and told him, "I'm just real excited to be here." Then the man added, "My son's name is Andy Page." Others singled out include founder Rohit Sharma and new CFO Chris Davis, who came on board a week before the road show. "The hardest part of her job, she had to listen to me 86 times," Martin jokes.

From the easy camaraderie he has with the crowd, you can see that the tall, buoyant CEO provides a good public persona for his company. He tells another story about dealing with the SEC: In anticipation of the IPO, which was expected on May 23, Loper had scheduled Martin to appear on several of the major financial news stations, including CNBC, CNNfn, and Bloomberg. CNBC had been trumpeting the appearance on its Website. What Martin refers to as the "voice of God," meaning an SEC regulator, got on the phone the next morning with ONI's attorney: "What in the hell are you guys doing? You're violating the law. Your CEO was on CNBC last night." A frantic half hour ensued during which it's verified that Martin did not make the appearance on CNBC, despite the publicity, because the IPO was delayed. Out of this came an order from the SEC that Martin must sign, in which he agreed not to appear on television for 25 days after the IPO.

Finally, Martin asks for questions from the employees. Several people shout out, "When are we moving to South San Jose?" Obviously, the secret has leaked. Martin levels with them: ONI has signed a deal on a facility in South San Jose. For the first time, boos mingle with the cheers. Some people's commutes will undoubtedly be more arduous in car-choked Silicon Valley. Martin insists that the majority will have a shorter commute and adds that the space is much cheaper, $1.87 per square foot compared with $4.25 to $4.50 where they are now. "To have the same level of profitability, we'd have to sell $65 million more product a year," he points out. "I'd rather put $65 million toward the bottom line." He promises that ONI will build a gym, fitness facility, and cafeteria, because there's no place to eat nearby, and the company expects people to be putting in a lot of hours. The move is expected by the first quarter of 2001.

When he gets no further questions, Martin concludes on a serious note: "Though the shirt says 'get lit, 'please don't. We need all of you."

The Road Show

It's hard to compare the period immediately preceding an IPO to anything else, except maybe a football team preparing for the Super Bowl or a troupe of actors rehearsing for a Broadway opening. The IPO road show--an entrepreneurial company's presentation to the all-important mutual funds, pension funds, money managers, and other institutional investors that will buy its stock--happens only once in a company's lifetime, and everything depends on it. If a road show doesn't generate enthusiasm for the planned offering, a company might still go public, but then languish in the ghetto of unfulfilled expectations.

Case in point: On the same day that ONI had its public offering, so did CrossWorlds Software, a Burlingame, California, software company that I profiled in my first book, Silicon Gold Rush. Unfortunately, CrossWorlds never executed on its early promise, and its IPO was lackluster. The shares were priced at $10 apiece, below the original range of $14 to $16. In first-day trading, investors bid up the price only 12.5 cents. CrossWorlds' problems extended far beyond the road show, of course, but its situation demonstrates that if the CEO and other senior managers making the presentation don't (or can't) effectively communicate the strategy and positioning of the company, its IPO can be DOA.

Martin and CFO Chris Davis were determined that that wouldn't happen to ONI. Davis joined the company the first week of May, literally the week before the road show, replacing Terry Schmid, who had been Martin's CFO at his previous company. About five weeks earlier, Schmid told Martin that he was having doubts about how long he wanted to stay with the company. Martin responded, "We should change now because we're going to be introducing you to 80 institutional investors," who would be counting on Schmid to be their liaison both before and after the IPO. Schmid's departure forced ONI to do a stressful search for a CFO just weeks before the road show.

Davis came on board from Gulfstream Aerospace, where she had handled a turnaround, an IPO, and a buyout. Before that, she had spent 17 years at General Electric. "My number one priority was making sure I spent enough time jumping into the business, understanding it so I could represent the company and myself in the IPO process," says Davis, who has light brown hair cut in a neat pageboy, high cheekbones, and a no-nonsense approach. "I wasn't about to go out there and bullshit people." She didn't have to, because ONI had impressive credentials--credentials that brought Davis on board in the first place. It was backed by blue-chip venture capitalists, and a gold-standard investment bank was going to take it public. In addition, says Davis, "this was in an exciting space with a leadership team that wanted to build a business for the long term."

How ONI was going to build that business was detailed in the actual road show pitch, accompanied by painstakingly assembled PowerPoint slides. The pitch to investors was designed to be finished in 30 minutes, about 25 minutes by Martin on the company's strategy and market positioning and five minutes by Davis on the financials. In a typical hour meeting, that left investors plenty of time for questions. Recalls Martin: "Chris [Davis] and Rohit [Sharma, the founder, who joined the road show in its New York City leg] would take bets on how fast I could do it. If I did it in 25 minutes they'd give me $1. I only collected $1 the whole road show."

Martin's central message was that ONI was delivering the infrastructure and services to power the Internet. He would explain that technology was in one of those periods of "discontinuity"--in this case the shift from electrons (conventional networking) to photons (optical networking). "Whenever there's a discontinuity, there are tremendous opportunities," he explained. "There's also going to be a $1 trillion buildup of the Internet over the next 10 to 15 years." After this promise of a megamarket, Martin would describe where ONI is positioned: offering optical networking and services within metropolitan areas and then connecting to long-haul carriers. Already, ONI, though still a small company, had major customers and impressive partners such as Sun Microsystems, Juniper Networks, Brocade Communications, and JDS Uniphase. After Martin introduced the ONI team, Davis would go through the financial milestones and income statement. During the road show, which spanned 17 cities in 12 days, the two of them did this 86 times, both to groups and in one-on-one meetings with more than 100 investors and funds (see "Red Eyes and Exhaustion").

In between appointments within a city, like athletes during a time-out, Martin and Davis would fortify themselves with bottled water, snacks, and Powerbars that were always on hand in their stretch limo. They'd also make phone calls and catch up on what Nasdaq was doing. What kept Martin going through the strenuous road show was his belief in ONI's mission. "This wasn't hawking something you don't believe in," he says. "For every single investor I wouldn't let them go until I had won them over. We had a 100 percent hit rate." To Davis, it was like being in the movie Groundhog Day, reliving the same experience over and over. "You have to remind yourself that even though you might have done the presentation seven times already that day, the people you're meeting with have never seen it before," she says.

For both of them, the road show has now become such a blur of presentations, people, and pitches that it's hard to single out memorable moments. Martin does remember being told by one investor, a woman, "Forget the presentation and tell me why you're building this company." He doesn't remember what he told her. "What I would say now is that I want to build something I can look back on and say, 'I made that, '" he says. "This is a very special time we're living in, and I don't want to look back someday and say, 'What did I do? '"


For an entrepreneurial company's top executives, the IPO road show represents perhaps the most incredibly intense couple of weeks in their business lives. Here, thanks to a diary kept by ONI Systems CEO Hugh Martin, is the actual schedule of its road show, which usually included Martin, CFO Chris Davis, and two representatives from Goldman Sachs & Company, the lead banker on the deal. Founder Rohit Sharma joined the team during the New York leg. After it was over, Martin summed up the road show this way: "It gets to be nothing but a blur." Once you read the schedule, you can see why.

Wednesday, 5/3/00. Pitch to the Bank of America sales force. BofA is one of four investment bankers who will handle the IPO. [Educating the sales forces is critical because they will in turn sell to investors. If the investment banks' sales forces don't love the deal, the IPO is dead.] Fly to New York that night to meet with Goldman the next day.

Thursday, 5/4. Pitch to Goldman Sachs' sales force. Goldman says the presentation is the best dry run they've seen. Fly home.

Friday, 5/5. Morning--present to Chase H & Q and FleetBoston Robertson Stephens, the two remaining investment bankers, in San Francisco. Afternoon--two meetings with investors.

Monday, 5/8. Presentation to about 200 people at the Chase H & Q high-technology conference, the largest and most important in the world. Numerous meetings with investors in San Francisco for the event. That evening, take private jet to San Diego.

Tuesday, 5/9. 6:30 A.M. meeting at investor's home in La Jolla, California. Drive to San Diego for another meeting, fly to Pasadena for a meeting, then fly to Portland, Oregon, for a meeting. That evening, fly to Houston, arriving at 12:30 A.M.

Wednesday, 5/10. Four meetings in Houston starting at 6:30 A.M. Fly to Chicago midday for three meetings in the afternoon. Take the 6:50 P.M. red-eye flight to London.

Thursday, 5/11. Land in London at 10 A.M., go to a meeting at 11 A.M., followed by a lunch meeting and four meetings in the afternoon. At 7 P.M. take a private plane to Frankfurt, Germany, arriving at 9:30 P.M.

Friday, 5/12. 7:30 A.M. breakfast meeting in Frankfurt with 15 investors. Take 10:30 A.M. flight to Paris for lunch meeting, followed by three meetings in the afternoon. Take 5:30 P.M. flight from Paris to San Francisco.

Sunday, 5/14. Catch 2:25 P.M. flight to Kansas City, Missouri.

Monday, 5/15. 7 A.M. three morning meetings in Kansas City. Fly to Denver for four meetings. Then fly to New York City, arriving at midnight.

Tuesday, 5/16. 6:30 A.M. take private helicopter from New York to Plainsboro, New Jersey, for 7:30 A.M. meeting. Fly back to New York for two meetings, followed by lunch at the Metropolitan Club with 150 people. Four afternoon meetings, plus a dinner meeting. Fly to Boston, arriving at 11:30 P.M.

Wednesday, 5/17. 7 A.M. start of four meetings in Boston. Lunch with 30 people at the Boston Harbor Hotel, followed by four afternoon meetings. Fly to Baltimore, arriving at 12:15 A.M.

Thursday, 5/18. 7:30 A.M. meeting in Baltimore. Take train to Philadelphia, and do two meetings downtown and three meetings in the suburbs. Take train to New York, arriving at 7 P.M.

Friday, 5/19. Nine meetings in New York. Take evening flight to San Francisco, arriving at 10:30 P.M.

Sunday, 5/21. Fly to Minneapolis.

Monday, 5/22. 7:30 A.M. start of two meetings in Minneapolis. Fly to Milwaukee, Wisconsin, for lunch meeting and three afternoon meetings. Then fly to New York, with pricing of the offering planned that evening and start of trading on Tuesday, May 23. [Actually, trading was delayed and Martin flew home to the San Francisco Bay Area on May 24.]

Overcoming an SEC Snag

The preparation for the IPO had split off into two legs, the first with Martin and Davis on the road, and the second with ONI's lawyers and accountants working to satisfy all the SEC queries. Martin had launched the road show without finishing up on the SEC end because the agency's early questioning had been very light. So he'd expected a quick resolution of all the paperwork that had to be done before the final prospectus was issued. But it wasn't to be. The SEC had unexpected questions about ONI's handling of its stock warrants, and the IPO got delayed again and again.

When the road show ended, Martin was in New York at Goldman Sachs' offices, expecting to price the issue on the evening of Monday, May 22, and then start trading on Nasdaq the following day. But the SEC still wasn't satisfied. With no resolution in sight, on May 24, Martin, who had intended to be in New York for the first day of trading (and appear on the financial news programs), flew home. The SEC finally cleared the offering more than a week later, on May 31, the following Wednesday, and trading opened on June 1.

The week and a half of waiting, although it left Martin and the ONI team twisting in the wind, wound up having a silver lining. After weeks of seesawing, Nasdaq managed to turn in a couple of strong days. In a June 1, 2000, online story by CNNfn, pundit Ben Holmes, president of ipoPros. com, commented on ONI's offering: "This is an example of an experienced underwriter timing the deal... They held back until they knew it was a good market to launch the IPO." That kind of speculation amuses Martin and Davis, who were frantically trying to get the IPO off the ground whenever they could. "With the delay, all the excitement and buildup gets yanked away from you," says Martin. To ease the disappointment of each day's agonizing postponement, he and other members of the management team forced themselves to adopt the attitude, "I won't believe it until it happens."

"Those extra days were extraordinarily painful," the CEO adds. "If I had to do it again, I wouldn't start the road show until after the SEC comments." Davis notes that while in hindsight the unusually long delay didn't hurt, no one knew that at the time. "After the successful road show, we were working very diligently to maintain the credibility of the company through the delay," she says.

ONI Systems' moment in the sun proved that the public offering window was still open, at least for companies with champion pedigrees, and gave hope to investors that the incredible run of 1999 and early 2000 was not entirely over. But investors were becoming far more discriminating. "Optical networking is the gold standard in the IPO market," wrote Holmes of "Nothing is garnering more interest or getting higher premiums." The previous hot sectors, dot-coms, and business-to-business (B2B) exchanges were yesterday's news. In mid-2000, fiber optics ruled the day.

Behind The Scenes

Almost unnoticed in the hoopla surrounding ONI's IPO were the venture capital firms whose cash and strategic advice propelled the company from its founding in 1997 to the momentous "going-out" day. After their initial funding of the spinout from Optivision, Mohr Davidow and Kleiner had continued to invest as the company grew and met designated milestones. Each VC firm wound up putting in about $23 million, and each had come out of the first day of trading with more than $1 billion worth of stock, which would later be distributed to the two firms' own investors. "It was the biggest single IPO for us so far this year," recalls Mohr Davidow's Feiber.

He'd had no doubts that ONI would be able to complete its IPO, given that its positioning as an Internet infrastructure play made it virtually market-proof. Infrastructure refers to a manufactured product-- software or hardware--that provides the underpinning of the Internet, allowing it to be accessed faster and better. Infrastructure is the refuge when markets go south, because although you don't need another jewelry or pet store on the Web, everyone needs infrastructure. "Even though the overall market for IPOs has been slow, communications infrastructure IPOs have remained very hot," said Tim Savageaux, senior research analyst at W.R. Hambrecht & Company, the day after ONI's offering. "Maybe they're not as hot as they would have been two months ago [before the market crash], but they've still been extraordinarily successful."

ONI netted $186 million in capital from the IPO (the other $14 million went to its investment banks), to continue building its business and possibly look for takeover candidates. The amount would also balance out about $90 million in accumulated losses. "The rest of [the surge in price] was gravy," says Feiber. "The company achieved its objective in raising the capital." By the way, the "gravy," as he calls it, goes entirely to investors, not to the company itself. ONI reaps only the capital raised from selling shares at the announced initial price.

However, the so-called IPO "pop"--the 230 percent gain in the opening day of trading--provides another type of reward for ONI: It puts the company on the map. "In a very short order, ONI has changed its stature to be one of the three or four leading companies in its sector instead of one of the mighta-bes," says Feiber. Competitors that go public in the future will aspire to ONI's offering-day performance. Its highly valued stock now becomes currency for acquiring smaller ventures with innovative technology. With only a small portion of the total number of shares (123 million) in public hands, ONI can contemplate a secondary offering to raise more money. Or it might do a debt financing, an option not usually available to a nonpublic company.

ONI also gave a boost to the entire technology arena. Because of the Nasdaq gyrations that preceded its offering, ONI wound up as a kind of bell cow, very closely watched to see which direction the IPO market was heading. ONI had all the elements to succeed:a good story in an important and emerging market, a respected management team, prestigious partners and investors, and so on. "When [public] investment gets constricted, there are inevitably one or two early companies that help to redefine the market," says Feiber. In a serendipitous way, ONI achieved that redefinition.

Back to the Future

Another common outcome for an entrepreneurial start-up like ONI is to be acquired by a larger, public company, which can result in the same economic returns to investors and executives as an IPO, but not the same emotional satisfaction. ONI explored, and continues to explore, buyout options, Martin acknowledges, but he insists that the intent is to remain independent. CFO Davis is with him on that: "I've already been at the top of a public company that got bought by somebody bigger. It's not where I want to be again," she says.

Some observers think of the IPO as an exit strategy or a liquidity event, allowing early investors, and even executives and employees, to cash out at significant premiums. However, the lockup and other restrictions don't allow any of these people to get out quickly. It will take at least a year, in most cases. For Martin, the IPO is an important event, to be sure, but only one in what he vows will be a long chain of important events. "For a company sitting here with $3.6 million worth of revenue in one quarter, to be worth $10 billion says we have a bright future. We have to make that happen," he says.

Feiber seconds him, saying that the IPO is a balancing act between recognizing its significance as a milestone and realizing what still must be accomplished. "I don't think we're so blasé we'd say the IPO has become a routine event," he says. "It's always thrilling when a company goes public." Employees deserve the chance to celebrate, but the hard work resumes very quickly. And because the company is now public, there's even more scrutiny and more pressure to achieve more milestones and move toward profitability. "ONI had a tremendous IPO, and follow-up was strong, but the real measure of a company is extended performance," notes Feiber. "What will the company be worth in a year, in five years?" He hopes that ONI will have other memorable days, like crossing the $100 million threshold in sales, growing to 1,000 employees, or recording its first profit.

Indeed, a couple of weeks after the IPO, ONI had its first board meeting as a public company, and it was business as usual. One change was that only the six actual board members, consisting of Martin, Feiber, Compton, and three outside directors, were present. The observer seats granted to late-stage investors and corporate partners disappear after an IPO. The board meeting included a review of the IPO, a status update on the company's progress in areas such as sales and marketing, and an update on engineering ONI's next product. The roles of Feiber and Compton, who remain on the board, will change, as they're now public rather than private investors. "Before, they were on the board because they wanted to watch over their investment," says Martin. "Now they're on the board because we want them there; they add value. Both of them are terrific advisers and consultants. As long as we continue to be a high-impact player, we're someone they want to be involved with."

To be that high-impact player, ONI had taken one major step forward. At the end of the day, the company pulled off such a successful IPO because it had a compelling story for a market soured on the empty promises of far too many dot-coms whose business strategy was spending to buy market share, with profitability never in sight. ONI also had astute VC backing, a seasoned CEO, and, after some initial flailing about in search of its market niche, a well-executed business plan. None of these things happened by accident. The coming chapters reveal how venture capitalists work with entrepreneurs to orchestrate all the elements that create a company like ONI.

Meet the Author

KAREN SOUTHWICK is a journalist and Executive Editor of Forbes ASAP. Her other books include the critically acclaimed Silicon Gold Rush and High Noon (both from Wiley).

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