by Steven Kent
Known as venture capitalists, these businessmen do not part with money easily. They are willing to invest in promising companies, but they demand stock and control in exchange for their investment. Once, a venture capitalist fired the founder and chairman of a home computer company over a disagreement about the company’s future.
Don Valentine, the founder of Sequoia Capital, was one of the computer industry’s first and most successful high-tech venture capitalists. Extremely conservative and intense, Valentine had a reputation for intimidating prospective clients. Al Alcorn once bragged, “I have actually seen Don Valentine laugh.”
As a venture capitalist, Valentine’s work involved sifting through hundreds of proposals a year. He invested in a very small percentage of the companies that approached him.
According to Valentine, when Bushnell first came to Sequoia, he mostly talked about “coin-operated games for bars.” Like the bankers Bushnell approached four years earlier, Valentine associated the coin-operated amusement business with organized crime. He was not interested. When Bushnell described Home Pong, however, he changed his mind.
One of the things that I was concerned about and interested in was that there be a product or series of products that were designed for consumers. Only after we were persuaded that the company would be taken in the direction of a home product were we persuaded to invest.
—Don Valentine
Valentine minimized the risk of investing in Atari by demanding an active role on the company’s board of directors. He decided to raise the capital from a network of partners that included Time Inc., the Mayfield Fund, and Fidelity Venture Associates. Combined with Atari’s annual earnings of $2.5 to $3.5 million, Valentine’s capital opened a $10-million credit line at a bank.1
Valentine took longer than expected to close the deal. By the time he was ready, the new business Atari received through its merger with Kee Games had resulted in increased earnings. While Bushnell waited impatiently to open a new money line with Valentine’s capital, his company amassed a balance sheet that was strong enough to get a loan. When Valentine finally decided to close the deal, Atari no longer needed him.
What happens with venture capitalists [is that] time is in their favor usually. They love to delay and delay because the more they wait, the more they’re squeezing your nuts and the more the deal gets better in their favor. In this case, we had pulled ourselves out of the fire. Things were going along pretty smoothly by the time Don was ready to cut the deal.
I don’t know the exact numbers, but two or three days before the deal was going to close, we had a board meeting and our corporate attorney told us, “You know, guys, the valuation on this deal is all wrong. You made the valuation back when you were in trouble. You’re no longer in trouble. The deal is way out of whack.”
We had two choices. We could let the deal go as is or change the price—basically, double the price. If we pissed Don off, we knew we’d never get the deal. I think we still needed some money, and he was our only chance of getting financing because he was the top venture capitalist in the valley.
We decided to roll the dice. We doubled the price Don had to pay us—double or nothing. If he didn’t buy it and we went out of business, what the hell, we’re all young.
Don showed up that night with a station wagon full of champagne to celebrate closing the deal, and Joe Keenan told him, “Oh, by the way, we’ve doubled the price.” Don blew up, but when he calmed down, he went ahead and did it at double the price.
—Al Alcorn
Valentine took his role as a member of the Atari board seriously. He attended board meetings and participated in the decision-making process. Though he did not particularly enjoy video games, he took Atari games home and played them. Despite the culture clash, he visited the manufacturing facility to observe the progress.
According to Valentine, he had to hold his breath whenever he visited Atari. Straightlaced and conservative, Valentine did not smoke. He claimed that the manufacturing plant reeked of marijuana, and if he wasn’t careful where he breathed, he sometimes accidentally inhaled it.
Valentine’s association with Atari ended two years later. Though he profited from the investment, Atari was far from his most lucrative deal. A few years later, Steve Jobs and Steve Wozniak asked Valentine to help them start Apple Computers. In 1986, Valentine was approached by Cisco Systems, a company that pioneered the development of Internet equipment. He invested $2.5 million in the company in exchange for one-third of its stock. Over the next decade, Cisco’s equipment became an integral part of the success of the Internet. By 1996, Valentine’s one-third share of the company was valued at more than $10 billion.
The Wild Ones
Don Valentine was not the only partner who clashed with Atari’s corporate culture. Sears Roebuck was a no-nonsense, button-down business as well.
By this time, Bushnell had used his new line of credit to purchase a manufacturing facility in Sunnyvale, California. One day, a number of Sears executives visited the new location for an inspection.
The plant was not yet in operation. Workers had recently installed a new conveyor line that Bushnell sometimes rode while in a box, as a diversion. The Sears executives arrived just in time to see Bushnell climbing into a box and “surfing” the line. They were shocked by his unorthodox behavior.
The difference in corporate cultures became even more apparent as the day went on. The Sears people had come in suits and ties. The Atari people wore T-shirts and blue jeans. By the end of the day, Bushnell was concerned that he had alienated his visitors.
Not wanting to leave a bad impression, Bushnell had one final chance to soften the situation. That night he and his board were scheduled to have dinner with the Sears team at a local Italian restaurant. In an effort to look more professional, Bushnell had his board attend the dinner dressed in suits and ties.
Unfortunately, the Sears executives, too, were worried about the impression they had made. Not wanting to appear too stuffy, they attended the dinner in T-shirts and blue jeans.
“Nolan Attacks”
I thought of Nolan as the great visionary, someone who would be bored by day-to-day operations. Joe Keenan was the volunteer who took care of most of the day-to-day operation.
—Don Valentine
For a brief period in 1975, Atari faced no emergencies. With the new factory in Sunnyvale, the company had enough manufacturing muscle to fulfill Sears Roebuck’s order for 150,000 Home Pong consoles. Under Jim Tubb’s direction, the manufacturing process moved along smoothly.
Through the merger with Kee Games, Joe Keenan became president of Atari. Because he was the least wild member of the original Atari board, Keenan made an excellent point man for working with Don Valentine and Sears.
During this time, Al Alcorn was vice president of research and development and Steve Bristow was vice president of engineering. Al’s department focused largely on home game technology but also built a prototype of an extra-wide pinball machine and developed a high-speed modem. Bristow’s team developed new arcade games. Of all the departments at Atari, Research and Development and Engineering were the departments that intrigued Bushnell the most.
Bushnell often visited. He looked over engineers’ shoulders as they designed new games. Sometimes he saw ways to improvise and improve designs. On occasion he suggested changes.
Alcorn referred to Bushnell’s visits as “Nolan Attacks” and said that they slowed the engineers’ progress. According to Alcorn, Bushnell would approach engineers in the middle of the design process with solutions, and because he had not been involved with the projects from the start, his suggestions did not always work.
Let me tell you what happens when you’re Nolan Bushnell. You go into a lab and you sit down and you’re talking with guys, and they’re having a problem. And they’ll say, “What about this?”
Unless you’re being very clear, sometimes junior guys think that you’ve told them what to do when in fact you’re really asking, “Have
you considered this solution?”
Two or three times people thought they were following orders when in fact I was just trying to help them solve a problem they were having.
—Nolan Bushnell
Hoping to keep Research and Development running smoothly, Alcorn made a new rule—engineers were not allowed to follow Bushnell’s orders unless he repeated them three times. Bristow was even more straightforward: “Nolan could do and discuss anything he wanted, but my staff made no changes until I OK’d them.” Since Bushnell rarely followed projects closely, he seldom checked to see if his suggestions were implemented.
Before long, Bushnell discovered Alcorn’s strategy. He held a brainstorming meeting for the research and development staff in Grass Valley. During an opening speech, Bushnell said, “I understand there’s a new rule that says you don’t have to do what I tell you unless I say it three times. Well, I’m telling you now, when I tell you to do something, you do it.”
An engineer sitting across the room shouted back, “Could you repeat that two more times?”
In an attempt to control Bushnell’s visits, Alcorn set up a security system. Whenever Bushnell entered Research and Development, Alcorn distracted him by leading him from project to project. If Alcorn was out of the department when Bushnell arrived, his engineers could reach him with a special beeper.
I couldn’t keep him out; but when he went in, I’d just follow him around and tell the guys, “If you do what he tells you to do, you’re fired. You’re working for me, not him.”
—Al Alcorn
According to Alcorn, this strategy worked for a while, but Bushnell eventually concocted a method of monitoring Research and Development that even fooled Alcorn. He placed an ally in the department to tell him about each project. His informant had to be unimportant, someone so small and insignificant that Alcorn would never notice him. Bushnell’s informant was Steve Jobs.
Jobs was so low on the totem pole at Atari that I didn’t care what happened to him. He was completely off the radar scope.
—Al Alcorn
Reminders of a Risky Past
In 1976, two events reminded video-game manufacturers of their roots in the pinball industry. The first was the legalization of pinball in New York and Chicago.
The process began in early 1976 when Irving Holzman, the president of the New York Music and Amusement Association, applied to the New York City Council to have LaGuardia’s 40-year ban on pinball removed. Gottlieb and Williams had been marketing special add-a-ball pinball machines in New York since 1972, and Holzman felt that the time had come to challenge the ban entirely.
The city council agreed to hold a hearing on the matter in April. One key testimony in the hearings came from Roger Sharpe, an editor at Gentlemen’s Quarterly. Sharpe was an extremely gifted pinball player who, after completing a feature about pinball, had decided to write a book about the history of the pinball industry.
Sharpe testified about pinball and the skills needed to master it. He talked about the work that went into designing pinball machines and the popularity of pinball throughout the United States and in many countries around the world. After his testimony, Sharpe was asked to demonstrate his skill.
Along with my testimony, I was supposed to give a demonstration to show that the game was based on skill, not chance.
There’s a funny aside to all this. There were two games set up. The second game was really a fall-back in case anything happened to the first. The cameras were all set up on the other game. We got to the end of my testimony and the head of the city council stood up and said, “I understand that you are now going to demonstrate pinball for us.”
I said, “Yes,” and he said, “Not that game. Let’s do that one over there.”
I guess he thought that the first game was fixed.
—Roger Sharpe
Sharpe was directed to play a Gottlieb pinball game called Bank Shot. He began by describing the machine to the council, explaining its targets, rules, and objectives. After some explanation, Sharpe played two balls, acquainting himself with the machine and demonstrating the use of the flippers. On his third ball, he decided to prove that proper use of the plunger required skill.
On the start of my third ball, I said, “Using the plunger takes skill as well.”
There were five lanes at the top of the playfield. I pointed to a lane and said, “If I pull this back just right, the ball is going to go right down this lane.” It was kind of like Babe Ruth calling his shot.
I pulled back the plunger. The ball went up, it went bounce, bounce, and right down the lane.
“Alright, we’ve seen enough.”
I was supposed to play an entire game. The city council passed it [the petition to legalize pinball] six-to-nothing.
August first of that year, which was my birthday, the mayor signed a law for pinball machines to be operated in the city.
—Roger Sharpe
That year, 1976, was also the first year in which concerns were raised about violence in video games. Exidy Games, a company founded by former Ramtek executive Pete Kauffman, released a driving game titled Death Race.
Kauffman, a very quiet man, had originally planned to design games for other companies. Destruction Derby, his first project, was a game in which players steered cars around a screen trying to hit other cars. The computer-controlled drone cars were slightly faster than players’ cars, but they traveled in zigzag paths. The only way to hit computer-controlled cars was to anticipate which way the drone would turn.
According to Kauffman, Chicago Coin bought Destruction Derby but refused to pay him his royalties. Kauffman responded by revising the game and re-releasing it himself.
The biggest change in the game was in the targets players hit with their cars. Kauffman renamed the game Death Race, and players ran over stick figures that were supposed to be skeletons escaping from a graveyard. When players ran over the skeletons, tiny crosses would appear in their places.
Death Race was a spin-off from a game we did for Chicago Coin called Destruction Derby, in which you hit other cars. We licensed that to Chicago Coin, and they forced us into competing with ourselves by not paying royalties. We came out with Death Race to compete with our own game.
—Pete Kauffman, founder of Exidy Games
Pete came up with a game called Death Race. It’s very tame by today’s standards, but in those days it caused a big controversy.
The player was asked to drive over running gremlins. They called them gremlins; the rest of the world thought they were stick people, real people, and the idea of the game, of course, was to kill them.
Every time you made a hit, a little cross would appear on the monitor, signifying a grave. Nice game. Fun. Bottom line, the game really took off when TV stations started to get some complaints from irate parents that this was a terrible example to set for children.
The industry got a lot of coast-to-coast coverage during news programs. The end result was that Exidy sales doubled or quadrupled.
—Eddie Adlum
Though the Death Race machine did substantial business in arcades, many location owners refused to carry it. According to Kauffman, Exidy sold only 1,000 Death Race machines, just a fraction of the number of Sea Wolf and Gun Fight machines Midway placed that same year, but Death Race stirred up protests and was even discussed on CBS’s 60 Minutes.
When defending their game in public, Exidy spokespersons claimed that Death Race was about running over demons and had nothing to do with killing people. In private, they agreed that the scandal had boosted their sales. When Death Race II arrived in 1977, it had the same basic theme—running over stick figures.
Death Race did very well, but nobody wanted to be associated with it publicly because of the accusations from the press. It seemed like the more controversy … the more our sales increased.
We did a sequel, but it was really just the same game. There wasn’t anything new about it.
—Pete Kauffman
Although no
one could argue with Exidy’s success, some competitors felt threatened by the public’s reaction to Exidy’s violent games. New York City had just legalized pinball, and Death Race threatened to cause the same kind of scandal that gambling machines brought to pinball.
We were really unhappy with that game [Death Race]. We [Atari] had an internal rule that we wouldn’t allow violence against people. You could blow up a tank or you could blow up a flying saucer, but you couldn’t blow up people. We felt that that was not good form, and we adhered to that all during my tenure.
—Nolan Bushnell
Strange Bedfellows
I got the contracts out, I got the lawyers out, and I removed Nolan from office. Nolan was simply removed and he was put on the beach.
—Manny Gerard, former vice president, Warner Communications
Manny Gerard? Manny was a free spirit in a three-piece suit.
—Steve Bristow, former vice president of engineering, Atari Corporation
The New Champion
Sears executives calculated the success of the products in their catalog by comparing dollars to inches. They measured the amount of page space given to each product and matched it to the number of dollars grossed. In 1975, the reigning champion was an Adidas sneaker. By 1976, a new champion emerged.
The previous record holder was Adidas tennis shoes. We blew that record away in total dollar volume. We also won the Sears Quality Excellence Award—something nobody knows or cares about, but they’re pretty proud of it.