Alpha Girls

by Julian Guthrie

  The Seattle company, F5 Labs, had been started by former bond trader and investment banker Jeff Hussey, who believed he had found something that was fundamentally missing from the Internet. As online traffic increased—some said usage was doubling every ninety days—websites were being strained to the point of paralysis. Overloaded servers were returning messages like HTTP error 404 “not found,” or HTTP error 503 “service unavailable.” Hussey knew that, ultimately, the Internet would not work if a major pillar of the infrastructure was broken.

  F5 built a system of “load balancing” software called BIG-IP, which functioned like the guard at the airport who directs passengers to whichever security line seems shortest and has the least delay. Hussey had seed investors—friends and family—and a new financing offer from the boutique San Francisco investment firm Hambrecht & Quist.

  Sonja understood that the deal was in play. She hung up with Kim and quickly made some calls, learning that F5’s lawyer and chief financial officer were attending a Cooley Godward conference at a hotel in Monterey, about ninety minutes south. She grabbed her keys, hustled out to her car, and was soon on her way to Monterey, the seaside town best known for its world-class aquarium and as the locale for many of John Steinbeck’s stories. Sonja needed to convince the F5 team of the value of working with a venture firm rather than a bank. Menlo had financed major deals with Internet and communication equipment companies and had both the connections and the track record to be a strong ally for the nascent F5.

  Sonja had come a long way from her days at TA Associates in Boston. Since arriving at Menlo in July 1994, she had led investments in several key deals, including in Vermeer Technologies in 1995, which provided tools for the growing market of Internet publishers. Vermeer had been acquired by Microsoft for $133 million in 1996, one month after Menlo invested. Sonja was the secondary investor—her partner Doug Carlisle was the primary—in Hotmail, the free Web-based e-mail service that Microsoft acquired in 1997 for an estimated $400 million, the largest all-cash Internet start-up purchase at the time. She had met Steve Jobs when Harvard Business School recognized Pixar Animation Studios as the entrepreneurial company of the year. Sonja had seated Jobs next to herself at dinner, hoping to have a conversation. Instead, Jobs spent most of the night leading Pixar employees outside to see his new silver Mercedes. He paid little attention to Sonja.

  One of Sonja’s favorite deals had been with Priority Call Management, a developer of computer systems (programmable digital switching platforms) to support enhanced telephone network services. PCM had been founded by the young Massachusetts-based entrepreneur Andy Ory. Ory and his father had spent countless nights at Kinko’s writing and printing business plans. They cobbled together some cash—including Andy’s father’s retirement savings—and worked out of a small office above a truck stop. The younger Ory raised $4 million over four years, selling stock wherever he went, at weddings, at funerals, in elevators, at bar mitzvahs, in subways, and in airport hotels across thirty states. Ory and his father had been working for 107 days straight when Sonja came calling. By that point, PCM was running on fumes.

  Sonja and Ory quietly joked that they didn’t really know what they were doing. It was her first deal at Menlo, and his first start-up. But Sonja trusted her instincts. She saw huge market potential both in PCM and in the tireless, bespectacled Ory. PCM targeted communication service providers (telephone companies wired and wireless) that had the foundational infrastructure of cell towers and equipment to connect one cell phone to another. PCM sold those carriers value-added features like voice mail, calling cards, call waiting, caller ID, and call forwarding—turnkey solutions that could give the carriers a package of premium features needed to stay competitive in the deregulated telecom market. Sonja lobbied her partners to invest $3 million in 1995. By 1998, PCM was a $50 million business and growing fast.

  Sonja was grateful for her unofficial mentor at Menlo, Tom Bredt, who loved working with entrepreneurs to help them build great companies. Bredt had worked at Bell Labs in New Jersey, where William Shockley and his colleagues had sparked the semiconductor revolution with the fabrication of the first transistor. When Sonja put together the PCM deal, Bredt took the PCM board seat, given his experience. But he told Sonja, “Come with me and let’s see if we can help this company become successful.” He liked to ask entrepreneurs, “What’s keeping you awake at night?” Sonja shadowed him at board meetings and in one-on-one meetings with entrepreneurs. He was a patient listener and had a succinct way of summarizing problems and solutions.

  Sonja hoped her mentorship by Bredt would pay dividends at her meeting with the F5 folks. Good timing wouldn’t hurt either.

  MJ

  Once again, the eight-thirty morning pitch meeting at IVP extended into the early evening. MJ had been largely unimpressed by the pitches she’d heard. The entrepreneurs had talked about the technology—not the market. Most entrepreneurs came in with new technology in search of a problem. MJ was attracted to entrepreneurs who identified a huge problem and created technology to solve it.

  Now her younger partner, Geoff Yang, a hotshot in the new info tech space, was holding the floor. His investments in IVP Fund VI had done so well that the partners agreed to give him “super carry,” a bigger share of future profits from investments made in Fund VII. After the limited partners—the investors—were paid off, Yang would be awarded a bigger slice of the financial pie than the other partners.

  * * *

  Yang had wanted to be a venture capitalist from the time he was in high school. He earned his economics and engineering degree from Princeton, then his MBA from Stanford. He’d worked at IBM and Goldman Sachs before joining IVP in 1987. Very high energy, he described his job in the dot-com days as similar to “drinking from a fire hose.” Corporations came to him wanting to know about the Internet, asking how to navigate “clicks versus bricks,” and proposing joint ventures with IVP so the big firms could reinvent themselves as incubators. He went to the trade shows and industry conferences, networked like crazy, and slept very little. Like MJ, Yang had three kids. Unlike MJ, he had a stay-at-home spouse and worked six days a week. He went to bed at eleven P.M. and awoke at three A.M., did e-mail, went back to sleep at 4:30 A.M., and got up to start the day at 6 A.M.

  MJ found herself continually packing more into her life. Beyond a husband, a job, a house, three kids, a dog, and a cat, she had bought her parents a house nearby. This was the life she had engineered for herself, a continuum of her games of hide-and-seek in the tall cornfields of Indiana. She had always been strategic about finding her way around closed doors and over hurdles that appeared insurmountable.

  During the last partners’ meeting, Yang had talked about what he called a “passive deal,” where IVP made a return of only twelve to fifteen times its investment. Weighing the pros and cons of a new potential investment, Yang said, “We can easily return ten times, but I don’t know if that’s worth it. Do we really need this when we’re doing deals returning one hundred to one thousand times?” In normal, non-boom-time years, VCs tried to earn ten times their investment. If they did ten deals, their hope was that two or three of them would yield huge returns. Typically, about 80 percent of the wins came from 20 percent of the deals, something VCs labeled the “Babe Ruth effect.” Ruth struck out a lot, but he also set all the slugging records. VCs had to hit those home runs to compensate for the strikeouts.

  MJ agreed with Yang. In the frothy dot-com investing world they currently lived in, a return of ten times was “kind of a yawn.” Everywhere MJ turned, she met another person claiming to be a VC. Her hairdresser was suddenly moonlighting as a VC. Her friend’s landscaper was a VC. Everyone was talking about the hot dot-com deals they were investing in. In 1998, Amazon’s stock returned 970 percent; AOL, 593 percent; and Yahoo!, 584 percent.

  At six P.M., with the pitch meeting over, the guys made plans to meet for drinks. But there was only
one place MJ wanted to be. She always made dinner for her family. She touched base with her husband, Bill; he said he’d be at work for at least another hour—which probably meant later. He had co-founded a venture firm, Foundation Capital, and was working start-up hours. MJ had met Bill at Purdue. He had sandy hair and the bluest eyes she had ever seen. He was both an engineering major and a Purdue cheerleader. In fact, he was everything her family was not: well traveled, adventuresome, athletic. He also seemed giving, which felt in some ways like the opposite of her father.

  Nowadays Bill liked to boast that he had something few men had: a wife who was a partner at a venture capital firm. He was proud of her in public. Yet at home, it was MJ who made dinner, got the kids into baths, checked Kate’s homework, and began the nightly reading of Goodnight Moon to Hanna, Blueberries for Sal to Will, and The Trumpet of the Swan with Kate. When Bill came home late, she heated his dinner. MJ, in effect, had multiple jobs—doing twice the amount of housework and three times the amount of childcare as Bill. To be fair, this was a choice she had made, in part because she remembered how she missed her own mother when she was working nights at JCPenney.

  At around ten-thirty, after watching the news, she told Bill she was going to bed. He said the same. It was a joke she kept to herself. On her way to bed, she started a load of laundry, turned on the dishwasher, took the dog for a walk, and picked up the living room. By the time she crawled in, Bill had already been asleep for an hour.

  SONJA

  At the hotel in Monterey, Sonja found the CFO and attorney of F5 and made her case for why F5 should work with Menlo. The meeting went well and the timing turned out to be perfect. Within a week, F5 founder and CEO Jeff Hussey flew to Silicon Valley from Seattle to meet with Sonja and the Menlo partners. Hussey had never been to Sand Hill Road—and was all nerves. A fast talker normally, he forced himself to slow down. He had never run a company or written contracts, and he had no idea how to raise money for a start-up. Seattle was a great city to build a company in, but it didn’t have the infrastructure of Silicon Valley: the venture community and the acquisitive companies that did research and development by way of mergers and acquisitions.

  In the conference room at Menlo, Hussey ran a rudimentary PowerPoint presentation for the Menlo partners, but he relied mostly on the whiteboard. He made the group laugh with appreciation when he shared a bit about the company’s origin story: “I had this epiphany. I thought, ‘Someone should build a load balancer! Someone should do for servers what was done for disk storage.’ ” He was referring to a technology called Redundant Array of Inexpensive Disks—RAID—that provided disk redundancy and speed optimization by distributing data across drives. “I thought, Wow, what if we could build this gizmo that is a redundant array of inexpensive servers?”

  He scribbled diagrams and numbers and noted that revenues were increasing 30 percent a month. Pointing to the diagram of how the load balancer worked, he turned to the partners and said, “Look, everything on Earth is going to be connected to the Internet. Something must change as it pertains to server economics. My view is that every piece of Internet traffic will one day flow through a load balancer. Nobody will build a network without a load balancer.”

  The following Monday—July 6, 1998, Sonja’s birthday—Sonja and Kim Davis flew to Seattle to make an offer. Sonja, blond and preppy, and Kim, tall, leggy, and African American, made quite a pair. Sonja had the term sheet, which explained the details of the investment offer. She had valued F5 at $55 million, based on revenues, projections, the market, various industry and comparable company multiples, other offers, and a sense of what Hussey would need to accept the deal. She had learned that one of the most important parts of her job was to figure out what the entrepreneur needed to make the deal happen. Menlo aimed for a minimum tenfold return on its investments, which would put F5’s potential at $550 million.

  “We want to invest,” Sonja told Hussey. “What’s your valuation?”

  For some reason, the question took Hussey by surprise. He had been watching other Internet companies get wild and frothy valuations. He had more revenue and customers than all his direct competitors combined. F5 clients included Microsoft, Montgomery Securities, Alaska Airlines, Monsanto, and dozens of other notable corporate names. Still, he was perpetually running out of money. Every day as an entrepreneur felt like an emotional Bay of Fundy, with vertiginous highs and lows. The ride took him from a peak of euphoria to the pit of despair daily.

  He went over the numbers in his head. “Well, okay, the valuation is sixty million pre,” Hussey said, referring to the value of the company without the proposed investments from Menlo and IDG Ventures, the firm where Kim worked.

  “I can do fifty-five million pre,” Sonja said.

  Hussey shook his head. “It’s gotta be sixty.”

  After a long pause, Hussey said, “I suspect you two need to call the mother ship. I’m going to step out, so you can make that call. I’ll come back when you’re ready.”

  Sonja and Kim talked for a moment before Sonja dialed the Menlo headquarters. It was late in the day, and the only one there was Mike Laufer, a young partner who specialized in health care companies. Sonja told him, “Mike, we need to get this up to sixty.” Laufer’s response—“Sounds good”—was all she needed.

  When Hussey came back into the room, Sonja thrust out her hand and said, “We have a deal.” Hussey got his $60 million pre-money valuation. Menlo would invest $5.7 million, and IDG Ventures was in for $2 million.

  Within a year, F5 Labs, which changed its name to F5 Networks, went from a bright idea to a public company—having raised a relatively paltry $12 million since inception. Jeff Hussey, not yet forty, soon found himself with six hundred employees and a company valued at $2 billion. Menlo’s investment of $5.7 million returned more than $100 million.

  THERESIA

  With Release in her rearview mirror, Theresia was weighing her job prospects when she got an unexpected request to do some consulting. Release founder Matthew Klein had hatched another start-up, but his first few pitches to VCs had yielded nothing. So he turned to Theresia for direction. She offered her opinions about what he needed to say and change in his pitch for Tech Planet, a start-up that would provide home office tech setup and consultancy.

  After incorporating Theresia’s changes, Matthew’s next three meetings with VCs were a different story. Almost before he finished his pitch, the VCs asked, “Where do I sign? I want to give you money now.” Meanwhile Geoff Ralston of Four11, the entrepreneur who had frantically laid extension cords across Middlefield Road to keep the power on, had sold RocketMail to Yahoo! for $92 million. It became Yahoo! Mail.

  Theresia’s dealings with Matthew on Tech Planet reminded her of how much she loved the phase of a company when it was just getting started, when chaos and purpose collided daily. During her time at Release, she’d also seen the important role that venture capitalists played, providing everything from money to expertise. What she hadn’t known before Release was how VCs secured later rounds of funding. The early-round Series A VCs—those investors who came in after “angels,” or friends and family—would connect with VCs at other firms for subsequent funding rounds, such as Series B funding, Series C, D, and so on. Series A marked the first round of financing from a VC, and the first time a company offered stock to outside investors. Subsequent rounds reflected a company maturing and scaling. The calls by early investors to later-round VCs made all the difference.

  Theresia had several friends who were VCs, including Greg Sands, who had left Netscape and joined Sutter Hill Ventures. A business school friend, Robin Richards Donohoe, had gone to work for the well-known VC Bill Draper, helping him launch the world’s first venture fund in India. Donohoe was now a partner and loved her job. Jennifer Fonstad, who had been a year ahead of Theresia at Bain in Boston, had become a partner at Draper Fisher Jurvetson a year after joining. (St
eve Jurvetson and Tim Draper had backed Release.) Fonstad had told Theresia stories of working on Mitt Romney’s 1994 Senate campaign against incumbent Ted Kennedy. Fonstad had traveled with Romney, a founder of Bain Capital, and listened to his stories about building businesses from the ground up, including Staples, where he had been the first investor. Romney had stocked shelves in the first Staples store. Fonstad hadn’t realized the hands-on role venture capitalists played. When the political campaign ended and Jennifer was headed to Harvard Business School, she decided she liked the idea of taking something that was fundamentally undefined and building definition around it.

  As soon as Theresia began going on job interviews, she got multiple offers. Several came from start-ups, and several more from venture capital firms. Greg Sands, who had been an angel investor in Release, told her that Accel Partners was looking to hire a new associate who had engineering and Internet experience. Bruce Golden, a partner at Accel, called her references, including Matthew Klein. When asked what distinguished Theresia, Klein told Golden, “Let me begin by stating that I’m about to be effusive. Theresia is the most outstanding person I’ve met in my whole life.” Accel partner Jim Breyer, a heavy hitter in the industry, was impressed that Theresia was multidisciplinary, understood technology, and had start-up experience. Breyer also found her “ethical and possessing an intellectual curiosity that was critical to success as a VC.” Breyer, Golden, and the Accel partners concluded that Theresia was “wicked smart, driven, analytical, had a good work ethic, and could play well with others.” The question remained, though, for the Accel partners: Could she parse through hundreds or thousands of investment opportunities and pick the ones that would be big moneymakers? That was the unknown.