Alpha Girls

by Julian Guthrie

  The limited partners were not happy with Accel’s returns, and important longtime institutional investors—Princeton, Harvard, and MIT chief among them—were considering pulling out of the next fund.

  Only three weeks after Sarah’s birth, Theresia was back at her desk talking to entrepreneurs on a conference call.

  “What is that weird noise?” one of the entrepreneurs asked. “Is someone inflating a bicycle tire?”

  Theresia thought the sound was more like the churning of an old dot-matrix printer. “Sorry, guys,” she said, “we’ve got construction going on here.”

  She realized that her once-chic all-glass office was not the best place to operate a lactation pump during a call. She and her assistant taped butcher paper over the glass for privacy and ordered blinds.

  MAGDALENA

  Magdalena was distracted as she worked with her sons on their math homework. Her other child, Salesforce, was in greater trouble. As Friday—payday—approached, Salesforce was in danger of not making payroll, again. The company was losing more than a million dollars a month. Investors were spooked, and the potential for bankruptcy was real. A 10 percent staff reduction had been ordered across departments.

  Since its infancy, Salesforce had relied on small payments from small companies. It offered its software free for up to five users for the first month, and customers could add or subtract users and services at any time. All this was done on a contract-free “pay as you go” model. Small businesses, typically more open to adopting new technologies, were Salesforce’s most important evangelists. All this had worked beautifully until the economy collapsed and most of those small Internet companies went bankrupt, decimating the evangelist ranks.

  Magdalena pondered Salesforce’s fate. There were parallels between raising kids, she realized, and building a company. Get them to crawl before they walk. Nurture, lead, and let go. When they’re ready, push them out of the nest. Along the way, expect the bad and hope for the good.

  Magdalena looked at her watch: It was 9:40 P.M. The family rule—her bad cop rule—was no Internet after 9:40 P.M. No amount of pleading, bartering, or protesting would weaken her resolve. If the boys’ online homework wasn’t finished, “too bad,” she would say. The boys could stay up until 10:00 or 10:30 P.M., but they had to be offline. She loved being a mother to boys, to these fierce yet sweet spirits who got into knockdown fights, wrestled and punched, but were fine with each other ten minutes later. There was no pettiness, no drama, just old-fashioned resolution.

  They were growing into independent young men. One day when Magdalena told the two of them that she was thinking about cutting back her hours at work to spend more time with them, Troy remained silent, but Justin said, “Mom, you’re very good at what you do. I think it’s a very bad idea for you to reduce your workload.” She understood him to mean, Mom, I don’t want you hovering over me.

  After the boys went off to their rooms, Magdalena set up her computer and files on the kitchen table. Her husband had his own reading materials and assumed his spot on the sofa. Magdalena had night duty with the boys, and Jim had mornings. She made sure she was out the door to work before anyone woke up. She had no desire to be pulled into the morning chaos of missing socks, homework, breakfast, and backpacks.

  Magdalena turned her attention to the cash flow crisis at Salesforce. Its business model—Marc Benioff’s genius in attracting attention and defining the company—was intentionally anti–Siebel Systems: no licensing of products, no discounts, no implementation challenges with seven figures of added expense. It was one price for all, pay for what you need when you need it. It had been great for customers but crippling for Salesforce. Adding to its current problems, the company couldn’t expand without hiring more salespeople, generating more expenses.

  As Magdalena opened an Excel spreadsheet, she asked herself, If investors won’t give us more money, where can we get it? They had raised just under $60 million since 1999 but were burning through $1 million to $1.5 million every month. They had maybe four months left before running out of cash.

  They had two possible sources of money: equity from investors and payments from customers. Customers accessed Salesforce software entirely online, a novelty at the time. They could access it every day, all day, through an account on its website. Magdalena thought the website had a terrible user interface, with Amazon-like tabs across the top. Payments were made by credit card.

  Siebel Systems, by contrast, licensed its software. Customers bought the license, took it to their offices, paid for it to be installed, and owned it outright, like moving furniture into a home. Salesforce operated more like an electric company, charging the customer by the amount of usage.

  Studying sales revenue, expenses, and the commission structure, Magdalena zeroed in on one of the biggest problems. They were paying their salespeople commissions for a twelve-month deal, while collecting payments from customers one month at a time. As a result, money was going out much faster than it was coming in. Magdalena thought, What if we offered a discount for up-front commitments and payments of one year? Or two years? Or even three? What if we collected all payments up front?

  The approach would bring new challenges, of course, beginning with setting up a contracts department. She made notes: How much longer would the sales cycle be? What would the discounts look like? How would sales commissions be reset? Would this create a net win?

  Next, Magdalena looked at possible conversion rates: What if 20 percent of their customers committed to two years? What if 30 percent made the same commitment? She extrapolated out to three years. Standing up to stretch, she exclaimed, “Our cash intake would make it so we wouldn’t even need cash from VCs! We’d be fine!”

  Jim, still on the sofa, had learned to disregard such exclamations. It was just Magdalena working through a problem.

  Well after midnight, Magdalena closed her computer and put away her papers. Now she just needed to sell Marc “No Contracts” Benioff on her idea. He continued to wear his NO SOFTWARE button to work every day and to tout no contracts, no licenses, no discounts. It was as much a part of him as his Hawaiian shirts and his golden retriever sidekick, Koa.

  For Magdalena, saving Salesforce had nothing to do with protecting her $500,000 personal investment. It was about saving the team, the idea, the product, and the potential. If they didn’t do something soon, Salesforce would go the way of so many other dot-coms, into the abyss of what venture capitalists euphemistically called “orderly shutdowns.”

  SONJA

  At her office at Menlo Ventures, Sonja met with one of her favorite entrepreneurs, Andy Ory. Sonja had invested $3 million in his phone services company, Priority Call Management, in 1995. In 1999, PCM was acquired for $162 million.

  When Sonja and Ory had first met as twenty-somethings, he was struggling. He couldn’t land venture funding, hadn’t slept in months, and was drinking endless amounts of coffee. His father had cashed out his retirement fund to support Priority Call Management, and the Orys had maybe $80,000 left in the bank.

  Sonja felt as if she and Andy had grown up together professionally. They shared similar philosophies, including a strong belief that building a company came with social responsibility. Andy was known to tell his employees, “Do the right thing. In every instance, do the right thing.” He believed that creating a company was about creating good for all the stakeholders. He felt a responsibility to raise people’s standard of living; to pay taxes; to engage in social philanthropy; and to help people create wealth and build value.

  Now Ory and his co-founder, Patrick MeLampy, had started a new company, Primary Networks, to enable voice and video calls over the Internet, a revolution that was just beginning.

  The two had hatched the idea when MeLampy called Ory excitedly to tell him that wireless carriers had just standardized something called SIP—Session Initiation Protocol—enabling p
eople to make calls over the Internet. “This is really transformational,” MeLampy said.

  Ory and MeLampy knew there would be huge obstacles to building a telephone network over the Internet. There would be firewall issues, security issues, and issues in getting a provider such as AT&T to connect over the Internet with another provider like Verizon.

  Within a few months, Ory went to visit Sonja on Sand Hill Road. While the working name for their new company was Primary Networks, Ory used the code name Acme Packet in his presentations to VCs. It was something of an inside joke. Acme was the fictional company that supplied Wile E. Coyote with the artillery and gear he used to pursue the Road Runner. The “packet” represented the packets into which data is divided before it can cross the Internet.

  “The point at which service provider networks come together to pass services between each other,” Ory told Sonja and the Menlo partners, “is the weak link in the service delivery process. We believe that by developing a technology to enable service providers to handle those border issues, we will create a company with real and sustainable value over the long term.” He called those way stations “session border controllers”—a category of product that didn’t yet exist.

  Ory acknowledged that creating a new category was far more difficult than innovating within an existing market. “The good news,” he said, “is that if you create a category, you create a lot of value. We are creating something entirely new. I am convinced that every single carrier will one day have our SBCs on the edges of their networks.”

  As he talked, Sonja was reminded of Jeff Hussey, the entrepreneur who had founded F5 Networks after seeing something fundamentally missing in the development of the Internet. As online traffic increased, so did overloaded networks. Hussey’s load-balancing software had solved that problem, and F5 grew into an industry leader.

  Sonja knew Ory to be a phenomenal entrepreneur and visionary, although his Harvard degree had been in visual and environmental studies with a concentration in film. Communications were moving away from the network architecture called TDM—Time-Division Multiplexing—to IP, or Internet Protocol. Her investment strategy was to look for the next big market that would make tomorrow’s big companies. Ory had the same approach, asking, What will the companies trying to move communications online need? What core infrastructure is missing?

  The Menlo partners were taken by Ory’s idea for Acme Packet and asked Ory what sort of funding he was seeking.

  Ory hadn’t thought that far ahead. He suggested, “How ’bout if Sonja flies to Boston in a week or so and we put together a business plan?” The partners agreed, and Sonja flew to Boston to work with him on a detailed plan. He soon returned to Sand Hill with a PowerPoint presentation, and talk turned again to financials.

  Referring to ownership percentages in the company, Ory said, “I know you want to be in the twenties, and I want to be in the forties. I’d say the company is a $28 million pre-money valuation. You put $12 million in, and it’s a $40 million post valuation.”

  The Menlo partners agreed. The $12 million investment would be Menlo’s first commitment from its new $1.2 billion fund Menlo IX.

  Back in Boston, Ory received a check from Menlo for $12 million, which he and his father took to the bank. The clerk said, “I’m sorry, we can’t deposit this into your account. Your business name is Primary Networks.”

  Andy replied, “Okay, today we change our name to Acme Packet.” As the paperwork commenced, Andy thought about the $12 million check he was holding. It represented people’s livelihoods, mortgages, and health insurance. It was money that Menlo’s limited partners had worked hard to make. And Menlo, he knew, would get paid only if his company became a success. The check represented the long road ahead.

  With the economic downturn, a credit crunch, 9/11, and the Bush administration’s war on terror, the wind was not at the backs of the economy or the Acme team. One of their investors even took Acme off the website following the telecom sector meltdown. But over time Acme landed one deal after the other. Soon it was routing all of Verizon’s wireless calls.

  Acme’s session border controllers, or SBCs, were becoming a staple of the industry. Whenever a telephone call or video call needed to be routed from one network to another, they needed Acme Packet. Small companies, including Skype and Vonage, used SBCs when they needed higher-quality and more secure solutions.

  Sonja, who had a seat on Acme Packet’s board, never wavered in her support for the company. As she told Ory in their struggling early years: “Some of the greatest companies are way behind plan in the beginning, but then they just start beating the plan consistently.” Whenever Acme needed more money, Sonja came through with it, something that wasn’t true of Ory’s other investors.

  Gary Bowen, also an Acme Packet board member, knew the challenges that went into building the company and securing later rounds of capital. And he came to admire Sonja’s business acumen. He told Ory, “Sonja represents the venture in venture capital. She is willing to believe and engage.”

  There was something else that Sonja did that impressed Ory. He attributed it to her being a woman. After every board meeting, she called him to ask how he felt. No one else on any board had ever called to ask him how he felt. She asked because she cared about him; they were friends. But she also wanted to better understand his thinking on business decisions. She was that rare individual who went beyond the numbers and strategies on a whiteboard. She was interested in his emotional state and how it related to the future of the business.

  THERESIA

  While Theresia loved being a mother, she was happy to be back at Accel full-time. She was fortunate to have an amazing support group. Tim enjoyed toting Sarah around; she was on a good sleep schedule; and Theresia’s mom and dad lived nearby and loved spending time with their granddaughter. Her parents also helped find an experienced nanny who was a part of the Gouw’s extended family. Theresia realized it was unrealistic for her to expect to be home for both breakfast and dinner each day, so she decided to try to be home for dinner and bedtime.

  A female CEO whom Theresia had met late in her pregnancy advised her that the time to keep working long hours is when your child is young and won’t remember her mother being away. “When they’re older, preteen or teen, when they don’t ask you to be around, that’s when you need to be around,” the CEO told Theresia. Then she added, “When they start carpooling to get around, sign up for carpool. That’s when you learn everything that’s going on.”

  Theresia was soon back to flying cross-country for meetings. The travel posed a challenge for her, since she was breastfeeding, sending her into cramped airplane bathrooms to pump. But she made it work. Sitting on the runway on a delayed flight to New York, she reviewed her notes for her upcoming ForeScout board meeting. She also had a meeting with Israeli cybersecurity star Shlomo Kramer, the ForeScout adviser who co-founded Check Point Technologies. He was the entrepreneurial security genius she’d made a point of befriending in 2001, knowing the day would come when he’d stop angel investing to start another company. He’d kicked around several concepts for a new approach to online security and had landed on an idea that felt big enough and important enough to pursue. The name for his new company was WebCohort.

  Theresia had arranged to take Shlomo around to a handful of Wall Street banks while she was in New York, to meet with chief information security officers to gauge their interest and solicit feedback on his idea. The bank security officers were happy to meet with Shlomo, given that he had already built Check Point into a multibillion-dollar public company.

  After the board meeting, Theresia and Shlomo headed to their first stop, Goldman Sachs. Where Check Point’s firewall security protected networks, WebCohort would be the first-of-its-kind Web application and database firewall. Shlomo had landed on the idea after reading a report on the growth of Web application servers, which host a combination of f
iles and programs to implement applications accessed remotely. Shlomo realized that security would be needed to protect the server and keep the Web applications secure.

  Theresia told the information security officers, “Your crown jewels—your database—are only one, two clicks away from hackers.” Hackers could easily create fake log-in credentials, she said, that would take them straight to the bank’s Web server and data server and into customer accounts and records.

  Shlomo added, “That’s where everything personal is, including all your credit card info. The hackers who penetrate applications are interested in the data and the database, and they get in using sequel queries,” or sequel injection attacks. “The Web applications are the front door to this data.”

  After Goldman Sachs, Theresia and Shlomo went to see executives at several other banks, including J.P. Morgan and Citibank. As they asked the information security chiefs about their systems and needs, their interest in what Shlomo was proposing ranged from enthusiastic to tepid. But most of the responses were favorable, no mean feat given the tough economic times, when budgets were tight.

  “We had enough good hits that I feel encouraged,” Shlomo said after the meetings. He thanked Theresia for suggesting they visit the banks.

  Shlomo had co-founded his original company, Check Point, in his grandmother’s sweltering Tel Aviv apartment. He liked to say that Check Point was the “Jewish grandmother version of the Silicon Valley garage start-up.” He and his partners tested the software for Check Point on two borrowed Sun workstations that they named Monk and Dylan (for Thelonious and Bob). Check Point wasn’t the first firewall security company, but it was embraced as the first firewall security company that was easy to use. Shlomo had had no idea when he co-founded Check Point that it would grow into an industry leader. With a gentle disposition and a genuine love of building things, Shlomo was hooked on seeing an idea take root, struggle, grow, and begin to flourish.