Under Rossmann’s watch, the resentment toward GO that had unfortunately been sown at EO’s inception continued to grow, creating an attitude of isolation and a determination to go it alone. GO had spent years building relationships with its ISVs, customers, and partners, and now many of them found EO less cooperative and supportive of their efforts.
Even worse, AT&T provided EO with extensive financing—tens of millions of dollars, more than the company required for its core hardware business—because they saw EO as a source of tangible products that could be marketed under an AT&T label. Rather than investing this money exclusively in hardware development, however, Rossmann undertook to differentiate EO’s offerings from those of other Penpoint vendors through software, by building or buying applications to bundle with his products. He sometimes sought to make these arrangements exclusive, meaning that no other Penpoint vendors could offer the same applications to their customers without a license from EO, a competitor.
From Rossmann’s perspective, this was just good business. But it had the side effect of discouraging other hardware manufacturers from working with Penpoint, because they appeared to be at a permanent disadvantage to EO. This strategy might lead to short-term gains for EO, but would hurt everyone, particularly GO, in the long run.
David prevented the discussion from descending into a bitching session. “This is a real strategic problem with no obvious solution,” he said. “The thing is, Rossmann is closer than we are to AT&T. We have to find a way to prevent him from drilling holes in the PenPoint boat below the water line before we all sink.” He turned to John Doerr, who had been oddly subdued during the discussion. “Why don’t you sound Bernie out about working with Rossmann on his attitude, maybe even recommend that he step aside?”
John heaved a deep sigh. “I already have, but the EO board is happy with Rossmann. There’s nothing more I can do.”
Just then the kitchen door swung open and dessert arrived. As everyone else formulated a plan of attack on their chocolate soufflés with crème fraîche, I fetched a speaker phone from my home office and plugged it in. “You guys have to hear this voice mail message. Remember the article about pen computing a few weeks ago in the Times? Well, get this. My mother calls me, and she’s indignant that my name is spelled wrong. Hey, what good are bragging rights in Palm Beach if the New York Times misspells your son’s name? So I suggested that she call up John Markoff and make sure he knows the correct spelling. I figured she’d never do it. Anyway, a few days later, I get this on my voice mail.”
I dialed up the office and played the message. “Jerry, this is John Markoff of the San Francisco bureau of the New York Times. I just wanted to let you know that I will never, ever, misspell your name again, so help me God. J-e-r-r-o-l-d.”
“Hey, we should hire her in the PR department,” Robert said. He narrowed his eyes, pointed his finger at the phone, and said in a scolding mother’s tone, “Don’t you dare talk that way about my son’s company! He’s a good boy. Always cleans his plate!”
After dessert, the guests dribbled slowly out, first the ones with kids, then those with wives. But Kevin stayed until last. “You know, Jerry, in a way this is a relief.”
I put my arm on his shoulder. “I can’t even imagine it. You look two inches taller already with all that pressure off.”
“But I want you to know that I don’t regret one day of it. It was just like you promised—one hell of a joyride. I’m just sorry I won’t be there when we reach our destination. And now with AT&T as a partner, we’re almost there.”
“Yep. You had the good sense to get off one stop before hell.”
We both laughed. Neither of us suspected how true this statement would turn out to be.
A few days later, I met with Brook Byers, one of the more senior partners of Kleiner Perkins Caufield & Byers, about GO’s future financing needs.
Byers shook my hand. “Man, what happened to your hair?”
Since we last saw each other, I had gone almost completely gray. “One gray hair for each day as an entrepreneur,” I said. He looked much the same as the first day we met, five years ago.
Byers listened sympathetically as I explained my view of the market, where we stood, and the still excellent prospects for success if we could just see it through.
“Jerry, you should know that there’s no way we can let this thing go south. KP’s got too much at stake.” I assumed he was talking about losing the money, but I was wrong—he was at least as concerned about the firm’s reputation. “You’ve got this pen thing stoked up white hot. One way or another, every firm in town has an investment in a Penpoint-related venture. If you don’t succeed, it’s not going to look very good for any of us. Right now AT&T’s the only deep pocket in sight. That’s a big problem.”
“How come?”
“In finance, you always have to have an alternative,” Byers said. “Otherwise, you’re sure to be eaten alive.”
“Even with a blue-chip company like AT&T?”
“With any large company. That’s why I recommend that you look into a Reg D with a retail investment bank.”
“What’s a Reg D?”
“Regulation D allows you to sell stock to individual investors of high net worth without having to register with the SEC as a public company. In a matter of weeks, retail brokers can sell GO stock in fifty or hundred K chunks to high-net-worth individuals. The bankers will take a big fee, of course, but they can move it out in no time, because their investors have made lots of money on these deals in the past, and the brokers get warrants on the company’s stock as an incentive. Reg D’s have been very popular in the biotech area.”
The way Byers talked about it made it sound pretty simple. “But what makes you think they’d do it for us?”
“It’s a hot market, and they’re hungry for product. But you better hurry up. I doubt that the market will hold much past New Year’s. They can pull together twenty-five to fifty million at a very attractive price. You should give them a call.”
My eyes lit up. “Twenty-five to fifty mil at a high price?” He didn’t have to ask twice. As I drove away, I wondered if there was any limit to how high we could fly with that much capital behind us.
“COMDEX, COMDEX, COMDEX. I can’t believe it’s COMDEX time again!” Robert said. We stood amid a scene out of a nightmare carnival. The red-and-white-striped registration tent seemed to span several acres, and was almost entirely filled with rows of those ribbon dividers used at banks and airports to channel people into one enormous snaking line. After half an hour, we were about midway through, having zigzagged perhaps twenty times. A sympathetic woman in a gray smock was stationed in the middle, passing out small paper cups of ice water from a large Styrofoam container. “It’s about fifteen minutes from here to where they make the name badges,” she announced.
“Either the years are getting shorter or I’m getting slower,” Robert said. “It seems like last year’s show was only a few months ago.”
“Twelve, to be exact,” I responded. I wasn’t in the best of moods. But he was right. Somehow the world seemed to be spinning faster and faster, like a carousel run amok. I sometimes forgot which hotel I was staying in, confusing one year with another. My only island of stability was the new life I was trying to build with my wife, Layne. But except for a long honeymoon weekend at Vinod Khosla’s vacation home in Carmel, we could find very little quiet time to spend together. I was fortunate that her background was also in the computer business, so at least she understood the demands on my time, but there’s a limit to what anyone should be expected to put up with. I knew that eventually something had to give, and despite my father’s advice that work comes first, I was determined that it not be my marriage.
When we finally got our passes, we rushed over to see the AT&T exhibit in the main hall. Word had spread rapidly through the PenPoint community that this COMDEX was going to be our big break. EO had just assembled a batch of their first product, the EO 440, and it was awesome. It had
more power than a fast 386, packed into a slim, two-pound package about seven by ten inches and less than an inch thick. (The nearest competitor, running Pen Windows, was about twice the weight and size.) On either side were two semicircular “ears,” one containing a microphone and the other a speaker. An optional flat cellular-phone module could be tucked underneath, with a cradle for a handset at the top, so you could make phone calls and send faxes while on the run.
AT&T had spent a fortune on a large booth to showcase the new technology, adorned with colorful flags and posters, and offered it to EO, gratis. The center of the space was an open theater with seating for several hundred. Eight-foot panels stood at irregular angles, displaying large billboards with a schedule of presentation times. Between shows, lively music played as a small army of EO, GO, and AT&T demonstrators milled about the area proudly showing Penpoint on the EO 440. Their loud voices and black-and-white-striped jerseys made them seem like hawkers at a sideshow. I watched as visitors darted about from demo to demo, straining to get a closer look.
Someone tapped me on the shoulder. “You look pretty dapper in that fancy business suit, Jerry.” It was Jim Cannavino of IBM, with his personal assistant and several other associates in tow.
“Well, we’re a small company, so I have to dress like I come from a big one,” I said. Then I noticed they were all wearing khaki pants and pastel sport shirts open at the collar. Apparently they felt that this informal uniform would reinforce the image of a new, easygoing IBM. “And I guess since you’re from a big company,” I said, “you have to dress like you’re from a small one.” Cannavino was relaxed and friendly as we chatted in the booth of his major competitor, AT&T, which was heavily promoting GO’s product. He seemed to be unaware of the fading relationship between our two companies, or at least he chose not to acknowledge it.
On Monday of that week, AT&T staged an announcement of their “personal communicator strategy” to an audience of a thousand or more. This production, in the big theater at Bally’s, was by far the largest and most expensive demonstration of GO’s technology. Robert’s demo of Penpoint easily overshadowed the prepared speeches and flashy videos presented by a sequence of AT&T executives. Then Alain Rossmann showed how a fax could be received on the 440 through a wireless cellular connection, to the delight of the crowd.
The announcement proved to be the main event at COMDEX. For the rest of the week, everyone was talking about the EO 440 and Penpoint. For the first time, it seemed that we had broken through and successfully delivered our message to the broader COMDEX community. Microsoft was relatively subdued by comparison. At various panels, Vern Raburn of Slate still promoted his position that the operating system didn’t matter. He had cut a deal with Grid to bundle his Pen Windows applications with Grid’s new Convertible, a cleverly designed four-pound package that was both a full laptop and a pen computer. But despite his efforts, the product was destined to die after an initial spurt of sales to the curious. Personal communicators were the happening thing, and since Raburn had ceased all Penpoint development for several months, he was distinctly behind. Apple, which usually kept a low profile at COMDEX, showed an inanimate model of Newton under a Plexiglas cover in a room off the main hall, but it attracted modest attention.
After a full week of press interviews, demos, customer meetings, analysts’ breakfasts, panels, ISV briefings, and parties, Robert and I boarded the plane back to San Francisco. “I’m so tired, I feel like I’m having an out-of-body experience,” he said.
“Mine’s more like an out-of-mind experience.”
As we took off, he looked out the window and smiled. “Well, I think we’re finally on our way. If only IBM had gotten behind us years ago, the way AT&T just did.”
I was a bit less sanguine. “Don’t pop the cork yet. EO is a long way from shipping anything. We haven’t even delivered final code to them, and it looks like we still have serious problems with the size of the code. Let’s just pray they get their product working and out the door before the echo dies down.”
He laid his head back against the seat and sighed. “Sometimes I feel like just running away and joining the circus.”
We looked at each other, realizing this was the perfect setup line. I didn’t have to say it. We both burst out laughing.
Soon after COMDEX, we held a board meeting to discuss our upcoming need for cash. In contrast to previous rounds, this time everyone was optimistic about our ability to attract the funds. The growing public awareness of pen computing, which we were instrumental in feeding, made investors more willing to open their wallets. Nothing strokes an investor’s ego more than having a friend or colleague mention a high-flying company in a hot new field and then pointing out that he’s in on the action. The press was enamored of us yet again, and we were about to ship Penpoint J, a more advanced version of Penpoint for the Japanese market. We hoped to follow this up, by the middle of the next year, with a similar version in English. Our new VP of sales had delivered a rosy forecast of 93,000 units in worldwide sales for calendar year 1993, backed up with detailed customer-by-customer and country-by-country projections.
But privately, the executives were uneasy. GO was over five years old and we were still running mostly on promises, like greyhounds chasing a mechanical rabbit around a track. The team was showing signs of wear. Engineers complained to each other of burnout. A growing number of employees had earned out their original stock grants. There was a lot of talk about the good old days, which never really existed. In contrast to the usual banter at our estaff meetings, the jokes were mostly gallows humor followed by nervous laughter. The plain fact was that startups aren’t supposed to make it this far without turning a profit. But somehow we were still in the race.
Randy Komisar had adroitly secured a verbal commitment for a Reg D offering at the sky-high price of $4 a share, despite the fact that the miniature speaker in his trick Halloween socks had delivered a ghostly howl when he bumped his foot during a formal presentation. Now GO’s outside directors were discussing the details of the offer.
“What’s that after the commission?” John Doerr asked. He strained across the table to reach a cookie from a plate sitting next to a bowl of grapes that had been nearly picked clean.
“About three-sixty, three sixty-five a share,” Randy said. “That’s a post-money valuation of one hundred fifty to one hundred seventy-five million, depending on how much we raise.”
I was worried that this price was unrealistic, and that the offering might not fly when it hit the street. “I just can’t see how our business plan supports that valuation,” I said. “It’s enough to make a sane investor toss his cookies.”
John couldn’t resist flinging his macaroon at me in protest. “There’s no right price, Jerry. It’s just willing buyer meets willing seller.”
“What about AT&T?” Vinod Khosla asked, changing the subject. “I talked to Atkinson last week,” Bill Campbell said, “just to let him know we’re considering the Reg D. He was concerned that we not get too many investors to answer to, in case AT&T ultimately decides they want to take a big position in us.”
Vinod’s eyes narrowed. “You should try to nail him down as soon as possible. The window for IPOs could close at any time, and the Reg D would go with it.”
“I agree,” said Bill. “What I want to do is give him a deadline on a ten-million-dollar AT&T commitment. According to our business plan, that should be enough to see us through to profitability—if our sales projections are in the ballpark and we get the next version out on time. I’ll tell Atkinson he has until mid-December for a go, no-go decision.”
“So to speak,” Mike Homer added. He was picking the last good grapes out of the bowl. “It seems to me this could put us on a path to an acquisition by AT&T. Are we sure that’s what we want to do? Personally, working for AT&T isn’t what I signed up for. Maybe we should do the Reg D to remain independent, and go for an IPO instead.”
“Not a chance,” said Bill. “Securing AT&T’s conti
nuing support is essential. We aren’t going to mess with them while they’re courting us, so we’re all just going to have to be patient, whether we like it or not.”
Mike grinned at Bill. “I can’t imagine you reporting to Kavner!”
Bill looked him right in the eye. “I won’t be. He’ll want to put his own flunky in here to run the show.” The room fell into an awkward silence. Never before had Bill suggested that there might be an end to his reign as GO’s CEO; his boundless energy and undying loyalty to the team seemed eternal. The mere suggestion of an end, even if in jest, cast a shadow over the meeting.
David Liddle continued the conversation. “We’re not a good candidate for an IPO anyway. First of all, the financials aren’t going be there for a long, long time. Second, if we’re important enough to AT&T to justify an IPO to the underwriters, they aren’t going to let us do it.”
“Why not?” I asked.
“It’s the ‘bubble instability.’” Everyone stared at him, ready for some dazzling metaphor. We weren’t disappointed. “Remember blowing soap bubbles as a kid? You know how sometimes you get a great big bubble with a little bubble stuck on the side? It stays that way for a while, but then they always either break into two separate bubbles or combine into one.” He looked around the room. No one had a clue what he meant. “Well, it’s the same thing with corporate partnerships. Either the little company doesn’t matter to the big one—in which case they inevitably wind up going their separate ways—or it’s real important, in which case the big company can’t take the risk of not owning the little one outright. There’s no in between.”
Try as we might, no one could come up with a counterexample. David’s insight was startling in its simplicity and evident truth. This was the reason virtually all of the “corporate partnering” arrangements between small companies and large ones don’t work out. Either they separate—usually wounding the small company fatally—or the smaller one gets absorbed.
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