Next, to have any real shot at increasing our share of film profits, Pixar had to be willing to pay all, or a large part, of the production costs of its films. We had learned how Hollywood ran on essentially two currencies: money and star power. Either one was a ticket to bigger opportunities, bigger profit shares, and more clout. Those who didn’t have either remained at the whim of those who did. If we were ever to renegotiate our agreement with Disney, or work with any other film distributor when that agreement was over, to begin any conversation about a bigger share of the profits we had to be prepared to pay the production costs of our films. I discussed this with Steve one Friday when he was at Pixar. We were in his office, just down the hall from mine.
“How much do you think we will need to raise?” Steve asked.
“At least seventy-five million dollars,” I said. “Competition for talent, carrying costs, and increasing technical challenges are driving production costs up. It won’t be long before our budgets hit seventy to a hundred million per film.”
“Will seventy-five million be enough?” Steve wondered.
“It would let us finance half the production costs on two films,” I said. “That should be enough to get us started. That’s no small sum, though. It’ll scare away banks and private investors. We can only raise that much by taking Pixar public.”
“Maybe we need more. It would be better to have a cushion of a hundred and fifty or two hundred million. Once we’re raising money, we might as well have a big war chest.”
I certainly had no objection to raising more capital for Pixar. But our chances of raising money went down the larger the amount we sought. For an unproven company like Pixar, investors would prefer to see us put smaller amounts of money to good use before they ponied up more. This wasn’t the time to debate that, though. Steve and I agreed on the second pillar of Pixar’s plan: take Pixar public to raise money in order to build the studio and to fund our own films.
Increasing our share of film profits and raising money wouldn’t be enough, though. We also had to increase the frequency with which Pixar released films. We were presently making one film at a time, which meant a film release every four to five years. There was no way to make the business work at this rate. Again, we tested different scenarios. The ideal rate of film releases, at least according to the numbers, was a new film every year. That seemed far out of reach from where we stood now, but any meaningful increase in how many films we produced would require a drastic increase in the size of Pixar so we could work on productions in parallel. Therefore, scaling Pixar to make films more often was the third pillar of the plan.
Finally, if Pixar was to become a serious entertainment company, we needed people to know about us. Under the terms of the Disney agreement, Disney would have most of the billing, and we feared that few people would understand that Pixar was the creative force behind its films. As it was, the movie posters for Toy Story would say, “Walt Disney Pictures presents Toy Story,” or worse, “Disney’s Toy Story,” with Pixar’s name in small print. This would make it hard for the world to fully associate Pixar with filmmaking.
“We have to change how the world perceives Pixar,” Steve said one evening when we were discussing Pixar’s brand. “Even if Disney gets the billing, people need to know that we made these films. We can’t build a company without a brand.”
That was the fourth pillar of our plan: turn Pixar into a brand.
So that was all we needed to do. Besides making films that would enjoy unprecedented box office success the world over, we simply had to
QUADRUPLE OUR SHARE OF THE PROFITS
RAISE AT LEAST $75 MILLION TO PAY FOR OUR PRODUCTION COSTS
MAKE FILMS FAR MORE OFTEN THAN WE KNEW HOW
BUILD PIXAR INTO A WORLDWIDE BRAND
Piece of cake.
9
IPO Dreaming
The linchpin of our plan involved raising money, a lot of it. That was the only way we could pay for our own films and gain the clout to earn a bigger share of their profits. The only viable path for a little company like Pixar to raise the kind of money we needed was to take it public. It was simply too much money, and too much risk given Pixar’s track record, for traditional banks or other financing sources to consider.
If there is a holy grail in Silicon Valley, it is the initial public offering, or IPO, of a company’s stock. This is Silicon Valley’s payday, the moment of arrival, when paper money becomes real. Every start-up in Silicon Valley harbored dreams of going public. Only a tiny percentage made it. Of those that didn’t make it, some would be acquired by larger companies, even fewer would manage on their own; the rest would shut down. This was because it could take years for start-ups to sustain themselves with their own profitability. Without a steady influx of investment, they just ran out of money.
For the employees of those start-ups that do go public, the promise of riches and the imprimatur of success can become a reality. This is why Silicon Valley was, in large measure, built around the promise of the IPO. Out of a hundred start-ups spawned by the plush venture capital firms that lined Silicon Valley’s famed Sand Hill Road, only a very few would be fit enough to make the rare but game-changing leap from being a private to a public corporation.
Corporations are owned through pieces of paper called stock certificates. Stock is simply a share of a corporation. The ownership of a corporation can be divided into as many shares as the corporation wants. If it is divided into a hundred shares, each share represents a hundredth, or 1 percent, of the corporation. If it is divided into a thousand shares of stock, each represents a thousandth of the corporation, or 0.1 percent. The Walt Disney Company has well over a billion shares, each one representing a very, very tiny piece of the company. Anyone can own the stock in a corporation. Steve owned most of Pixar’s stock, all except the part set aside to transfer to employees as they exercised their stock options. Even then, Steve would still own the vast majority.
Ownership of the stock in a corporation is either private or public. Most corporations are private, meaning there is no public access to their stock, no marketplace in which to buy or sell it. This was Pixar’s present status. There was no way to buy Pixar’s stock without knocking on Steve’s door and asking him directly to sell some of his. There was also no marketplace in which he could sell his stock, even if he wanted to.
A public corporation, in contrast, is one whose stock is available for purchase and sale by anyone. There is a market for it, like the New York Stock Exchange or NASDAQ. If a corporation is public, any person is free to buy or sell its stock. The more buyers, the higher the stock price. The more sellers, the lower the stock price.
The first time the stock of a corporation is sold to the public is called an initial public offering of its stock, or IPO. From that moment on, the corporation is public because its shares can be bought or sold by anyone.
For any company, an IPO is like adding a rocket booster, full of fuel, to its trajectory. In Pixar’s case, an IPO had taken on even more significance. By this time, we had implemented a stock option plan and awarded stock options to Pixar’s employees. As I had predicted, many felt they did not receive their fair share. The solution was to make the shares they did have as valuable as possible. This depended on a very successful IPO.
Adding even more pressure was how much Pixar’s IPO meant for Steve. It carried with it the full weight of his return from the wilderness into which Apple had banished him ten years earlier. If there was one event that would unquestionably signify Steve’s redemption, it would be Pixar’s IPO. This would seal his comeback like nothing else could. It was no wonder, then, that whenever we talked about it, his tone took on a weight and importance of almost biblical proportion.
“I’ve been thinking about Pixar’s public offering,” Steve started on the phone one night in early August 1995. “There’s never been anything like it. It could be one of the hottest IPOs in the history of Silicon Valley. We’re gonna make history, not just in tech but in enterta
inment.”
“It’s not going to be easy for investors to get their heads around Pixar’s business,” I suggested. “We have a lot of explaining to do.”
“Why not?” Steve said, a little miffed. “Investors are savvy. They have experience with unconventional business models.”
They did, I thought to myself, but not in a good way. One of the lessons I learned from the IPO of my previous company, Electronics for Imaging, was that if there is anything investors prefer it is predictability and stability. They become most nervous when things appear erratic and changeable. And the truth was, nothing about our projections for Pixar had predictability or stability. It was impossible to predict the box office performance for a film, and our film release schedule was erratic to say the least. After Toy Story, it would be three years before our next film was released. Predicting Pixar’s business performance felt like little more than a guess. Investors might accept an unconventional business model, but I didn’t think it was a plus.
In fact, in all my experience in law and business, there was no other transaction that was more fraught with difficulty and risk than launching an IPO. It called for an almost impossible coming together of strategic, financial, legal, and market conditions. IPOs had a long history that proved just how hard they were to pull off. Their origins went back almost four hundred years to, of all things, nutmeg.
If innovation was the harbinger of corporate power in the twentieth century, in the seventeenth century it was spices: nutmeg, mace, cloves, cinnamon, pepper, ginger. These exotic substances were immensely popular in Europe, used to flavor and preserve foods, make medicines and aphrodisiacs, gifts for royalty, and even currency for trading. A huge spice trade existed to source these rare substances from exotic, faraway places like the Banda Islands, ten tiny volcanic islands in the Banda Sea, at that time the only place in the world where nutmeg trees grew. It could take two years for a shipping expedition to journey there and back. To assure the success of these expeditions, governments granted legal monopolies to trading companies that would permit those companies to become the sole source of spice trading.
One of these companies, founded in 1602, was the Dutch East India Company. It grew to become the most powerful and richest company on the planet—in large measure due to the unbridled brutality it unleashed to gain control over the Spice Islands—the first major multinational corporation. It was a dominant force in commerce for almost two hundred years. In 1604, the Dutch East India Company sold stock to investors in a transaction that would be the forerunner of the modern IPO. It used the capital it raised to finance its voyages, and it even created the first modern stock market for the purpose of trading its stock, the Amsterdam Stock Exchange. On that exchange you could purchase an interest in the Dutch East India Company and then, literally, wait to see if your ship came in.
It turned out that giving ownership of a company to individuals who had no personal involvement with that company could be a double-edged sword. On the one side, it ushered in the ability to amass capital in amounts that had never before been attainable. It indeed made it possible, in theory, to raise $100 million to make animated feature films. On the other side, the ability to raise capital from an unsuspecting public also brought with it dangers of fraud that would eventually bring the world to its knees.
For example, how would the potential buyer of stock in the Dutch East India Company know if the fleet of ships returning in several months would have a cargo laden with exotic spices or whether its trove had been plundered by pirates? Worse, what if someone in the Dutch East India Company did know that the fleet’s cargo had been stolen by pirates and kept that information quiet in order to sell stock in the company at a high price to buyers who did not have that information? This problem, today infamously known as insider trading, is as old as the spice trade.
In the few hundred years after the Dutch East India Company went public, the many scandals and frauds in trading stock had a minimal impact on the economy as a whole. Investment was limited to the tiny sliver of the population with money to invest. But all that changed in the 1920s.
In the prosperity that followed World War I, the growing American middle class invested in the stock markets on a scale never before seen. This meant that when the stock market crashed in 1929, the economic turmoil that followed was so widespread and so intense that it washed away the financial stability of millions in one fell swoop, bringing the country into the depths of a depression that would last for years. To guarantee that nothing on this scale could happen again, Congress passed a body of laws that, to this day, governs any company seeking to raise capital from the public, laws that are enforced by a government agency called the Securities and Exchange Commission (SEC). These laws would govern any attempt by Pixar to become a public company.
The idea behind modern securities laws is that investors should be left to make their own investment decisions, so long as they are given equal and accurate information with which to make those decisions. The world in which some were in the know and others were not was to come to an end. Taking Pixar public meant Pixar would have to describe and disclose every detail of its business. Life for a public company was life in a fishbowl. Once a public company, there would be nowhere to hide. Nowhere. We would endure a never-ending onslaught of questions about every detail of our business. It would force Pixar into a level of public scrutiny that it had never experienced. We had to be ready for it.
The risks in Pixar’s business plan, combined with the perils of taking a company public, conspired to make me cautious. Steve would have none of it, though. I was quite certain he dreamed about Pixar’s IPO and saw visions of Pixar’s stock price emblazoned across the stock exchanges, a stock price that would announce to the world just exactly what Steve’s personal investment in Pixar was now worth. It worried me that he saw Pixar’s IPO through glasses that were too rose-colored.
“The markets seem healthy and receptive right now,” Steve declared while we were on the phone one morning. “People I know say it’s a good time. Other companies are getting ready to go public. Netscape is going to be as big an offering as we’ve seen in a while. I think Pixar is bigger, and better.”
The upcoming Netscape offering had everyone excited. Netscape was credited with inventing the first widely used Web browser, called Navigator. Its public offering was one of the first public offerings in the new Internet space, and it had enjoyed huge attention in the media. Netscape’s IPO was scheduled for August 1995, just a couple of weeks away.
“Netscape represents an entire new industry,” I replied. “Interest is huge. Investors all over are talking about the Internet. They’re not thinking about animation. We’ll have to convince them about Pixar.”
“They’ll get it once they see what we’re doing,” Steve asserted. “We should plan a Pixar public offering as soon as possible.”
“We also have to consider when the market will be most receptive to Pixar,” I replied, “before we release Toy Story or after. If we do it before, and Toy Story sinks, we’ll have a disaster on our hands.”
“Why’s that?” Steve retorted. “We don’t have to promise a blockbuster to take Pixar public. We’re building a company, not a film. Investors will be buying into the idea of a new kind of entertainment company. If Toy Story disappoints, we might never be able to raise the capital we need. Maybe we should do it sooner.”
I wasn’t sure I agreed. If Pixar raised capital on the promise of Toy Story, and Toy Story flopped, Pixar’s stock price would plummet and it might never recover. Investors might never forgive Pixar if they lost money immediately, and it would be three years before we could prove ourselves to them again with a new film. In a heartbeat, Pixar could go from an exciting, hot company to a has-been known only for its disappointments. In some circles, Pixar already had this reputation. Investors would be even more unforgiving. If we took Pixar public, the timing had to be absolutely perfect. I did not think we could, or should, do it before Toy Story’s release.
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br /> “Working with Steve can be exasperating,” I complained to Hillary one night. “Some of his ideas are brilliant but others are off the mark. It’s hard to rein him in sometimes.”
“You know how to work with that,” Hillary replied. “You did it with Efi. It’s similar with Steve.”
Like Efi, for as trying as Steve could be, he was in equal measure brilliant and invigorating. But on the issue of Pixar’s IPO, I needed a sanity check. If there was one person I could turn to for that, it was my old boss and mentor, Larry Sonsini.
10
On Board
Larry Sonsini was the managing partner at my old law firm, Wilson, Sonsini, Goodrich & Rosati. He was a legend in Silicon Valley, and with good reason. Larry was Silicon Valley’s resident guru on start-ups and IPOs; he had built the firm advising many if not most of Silicon Valley’s most famous start-ups, guiding them and advising them through their initial public offerings and beyond. He was chief legal adviser to Silicon Valley’s most prominent CEOs and boards of directors. If Silicon Valley had a consigliere, it was Larry.
Within the law firm, Larry inspired a combination of admiration and awe. He was a brilliant lawyer—efficient, effective, and intensely focused on client service. I also found him to be decent and generous, and I was proud to consider him a mentor. Larry had offered me a job at his firm, given me the opportunity to build a new kind of law practice there, made me a partner, and even supported my decision to leave. I especially admired the pride he took in the firm and its role in Silicon Valley. On one occasion in his office, when we had a few minutes to talk, he compared running the firm to building a start-up: “Our mission is simple,” he said. “We serve Silicon Valley companies with as fine a legal counsel as they could get anywhere in the world. They don’t need to go anywhere else.”
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