“They might do it,” Steve went on. “There’s a lot in it for both of them. A chance for each of them to be part of one of the hottest IPOs of the year.”
I could see that Steve was not so much interested in which of the two I preferred. He had something else in mind. He wanted both.
“Well, we can ask,” I said. “No harm in trying.”
If Steve wanted both Goldman Sachs and Morgan Stanley to be involved in Pixar’s IPO, I certainly wouldn’t be against it. Actually, I’d be ecstatic. I’d be thrilled to work with even just one of them. Maybe Steve had the clout to tell them they had to work together in order to have Pixar’s business. I didn’t think we were in a position to be too presumptuous, though, and I worried about blowing it with Goldman Sachs or Morgan Stanley by telling them they’d have to work together.
“Let’s meet them first,” I suggested. “Then we’ll gauge their interest.”
The heads of the Silicon Valley branches of Morgan Stanley and Goldman Sachs could not have been more different. Frank Quattrone, of Morgan Stanley, was probably the best-known investment banker in Silicon Valley. He had a legendary, larger-than-life reputation for being bold, gregarious, difficult to impress, and a great fighter once he was on your side. He was tall, with a stocky build, a thick mustache, and an infectious smile. His personality would fill a room. He had been involved in taking many hot tech companies public, and everyone vied for his attention. He was also the lead banker for Netscape’s IPO, the hottest IPO of the year so far.
Eff Martin of Goldman Sachs was quieter and more understated. He had a warm smile and conveyed a polished and polite demeanor. If Frank Quattrone came across as Wild West, Martin was more Establishment East. About ten years older than me, Martin had a pleasant, easygoing way about him. He always seemed calm and relaxed.
Steve placed the first call to each of them to invite them to learn about Pixar. They were both enthusiastic. The game was on.
Steve and I prepared a dog-and-pony show, an informal presentation that depicted Pixar’s vision, business plan, and the risks associated with realizing that plan. The story, essentially, was that we were going to do in the 1990s what Disney had done in the 1930s, usher in a new era of animated entertainment that would take advantage of a new medium for storytelling, and in so doing create iconic films and characters that would be beloved the world over.
We made a plan that our meetings with Morgan Stanley and Goldman Sachs would begin with Steve presenting Pixar’s vision, then I would take the lead on describing our business strategy—the four pillars. That would take us to a discussion of Pixar’s business in which the risks and challenges would naturally be a part. Following my earlier discussion with Larry Sonsini, we were well prepared to discuss the risks.
The meetings went off without a hitch. Steve did a fantastic job mesmerizing Quattrone and Martin over Pixar’s potential. They could hardly have been more enthusiastic about the vision and strategy. They understood Pixar was not the typical Silicon Valley tech company, and both said they wanted to involve their entertainment specialists in LA. Even the discussion over Pixar’s risks had gone well.
“How long do you think it might take for Pixar to share in more of the profits from your films?” Martin asked.
“There’s nothing forcing Disney to renegotiate,” I said. “They could hold us to the terms of our existing arrangement, in which case it would take until our first three films have been released, maybe seven or eight years from now. If Toy Story is a hit, they might be willing to renegotiate early, especially if we’re prepared to finance our own films.”
“Have you indicated you might want to renegotiate?” Martin asked.
“Our feeling is that it’s too early,” I explained. “It would be better after releasing our first film, and after we have the funds we need.”
“Yes, yes, of course,” Martin said. “That makes a lot of sense.”
I could tell Steve was antsy in this part of the discussion. He was itching to move on, to turn the talk back to Toy Story and the dream, the part where Pixar changed the world. But I knew that although Quattrone and Martin did not know the entertainment industry deeply themselves, they had experts in Hollywood who did. These would be individuals who had spent their careers analyzing the entertainment business. It wouldn’t take them more than five minutes to figure out the financial challenges of making computer-animated feature films. I wanted them to think we knew what we were doing rather than look like entertainment neophytes who didn’t understand the business.
All in all, these meetings had gone very well, and I would have been thrilled to work with Quattrone or Martin.
“Both of them loved the story,” Steve said excitedly. “Next we bring them to Pixar. I think that’ll make them even more excited.”
I had no doubt that it would. They would be on our home turf at that point. Many companies never got that far with Goldman Sachs or Morgan Stanley. Having them both visit Pixar was a big deal.
After so much skepticism over whether we would be able to take Pixar public at all, I started to feel that perhaps we had more going for us than I had thought. With the world’s two most prestigious investment banks gearing up for a visit, it was possible we had a shot. It was even conceivable that maybe, just maybe, we would work with both of them. That would even outdo Netscape.
12
Speechless
Both Goldman Sachs and Morgan Stanley were excited to visit Pixar’s offices in Point Richmond. These would be show-and-tell meetings. No discussion of risks; just a tour of Pixar—their first chance to peek under the covers. We scheduled the meetings soon after the initial gatherings with Quattrone and Martin.
It was almost impossible for anyone to visit Pixar without coming away completely mesmerized. The rundown and humble nature of our offices, across the street from the oil refinery, belied the artistic wizardry within, turning any visit into a feast of surprises. We made certain to put our best foot forward with the two investment banks. First to visit was Quattrone from Morgan Stanley. He brought along a couple of the junior bankers from his office.
We began with a short talk in the conference room near Ed’s and my offices, a small, windowless space with a conference table in the middle and a whiteboard at one end, near the door. Steve, Ed, and I were present for this meeting. Steve began with a quick overview of Pixar’s history, an update on Toy Story’s production, and our vision for the company.
“Now we’d love to give you a tour,” Steve wrapped up.
“Great,” Quattrone responded. “Just what we’ve been looking forward to.”
We began in a nearby office where there were two engineers working on 3-D exoskeleton models for Pixar’s next film, A Bug’s Life. The office was unremarkable, like any you might see in Silicon Valley, although you wouldn’t often find engineers working on digital models of bug shells.
Then we meandered past a hallway where Quattrone and his team got their first glimpse of something film related. It was a small room with a large, high table in the middle and a shelf around the sides. On the table and shelf were clay models of Toy Story’s characters. These models, usually about a foot high, were used to develop film characters, and eventually to help digitize them into 3-D computer models.
“Wow!” Quattrone marveled. “These are exquisite. So this is how you first develop the look of a character?”
“Yes,” Ed explained. “It is the first time we see them in 3-D. These are the models we use to build the computerized versions you’ll see soon.”
“They’re extraordinary,” Quattrone said. “They belong in a museum!”
We were off to a good start, and we were just warming up.
Then we visited the group who created the artistic renderings of the film’s scenes and backgrounds—explorations of color, lighting, mood, and style. There, we showed off the renderings of different scenes in Toy Story: Andy’s room, the final chase sequence, the aliens in the vending machine.
“This is incr
edible,” Quattrone said. “I had no idea this level of artistry was happening here.”
Next up was the storyboard room where we wandered through the thousands of white cards that depicted every detail of the film. Quattrone could hardly believe that we’d have to draw around twenty-five thousand of them before a film’s story was finalized.
Then we walked over to the animators’ area that had so impressed me when I first visited. We had arranged a visit with one of the animators who demonstrated the painstaking process of bringing the characters to life on their large computer monitors, one tiny movement at a time, all perfectly timed to the film’s dialogue track.
For the grand finale, we took Quattrone and his team to the screening room where they laughed at the goofiness of the old couches and then sat down for a screening. We showed them Pixar’s short films and a segment from the beginning of Toy Story, just as I had seen when I first came to Pixar.
“What do you think?” Steve asked Quattrone when it was over.
“I’m speechless,” Quattrone said. “Really. I had no idea what was going on here. This is truly amazing. You have to see it to really get it. We’d have to make sure investors can somehow see this too.”
A very good sign.
A few days later, Eff Martin from Goldman Sachs visited. We took him through the same experience.
“This is fantastic!” Martin beamed at the end of the screening. “I love that this is happening right here, away from Hollywood. It is so exciting. Thank you for showing us. I want to get my Hollywood counterparts involved.”
Those were the magic words we wanted to hear. The next step with both Goldman Sachs and Morgan Stanley was to speak to their industry experts in Hollywood. That’s where we would get down to the nitty-gritty of Pixar’s business.
These visits had gone so well I was beginning to think maybe Steve was right. Perhaps both Goldman Sachs and Morgan Stanley would be so enthusiastic about wanting to be part of Pixar’s IPO that they would do it together. That would be an incredible coup, almost unprecedented in the start-up world. If we had to choose between them, though, I wasn’t sure which way we would go.
“What do you think?” I asked Steve. “Any preference?”
“I’m torn,” said Steve. “I like Frank Quattrone, and he’s done a lot of important deals. Eff is also great.”
“My thoughts too,” I said. “I also want to meet their entertainment industry experts. That might sway us.”
I looked forward to that opportunity.
We heard from Martin of Goldman Sachs first. A few days after the visit to Pixar he called Steve and asked to meet us at Steve’s offices at NeXT. I stopped by there on my way up to Pixar, and we met in a conference room.
“I talked to my Hollywood counterparts,” Martin said. “We love Pixar. It’s a fantastic story, really fantastic, and we want to be part of it.”
This is exactly what we wanted to hear.
“Our concern is the timing,” Martin went on. “The length of the Disney contract injects a lot of uncertainty about when you’ll be able to earn more of the profits from your films. We’re thinking it would be better to wait until there is more visibility into increasing your profits, and then take it public. That would give you a much better chance. How does that sound to you?”
It sounded terrible. Goldman Sachs didn’t want to take the risk that it might take years until Disney would renegotiate or until we could talk to other studios. But we needed to raise capital in anticipation of that renegotiation. This was a thinly veiled “no.” Steve was shocked.
“I don’t think you get it at all,” he protested. “We can’t wait that long.”
“I hear your frustration,” Martin tried to empathize, “but right now there’s just too much risk. We think it’s better to wait.”
After Martin left, Steve seemed dumbfounded.
“They just didn’t get it,” was all he had to say.
But it was okay. We needed only one lead investment bank. Morgan Stanley had taken Apple public and perhaps it was fitting that they do another Steve Jobs IPO. Quattrone had promised to get back to Steve quickly, and it was just a couple more days before he did. But he didn’t ask for a meeting, as Martin had done. He just picked up the phone and called. Steve contacted me right away with the news.
“I spoke to Frank Quattrone,” he started.
“Great!” I said. “What are the next steps?”
“None,” Steve replied. “They’re not interested.”
A rare silence on the phone.
This was a huge blow. I wasn’t sure what to say. Steve didn’t sound like he was in the mood to talk.
“Did he say why?” I asked.
“Something about the risks of blockbuster films and their unpredictability.”
That is all I got from Steve.
In one instant, Steve’s dreams of an iconic IPO had been dashed. There would be no Goldman Sachs. No Morgan Stanley. Just like that, the gatekeepers had closed the gate.
13
West Coast Swagger
As I put down the phone after Steve told me about Morgan Stanley’s rejection, all of my fears about Pixar came rushing back. Perhaps I had allowed Steve’s exuberance and the bankers’ early enthusiasm to cloud my view of Pixar’s business risks. Before we had engaged Goldman Sachs and Morgan Stanley in discussions, I would have said that working with either one of them was a long shot. I wouldn’t have been at all surprised if they had turned us down. But somewhere in the process I had let myself believe they would want to go forward. That made the rejection sting all the more.
Over the next couple of days, the magnitude of what had occurred sunk in. I didn’t hear much more from Steve about it. He just went quiet. I also didn’t want to make a big deal of it at Pixar. There was too much excitement over Toy Story, which was opening in just over three months. Moreover, no one was thinking much about Pixar’s investment bankers. They were thinking about the IPO, though. Everyone knew this was the only way to bring value to their stock options. The buzz around the company was that we were racing toward the release of Toy Story while also having an IPO in our sights. The last thing I wanted to do was deflate the Toy Story balloon with bad news on the IPO front.
As usual, I found plenty of time to think on my long commute.
In the first place, I didn’t like how things had played out with Goldman Sachs and Morgan Stanley. I understood that it was common for companies to be passed over somewhere in the process of interviewing with investment banks, but I felt we never even had our day in court. I was confident Quattrone and Martin had talked to their banks’ Hollywood experts, but then we were dismissed out of hand, without ever having the chance to make our case to them. That left a bitter taste in my mouth. Now I had another reason for making Pixar’s IPO a big success: to prove to the world’s two largest investment banks that they were wrong. They might be the kings of the investment banking hill, but they were far from almighty. We’d show them.
More significant was whether their rejection signaled a bigger issue with taking Pixar public. Were they reflecting what any investment bank would say? It was certainly possible because Pixar’s financial profile was so risky and so unconventional. Moreover, if we wanted to do an IPO this year, the window was rapidly closing on us. It took time to bring investment banks up to speed, and it wouldn’t help that another investment bank might wonder why Morgan Stanley and Goldman Sachs turned us down. If we missed this crucial window, with our next film at least three years away, who knows how long it might be before we could raise the capital we needed? That put the entirety of our business plan at risk. We needed someone fast.
One possibility came to mind, an investment bank that I had done business with before: Robertson Stephens.
Robertson Stephens had been the lead banker on the IPO for my previous company, Electronics for Imaging. I had a great relationship with them, and I was pretty sure they liked and trusted me. They were one of a handful of boutique investment banks that spec
ialized in high-tech public offerings. In Silicon Valley they had a stellar reputation, but they didn’t have the size or clout of Morgan Stanley or Goldman Sachs, and they had no expertise in the entertainment industry. That would normally count them out of representing an entertainment company.
But we were running out of options. If Robertson Stephens came on board, we would certainly need another investment bank that did bring clout in the entertainment world. I also liked Robertson Stephens. They prided themselves on being as effective as the big players, only nimbler and more efficient. If they saw Pixar as a hybrid technology/entertainment company, there was a chance they might just take a swing at it.
My first step was to give Larry Sonsini a call. He knew Robertson Stephens well. If he thought this was a bad idea, I wouldn’t take it any further.
“I like it,” Larry said. “The firm has a great relationship with Robertson Stephens; so do you. I agree we can bring someone else in on the entertainment side. It’s worth a shot.”
Once again, Larry’s backing gave me momentum. Now I had a plan that depended on convincing one local technology industry investment bank to do an entertainment IPO, and then finding another investment bank that would give us credibility in the entertainment world. In a sense, we needed to be struck by lightning—twice.
Steve also had to be on board, and I imagined he would not be thrilled about Robertson Stephens, an investment bank he probably knew little if anything about. Even if Steve saw this as the backup plan, if he had any hope of fulfilling his IPO dream this year, we needed some new investment bankers, and we needed them yesterday. My next conversation was with him.
“We need a banker on board right now if we’re to have any shot at doing an IPO this year,” I said. “How do you feel about me giving Robertson Stephens a call?”
“Robertson Stephens?” Steve said skeptically. “I’ve never dealt with them.”
“I know them well,” I said. “They’re good, really good. They’ve been one of the most active investment banks in the tech industry. They can do as good a job as Goldman or Morgan. But they’re local. No entertainment experience. Just tech.”
To Pixar and Beyond Page 13