the hard thing about hard things full audio book by ben horowitz

0:01 this is for Felicia Sophia Mariah and the buer me Familia for putting up with me when I was learning all of this 100% of my portion of the proceeds of this book will go to help women in developing countries gain basic civil rights via the American Jewish World Service they truly face the hard things introduction this the real world homie School finished they didn't sto your dreams you don't know who did it Kanye West Gorgeous every time I read a management or self-help book I find myself saying that's fine but that wasn't really the hard thing about the

0:48 situation the hard thing isn't setting a big hairy audacious goal the hard thing is laying people off when you miss the Big Goal the hard thing isn't hiring great people the hard thing is when those great people develop a sense of entitlement and start demanding unreasonable things the hard thing isn't setting up an organizational chart the hard thing is getting people to communicate within the organization that you just designed the hard thing isn't dreaming big the hard thing is waking up in the middle of the night and a cold sweat when the dream turns into a nightmare the problem with these books is that they attempt to provide a recipe for challenges that have no recipes there's no recipe for really complicated

1:33 Dynamic situations there's no recipe for building a high-tech company there's no recipe for leading a group of people out of trouble there's no recipe for making a series of head songs there's no recipe for playing NFL quarterback there's no recipe for running for president and there's no recipe for motivating teams when your business has turn to crap that's the hard thing about hard things there is no formula for deal with them nonetheless there are many bits of advice and experience that can help with the hard things I do not attempt to present a formula in this book instead I present my story and the difficulties that I have faced as an entrepreneur a CEO and now as a venture capitalist I

2:18 still find these lessons useful especially as I work with a new generation of founder CEOs building a company inevitably leads to tough times I've been there I've done that circumstances May differ but the deeper patterns and the lessons keep resonating for the past several years I've encapsulated these lessons in a series of blog posts that have been read by millions of people many of those have reached out to me wanting to know the backstory to the lessons this book tells that backstory for the first time and includes the related lessons from the blog I've also been inspired by many friends advisers and family members who've helped me throughout my career and also by hip-hop rap music because hip-hop artists aspire to be both great

3:05 and successful and see themselves as entrepreneurs many of the themes competing making money being misunderstood provide insight into the hard things I share my experiences in the hope of providing Clues and inspiration for others who find themselves in the struggle to build something out of nothing chapter 1 on from communist to venture capitalist this here is all about my wife my kids the life that I live through the night I was his it was right but I did my ups and downs my slips my Falls my trials and tribulations my heart my

3:51 balls DMX who we be the other day I threw a big barbecue at my house and invited a hundred of my closest friends these types of gatherings aren't unusual my brother-in-law carthew and I have been barbecuing for years and my skills have earned me the nickname from my African-American friends the Jackie Robinson of barbecue I cross the color line at this particular barbecue the conversation turned to the great rapper NS my friend Tristan Walker a young African-American entrepreneur commented proudly that NS was from his home project Queensbridge New York one of the largest public housing project projects in the United States my 73-year-old Jewish father interjected I've been to Queensbridge convinced that there was no

4:37 way that my old white father been to Queensbridge Tristan said you must mean Queens Queensbridge is actually a housing project in an extremely rough neighborhood my father insisted no it was Queensbridge I pointed out to Tristan that my father grew up in Queens so he couldn't possibly be confused then I asked Dad what would you doing in Queensbridge he replied I was passing out communist literature when I was 11 years old I remembered well because my mother got very upset that the Communist Party sent me into the projects she thought it was too dangerous for a little kid my grandparents were actually card carrying Communists as an active member of the Communist Party my grandfather Phil Horowitz lost his job

5:23 as a school teacher during the McCarthy era my father was a red diaper baby and grew up in rated in the philosophy of the left in 1968 he moved our family West to Berkeley California and became editor of the faint new left magazine ramparts as a result I grew up in the city affectionately known by its inhabitants as the People's Republic of Berkeley as a young child I was incredibly shy and terrified of adults when my mother dropped me off at Nursery School for the first time I began to cry the teacher told my mother to just leave while reassuring her that that crying was common among nursery school children but when Alyssa Horowitz returned 3 hours later she found me soaking wet and still crying the teacher explained that

6:09 I hadn't stopped and now my clothes were drenched as a result I got kicked out of Nursery School that day if my mother hadn't been the most patient person in the world I might never have gone to school when everybody around her recommended psychiatric treatment she was patient willing to wait until I got comfortable with the world no matter how long it took when I was 5 years old we moved from a one-bedroom house on Glenn Avenue which become far too small for a six-person family to a larger one on Bonita Avenue Bonita was middle- class Berkeley which means something a bit different from what one finds in most middle- class neighborhoods the block was a collection of hippies crazy people lower class people working hard to move up and upperclass people taking enough

6:55 drugs to move down one day one of my older brother Jonathan friends Roger not his real name was over at our house Roger pointed to an African-American kid down the block who is riding in a red wagon Roger dared me go down the street tell that kid to give you his wagon and if he says anything spit in his face and call him a a few things require clarification here first we were in Berkeley so that was not common language in fact i' never heard the word before and didn't know what it meant meant though I guessed it wasn't a compliment second Roger wasn't racist and he wasn't raised in a bad home his father was a Berkeley professor and both

7:40 his parents were some of the nicest people in the world but we later found out that Roger suffered from schizophrenia and His Dark Side wanted to see a fight Roger's Command put me in a difficult situation I was terrified of Roger I thought that he would surely give me a severe beating if I didn't follow his instructions on the other hand I was terrified of asking for the wagon hell I was terrified of everything I was much too scared of Roger to stay where I was so I began walking down the block toward the other kid the distance was probably 30 yard but it felt like 30 mil when I finally got there I could barely move I did not know what to say so I just opened my mouth and started

8:25 talking can I ride in your wagon is what came out Joel Clark Jr said sure when I turned to see what Roger would do he was gone apparently his light side had taken over and he'd moved on to something else Joel and I went on to play all day that day and we've been best friends ever since 18 years later he would be the best man at my wedding until now I've never told that story to anyone but it shaped my life it taught me that being scared didn't didn't mean I was gutless what I did mattered and would determine whether I would be a hero or a coward I've often thought back on that day realizing that if I done what Roger told me to do I

9:12 would never have met my best friend that experience also taught me not to judge things by their surfaces until you make the effort to get to know someone or something you don't know anything there are no shortcuts to knowledge especially knowledge gained from personal experience following conventional wisdom and relying on shortcuts can be worse than knowing nothing at all turn your in over the years I worked hard to avoid being influenced by First Impressions and blindly adhering to Convention growing up in Berkeley as an excellent student in a town that frowned upon football as being too militaristic I wasn't expected to join the Berkeley High School football team but that's

9:58 what I did this was a big step for me I had not played in any of the PE football leagues so it was my first exposure to the sport nonetheless those earlier lessons in dealing with fear helped me tremendously in high school football being able to handle fear 75% of the game I will never forget the first team meeting with head coach Chico Mendoza Coach Mendoza was a tough old guy who had played college football at Texas Christian University home of the mighty horn frogs Coach Mendoza began his opening speech some of you guys will come out here and you just won't be serious you'll get here and start shooting the talking bullshitting not doing and just want to look good in your football if you do that then you know what

10:46 turn your in he went on to elaborate on what was unacceptable come late to practice turn your in don't want to hit turn your in walk on the grass turn your sh in call me Chico turn your in it was the most intense hilarious poetic speech I'd ever heard I loved it I couldn't wait to get home and tell my mother she was horrified but I still loved it in retrospect it was my first lesson in leadership former Secretary of State Coen Powell says that leadership is the ability to get someone to follow you even if only out of curiosity I was certainly curious to see what Coach Mendoza would say next I was

11:33 the only kid on the football team who was also on the highest academic track in math so my teammates and I didn't see each other in many classes as a result I ended up moving in multiple Social Circles and hanging out with kids with very different outlooks on the world it amazed me how a diverse perspective utterly changed the meaning of every significant event in the world for instance when run dmc's Hard Times album came out with with its Relentless bass drum it sent an earthquake through the football team but not even a ripple through my Calculus class Ronald Reagan Strategic Defense Initiative was considered an outrage among young scientists due to its questionable technical Foundation but those aspects when unnoticed at football practice looking at the world through such

12:19 different prisms helped me separate facts from perception this ability would serve me incredibly well later when I became an entrepreneur and CEO and particularly dire circumstances when the facts seem to dictate a certain outcome I learned to look for alternative narratives and explanations coming from radically different perspectives to inform my Outlook the simple existence of an alternate plausible scenario is often all that's needed to keep hope alive among a worried Workforce blind dat in the summer of 1986 I'd finished my sophomore year of college at Columbia University and I was staying with my father who was now living in Los Angeles I had been set up on a blind date by my

13:06 friend and high school football teammate Claude Shaw Claude and I got ready for the double date with his girlfriend Jackie Williams and my date Felicia Wy by preparing an elaborate dinner we meticulously planned and cooked all day and had the entire meal including four perfectly presented T-bone steaks ready at 7:00 p.m. date time but there were no dates an hour passed but we didn't get too worked up Jackie was known for her tardiness so no worries then 2 hours passed and Claude called for a status check I listened in shock as I looked over the now cold gourmet meal that we prepared my date Felicia had decided that she was too tired to show up for the date wow how

13:53 obnoxious I told Claude to ham me the phone I introduced myself hi this is man your blind date Felicia I am sorry but I'm tired and it is late me well it is late because you are late Felicia I know but I'm just too tired to come over at this point I decided to appeal to her sense of empathy me well I understand your predicament but the time to communicate this message would have been before we spent all day cooking dinner at this point anything short of getting into your car and driving here immediately would be rude and leave a permanently poor impression if she was totally self-centered as she appeared to be my plea would have no effect and I

14:39 would be better off missing the date on the other hand if she didn't want to go out like that then there might be something there Felicia okay I'll come over 90 minutes later she arrived wearing white shorts and looking as pretty as can be and all my focus and anticipation about the date I completely forgotten about the fist fight I'd been in the day before during a pickup basketball game in the San Fernando Valley a 6'2 in crew cut sporting camouflage pants wearing fraternity boy looking player threw the ball at my brother Jonathan was a musician had long hair and probably weighed about 155 lbs at the time on the other hand I was used to football and fighting and was ready for action I judged the situation on my

15:25 first impression and I rushed the frat boy a scuffle ensued I landed some good punches but caught a right hook under my left eye leaving a bit of a Mark it's possible that my target player was simply mad about a hard foul rather than trying to bully my brother but that's the price of not taking the time to understand I will never know whatever the case when I opened the door to greet our dates Felicia's award-winning green eyes immediately fixed on the welt under my eye her first impression told to me years later this guy's a thug coming here was a big mistake fortunately neither of us relied on our first impressions we have been happily married for nearly 25 years and

16:12 have three wonderful children Silicon Valley during one summer in college I got a job as an engineer at a company called silicon Graphics SGI The Experience BW blew my mind the company invented modern computer graphics and powered a whole new class set of applications ranging from the movie Terminator 2 to amazing flight simulators everybody there was so smart the things they built were so cool I wanted to work for silicon graphics for the rest of my life after graduating from college and graduate school in computer science I went back to work for SGI being there was a dream come true and I loved it after my first year at

17:00 SGI I met a former head of marketing for the company rosley buoro who had a new startup Rosalie had heard about me from her daughter who also worked with me at SGI Rosalie recruited me hard eventually she got me and I went to work for her at netlabs joining netlabs turned out to be a horrible decision for me the company was run by Andre swager a former huet Packer executive and more important rosal's husband Andre and rosaly had been brought in by the Venture capitalists as the professional management team Unfortunately they understood very little about the products or the technology and they sent the company off in one crazy Direction after the next this was the first time

17:45 that I started to understand the importance of Founders running their companies to make matters more complicated my second daughter Mariah have been diagnosed with autism which made working at a startup a terrible burden for our family as I needed to spend more time at home one very hot day my father came over for a visit we could not afford air conditioning and all three children were crying as my father and I sat there sweating in the 105° heat my father turned to me and said Son do you know what cheap since I had absolutely no idea what he was talking about I replied now what flowers flowers are really cheap but do you know what's expensive he asked again

18:33 I replied no what he said divorce something about that joke which was not really a joke made me realize that I had run out of time up until that point I not really made any serious choices I felt like I had unlimited bandwidth and could do everything in life that I wanted to do simultaneously but it's just made it suddenly clear that by continuing on the course I was on I might lose my family by doing everything I would fail at the most important thing it was the first time that I forced myself to look at the world through priorities that were not purely my own I thought that I could pursue my career all my interests and build my family

19:20 more important I always thought about myself first when you are part of a family or part of a group that kind of thinking can get you into trouble and I was in deep trouble in my mind I was confident that I was a good person and not selfish but my actions said otherwise I had to stop being a boy and become a man I had to put first things first I had to consider the people who I cared about most before considering myself I decided to quit net Labs the next day I found a job at Lotus development that would allow me to get my home life straightened out I stopped thinking about myself and focused on what was best for my family I started being the person that I wanted

20:06 to be Netscape one day while working at Lotus one of my co-workers showed me a new product called Mosaic which was developed by some students at the University of Illinois Mosaic was essentially a graphical interface to the internet a technology formerly only used by scientists and researchers it amazed me it was so obviously the future and I was so obviously wasting my time working on anything but the internet several months later I read about a company called Netscape which had been co-founded by former silicon Graphics founder Jim Clark and Mosaic inventor Mark Andre I instantly decided that I should interview for a job there I called a

20:52 friend who worked at Netscape and asked if he could get me an interview with the company he obliged and I was on my way during the first interviews I met everyone on the product management team I thought the meetings went well but when I arrived home that evening Felicia was in tears the Netscape recruiter had called me to give me some tips and Felicia had answered this was before the days of pervasive cell phones the recruiter informed her that it would be unlikely I'd get the job because the group was looking for candidates with Stanford or Harvard mbas Felicia suggested that maybe I could go back to school given that we had three children she knew this was unrealistic hence the tears I explained that recruiters were not hiring managers and that they might

21:38 consider me despite my lack of proper business schooling the next day the hiring manager called back to let me know that they wanted me to interview with co-founder and chief technical officer Mark andr he was 22 years old at the time in retrospect it's easy to think both the web browser and the internet were inevitable but without Mark's Work it is likely that we would be living in a very different world at the time most people believed only scientists and researchers would use the internet the internet was thought to be too arcade insecure and slow to meet real business needs even after the introduction of Mosaic the world's first browser almost nobody thought the internet would be significant beyond the scientific Community least of all the most important technology industry

22:24 leaders who were busy building proprietary Alternatives the overwhelming favorites to dominate the race to become the so-called information Super Highway were competing proprietary Technologies from industry powerhouses such as Oracle and Microsoft their stories captured the imagination of the business press this was not so illogical since most companies didn't even run tcpip the software foundation for the internet they ran proprietary networking protocols such as Apple talk net bios and sna as late as November 1995 bill Gates wrote a book titled the road ahead in which he predicted that the information Super Highway a network connecting all businesses and consumers in a world of frictionless Commerce would be the logical successor to the

23:10 internet and would rule the future Gates later went back and change references from the information super highway to the internet but that was not his original Vision the implications of this proprietary Vision were not good for business or for consumers in the minds of Visionaries like Bill Gates and Larry Ellison the corporations that own the information Super Highway would tax every transaction by charging a vigorish as Microsoft's then Chief technology officer Nathan merval referred to it it's difficult to overstate the momentum that the proprietary information Super Highway carried after Mosaic even Mark and his co-founder Jim Clark originally planned a business for video distribution to run on top of the proprietary information Super Highway

23:55 not the internet it wasn't until d deep into the planning process that they decided that by improving the browser to make it secure more functional and easier to use they could make the internet the network of the future and that became the mission of Netscape a mission that they would gloriously accomplish interviewing with Mark was like no other job interview I'd ever had gone were questions about my resume my career progression and my work habits he replaced them with a dizzying inquiry into the history of email collaboration software and what the future might hold I was an expert in the topic because I'd spent the last several years working on the leading products in the category but I was shocked by how much a 22-year-old kid knew about the history of the

24:41 computer business I've met many really smart young people in my career but never a young technology historian Mark's intellect and instincts took me aback but beyond Mark's historical knowledge his insights about Technologies such as replication r decisive and on point after the interview I phoned my brother and told him that I just interviewed with Mark Andre and I thought that he might be the smartest person I'd ever met a week later I got the job I was thrilled I didn't really care what the offer was I knew that Mark and Netscape would change the world and I wanted to be part of it I could not wait to get started once at Netscape I was put in charge of their

25:26 Enterprise web server product product line the line consisted of two products the regular web server which listed for $1,200 and the secure web server a web server that included the then brand new security protocol invented by Netscape called SSL secure sockets layer for $5,000 at the time that I joined we had two Engineers working on the web servers Rob McCool who had invented the NCSA web server and his twin brother Mike mol by the time Netscape went public in August 1995 we had grown the web server team to about nine Engineers the Netscape initial public offering IPO was both spectacular and historic the stock initially priced at $14 per share but a

26:12 last minute decision doubled the initial offering to $28 per share it spiked to $75 nearly a record for a first day gain and closed at $58 giving Netscape a market value of nearly $3 billion on the day of the IPO more than that the IPO was an earthquake in the business world as my friend and investment banker Frank quatron said at the time no one wanted to tell their grandchildren that they missed out on this one the deal changed everything Microsoft had been in business for more than a decade before its IPO we've been alive for 16 months companies began to get defined his new economy or his old economy and the new economy was winning the New York times

26:58 called the Netscape IPO world shaking but there was a crack in our armor Microsoft announced that it would be bundling its browser Internet Explorer with its upcoming breakthrough operating system release Windows 95 for free this posed a huge problem to Netscape because nearly all of our Revenue came from browser sales and Microsoft controlled more than 90% of operating systems our answer to investors we would make our money on web servers 2 months later we got our hands on an early release of Microsoft's upcoming web server internet information server IIs we deconstructed IIs and found that it had every feature that we

27:43 had including the security in our high-end product and was five times faster uh-oh I figured that we had about 5 months before Microsoft released IIs to solve the problem or else we would be toast in the old economy product Cycles typically took 18 months to complete so this was an exceptionally short time frame even in the new economy so I went to see our department head Mike Homer with the possible exception of Mark Mike Homer was the most significant creative force behind Netscape more important the worse a situation became the stronger Mike would get during particularly brutal competitive attacks most Executives would run from the Press Mike on the other hand was was always front

28:28 and center when Microsoft unveiled its famous Embrace and extend strategy a dramatic pivot to attack Netscape Mike took every phone call sometimes even talking to two reporters at once with a phone in each hand he was The Ultimate Warrior Mike and I spent the next several months developing a comprehensive answer to Microsoft's threat if they were going to give our products away then we were going to offer a dirt cheap open alternative to the highly expensive and proprietary Microsoft back office product line to do so we acquired two companies which provided us with a competitive alternative to Microsoft Exchange we then cut a landmark deal with the database company infomix to provide us unlimited relational database access

29:14 through the web for $50 a copy which was literally hundreds of times less than Microsoft charged once we assembled the entire package Mike named it Netscape sweet spot as it would be the suite that displac Microsoft's back office we lined everything up for a major launch on March 5th 1996 in New York then just 2 weeks before the launch Mark without telling Mike or me revealed the entire strategy to the publication computer reseller news I was livid I immediately sent him a short email two Mark andreon CC Mike Homer from Ben Horowitz subject launch I I guess we're not going to wait until the 5ifth to launch the strategy

30:01 Ben within 15 minutes I received the following reply two Ben Horowitz CC Mike Homer Jim barkdale CEO Jim Clark chairman from Mark andreon subject reply launch apparently you do not understand how serious the situation is we are getting killed killed killed out there our current product is radically worse than the competition we've had nothing to say for months as a result we've lost over $3 billion in market capitalization we are now in danger of losing the entire company and it's all server product Management's fault next time do the interview yourself you

30:48 Mark I received this email the same day that Mark appeared Barefoot and sitting on a throne on the cover of Time Magazine when I first saw the cover i f thrilled I never met anyone in my life who had been on the cover of time then I felt sick I brought both the magazine and the email home to Felicia to get a second opinion I was very worried I was 29 years old had a wife and three children and needed my job she looked at the email in the magazine cover and said you need to start looking for a job right away in the end I didn't get fired and over the next 2 years sweet spot Grew From nothing to a $400 million a year business more shocking Mark and I

31:33 eventually became friends we've been friends and business partners ever since people often ask me how we've managed to work effectively across three companies over 18 years most business relationships either become too tense to tolerate or not tense enough to be productive after a while other people challenge each other to the point where they don't like each other or they become complacent about each other's feedback and no longer benefit from the relationship with Mark and me even after 18 years he upsets me almost every day by finding something wrong in my thinking and I do the same for him it works starting a company at the end of 1998 and under

32:19 immense pressure from Microsoft which used the full force of its operating system Monopoly to subsidize free products in every category in which net competed we sold the company to America Online AOL in the short term this was a big victory for Microsoft since it had driven its biggest threat into the arms of a far less threatening competitor in the long term however Netscape inflicted irreparable damage on Microsoft's stronghold on the Computing industry our work moved developers from win32 API Microsoft's proprietary platform to the internet someone writing new functionality for computers no longer wrote for Microsoft's proprietary platform instead they wrote to the internet and worldwide web's standard

33:06 interfaces once Microsoft lost its grip on developers it became only a matter of time before it lost its Monopoly on operating systems along the way Netscape invented many of the foundational Technologies of the modern internet including JavaScript SSL and cookies once inside AOL I was assigned to run the e-commerce platform and Mark became the chief technology officer after a few months it became apparent to both of us that AOL saw itself as more of a media company than a technology company technology enabled great New Media projects but the strategy was a media strategy and the top executive Bob Pitman was a genius media executive media companies focused on things like creating great stories whereas

33:52 technology companies focused on creating a better way of doing things we began to think about new ideas and about forming a new company in the process we added two other potential co-founders to the discussion Dr Timothy hows was co-inventor of the lightweight directory access protocol ldap a masterful simplification of its bustine x.500 predecessor we hired Tim at in Netscape in 1996 and together we successfully made ldap the internet directory standard to this day if a program is interested in information about a person it accesses that information via ldap the fourth member of our team was incre who had co-founded an application server company called Kaa systems which

34:39 Netscape had acquired he had been acting as CTO of the e-commerce division that I ran and in particular worked closely with the partner companies in making sure that they could handle the AOL scale as we discussed ideas Inc complained that every time we try to connect an AOL partner on the AOL e-commerce platform the partner's site would crash because it couldn't handle the traffic load deploying software to scale to millions of users was totally different from making it work for thousands and it was extremely complicated H there ought to be a company that does all that for them as we expanded the idea we landed on the concept of a Computing Cloud the term Cloud had been used previously in the Telecommunications industry to describe

35:24 the smart Cloud that handled all the complexity of rout in Billing and the like so that one could plug a dumb device into the smart cloud and get all the smart functionality for free we thought the same concept was needed in Computing so that software developers wouldn't have to worry about security scaling and disaster recovery and if you're going to build a cloud it should be big and loud and that's how loud Cloud was born interestingly the most lasting remnant of loud cloud is the name itself as the word cloud hadn't been previously used used to describe a Computing platform we incorporated the company and set out to raise money it was 1999 chapter

36:11 2 I Will Survive did you think I'd crumble did you think I'd lay down and die oh no not I I Will Survive Gloria Gainer I Will Survive coming off the success of Netscape Mark knew all the top Venture capitalists in Silicon Valley so we needed no introductions unfortunately for us Kleiner Perkins The Firm that backed Netscape had already funded a potentially competitive company we spoke to all the other top tier firms and decided to go with Andy rackliffe of Benchmark Capital if I had to describe Andy with one word it would be gentleman smart refined and gracious and was a

36:57 brilliant abstract thinker who could encapsulate complex strategies into py sentences with ease Benchmark would invest $15 million at a pre-money valuation the value of the company before the cash goes into the company treasury of $45 million in addition mark would invest $6 million bringing the total value of the company including its cash to $66 million and would serve as our full-time chairman of the board Tim how would be our chief technology officer I would be CEO loudcloud was 2 months old the valuation and the size of the funding were signs of the times and created an imperative to get big and captur the market before similarly well-funded competitors could and he said to me Ben

37:44 think about how you might run the business if Capital were free 2 months later we would raise an additional $45 million from Morgan Stanley in debt with no covenants and no payments for 3 years so Andy's question was more reality based than you might think nonetheless what would you do if Capital were free is a dangerous question to ask an entrepreneur it's kind of like asking a fat person what would you do if ice cream had the exact same nutritional value as broccoli the thinking this question leads to can be extremely dangerous naturally I took the advice and ran with it we quickly built out our Cloud infrastructure and began signing up customers at a rapid rate within 7 months of founding with we'd already booked $10 million in contracts

38:30 loudcloud was taking off but we were in a Race Against Time and the competition this meant hiring the best people and Fielding the broadest cloud service and that meant spending money lots of it our ninth hire was a recruiter and we hired a human resources person when we had a dozen employees we were hiring 30 employees a month and snagging many of the Valley's smartest people one of our new recruits had quit his job at AOL to spend 2 months mountain climbing but instead he joined us another forfeited Millions to join loudcloud when he resigned from another company on the day of its IPO 6 months in we had nearly 200 employees Silicon Valley was on fire and loudcloud was buil in a wired cover

39:17 story as Mark andreason's second coming we traded our first office where you'd blow a circuit if you ran the microwave and coffee maker at the same time for 15,000 foot Warehouse in Sunnyvale which was too small for us by the time we moved in we spent $5 million to move into a new three-story stucko building with Jade colored tiles we called Lage as in the Taj Mahal it was also too small to keep Pace with our Hing frenzy and people were sitting in the hallways we rented a third parking lot down the street and ran shuttle Vans to the office the neighbors hated us the kitchen was stocked like Costco and when we fired the snack contractor for making our fridge look like the one in Philip Roth's goodbye Columbus he asked for

40:03 Equity this was the time in the next quarter we booked $27 Million worth of new contracts and we were less than 9 months old it seemed like we were building the greatest business of all time then came the great.com crash the NASDAQ peaked at 54862 on March 10th 2000 more than double its value from the year before and then fell by 10% 10 days later a Baron's cover story titled burning up predicted what was to come by April after the government declared Microsoft a monopoly the index plummeted even further startups lost massive value investors lost massive wealth and Dooms once heralded as the harbinger of a new

40:49 economy went out of business almost overnight and became known as dot bombs the NASDAQ eventually fell below 12200 an 80% drop from its peak we thought our business might have been the fastest growing of all time at that point that was the good news the bad news was that we needed to raise even more money in this disastrous climate nearly all of the $66 million in equity and debt we had raised had already been deployed in our quest to build the number one cloud service and to support our now fast growing set of customers theom crash had spooked investors so raising money wasn't going to be easy especially since most of our customers were startups this became quite clear when we pitched the deal to the Japanese firm soft Bank

41:36 Capital my friend and loudcloud board member Bill Campbell knew the soft Bank people well and offered to get some back Channel information following the pitch when my assistant told me that bill was on the line I quickly answered the phone I was eager to hear where we stood I asked Bill what did they say Bill replied in his raspy coach's voice Ben well honestly they thought you were smoking crack with nearly 300 employees and very little cash left I felt like I was going to die it was the first time I'd felt that way as CEO of loudcloud but not nearly the last during this time I learned the most important rule of raising money privately look for a market of one you

42:22 only need one investor to say yes so it's best to ignore the other 30 who say no we eventually found investors for a series C round meaning our third round of funding at an amazing $700 million pre-money valuation and raised $120 million the sales forecast for the quarter came at at $100 million and things seemed like they might be okay I felt confident that our sales forecasts would hold up given that previous forecasts that underestimated actual performance and perhaps I speculated we could seamlessly migrate our customer base away fromom bombs to more stable traditional customers such as Nike our largest customer at the time and then the wheels came off we finished the

43:08 third quarter of 2000 with $37 million in bookings not the $100 million that we had forecast theom implosion turned out to be far more catastrophic than we had predicted Euphoria and Terror I needed to raise money yet again only this time the environment was even worse in the fourth quarter of 2000 I met with every possible funding source including Prince aled bin talal of Saudi Arabia but nobody was willing to invest money at any valuation we'd gone from being the hottest startup in Silicon Valley to unfund in 6 months with 477 employees and a business that resembled a ticking Time Bomb I searched for

43:55 answers thinking about what might happen if we ran completely out of money laying off all the employees that I'd so carefully selected and hired losing all my investors money jeopardizing all the customers who trusted us with their business made it difficult to concentrate on the possibilities Mark and Dron attempted to cheer me up with a not so funny at the time joke Mark do you know the best thing about startups Ben what Mark you only ever experience two emotions Euphoria and Terror and I find that lack of sleep enhances them both with the clock ticking one unattractive but intriguing option emerged we could go public in an

44:42 oddity of the times the private funding Market shut down for companies with our profile but the window on the public market remained just slightly open this may sound like a crazy anomaly and it was but private funds have become completely cynical while the public markets were only 80% of the way there with no other options available I needed to propose to the board that we go public in order to prepare I made a list of the pros and cons of an IPO I knew that bill Campbell would be the critical person I'd need to persuade one way or another bill was the only one of our board members who had been a public company CEO he knew the pros and cons better than anyone else more important everybody always seemed to to defer to

45:27 bill in these kinds of sticky situations because Bill had a special quality about him at the time Bill was in his 60s with gray hair and a Gruff voice yet he had the energy of a 20-year-old he began his career as a college football coach and did not enter the business World until he was 40 despite the late start Bill eventually became the chairman and CEO of intu following that he became a legend in high-tech mentoring great CEOs at Steve Jobs of Apple Jeff Bezos of Amazon and Eric Schmidt of Google bill is extremely smart super charismatic and Elite operationally but the key to a success goes beyond those attributes in any

46:12 situation whether it's the board of Apple where he served for over a decade the Columbia University Board of Trustees where he is Chairman or the girls football team that he coaches bill is inevitably everybody's favorite person people offer many complex reasons for why bill rates so highly in my experience it's pretty simple no matter who you are you need two kinds of friends in your life the first kind is one you can call when something good happens and you need someone who will be excited for you not a fake excitement veiling Envy but a real excitement you need someone who will actually be more excited for you than he would be if it had happened to him the second kind of friend is somebody you can call when things go horribly wrong long when your

46:58 life is on the line and you only have one phone call who is it going to be Bill Campbell is both of those friends I present my thinking as follows we've not been able to find any investors in the private markets our choices are to either keep working on private funding or start preparing to go public while our prospects for raising money privately seem quite difficult going public has a large number of issues our sales process are not robust and it's difficult to forecast in any environment we're not in any environment we are in a rapidly declining environment and it's not clear where the bottom is our customers are going bankrupt at an alarming and unpredictable rate we are losing money

47:44 and will be losing money for quite some time we are not operationally sound in general we are not ready to be public the board listened carefully their expressions show WR deep concern with the issues I'd raised and an awkwardly long silence ensued as expected Bill broke the dead air Ben it's not the money I felt a strange sense of relief maybe we didn't have to go public maybe I'd overestimated our cash problems perhaps there was another way then Bill spoke again it's the money okay I guess we're going public in addition to the issues I had outlined

48:30 for the board our business was complex and hard for investors to understand we typically signed customers to 2-year contracts and then recognized the revenue monthly this model is now common but it was quite unusual then given the fast growth in our bookings Revenue lagged behind new bookings by quite a bit as a result our S1 our registration with the SEC stated that we had 1.94 million in trailing six months revenue and we forecast $75 million for the following year an incredibly steep Revenue ramp since earnings are driven by revenue and not bookings we had gigantic losses in addition the stock option rules at the time made it seem like our losses were about four times as

49:16 large as they actually were these factors led to extremely negative press heading into the IPO a scathing story in red herring for instance noted that that our list of customers was quite thin and that we were too reliant on Dooms it quoted a Yankee group analyst positing that we had lost something like $1 million per employee over the last 12 months and conjecturing that the way we did it was by having a bondfire in the parking lot and getting everyone busy burning dollar bills Business Week took us apart in an article that declared us the IPO from Hell A Wall Street Journal cover piece quoted a money manager's reaction to our offering as wow they were desperate one financier who actually invested in the offering called

50:02 it the best option among a particularly ugly set of options despite the horrifying press we prepared to hit the road benchmarking ourselves against comparable companies we settled on the price of the offering at $10 per share after an upcoming reverse split which would value the company at just under $700 million less than the valuation from the previous private round of financing but much better than bankruptcy it was not at all clear that we would be successful with the offering the stock market was crashing and the public market investors we visited were visibly distressed at the end of the preparation process and after the banks had signed off our Director of Finance Scott Cooper received a call from our Banker at Morgan

50:48 Stanley Banker Scott did you know that $27.6 million of your cash is restricted and tied up in real estate commitments Scott yes of course Banker so you have just over 3 weeks worth of cash before you go bankrupt Scott yes Scott then relayed the conversation to me saying can you believe they underwrote the deal and didn't notice that the cash was restricted until now we gave them all the documents right before we were to leave for the IPO Road Show I called an all compan meeting to share two pieces of news first we were going public or at least we were going to try to go public second the company had fallen so far in

51:34 value that we would have to reverse split the stock two for one I thought the first part would go okay but I was worried about how the second piece of news would be received we had to reverse split the stock to get the price per share high enough to go public in theory a reverse split shouldn't matter at all each employee owned a certain percentage of the company the company had a total number of shares of stock multiply the total number of shares by the percentage and you get the employee share number cut the number of shares in half and while employees would have half the number of shares they'd still own the exact same percentage of the company nothing changed oh but it did as we grew from zero to 600 employees in less than 18 months the stage was set for Hyperbole

52:21 and momentum some overly excited managers oversold the dream they he spoke only in terms of shares rather than in percentages and spun stories of a potential $100 per share stock price employees then calculated their fantasy price per share and figured out how much money they would make I was aware that this was going on but I never thought we would reverse split the stock so I never worried about it like many other things that I screwed up during that period I should have worried my wife Felicia came to the all company meeting as she always did this time her parents were in town so they came too the meeting did not go well people did not realize how close to the edge we were so the news of the IPO

53:07 didn't make anyone happy the news of the reverse split made them even less happy in fact it infuriated them I had literally cut their fantasy number in half and they were not pleased about it nobody said harsh things directly to me my in-laws however heard everything and and as my father-in-law put it it wasn't nothing nice my mother-in-law Loretta asked my wife why does everybody hate Ben so much Felicia who is normally the most electric outgoing person in any room was just recovering from Heria surgery so she wasn't her normal bubbly self she was discouraged my in-laws were depressed the employees were pissed I

53:53 had no idea if I'd be able to raise the money what a way to start a road show an event that's usually the cause of a bit more Fanfare the road show was brutal the stock market crashed daily and technology stocks were to blame investors looked like they'd come out of torture chambers when we arrived one mutual fund manager looked right at Mark and me and asked why are you here do you have any idea what's going on in the world I thought that there was no way we'd be able to raise the money we were going to go bankrupt for sure I did not sleep more than 2 hours total during that entire 3we trip 3 days into the tour I received a call from my father-in-law John Wy had been through a

54:38 lot in his 71 years as a boy his father was murdered in Texas in order to survive he and his mother moved in with an unkind man and his nine children there John was abused made to stay in the barn with the animals while the other children ate his dinner eventually John and his mother left that cruelty by walking for three days down a dirt road carrying everything they owned John would recall that journey in great detail his entire life as a young man before finishing his high school education he left home to fight in the Korean War so that he could support his mother as a young father of five he took every job imaginable to support his family including unloading banana boats

55:24 and working to build the Alaskan Pipeline he tragically saw two of his children die before he reached the age of 60 he had a hard life and was used to bad news John Wy did not call me for casual reasons if he called it was serious possibly even deadly serious Ben hello John Ben the office said not to bother you but I just want to let you know that Felicia stopped breathing but she's not going to die die Ben not going to die what what happened I could not believe it I'd been so focused on work that I had lost focus of the only thing that really mattered

56:09 to me once again I neglected to worry about the one thing that I should have worried about Ben what happened John they gave us some medicine and she had an allergic reaction she stopped breathing but she's okay now Ben when John yesterday Ben what why didn't you tell me John I knew that you were busy and that you were really in trouble at work because of that meeting that I went to Ben should I come home John oh no we'll take care of her you just take care of what you need to do I was completely stunned I started

56:55 sweating so hard that I had to change my clothes right after the call I had no idea what to do if I returned home the company would surely go bankrupt if I stayed how could I stay I called back and had him put Felicia on the phone Ben if you need me I will come home Felicia no get the IPO done there's no tomorrow for you and the company I'll be fine I stumbled through the rest of the Road show completely discombobulated one day I wore a mismatching suit jacket and suit pants which Mark pointed out to me Midway through the meeting I had no idea where I was half the time during the 3 weeks we were on the road comparable companies

57:42 in our Market lost half of their value which meant that our $10 share price was roughly double the current Benchmark the bankers recommended that we lower the price of the offering to $6 a share in order to reflect this new reality but they gave us no assurance that the deal would actually get done then the day before the offering Yahoo the lighthouse company of the internet boom announced Tim cougal its CEO was stepping down we had hit the nater of the dotom crash the loudcloud offering finally sold at $6 a share and we raised $1 162.5 million but there was no celebration and no party neither Goldman Sachs nor Morgan Stanley the two banks that that took us public even offered us the

58:28 traditional closing dinner it may have been the least celebratory IPO in history but Felicia was feeling better and we had pulled it off in a brief moment of light-heartedness on the plane ride home I turned to Scott Cooper my Director of Finance and said we did it he replied yeah but we're still years later in 2012 after Yahoo fired at CEO Scott Thompson Felicia m should they bring back cougal I replied Tim cougal how do you even know who Tim cougal is she then relived at the conversation we'd had 11 years earlier it went something like this Ben we're Felicia what do you mean what

59:15 happened Ben Yahoo fired Google it's over the whole thing is over Felicia who is Google Ben he was the CEO of Yahoo we're I'm going to have to shut the company down Felicia are you sure Ben didn't you hear me they fired cougal we're she had never seen me that depressed before and she never forgot it for most CEOs the night before their public offering is a highlight for me it was a highlight of depression if you're going to eat don't

1:00:01 nibble during the road show as a way to break the tension mark would say remember Ben things are always darkest before they go completely black he was joking but as we entered our first quarter as a public company those words seemed preent customers continued to churn the macroeconomic environment worsened and our sales prospects declined as we got closer to to our first earnings call with investors I conducted a thorough review to make sure that we were still on track to meet our Guidance the good news was that we would meet our forecast for the quarter the bad news there was very little chance that we would meet our forecast for the year typically investors expect that companies will refrain from going public if they can't

1:00:47 hit at least their first year's forecast these were exceptional times but resetting guidance on your very first earnings call was still a very bad thing to do as we discussed where to reset guidance to investors we were faced with a tough choice should we try to minimize the initial damage by taking down the number as little as possible or should we minimize the risk of another reset if we reduce the number by a lot the stock might fall apart on the other hand if we didn't lower it enough we might have to reset again which would cost us all the credibility we had left my controller Dave ke raised his head with what would be the definitive advice no matter what we say we're going to get killed as soon as we reset guidance

1:01:32 we'll have no credibility with investors so we might as well take all the pain now because nobody will believe any positivity in the forecast anyway if you're going to eat don't nibble so we reset guidance for the year slashing our original forecast of 75 million in projected Revenue to $55 million resetting Revenue guidance also meant resetting expense guidance and that meant laying people off we've been the darling of the startup world and now I had to send home 15% of our employees it was the clearest indication yet that I was failing failing my investors failing my employees and failing myself following the reset Goldman Sachs and Morgan Stanley the

1:02:19 investment banks that had taken us public both dropped research coverage meaning their analysts would no longer follow the company's progress on behalf of their clients this was a huge slap in the face and a massive rigging of the promises they made when they were pitching us but times were tough all around and we had no recourse with the vote of no confidence from our banks and a lowered revenue forecast the stock price plummeted from $6 a share to $2 despite the mammoth negative momentum we soldiered on and we putting together a fairly strong quarter in the third quarter of 2001 then on September 11th terrorists hijacked four jetliners flying two into the World Trade Center and another into the Pentagon and in the

1:03:05 end throwing the whole world into chaos it turned out that our largest deal that quarter was with the British government it represented onethird of our bookings and we would miss the quarter's targets badly without it our champion on the deal called to inform us that Prime Minister Tony Blair had redirected the funds for our deal to the war chest literally by some miracle our sales director convinced one of Tony Blair's staffers to get the money back so we got the deal and made the quarter nonetheless the close call was assigned to me that the entire operation was far too fragile I got another sign when our largest competitor Exodus filed for bankruptcy on September 26 it was a

1:03:50 truly incredible bankruptcy and that the company had been valued at $50 billion a little more than a year earlier it was also remarkable because Exodus had raised $800 million on a fully funded plan just 9 months earlier an exodus executive later joked to me when we drove off the cliff we left no skid marks if Exodus could lose $50 billion in market capitalization and $800 million in cash that fast I needed a backup plan in my first attempt at a plan B we eval evaluated acquiring data return a company like ours that focused more on Windows applications than Unix applications as we did we studied the deal for weeks modeling what the two

1:04:37 companies might look like together figuring out product offerings and cost synergies my CFO at the time was extremely excited about the deal since it would make use of his favorite skill set cost cutting toward the end of the process I took a 2-day vacation to Ashland Oregon almost as soon as I arrived arrived I received an urgent call from John oferrell who was in charge of corporate and Business Development John Ben sorry to disturb you on vacation but we just had a meeting on the data return deal and I don't think that we should do it Ben why not John quite frankly our business is in trouble and their business is in trouble and putting them together will just be double trouble Ben I was

1:05:24 thinking the exact same thing in fact looking at Data return's Business made it crystal clear to me that loudcloud would probably not end well some things are much easier to see in others than in yourself looking at data return I could see loud Cloud's future and it was not pretty had a great deal of trouble sleeping as I thought about Our Fate I tried to make myself feel better by asking what's the worst thing that could happen the answer always came back the same we'll go bankr corupt I'll lose everybody's money including my mother's I'll have to lay off all the people who've been working so hard in a very bad economy all of the customers who trusted me will be screwed and my reputation will be ruined funny asking that question never

1:06:11 made me feel any better then one day I asked myself a different question what would I do if we went bankrupt the answer that I came up with surprised me I'd buy our software opsware which runs in loudcloud out of bankruptcy and start a software company opsware was the software that we'd written to automate all the tasks of running the cloud provisioning servers and networking equipment deploying applications recovering the environment in case of disaster and so forth then I asked myself another question is there a way to do that without going bankrupt I ran through different scenarios in my mind where we might move into the software business and exit the cloud business in each scenario step one

1:07:00 was separating opsware from loudcloud opsware had been written to run only in loudcloud and had many constraints that prevented it from being a product that would work in any environment I asked my co-founder and CTO Tim house how long it would take to separate opsware from loudcloud he said about 9 months which would prove to be quite optimistic I immediately assigned a team of 10 Engineers to start the process in a project we called oxide at this point our business was still a cloud business and I gave no indication to the rest of the staff that I might have other ideas doing so would have instantly doomed the only business we were in as everyone would want to work on the future and not the past I said that oxide was simply another

1:07:46 product line this statement deeply worried two of my employees who had graduated from Stanford Business School they scheduled an appointment and presented me with a slide deck detailing why my decision to start oxide was Quicks Sonic misguided and downright stupid they argued that it would steal precious resources from our Core Business by pursuing a product that would surely fail I let them present all 45 slides without my asking them a single question when they finished I said did I ask for this presentation those were the first words I spoke as I made the transition from a peacetime CEO to a wartime CEO by virtue of my position and the fact that we were a public company

1:08:32 nobody besides me had the complete picture I knew we were in deep deep trouble nobody besides me could get us out of the trouble and I was through listening to advice about what we should do from people who did not understand all the pieces I wanted all the data and information I could get but I didn't need any recommendations about the future direction of the company this was wartime the company would live or die by the quality of my decisions and there was no way to hedge or soften the responsibility if everybody I had hired and who gave their lives to the company could be sent home with little to show for it then there were no excuses that would help there would be no it was a horrible economic environment I got bad advice things changed so

1:09:19 quickly the only choices were survival or total Destruction yes most things could still be delegated and most managers would be empowered to make decisions in their areas of expertise but the fundamental question of whether and how loudcloud could survive was mine and mine alone to answer we muddled through the fourth quarter of 2001 and beat our Target for the year delivering $57 million in Revenue against our $55 million forecast not a great win but very few companies

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