1: Things were looking bleak. Very bleak.
The year was 2001, and the dot-com crash was happening.
One by one, technology startups that only a year earlier boasted sky-high valuations and lavish offices were collapsing, leaving behind empty cubicles, burned-out servers, and a sobering lesson in the perils of unchecked optimism.
Loudcloud CEO Ben Horowitz decided to sell the company’s cloud business and pivot to software.
“The situation was complex, because 440 of our 450 employees worked in the cloud business, which represented all of our customers and generated 100 percent of our revenue,” Ben writes in The Hard Thing About Hard Things.
“I could not tell the employees or even my executive team that I was considering abandoning the cloud business,” he recalls, “because our stock price would have collapsed to nothing, killing any hope of selling the company and avoiding bankruptcy.”
Ben called his board member and legendary CEO coach Bill Campbell to explain why he thought we needed to exit the cloud business.
“Bill understood what a crisis looked like since he’d been CEO of GO Corporation in the early 1990s,” Ben notes. “Essentially GO had attempted to build an iPhone-like device in 1992 and ended up being one of the largest venture capital losses in history.
“I took Bill through my logic,” he writes. “The only way out of the cloud business without going bankrupt was through higher sales, because even if we laid off 100 percent of the employees, the infrastructure costs would still kill us without a sharper sales ramp.
“I further explained that the dwindling cash balance decreased customer confidence, which in turn hurt sales, which in turn caused the cash balance to decline further.”
Bill replied by saying one word: “Spiral.”
“And I knew he understood,” Ben remembers.
Next, he met with his colleague John O’Farrell, who ran Loudcloud’s business and corporate development.
John was “the one person I needed and could trust,” Ben writes. He was also “the greatest big-deal person I had ever known.”
Ben explained his “contingency plan”: they would be a two-person team and needed to get started ASAP.
“John and I mapped out the ecosystem to figure out which companies might be interested in acquiring the Loudcloud business,” he writes.
They decided to focus on IBM and EDS.
IBM showed immediate interest due to Loudcloud’s strong brand and reputation for technology preeminence.
“EDS, on the other hand, showed no interest,” Ben writes. “This worried me intensely as I studied all the public filings from both companies; it was clear to me that EDS needed Loudcloud far more than IBM did. Needs always trump wants in mergers and acquisitions.”
Given IBM’s strong response, John suggested they focus there to get the deal done quickly.
Ben wasn’t so sure they should walk away from EDS.
“I asked him to draw the EDS organizational chart one more time to see if we could find someone influential at EDS whom we hadn’t yet approached,” he recalls.
One name stood out: Jeff Kelly.
John paused, then said, “You know, we haven’t gotten to Jeff, but he may be able to make this decision.”
Boom.
“Sure enough, Jeff was interested,” Ben writes.
“Now with two potential bidders, we put things in motion,” he explains. “John and I worked hard to create urgency with both IBM and EDS, because time was against us. We hosted both companies in our facilities, sometimes with them passing each other in the hallway as part of John’s well-orchestrated sales technique.”
2: With both IBM and EDS now engaged, the next challenge was to define the endgame.
“John and I debated the best way to do this as the deadlines that we planned to set were clearly artificial,” Ben writes. “I suggested that we stop by Los Angeles on our way to Plano, Texas, home of EDS, to get some advice from Michael Ovitz.
“Michael was on Loudcloud’s board, but more important, he had formerly been known by many observers as the Most Powerful Man in Hollywood.”
When he was 28, Michael had started Creative Artists Agency (CAA), which became the most powerful agency in the entertainment industry.
“CAA’s rise made Michael so influential that he could routinely structure deals that had never been done before,” Ben notes.
“When we arrived in his offices, the place buzzed with activity,” he writes. “Michael seemed to be engaged in a dozen different activities, but finally came out to meet with John and me.
“We explained the situation: We were racing against time and had two bidders, but no specific incentive to coax them toward the end of the process.”
Michael paused and sat back in his chair.
“Gentlemen,” he said, “I’ve done many deals in my lifetime and through that process, I’ve developed a methodology, a way of doing things, a philosophy if you will.
“Within that philosophy, I have certain beliefs. I believe in artificial deadlines. I believe in playing one against the other. I believe in doing everything and anything short of illegal or immoral to get the damned deal done.”
Ben writes: “Michael had a way of making things extremely clear. We thanked him and headed to the airport.
“We called both EDS and IBM to let them know that we would complete the process over the next eight weeks and sell the Loudcloud business to someone,” Ben shares.
“If they wanted to play, they had to move on that schedule or withdraw immediately.”
Seven weeks later, EDS agreed to acquire Loudcloud for $63.5 million in cash, with EDS assuming the associated liabilities and cash burn.
“We would retain the intellectual property, Opsware, and become a software company,” Ben writes. “EDS would then license our software to run both Loudcloud and the larger EDS for $20 million per year.”
3: Ben was elated. “I felt 150 pounds lighter,” he remembers. “I could take a deep breath for the first time in eighteen months.”
Still, it would be difficult, as he would need to lay off 140 colleagues, with only half the team joining EDS.
Ben called his board member, Bill Campbell, to share the good news: “The deal was signed and we would be announcing it in New York on Monday.”
Bill said, “Too bad you can’t go to New York and be part of the announcement; you’ll have to send Marc [Andreessen, Ben’s co-founder].”
“What do you mean?” Ben replied.
“You need to stay home and make sure everybody knows where they stand. You can’t wait a day. In fact, you can’t wait a minute. They need to know whether they are working for you, EDS, or looking for a f***ing job.”
“Damn. He was right,” Ben recalls thinking. “I sent Marc to New York and prepared to let people know where they stood.
“That small piece of advice from Bill proved to be the foundation we needed to rebuild the company,” he writes. “If we hadn’t treated the people who were leaving fairly, the people who stayed would never have trusted me again.”
The lesson? “Only a CEO who had been through some awful, horrible, devastating circumstances would know to give that advice at that time,” Ben says.
More tomorrow!
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Reflection: When I feel like I’m in a “spiral,” do I freeze—or do I start mapping creative options, enlisting trusted allies, and moving decisively, even when the odds look terrible?
Action: Identify one area of my life or work that feels like it’s sliding in the wrong direction, list at least three bold options (including uncomfortable conversations or “deals” I could pursue), and choose one concrete step I will take this week to create a new path forward.
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