Livingston: How did Excite get started? Kraus: We decided to start a company together before we had any idea what we were going to work on. But we were so committed to the idea of starting something together that we knew we were going to figure it out. For me, that idea came from a formative experience after freshman year of college. As soon as I had arrived home to Los Angeles from Stanford, my parents said, "Good news"--and that usually meant something bad--"We went to your high school fundraiser last night and we bought you a summer job." And I thought, "Oh, that's terrible news." I had thought I would pump yogurt or bag groceries and then I could surf and hang out with friends, which was really what I wanted to do. I said, "Well, where is this job and what is it?" They said it was at an architectural engineering firm. I thought, "Well, that sounds kind of interesting. I don't know what that is, but OK." So I show up for work on my first day and the job is to duplicate microfiche with three 70-year-old women. For a 19-year-old guy, this is hell. You had to expose the microfiche to ultraviolet light and then run it through this developer, which had this ammonia smell. It was really bad. I did that for 3 weeks and I quit and bagged groceries. I kind of determined from that point 61 Joe Kraus Cofounder, Excite 4 CHAPTER forward that my life wasn't going to be about being in an office, working with people I didn't want to work with and doing jobs I didn't want to do. The next summer, to avoid the risk of my parents buying me another job, I contacted a high school friend who was an artist and said, "Let's start a T-shirt company together over the summer." How do you start a T-shirt company that runs only 3 months and then evaporates? The answer is that we found a group of clients that actually buy summer wear in the summer--which is very unusual because in retail, you buy your summer goods in the winter and winter goods in the summer. Nobody's buying T-shirts in the summer in traditional retail. But it turns out that private school bookstores have a lot of gear: T-shirts, sweatshirts, hats, etc. We went to some of the larger printing houses in Los Angeles, who laughed at our orders because they were so small. They wouldn't do them. But in touring the facility, we inevitably met the foreman of the line, who usually had a backyard operation--some silk screening units in the backyard. That summer we made $25,000. For college students that was huge. Also, our days were great: we'd get up a little late, do sales calls in the morning and show our portfolio and designs. In the afternoon, we'd go surfing or some outdoor activity and at night we would get together and do designs. It was a blast. So I definitely had the bug. I also worked for Domino's Pizza in college, at a prepress house--all sorts of ways to try to earn some money. But the stuff I loved was doing something on my own. By the time senior year rolled around and my parents were saying that I should get a job, my whole thing was, "No, I don't want to get a job. I want to figure out how to do something in tech." Even though I'm not technical--I was a political science major--your role models at Stanford if you're at all entrepreneurial are tech entrepreneurs. You don't have to look very far and you see buildings with names like Hewlett Packard, etc. There were even classes on this stuff that I started taking. The smartest person I knew, by far, was my friend Graham Spencer, who was my next door neighbor freshman year. I thought, "If I can convince him to do something, then I bet we can make something interesting happen." He was being courted by Apple, Microsoft, and all the big players of the day, and my pitch was "Look, those guys are always going to want you and it's rare that you are going to be in the position in life where you have so little responsibility, except to yourself. So now's the time to do it. Yeah, we don't know anything. We're dumb and we're just coming out of college. But now's the opportunity." Once Graham agreed, we gathered four of our other friends and went to a taqueria down in Redwood City and the dinner was focused around figuring out what this company was going to work on. "We are a company. Now what on earth do we do?" Livingston: How did you choose to involve your four other friends? Because they were friends and you trusted them, or they were technically good? Kraus: They were willing, capable, and friends--all of those things at once. They were all technical, they were all enthusiastic about starting something like this--it sounded like a good idea to them, as opposed to something they were 62 Founders at Work scared of. Actually, every one of us was in the same freshman dorm. This was a company started out of essentially freshman dorm relationships. So we get together at our favorite taqueria. We each had brought ideas to the table and they all sucked. There were things like applications for the Apple Newton--that was my brilliant idea. My other brilliant idea was automatic translation software, which to this day doesn't work. Everybody had ideas and they were all terrible, and by the end we were all very depressed. And then Graham started talking. It's hard to remember exactly what he said, but it was something like this: "Look, between CD-ROMs and command line stuff, more and more information's being made available electronically." (We'd all been using command line email systems at Stanford since '89, and there were tools like Veronica, Archie, and Gopher. And WAIS had just come out, which was kind of a big thing at the time.) "But, as far as I know, the tools for searching through all that stuff were built in the '50s. There's got to be an opportunity to do something there." So we thought, "Well, that's the best idea we've heard, so that's what we're doing." We came up with our slogan, which was "We are unencumbered by reality." We were so naïve we didn't know we could fail, and therefore we almost had to succeed. We set off trying to research what was happening in R&D in search technology. We had no idea how we were going to make any money. But we started spending a lot of time in the math and science library, trying to figure out what had happened over the last 30 years in search. Livingston: Was it search for the Web? Kraus: No, it was just search. We didn't know what the application was going to be. Was it going to be a search engine that you'd include on CD-ROM when they distributed online encyclopedias? Was it going to be for law firms who had a lot of text documents to be searched through? In 1993 we weren't thinking Internet search because the Internet was very nerdy. There wasn't anything there. Those weren't people who would pay for stuff. We all tried to get $3,000 from each of our parents, and five of the six parents put up, so we had $15,000. After graduating, three of us lived in one house in Palo Alto and three of us lived in another. We set up shop in the garage of the house that I was living in. It was the classic setup. My parents came up and they saw the garage and wound up buying us some nasty carpet. The tables were all Formica. I won a fax machine at Office Depot. We stole our chairs from Oracle Corp. One of the founders was working a part-time job at Oracle, and back in those days, you could take home VT100 terminals to work from home. The way you got them to your car was by going to the supply closet: you took a VT100 and you put it on this $1,000 Herman Miller chair, and you rolled the chair out to your car, put the terminal in your car, and brought the chair back into work. So we thought, "That's a good idea. We could get some VT100s and some chairs all at once." We rolled up a U-Haul and brought down six chairs and six terminals and rolled away. Joe Kraus 63 We bought two Sun machines. I bought one from an earthquake researcher in Berkeley for $600. Honestly, the biggest fight we had in those early days was over a used copier that I bought for $300. I'd used a substantial fraction of our capital on a copy machine while Graham was out of town, and we had this major fight about having spent all that money on a copy machine. Graham thought it was foolhardy to spend that much on a copier, and my view was that I was spending all my time having to go to the bank and get dimes for the copy machine at the math and science library, so I'd rather just buy this thing. It was used, and it never worked, so he was right and I was wrong--it was a stupid purchase. We basically sat in the garage coding for around 18 months. In retrospect, it was really fun. But I remember a lot of worry. "Are we doing anything of value?" We were building the core engine, the indexing engine that would actually index the text, and the search libraries that would query that index. It got cold in the garage and we didn't have a heater, so we would use the dryer for heat. We'd tape the little button down that made it run with the door open. In about mid-'94, we now needed to put an interface on the software to start showing demos. Livingston: Were you still living off the original $15,000? Kraus: Yeah. Some of us had part-time jobs. I got my nickname during that time: "Phone Boy" (which it still is). My job every morning would be that--I was doing some coding, but not very well--I would read the Wall Street Journal to find out if there were people that I might call that could be interested in search stuff. So I invariably just did cold calls most of the time, "I saw your name in the Journal and we're this little startup..." I didn't know any better. Why wouldn't somebody take us seriously? Livingston: Was there a cold call that you made that turned out to be pivotal? Kraus: No, the pivotal things were all unintentional. Like the way we got turned on to the Web: it was about '94 and we were deciding between two technologies for the interface. How do you present search technology to the user if it's not a command line? One was HyperCard and the other was this Web thing. And Graham, wisely, chose the Web. I believe it was because of that particular chance moment that we ended up being web-oriented and got known as a web search thing. The intentional things were rarely pivotal in those early days, but the being persistent, following-your-nose thing made a big difference. The chain of events that led to our funding had no connection. You write them all down in a line and you wonder how these all led to each other, but the chain was very direct from step to step. When I graduated, my college girlfriend gave me a book called Accidental Empires. It was a gossip history of Silicon Valley by a guy whose pen name is Bob Cringely. In it he writes, "Here's a tip for entrepreneurs. Call me, I'm a cheap date." So I call him and we get together for lunch and I tell him what 64 Founders at Work we're working on. He gets very excited about it and we get the whole group together and he says that he wants to join the company. We think, "If he joins, we are golden, because he's huge, he's an author." It's funny to say now, but we felt that way. He didn't end up joining, but he did introduce us to his bosses at InfoWorld (where he wrote a column), Amanda Hixson and Stuart Alsop. InfoWorld was interested in the search stuff we were doing so they said, "We'll give you a $100,000 contract if you can index our archives and make them available on the Web." They said that, if we did a good job, they'd introduce us to their parent company, IDG. So we did a good job and they introduced us to IDG and we attended a board meeting where we presented what we had done. They were talking about investing and one of the people on the IDG board was a guy named Steve Coit, who was a partner at Charles River Ventures. Charles River started getting interested in investing, but they wanted a West Coast partner and they introduced us to Geoff Yang. Geoff didn't know what to do with us. In fact, many of the VCs we met with didn't know what to do with us at all. They were very excited through the course of the demo until they got to the first question, which was "How do you make money?" Especially given that search had never made money for VCs before. Verity, PLS, Open Text--these had never been big and profitable businesses. We were saying, "We think advertising is interesting, and if not, we kind of hoped you would help us figure that out." And the conversations usually went very poorly from there. But it was Geoff's introduction to Vinod Khosla, who ultimately funded the company along with Geoff, that really made the difference. Vinod interrupted the demo and said, "Can your technology scale? Can it search a big database?" And we said, "That's an interesting question. Nobody's asked us before." We liked the fact that he didn't ask us the "how do you make money?" question. We answered honestly, "We don't know because we can't afford a hard drive that's big enough to test." In a kind of Jerry Maguire "you had me at "hello'" moment, he takes out his cell phone, calls his assistant and says, "I'm meeting with Joe Kraus and Graham Spencer of Architext and I want you to buy them a 10-gig hard drive." Which at the time cost like $9,000. And we were forever indebted to him. As it turned out, yes, it did scale. We figured out how to make it scale, and we worked and worked and worked and ultimately put together a $3 million financing with Kleiner Perkins and Geoff Yang's firm, which was called IVP at the time. Livingston: So you went from your families' $15,000 to a $100,000 contract to a $3 million VC financing? Kraus: That's right. Because there wasn't a lot of angel money around at that time--at least that I knew of or had access to. Livingston: Did the VCs let you keep your original stock? Joe Kraus 65 Kraus: They adjusted the vesting schedule a little bit. I think by the time we did the financing we had been working on it 2 years, but they only vested us a year. So, they got a year of free vesting from us. Livingston: Had you incorporated when you were in the garage phase? Kraus: Yeah, we must have. How did we do that? We had to in order to accept the $100,000 from InfoWorld, so we incorporated pretty early. I think we got a lawyer to do it for us really, really cheaply. I had a friend whose father was a lawyer, so I called that friend and talked to his father and asked, "How do I do this?" and I think they actually just did it for us. Livingston: Did you wind up doing something for IDG? Kraus: No, we didn't. I think they might have put in a small amount of money--I actually can't recall. But we never ended up doing anything big with them. Livingston: When you got the VC money, I read that you had to think hard about how you were going to redistribute the stock. You described it as a "couch moment," right--where you would pull the couches face-to-face to discuss difficult situations? Kraus: Yeah, it sucked. People ask me all the time, "Would you start a company with your friends again?" This presumes that starting a company with your friends is bad. And there are some things that are bad about it. It makes it hard to be objective about personnel decisions. I love the show Entourage on HBO. In it, the lead character is a rising movie star and his best friend really wants to be his manager and is quite competent at it. The lead character says to his friend, "Remember, I can't fire my friend, but I can fire my manager." And that's the hard one, right--if you have to make personnel decisions, you can't fire your friend, but you can fire your business partner. That's a very difficult line. But we would have never, ever survived as a company without having something bonding us other than the pursuit of a business idea. Because we came together to start a company before even knowing what that company was doing. We were more committed to the idea of starting something together and figuring it out than a bunch of people who were only personally interested in how much money they could make or what could be built around a particular idea. That morphs over time as the business actually starts to take off, but that commitment carried us through a lot of very dark moments and no money and difficult nights and toiling away in a garage. It is the thing that got us through the couch moment of redistributing the equity. We originally had the company divided evenly: everybody had a sixth. When Kleiner came in, Vinod said, "You know, you can leave it that way if you want, but I think you guys are going to want to look at this." And so Graham and I went and had a meeting with the whole team and said, "We think we need to redistribute equity in a way that isn't even." And that's no fun to hear. I think, quite honestly, nobody had a problem giving Graham more, because Graham was clearly the man among boys in terms of his technical ability. The other guys 66 Founders at Work were smart, but they did what Graham asked them to do and Graham was the guy who really architected the whole thing. The hard part was, "How do we value Joe, who's not technical. He does stuff, but I don't know whether I could do his stuff better." Basically it was, "I don't know how to measure myself against Joe, and therefore how do I feel comfortable that he has more?" But we ended up working through it. I don't remember the specifics of the conversation. I remember it being very awkward and I remember it being quiet. People were unhappy. No screaming or anything like that, but awkward. I think the fact that Vinod was talking about it helped, as an outside instigator. But we never would have made it through if we had not been friends. I think you needed something stronger than greed pulling people together at that moment when greed alone would have caused huge fractures in redistributing. In the end, I think it made a lot of sense to do because those conversations only get harder and harder to have. Livingston: What about your first version? Did it seem like you were onto something huge? Kraus: No, it was never clear that we were on to something huge. You never know anything. The hardest part in a startup is that you wake up one morning, and you feel great about the day, and you think, "We're kicking ass." And then you wake up the next morning, and you think "We're dead." And literally nothing's changed. You haven't made some big deal, you haven't sold something new. Maybe you wrote a few lines of code over the course of that last day. Maybe you had some conversations with people, but nothing's really moved. It's completely irrational, but it's exactly what you go through. The thing is, you never know. I am certainly sort of a paranoid competitor. I was always worried about who was going to kill us and what they were going to do. I'd feel like "We're going out of business any day and anything could upset the applecart." I really wanted it to get to a point where I'd say, "OK, I know we're on to something huge." Even up to the time when Excite was several hundred people and we were the fourth largest website in the world, it didn't feel real. It doesn't feel like you're really doing something huge. On some level it feels like you're fooling people--like, are we really doing this? It's the whole sausage and sausage factory problem: when you're outside and you only see the sausage coming out you think, "That's pretty tasty." When you're on the inside and you know how it's made, it's terrifying. That's the feeling. You just don't ever feel like the progress is smooth. It's never, "We set out this well-orchestrated plan, we're executing it, it's going exactly according to plan. We're getting bigger by the day and it's just as I thought." It's never been that, ever, for me. It's always been, "I know this can be huge, I believe it in my heart. How on Earth do we make this happen? Why don't other people think it's huge yet?" It's just this complete, everyday banging your head against the wall trying to figure out how to convince other people that this thing is the biggest thing in the world. Livingston: What did people misunderstand most? Joe Kraus 67 Kraus: First, back in those days, it was legitimate to ask, "Why would I use a search engine more than a couple of times to find the sites that I like? Then I'll bookmark those sites and never go back to a search engine again." Microsoft made a buyout offer for Excite in late '95, and even then I had Microsoft's CTO, Nathan Myhrvold, yelling at me, "Search is not a business. People are just going to search a few times and then bookmark what they want to go to." The second was that nobody knew what the business model was going to be. In fact, Excite really never got the business model right at all. We fell into the classic problem of how, when a new medium comes out, it adopts the practices, the content, the business models of the old medium--which fails, and then the more appropriate models get figured out. For example, all the television programming in its early days looked like radio. It was literally the same guys reading the radio program on television, and it was extraordinarily boring. And advertising was radio advertising--the announcer reading the ad. We too adopted the business model of the prior medium, which was print. Cost per thousand impression (cpm)-based advertising was how we made money in search, and that was wrong. We never figured out the cost-per-click piece of it. We got too buried in our legacy of cpm-based advertising and that's how we died. Or at least that's how the Excite piece of the business wasn't as much as it could have been. By 1997 everybody was diversifying into portal strategies, because nobody knew how to make money from search. Search was viewed as the traffic director to other more profitable businesses, when in reality, search was the business. That wasn't obvious at the time. Livingston: What competitors did you worry about? Kraus: Early on you worry about the ones that don't matter, because you don't know any better. Early on, as a search technology company, we worried about Verity, PLS, Open Text. We were too young to realize that existing companies' biggest problem is legacy. Period. They can't focus on new businesses because they've got to manage their old ones. And so when we moved to web search, it was never clear to us that Verity, PLS, and Open Text wouldn't actually go and do this. But they couldn't because they were servicing all their existing businesses and could never invest enough in this new kind of business. We worried about Yahoo, Lycos, and Infoseek the most when we started getting into the web search business, for sure. There were some rumors of entries from big companies, like MCI. Was AT&T going to play in this space? What was AOL going to do? Livingston: You felt there was the threat of the larger companies with deep pockets getting into the space? Kraus: Right, and they never did. When Microsoft made its buyout offer for Excite in late 1995, they offered about $70 million. We'd just launched in October '95 and they're offering $70 million. We said no, and we told them the number needed to be more like $100 million. And apparently what happened 68 Founders at Work is--and I only learned this story recently--the negotiator we were working with went back to Gates and said, "I think the number's going to be $100 million if we want to do this." And Gates said, "How much would it cost us to do it ourselves?" So the guy went away and built a plan and said it would be about a year and $25 million and 25 people or something like this. And the interesting thing is that they didn't buy Excite for the $100 million, and they didn't invest and build it themselves. Instead they did nothing. Which is really interesting to me in terms of the longer-term history of Microsoft and the search wars. It's interesting that MCI and AT&T and these guys never got into the business. Livingston: How did you get the Netscape search button deal? Kraus: That was a gut-wrenching moment. We needed distribution--we needed eyeballs and more people to be trying Excite. The natural point of distribution was the browser. The only real point of distribution. No websites had any traffic of any size to do a deal with. It was the browser getting bundled in that made the big difference. So we went to Netscape. They had two buttons on the browser: NetSearch and NetDirectory. NetSearch was pointing to Infoseek and NetDirectory was pointing to Yahoo. And those deals were free; it was just free traffic to those services. Unbelievable. But nobody knew how to make any money off traffic or that traffic itself was valuable. Netscape wasn't a media company; it didn't view that as valuable. What Netscape wanted was more downloads of its client, which would help them sell more servers and more client licenses. So they finally decided to put these two buttons up for bid and there were three bidders: us, Infoseek, and MCI (with a rumored new service). We had $1 million in the bank and we didn't know what we were going to bid. We sat down in my office, all on the floor. Vinod said we should bid $3 million. I was like, "How do we bid $3 million? We only have $1 million in the bank." And he said, "Well, if we win, I'm pretty sure we can raise it, but if we don't win, I don't know how we're going to raise it." And so I thought, "OK, this is really scary." (If you are 22 and trying to make these big decisions, it's great to have a very active guy like Vinod helping you out. And I mean active. I was talking to Vinod twice a day easily. He's one of the senior partners at Kleiner Perkins and he's spending multiple hours a day on my business, which you just don't get. But that's Vinod's style.) We decided to bid $3 million. We had no way to pay for it, but we weren't going to reveal that. We bid the $3 million and we lost. It was horrible to lose; it felt like somebody had died. It was just this feeling of, "Oh my God, what are we going to do?" Because you spend so much time wanting to get the deal that when you don't get it, you're like, "Oh, are we really screwed?" (And I think we would have been screwed.) Vinod told us this whole story about how he'd gone through a similar situation at Sun in losing a deal, and he just never gave up and won the deal back. He said, "We haven't lost. Let's meet with them. Let's show up in their lobby Joe Kraus 69 unannounced." We did all this stuff; we called them constantly; we just basically acted like the bidding wasn't over. And made a total pain in the ass of ourselves. It would have been embarrassing if it weren't so serious. Then luck struck: MCI couldn't deliver its service to Netscape on time. Netscape wanted its money and they wanted to have a vendor in that slot, so they came back to us and said, "OK, we'll take your $3 million and you can be in the NetDirectory play and good luck." I can tell you that, had we given up, we never would have gotten the deal back. And without that deal I don't think Excite would have had its run at all. That was what helped launch the company. It's so ironic. If you look at the way that a lot of huge companies get built... Microsoft built itself off IBM, unwittingly. Excite built itself unwittingly off Netscape. Google built itself unwittingly off Yahoo. I don't think we would have gotten where we got without the Netscape deal and we certainly wouldn't have gotten the Netscape deal without a really valuable lesson in persistence. I see way too many people give up in the startup world. They just give up too easily. Recruiting is a classic example. I don't even hear the first "no" that somebody says. When they say, "No, I'm not interested," I think, "Now it's a real challenge. Now's when the tough part begins." It's hard to identify talent, but great people don't look for jobs, great people are sold on jobs. And if they're sold they're going to say no at first. You have to win them over. For example, we had this VP of marketing that I worked to get for about 3 months. He was the former VP of marketing at QVC. He called me literally the day before he was supposed to move out to California and said, "I can't do it." I said, "Well, we're going to have dinner tonight, so I'm coming out to New York." I got on a plane and went to New York and sat down with him. And I got really lucky: we're at the restaurant and we were quiet for a second and you could hear people talking about the Net. They were talking about Hotmail and AOL and the Internet boom going on. So I said, "Look, these people aren't talking about home shopping, they're talking about the Internet. So your choice is, "Do you want to be part of the past or do you want to be part of the future?'" I love this stuff; the persistence part is the part that I like. It's actually not fun when it's happening, but you know it makes a difference because 99.9 percent of the people give up. And Vinod gave me that lesson in spades. I think I would have given up with Netscape. I wouldn't have known what to do. I wouldn't have had the chutzpah to just say, "No, we haven't lost, we're still negotiating, aren't we?" And treating it as if I didn't hear their "no." It was very unfamiliar to me originally. Livingston: What was most surprising to you? Kraus: That opportunity creates opportunity. One of our first acquisitions was a company called Magellan, an editorially oriented search engine. The primary reason for doing the deal was to show that in a space that was ripe for consolidation, we were going to be doing the consolidating, not being consolidated. Because otherwise the deal didn't make a whole lot of sense to me. It was a momentum play. 70 Founders at Work People asked a lot of questions about why we did that deal. We couldn't predict it at the time, but it led to the acquisition of WebCrawler. The acquisition of WebCrawler happened because we had acquired Magellan and because AOL saw it and said, "Hey, this company is doing something." When we were at a very bleak stage--we were public and running out of money--we were saved by Intuit, who we did a $20 or $30 million deal with. The original impetus was something related to some other deal we had done, which in turn was built because of the WebCrawler deal. Reading the Cringely book, which led to a lunch, which led to an introduction, which led to a $100,000 contract, which led to a board meeting, which led to a VC, which led to another VC, which led to a financing. It's the same as Magellan leading to WebCrawler leading to AOL leading to Intuit, and you can't predict these things going forward. Some famous person said, "Success is 50 percent luck and 50 percent preparedness for that luck." I think that's a lot of it. It's being ready to take advantage of opportunities when they arise. The other thing that surprised me was how well companies can do if you challenge them with these big, crazy goals. When we launched in October '95, we were number 17 in a 17-horse race. We said to the company in January '96, "We're number 1 or number 2 by the end of the year or we don't matter." We did a lot of crazy things--from acquiring companies to building new products to distribution deals. How is it realistic to say that you'll go from 17 to 1 or 2 in a year? It's crazy, but the company rallied around it. I'm surprised really pleasantly by the ability of people when challenged to rise to the occasion. So I guess the last lesson is that people make all the difference in the world. Everybody says that people matter most, but boy, I've never worked with a finer group of people. They just were inspired. Venture capitalists, with the exception of people like Don Valentine, would tell you that they'd rather fund a great team than a great idea. The reason is that if they have a bad idea, great teams can figure out a better one. Mediocre people even with a great idea can screw it up in its execution. Or if they have a bad idea, then they aren't going to be in a position to think about how to change it. They're just going to pursue it blindly. Livingston: What important lessons did you learn at Excite that you are carrying over to JotSpot? Kraus: One is hiring slowly and more carefully. Another is be cheap, cheap, cheap. Also, get the legs of the business underneath it before you run terribly fast. We were always playing catch-up at Excite and I never liked that feeling. You always felt like the traffic, the momentum, the deals were all ahead of where the business naturally was. You want to be ahead of where it naturally is, but you don't want to be two times ahead of it. So, I think really taking the time to understand the dynamics of the business, so we can scale it, is important, along with being cheap and hiring well.