Serialisation: eBoys - Part 2

In this, the second excerpt from eBoys, the story of the Benchmark Capital team, we see just how Webvan flopped in front of Kleiner Perkins but succeeded with Sequoia Capital. Presenting to VCs was never easy - not even back then...

[Benchmark partner] Dunlevie had finally succeeded in getting Louis Borders to pare the stock-keeping units [SKUs] down to one million, but even that number struck [fellow VC] Beirne as being essentially infinite. Borders still envisioned Oasis offering not only groceries and home-meal replacements but the retail merchandise of a 'modern general store', including books, music, consumer electronics, housewares, toys, and sportswear. Borders matter-of-factly defined his chosen corner of the market as "the US retail market", which happened to be $2.3tr as of 1995.

When he joined Benchmark, Beirne had said he wanted to pursue a go-big strategy, and this one certainly qualified. But he did not accept the whole vision. He wanted instead to start with groceries only, use Borders' ideas about hub-and-spokes with an automated warehouse and neighbourhood depots to replenish local delivery vans, but drop the idea of retail storefronts, which entailed unnecessary cost and complexity. Would Borders accept a less ambitious vision for this new company's start?

When Dave Beirne met with Borders for the first time, he shared his own thinking about MyStore, with conviction and details that showed it was not something he had cooked up to pander to Borders. But like a surgical resident facing a prospective first patient, any new venture capitalists will have difficulty signing up entrepreneurs nobody wants to be the first. In Beirne's case, however, he had been offering advice about business strategy to clients for a long while it was part of what differentiated Ramsey Beirne from other executive search films. Borders took to Beirne and, at Benchmark's prodding agreed to drop the idea of the retail stores.

Even so, this was a deal that was going to require an enormous amount of capital: $35m, perhaps, to get Oasis, rechristened Webvan, up and running in a single city, and another $25m for each additional city. Webvan's capital needs would have seemed to make it a deal unsuitable for an early-stage venture capital fund, but Webvan was only going to raise about $10m initially. After planning advanced further, another round of financing would rely on OPM - Other People's Money - which would come in when Webvan commanded a much higher valuation. Presently, the Webvan deal was valued at $9m before it received the infusion of capital. The company then consisted of Louis Borders, a handful of senior managers he had hired from the grocery business, and an office in Foster City, California, that he had set up under the purposely unrevealing name of Intelligent Systems for Retail.

Having worked closely with Jim Clark in building Netscape before joining Benchmark, Beirne knew that the past success of a name-brand entrepreneur was an asset that would allow him to paint a picture of future success, which in turn would attract more capital and more good people. The identical business concept in the hands of an unknown entrepreneur, however, would starve for lack of nourishment.

Entrepreneurs who sought venture funding usually did not need to invest any more personal money into the venture than they had already spent to bring it to life. But some venture capitalists did demand more. Arthur Rock, the senior dean of American venture capitalists and an early investor in Intel, always insisted whenever his venture firm put money into a start-up that the entrepreneur co-invest one third of his total net worth, whether it be large or small. If the entrepreneur was extremely wealthy, the venture firm had higher expectations about his co-investing. The venture guys didn't want the high-net-worth entrepreneur to regard the start-up as a hobby. To prove commitment, he was asked to have skin in the game, and that was what Beirne asked of Borders, whose net worth Beirne assumed to be around $100m. Borders put in $3.5m, along with Benchmark's $3.5m, and $3.5m was sought from another venture firm, not to spread financial risk - the amount involved was too small relatively for that to be a pressing issue - but in order to tap the other firm's access to capital markets - more OPM - which would be needed.