Kleiner ex Machina

Kleiner ex Machina

Kleiner ex Machina

Arts has moved! You can find new stories here.
March 19 1998 3:30 AM

Kleiner ex Machina

In Silicon Valley, money walks, bullshit talks.

61000_61074_lead

When I first visited Eric Ver Ploeg last fall he was a ward of the state and of MasterCard. He and his partner Ivor Frischnecht occupied a dingy office subsidized by the federal government across from an ugly strip mall. They were waiting for two venture capital firms, which had agreed in theory to back them, to actually cut the checks. Their database software company, the weirdly named Angara, had only the sketchiest of products. Eric and Ivor needed money to hire the nerds to create the product they planned to sell.

Advertisement

When I heard that the money had finally arrived, I visited them again last week. Eric's blond hair was still neatly combed, his mind still coolly analytical, his humor still sharp and self-effacing. But now, perhaps for the first time in his life, he was wearing a coat and tie. ("I don't wear this every day," he apologized.) Angara was now in new offices in a fancy part of Palo Alto, right over a Lamborghini dealership that sells $256,000 cars ($500 more if you want purple). The offices teemed with expensive-looking employees sipping cappuccinos in front of new computers. With their three or so million dollars of venture capital, Eric and Ivor plan to hire 22 people as quickly as possible. Twenty-two people means 22 cubicles and 22 desks and 22 computers. At the rate they were going, Eric and Ivor would run through their first $3 million in nine months.

Eric Ver Ploeg must feel unnerved, I thought. This new role of spendthrift didn't suit him at all. He had spent the past two years scrounging for survival. He had never had more than a few thousand dollars. And he was not by nature a con artist. He's what used to be called a nice young man. Now he was taking $3 million of other people's money, piling it on top of a Lamborghini dealership, and setting it on fire. So was he intimidated at all? "Nah," he said. "You run through the money so fast you don't even think of it."

It turns out that spending vast sums of money very quickly--even if you show no signs of ever making more money--is a sign of entrepreneurial success. The analogy that comes to mind is of a rocket trying to get off the pad. The company roars and splutters spectacularly for some time without budging an inch. But if it spends enough money, and makes enough noise, it might just take off and shoot the moon.

The trouble with this analogy is that spending vast sums of money without making money is also a sign of a flop. "Really great and really crappy companies both burn great sums of money really fast--and it's impossible to tell one from the other from the outside," says Eric, who then laughs. "Actually, it's impossible to tell from the inside."

Advertisement

Thus the first rule of Silicon Valley, which is also the first rule of Hollywood: Nobody knows. Everyone involved in helping Eric to become a child billionaire is just guessing. This includes Eric. "The trick is to create the illusion of success," he says. "And if you do it well enough, you might have actual success." He pauses. "There are good products and there are bad products, and they are not that different." In this world the most important ingredient is no longer money, since everyone has money. It's the right kind of bullshit.

Enter Kleiner Perkins Caufield & Byers. Kleiner is one of two venture capital firms that gave Eric his $3 million. Kleiner's successes include Sun, Netscape, ONSALE, and @Home. Kleiner is the best kind of bullshit. And the moment Kleiner bought into Angara, Eric's and Ivor's lives changed.

The first inkling they had of their transformation came when they went to pay their attorney. Lawyers in Silicon Valley often agree to defer their fees from startup companies until the company has received funding. But once the money arrives, so does the bill. Eric and Ivor met with their lawyer to discuss the fee. The lawyer hemmed and hawed for a bit and then, mentioning how nice it was that Kleiner Perkins had backed them, offered them a deal: He'd happily take less cash if he could have a sliver of stock options in Angara. Done!

61000_61075_perkinsani

S oon enough the real estate agent, the furniture company, the equipment leasing company, the headhunters, just about everyone who showed up in the new offices over the Lamborghini dealership were making the same sort of pitch. "Furniture normally goes for three grand a cube, but the furniture company said that they'd cover their costs with cash and take their profits in equity," Ivor said. Was there any creditor who didn't ask for stock options in lieu of payment? Ivor thought for a moment. "Kinko's," he said, at length. "But then they don't know who we are yet."

They will. "Everyone in Silicon Valley thinks he knows how to be a VC," said Eric. "I'd tell them about Angara and everyone would want to tell me why my business idea would not work. The Kleiner money has been an instant solution to that problem. Tell them I have it and bing, I am legitimate. It shuts people up."

Kleiner Perkins, of course, knows almost nothing about what Eric and Ivor are up to. It was the other venture capitalist, a small firm based in Reno called JMI, that understood Angara's business and made an informed decision to invest. Kleiner came in as an afterthought. No matter. Eric still has no idea whether he will succeed or fail, but the world around him has suddenly found religion.