I received this article since Promod Haque is actually the teacher for
my single adult Sunday School class. However, I decided to FoRK it
as it is a good snapshot of the process of getting venture funding.
He's also Indian. Another potential backer, Rohit?
-- Ernie P.
> BUSINESS & NEWS
> Published Sunday, August 16, 1998, in the San Jose Mercury News
> BY SCOTT HERHOLD <mailto:sherhold@sjmercury.com>
> Mercury News Staff Writer
> If a venture capital deal can be likened to an elaborate courtship,
> the Annuncio Software pact signed by Didier Moretti, Promod Haque and
> Jos Henkens offers a chance to examine what goes into the dowry.
> Moretti was the entrepreneur, Haque and Henkens the venture
> capitalists. Their market: a dry but potentially lucrative niche of
> software designed to let corporations plan and measure their
> marketing, primarily through the Web.
> The three parties agreed last month on a second-round funding of $3.5
> million that is expected to fund Annuncio into 1999. That came less
> than a year after they had closed an original $3.25 million round.
> The deals involved haggling over money -- no surprise -- but strategy,
> background and chemistry were equally important. Taken together, the
> negotiations offer a portrait of how venture capitalists and
> entrepreneurs hammer out a prenuptial agreement.
> For starters, none of the three was strangers. Haque had known Moretti
> from Cambio Systems, a client-server software company that his venture
> firm had backed. Though Cambio had not succeeded, Haque was impressed
> with Moretti's efforts as a turnaround CEO. So, too, was Henkens, who
> was familiar with Cambio, though he did not invest.
> Finally, Haque's firm, Norwest Venture Partners, and Henkens' firm,
> Advanced Technology Ventures, had co-invested before. In an
> increasingly competitive VC world, they consider themselves friends.
> Their offices are a block away in downtown Palo Alto.
> None of the three men was born in the United States: Moretti, of mixed
> Italian and French heritage, was born in Lebanon and schooled at the
> elite Ecole Polytechnique in Paris. Haque comes originally from India.
> And Henkens is a native of the Netherlands.
> Consuming interest
> But they shared a consuming interest in what has become known as
> ``marketing automation,'' one of the last unexploited software fields
> for big corporations -- one not yet dominated by giants like
> Peoplesoft Inc. or the German-based SAP.
> The software is designed to allow an executive to plan a sales
> campaign, know immediately whether it's working, and even tweak it
> midstream. While this kind of software exists in other forms, the
> notion behind Annuncio was to center its application on the Web.
> As the only venture capital investor in Peoplesoft, one of the most
> successful of the enterprise software companies, Norwest was familiar
> with the field. And the firm had looked at a couple of start-ups that
> addressed marketing automation. But the partners weren't persuaded to
> invest.
> Haque then turned to Moretti, who was pondering what he wanted to do
> next. Moretti had already begun conversations with Henkens, and the
> three men began to converge on the idea behind the company. To explore
> the idea and draft a budget, Moretti moved into a small office at the
> end of the hall in ATV's suite, above a downtown Palo Alto coffee
> shop.
> ``What I liked about it was that it was one guy in a garage,'' says
> Haque now. ``It was all green fields. We had an opportunity to
> influence the selection of key people in the executive team.''
> Looking for a No. 2
> Early on, one of the biggest issues for both Moretti and the venture
> capitalists was who would be its vice president of engineering, a
> co-founder to provide the technology backbone for the company.
> ``That was a key point,'' says Moretti, a boyish-looking 39-year-old
> whose company biography identifies him as a former competitive swimmer
> who once swam in shark-infested waters off New Guinea.
> Through a venture capital friend, Moretti met Maurizio Gianola, an
> Italian native who was a pioneer in document imaging and work-flow
> software: He had been a vice president of engineering at Extensity, a
> company that produces software to manage corporate costs via the Web.
> As a youth, Gianola had dreamed of designing Ferraris -- and there was
> an immediate fit.
> ``We felt that Maurizio really got it, because he said, `Hey, I'm not
> gonna design the applications server (the hardware platform),' ''
> Haque said. ``Our notion was to create the value in the marketing
> automation, not the plumbing.''
> But there were some delicate issues. For one thing, Gianola wasn't
> ready to leave his old job until it was clear that the venture
> capitalists were going to fund the company. And part of that depended
> on the piece of the company the investors took.
> Finally, all three parties had to decide how much in stock options to
> put aside to recruit a management team and employees.
> Moretti and Gianola ``were an impressive team, but we knew we needed
> to add to the strength of management in marketing, sales and customer
> support,'' says Henkens. ``And we knew we had to hold back a
> substantial chunk of the equity to attract that team.''
> One ingredient in this discussion was Moretti's estimate of how much
> money it would take until the company could break even. Broken down
> over time, that is measured by the ``burn rate,'' how quickly the
> company will spend money.
> With that figure in mind, the two sides debated the valuation of the
> company, or the price that the venture capitalists place on it.
> The proposed venture investment -- a bit more than $3 million -- would
> have given the VCs slightly more than 40 percent of the company. That
> means its total valuation -- including the founders' sweat equity --
> was in the range of $8 million.
> ``I floated the original proposal, and Didier (Moretti) then went out
> to check the market,'' Henkens said. ``He came back with a
> counter-proposal. We then sat down and negotiated the deal in one
> session. He gave a little and so did I.''
> Each side had leverage. Moretti could always have gone to another
> venture capitalist. In today's era of easy money, his chances of
> getting a better valuation were not bad.
> ``We went back and forth,'' acknowledges Haque today. ``Didier is a
> very gracious, soft-spoken. But he knows what he wants. He's an
> intense negotiator.''
> Leverage
> The venture capitalists had leverage, too, primarily in their
> experience and contacts. Haque, for example, has served on the boards
> of fast-growing software companies like Tivoli Systems and Forte
> Software. And his partners George Still Jr. and Kevin Hall served on
> the boards of Peoplesoft and Vantive, respectively.
> (Before they embarked on the company, Haque made sure that Moretti
> talked with key executives at Peoplesoft and Vantive to vet the
> Annuncio concept and get a sense of whether the giants would enter the
> same space. The verdict was no, at least not yet.)
> Moretti, who says he believed that getting to market quickly was
> crucial, acknowledges that the relationships and comfort with his
> investors were ultimately more important than the precise split of the
> company.
> ``My view is that I'm here to build a successful company,'' he says.
> ``You can ask whether you'd rather have 100 percent of a $1 million
> company or 1 percent of a $100 million company. I'm focused on the
> high end.''
> Nonetheless, there were some tough, nitty-gritty issues to negotiate.
> One was the vesting schedule for management. Typically, an employee
> holding stock options can vest over a four-year period, with a quarter
> to be cashed each year. Because Moretti and Gianola were founders --
> and could be replaced -- the schedule had to be carefully negotiated
> to protect their interests yet motivate their efforts.
> A second piece for the negotiators was the composition of the board.
> Ultimately, they decided upon Moretti; Andre Touma, an ex-Oracle
> executive approved by the CEO; the two venture capitalists, and a
> fifth member agreed upon by both sides. The composition thus mirrors
> the VCs' investment: close to a majority, but not total control.
> Twenty percent of the company's stock was set aside to grant options
> to employees.
> Everyone finally agreed on a first-round investment of $3.25 million,
> which included $250,000 from private investors who deal regularly with
> the VCs. ATV and Norwest split the bulk of the investment.
> With the valuation decided upon, the three men shook on a term sheet,
> the proposal that outlines the deal. That document went to the
> lawyers, who drafted a formal prenuptial agreement. By October 1997,
> the money was in Annuncio's bank.
> (The story behind the name illustrates some of the serendipity that
> flavors start-ups. After searching through domains on the Web, Moretti
> couldn't find an English name he liked. So the two founders went with
> ``Annuncio,'' which means ``announce'' in Italian. Months later, they
> broached the idea of changing the name with their investors. But the
> VCs had come to like it and urged the company to keep it).
> The two co-founders spent most of their first months hiring an
> executive team. Today, Moretti acknowledges that it went a little
> slower than he expected -- primarily because of the difficulties of
> attracting top-notch people.
> This summer, Moretti met with Haque and Henkens and quietly agreed on
> another $3.5 million round. While the co-founders gave up another
> piece of their company, the valuation placed on the company was
> larger. Moretti says they'll probably need another round next year.
> Today, the company is engineering its product, which it hopes to
> deliver in beta form this fall. Moretti is wooing potential job
> applicants with stock options, flowers and welcome gifts. He says
> they've interviewed more than 300 people to hire Annuncio's current
> 25-odd employees.
> ``We've been picky, obviously,'' the entrepreneur says. ``Especially
> at first, you have to be very, very picky.''
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