Piece of Cake     Information Letter 11

Information Letter 10

Here it is. John Walker recommending that Autodesk go get venture capital, even if it meant surrendering the autonomy and sense of control over our destiny that was the main reason for starting the company in the first place. But read the arguments—and remember that they were the very same arguments that possessed us to go public in 1985. This was the first “modern” information letter: written for a company in which founders were outnumbered by employees hired after the company began to expand, and after the company had significant sales and a regular operation. Thankfully, the technology crash of '83 and our unwillingness to sacrifice our principles at the altar of Mammon precluded our obtaining venture capital. No, there was no Information Letter 9; when I wrote this one, I didn't have copies of the prior letters and I miscounted.
Autodesk, Inc.
Information Letter # 10

by John Walker
Revision 8 — October 25, 1983

In periods of frenzied haste toward wealth, of feverish speculation and of crisis, the sudden downfall of great industries and the ephemeral expansion of other branches of production, of scandalous fortunes amassed in a few years and dissipated as quickly, it becomes evident that the economic institutions which control production and exchange are far from giving society the prosperity they are supposed to guarantee; they produce precisely the opposite effect.

— Peter Kropotkin, 1880


Well it has been a long time since the last information letter, hasn't it? These letters only get written when things are sufficiently calm that there is time to reflect enough to put one together, or when the gusts of crisis blow so hard that one is forced to communicate to share the urgency. Up to now. This letter is a review of our accomplishments, an attempt to summarise our current position, and a sales pitch for my recently acquired view of where we should be going.

My original working document for the formation of this company began with the words “the game has changed”.[Footnote] The game has indeed changed, and we have changed with it. Our success to date is a measure of our ability to change and adapt to the software game in the 80's. But the game is continuing to change, and we must continue to adapt or else we will lose the opportunity we've created by our labours to date.

We started a company composed of highly skilled programmers. Our idea was to develop multiple products. We did that. We planned to test market these products and determine which had the best potential. That was done. We intended to focus our efforts on the product which, in test marketing, showed the best prospects of being a success, and we did it. We decided from the start that we would have to recruit a marketing professional to build an effective marketing team to promote our products. Since joining the company, Mike Ford has done an amazing job of expanding our sales from zero to the million dollar level, and is building a marketing organisation as competent as the original technical team. We knew that we couldn't succeed while remaining a cottage industry. When the time was right, we had to take on the burdens of office facilities, manufacturing machines, full time employees, and the rest. Since his joining the company, John Kern has made the operational side of the company professional, efficient, and responsive, while reducing the cost of our product as sold by over 50%. We are now positioned to expand our production capacity by a factor of ten without catastrophe.

So far we are on course, profitable, productive, and positioned in the fastest growing corner (CAD/CAM) of the hottest industry (Software). In the historical course of things, we should plow our profits back into the business, add to our production and marketing capacities, and continue R&D to enhance our product. But these are the go go 80's, where product lifetime may be measured in months, and company lifecycles in one to two years. As long as all our competitors play by the rules we're using we will win. But will they?

We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time, so that everyone keeps asking, “What time is it? What time is it?” but none of the clocks have hands.

— Adam Smith, Supermoney

How lucky we have been! I can think of almost no parallel in the history of the microcomputer business where one company had the only product in a major market for over a year. Had we entered a market like word processing, BASIC compilers, or spread sheets, we would have long ago been blown away by better organised and capitalised competition. It is simply fantasy for us to assume that we will continue to have this market to ourselves, or to assume that our primacy in the market guarantees success down the road. Review my initial papers about this business. Remember Electric Pencil? Has anything changed? Let's not be deceived by our initial success. We've all worked hard, and we've been lucky, but from now on in we have to make our own luck because the competition is on the way.

Our continued expansion plans can be disintegrated almost overnight by any one of the numerous competitors who are appearing on the horizon. There is little doubt that our product is technically the best, and so far we have been able to react faster and complete development goals in a more timely fashion than the competition, indicating that our technical staff is the best.

However, we are weak in our ability to promote our product. We have bootstrapped this company from the very start. This mode of operation preserves control in our hands, but it limits our ability to counter competition, particularly in advertising blitzes, to the monthly profit from operation. For September, this number came out to a little over $13,000, which will buy from 3 to 4 full-page ads depending on where you run them (just page rates, not even figuring production cost). If you start to calculate in additional staff, overhead requirements, promotional material, etc. it becomes clear that we will have to run at a substantial loss to sustain even a modest promotional campaign. Our reserves are very healthy for a company at our state of development, but could be exhausted in less than three months by even a modest step-up in our marketing budget.

Therefore, the time has come to seek outside funding. The time is right; AI has a product recognised to be the industry leader, so we can build our having arrived first into a large market share by a properly targeted campaign. Second, this is an ideal time for a company of our kind to raise money—software is one of the hottest items now, and CAD is one of the best bets in software. This may not be true in six months. Not long ago, venture capitalists were tripping over themselves to fund start-ups in desktop computers. Today such ventures are shunned as hopeless charges against the IBMonolith. Remember gene splicing?

If we raise money now, we will get more, and give away less, than if we wait. By waiting we are gambling that our continued growth will not be aborted by a well-funded competitor, that our growth will add value to the company faster than our competitors grow, and that if we later need money we will be able to find it on attractive terms. All of those are very uncertain propositions. On the other hand, if we raise money and discover we don't need it immediately, it can serve as a cushion against hard times in the future.

Going after heavy-duty outside money will make some serious changes in this company in the process of getting it, and if we succeed, after we get it. We will have to prepare a formal business plan with sales forecasts and departmental budgets to the line-item level for the next three years. (This is a good idea anyway, and we're already doing it.)

We will have to reconcile ourselves with giving up 20 to 35 percent of the company in return for 2 to 3 million dollars in funding.

We will have to abandon any remaining ideas of running the company on an informal basis. We will be on the fast track, spending other peoples' money, and will have to show that we are being prudent and professional with the resources they are speculating on us.

We will have to accept outside participation in the management of the company. There will almost certainly be additional professional management installed, possibly replacing the entire current management of the company.

We will largely preclude operating the company as a steady-state enterprise which generates revenues adequate to make us all happy. People don't stick 3 million dollars in an untested company unless they expect to increase it by at least a factor of ten to twenty, so we'll be basically signing onto an exponential growth treadmill with serious consequences for failure to perform as advertised (e.g., loss of control of the company and serious dilution of our stock ownership).

These are serious consequences, and should only be accepted after reflection on the alternative.

Life in the fast lane, surely makes you lose your mind.

— The Eagles

Ahhhh, but the slow lane has its problems too. We are now at the point in the lifecycle of our product where the market share war usually begins. Several products have announced. None has come to the attention of more than a few percent of the potential customers. The process of new market creation is in its infancy. The entrenched large system sellers are largely unaware of the barbarians at the gate.

In fewer than ten years, drawing systems will be on the desk of virtually every person employed in a job in which drawing is a means of communication. These drawing systems will be based upon the fundamental concepts present in AutoCAD. There is little doubt that AutoCAD can do the job that is there to be done. Whether those machines run AutoCAD or another package will be largely determined in the next year. Our actions will decide whether AutoCAD becomes synonymous with “drawing tool” as VisiCalc has become with spreadsheet.

Our technical edge is only a tenuous advantage. Every day the success of the IBM PC proves that the race does not necessarily go to the best product. One must have the best company, and that is a composite of the product itself, the development staff which maintains and further develops the product, the customer support staff which largely determines how the product is perceived after sale, the production facility, which controls whether delivery commitments are upheld and manufacturing quality maintained, the marketing department, which must build the visibility of the product and expand the channels of its distribution, and the overall management of the company and of the departments.

But just as important as these obvious components of a successful company is its financial position. It has been proved again and again that a perfect company with the ideal product can be wiped out by a competitor who is better capitalised. For example, who would argue that the IBM PC is a better machine than (name the competitor you like best!). But IBM is not only a superbly functioning company, there's the matter of their 4.3 billion dollars in the bank. When a company like Victor raises a sum like $35 million by going public, this amasses a war chest that is insignificant against IBM's television advertising budget alone.

Not only is our current technical and market advantage tenuous, it can evaporate in the face of well funded competition. Our technical development is still very slow, very informal, and basically built on a few key people burning themselves out to get work done. I know all about large software projects and the false economies of scale, but the fact remains that if, say, Digital Research plans to enter the CAD market, they can field a product within 9 months which would be better than AutoCAD by most technical measures.[Footnote]

Next, there's the fact that simply by obtaining outside funding we add an aura of credibility to the company and make ourselves more visible. I don't like the fact that companies who bootstrap themselves are sneered at, but that's the way it is, folks. And with a 46% tax on profits before you pour them back into development, it's a lot easier to do it with other peoples' money than with your own. By being in the portfolio of a well known high technology venture capitalist, we will be exposed to possible joint venture opportunities or markets for our products which we would otherwise have to painfully find for ourselves.

Then there's the experience we can draw on in addition to the money. Before we started this company, none of us had started from zero and built a company to the million dollar scale. I'm sure that had we done it before, we would have done many things differently, and made fewer painful mistakes. I know I would do it differently if I had it to do over. Now we have to face the fact that none of us has built a million dollar company into a 30 million dollar company. This is a lot faster, more high stakes game than the one we have been playing so far, and we will need a lot more than honest intentions and a couple of books to survive in it.

The point is that these venture capitalists have done the trick numerous times. They know what you have to do when, what to do when you get in trouble, and where to find the people you need when you have to build up a critical part of the company. In growing and keeping out of trouble, this knowledge can contribute mightily to the chances of success. And with 80% of new businesses failing within 5 years of formation, we can use all the help we can get.

It's better to burn out, than it is to rust.

— Neil Young

So, all things considered, it seems to me that the time has come for us to seek outside financing. We should attempt to raise from 2 to 3 million dollars by selling up to 35% of the company. We will almost certainly have to accept serious downside risk in the form of loss of control or dilution should we fail to meet performance criteria spelled out in the financing agreement, so we will be betting everything on success and risking all we have done so far.

But it really boils down to this: take your present percent ownership of the company. Would you rather have that percentage of a company with a market value of $3 million, or 65% of that percentage of a company with a value ten to twenty times as great? I think that the risk of failure is very great, but that we can fail just as badly by not taking the risk—since we are not operating in a vacuum and even our present market share may erode to the point of disaster against a well financed group of competitors.

I have come to this recommendation from a position almost completely opposed to what I'm recommending now. I have changed my mind because I think that we have in our hands a product which can make us all very well off, indeed. As much as I dislike it, I believe that the only way we can get from where we are to where we want to be is to bring in outside money and talent, and rapidly make this a professional, conventional company.[Footnote] Not to do so is to subject our work to date to a greater risk of loss due to competition.

The next year or two are going to be very interesting ones. We are going to be jumping on a tiger's back and trying to hold on as we learn how to steer. But I can't think of a better time, or a better industry, or a better product, or a better team of people with which to make this gamble. And I can't imagine starting over if we let this opportunity slip away.

But with the throttle screwed on there is only the barest margin, no room at all for mistakes. It has to be done right…and that's where the strange music starts, when you stretch your luck so far that fear becomes exhilaration and vibrates along your arms.

…letting off now, but only until the next dark stretch and another few seconds on the edge…The Edge…. There is no honest way to explain it because the only people who really know where it is are the ones who have gone over. The others—the living—are those who pushed their control as far as they felt they could handle it, and then pulled back, or slowed down, or did whatever they had to when it came time to choose between Now and Later.

But the edge is still Out there.

— Hunter S. Thompson, Hell's Angels

And we're a long way from it…. Right now we are ticking along in first gear, running smoothly, and taking every precaution. But what's that noise from behind? Shall we reach for the throttle, try to hide, or hope they will just go away?

I say let's go for it.

Piece of Cake     Information Letter 11