The Millionaires Next Door
What do you get when you combine raw brainpower, 80-hour workweeks and 50-pound sacks of rice and beans?
By Tia O'Brien
The five guys waiting in line for burritos look like college kids--shlumpy in a slacker-dude kind of way with their flannel work shirts, blue jeans and 10-year-old running shoes. Success is so new to the founders of Excite Inc. that they're not sure how to wear it, except maybe on their license plates--like the one on Ryan McIntyre's Volkswagen Golf, which reads "XCITE."
"Like these guys pulled up next to my car the other day," McIntyre, '93, tells his buddies who quickly gather around, forgetting their burrito orders. "They rolled down the window and said, 'Wow, are you one of the guys who started Excite?' And I said, 'Well, like yeah.' And they said, 'Wow!' "
Just four years out of Stanford, the founders of Excite still marvel at the wild rocket ride that blasted them from their Stanford dorms to millionaire status at the tender age of 25 (one was 27). But in a world of unbridled hype about the high-tech revolution, these guys are authentic: They built one of the top Internet "search-engine" companies out of nothing but an idea, $15,000 from their parents, maxed-out credit cards, 50-pound bags of beans and rice--and a slogan: "Unencumbered by reality."
Now a sobering reality stares the young entrepreneurs in the face. Excite made it big because the founders devised a powerful way to help a new world of Internet users find what they wanted among millions of websites. But in the race to cater to the digital hordes, the company is up against life-threatening competition. Excite ranks a notch behind the undisputed leader of the search-engine world, Yahoo! (another start-up founded by Stanford alumni). Of the dozens of Internet search engines, only a couple are expected to survive as key players. And Excite is determined to come out on top, disproving some Wall Street seers who predict that it will be swallowed altogether by America Online (which already owns 20 percent of Excite) or a cash-rich competitor.
While Yahoo! has become something of a household name, Excite is spending millions to capture its share of the exploding consumer market. A recent TV advertising blitz, aimed at web users, featured Jimi Hendrix singing, "Are You Experienced?"
To understand why Excite's founders are so confident they'll emerge winners, you have to understand something about these innocent- looking recent grads: They are killer competitors who talked their way into venture capitalists' offices and won financial backing without having a clear idea about how they could turn their technology into a commercially viable product.
In all, there are six Excite founders. Five of them are, well, nerds from Stanford's computer science department. One is a political science graduate. The fact that the six are still business partners and friends is remarkable in itself. The entrepreneurial highway is littered with exploded partnerships, detonated by feuds over money and power. But the Excite men still are standing shoulder-to-shoulder, even though only two are officers of the company and are worth millions more in stock than the other four.The birth of Excite can be traced back to whoever allotted freshman housing in 1989. "We all were assigned to the same freshman dorm--then called Madera--in the Wilbur Hall complex," clean-cut Joe Kraus, '93, tells me in an interview in his office. He's the poli-sci major and born entrepreneur who earned the nickname "Phone Boy" for his relentless pitches to potential investors. The Excite men agree that without Kraus's moxie and penchant for wearing ties, they never would have gotten beyond the drafty Palo Alto garage that served as their postgrad corporate headquarters.
In the company's early days--way back in 1994--Kraus held the title of company president. Now, with seasoned businessmen at the top, he's senior vice president in charge of business development.
The six friends from Madera stayed tight; three of them formed a jazz and funk band named Where's Julio? (and even cut a CD, which they'll hand out to anyone who asks). In the winter of '93, with graduation looming, reality began closing in on Kraus. He turned to his brilliant freshman dormmate, Graham Spencer, who was also set to graduate in the spring. "I didn't want to work for anyone else, so I said, 'How can I get this guy [Spencer] who's really, really smart to do something?' " Kraus recalls. His former dormies, just as eager to avoid life under a boss, all agreed it was time to convene a let's-plan- our-lives-together meeting over burritos at Rosita's Taco Stop in Redwood City.
Kraus: "When we got there, we said, 'Let's start a company.' But we didn't know what we wanted to do. So we looked at Graham and said, 'What should we do?' And he said, 'Well, I think we should build technology for searching through big databases. That's a problem that no one's really solved well.' "Note that Spencer, '93, MS '94, wasn't specifically talking about a navigation service for the Internet. On this day in 1993, the infant Internet was merely a network used mostly by government and academic types; it would be another two years before millions of regular folks got hooked.
But Spencer, a low-key brain who lists his hobbies as "attending punk-rock concerts, reading philosophy and searching for UFOs," shrewdly foresaw the need for a powerful search tool. He figured they'd sell the tool to companies that wanted to do in-depth data searches. So, in the final months before graduation, the boys started researching search-and-retrieval tools at Stanford's libraries. They requisitioned conference rooms in the history department for corporate huddles; they logged on in the computer lab. By the time they got their act together, the Internet was making the cover of Newsweek. Their search-engine tool couldn't have been better timed.
But it wasn't that easy. Standing between these would-be millionaires and success was a couple of years of 80-hour workweeks and a ton of anxiety.
After graduation, they borrowed $15,000 from their parents, purchased an old Sun Microsystems workstation from Stanford's electronics graveyard and set up their "office" in a South Palo Alto Eichler home. "Very nasty" is how Kraus describes the funky tract house that served as headquarters as well as home to Mark Van Haren, '91 (the former resident assistant for Madera and the band's lead singer) and Spencer. Two of the founders----Ben Lutch, '94, and Martin Reinfried, '94--still lived on campus while finishing a fifth year of classes. McIntyre had moved in with other college buddies.
"We all were terribly naive about how much work would be involved. But we thought it would be kind of fun to work together," explains Reinfried as the five techie founders and I convene our reenactment burrito dinner at the Redwood City taqueria. (Kraus is off at a meeting with Dean Witter finance folks.) Seated around the ersatz-wood table, they smile and chuckle as they tell their tale, one finishing the other's sentence, much like Lotto winners relating their incredible luck.
They set to work in the drafty, frigid garage because there was no room inside the cramped Eichler. For heat, they ran the clothes dryer. When it blew a fuse, the screens went dark. "You'd always see Mark programming with his little wool hat and his fingerless wool gloves," McIntyre recalls.
A Los Angeles Times writer who visited the garage described it as looking like "the group house you shared with your friends after high school--the vacant refrigerator, the tumbleweed-sized dust balls, the cloth sofa that gave off a cloud of dust every time someone sat on it."
I ask if they picked a garage so that one day, when famous, they could boast about their gritty start à la Hewlett-Packard? Shrieks of laughter all around the table. "Yeah, sure--'When we were famous!' " Van Haren says. McIntyre continues, "All we wanted was a warm place to write programs that didn't require running the dryer to keep us warm."
The entrepreneurs subsisted on rice and beans bought in 50-pound bags from the Price Club at $11 a sack, supplemented by Campbell's soup. Spencer remembers the next 14 months as a blur, with Kraus scheduling demos before they had completed the software. But a year later, Spencer had devised a revolutionary way to retrieve information. It could take a broad search request, locate items of potential interest, rank them in a list and let the user quickly fine-tune the list for only the most interesting material.
This approach set it apart from rivals such as Yahoo! whose searches used only key words. Ask for articles on United Airlines, and you'll get a mammoth list--much of it useless--of any document that includes United's name. Excite's software started attracting attention because it could perform a more exact search, retrieving a compact list of documents even if the searched-for word wasn't in the document at all.
In July 1994, Excite got a break. International Data Group, publisher of the computer magazine InfoWorld, paid the fledgling company $100,000 to develop a secret online service. They plowed all the money back into the company, but the contract allowed them to move out of Palo Alto and into a larger Cupertino tract house, setting up their computers in the dining room-turned-office.
Kraus and Spencer were virtually clueless about what it took to win seed money. But that didn't stop them from making the rounds of venture capitalists. Their naiveté won them the Silicon Valley boot at most VC offices. "We'd say, 'Here's this technology, help us make a business out of it,' " Spencer recalls. "But what they wanted to hear was, 'Here's our company. Give us this money, and we'll give you 10 times that in four years.' " That's how a typical conversation went until a meeting in December 1994 with Vinod Khosla, MBA '80, a partner at the high-tech venture capital firm Kleiner Perkins Caufield & Byers.
"I didn't expect much because they'd been passed from VC to VC," Khosla says. "But in the first 15 minutes, I really liked them." The bright, young, energetic guys seated at Khosla's desk reminded him of his own start-up team for Sun Micro-systems. In 1981, he and his three co-founders won backing from Kleiner Perkins to launch workstation giant Sun. Khosla later joined Kleiner Perkins as a venture capitalist. He was struck by Spencer's maturity and ability to analyze technology. Kleiner Perkins has built its success by taking risks on such formerly raw start-ups as Genentech and Tandem. Khosla was also impressed by the technology. But a crucial question hung in the air: Could it "scale"--search large databases?
Kraus looked at Spencer, the technical wizard, who shrugged. "I'm like, 'How would I know? We don't have that much space on a disk drive,' " Spencer said. "Keep in mind the sum we're talking about for a larger disk drive is a couple of grand. That's enormous to us."
Khosla picked up his cell phone and told his assistant to order the boys a $5,000 disk drive. "We're like, 'Yeah, this is how to get results,' " Spencer says. The hard drive, still owned by the boys and nicknamed KP (for Kleiner Perkins), proved their technology could scale. Within a month, KP (the venture firm) decided to back Excite. The firm arranged for $1.5 million in financial backing-- $250,000 up front, matched by Geoff Yang, MBA '85, from Institutional Venture Partners, with a promise of another $1.5 million in 18 months.
But instead of celebrating, the young entrepreneurs were stressed: They'd also had an acquisition offer from a company called Verity, then the market leader in information retrieval. For a few million, they could sell their idea outright. Should they take the buy-out money and run or gamble on a high-risk future? It was their first major business decision.
So, how did you decide, I ask the group. In unison: "We split down the middle." A split that put their partner-ship on the line.
This was what the Excite founders call a "couch moment." Whenever they were faced with a dilemma, the guys would pull their ragged couches face-to-face and hash it out. On that tense night, Kraus, Spencer and Van Haren sat on one couch; McIntyre, Reinfried and Lutch on the other.
McIntyre: "We just stared at each other for about five minutes."
Lutch: "It had to do with our end goals. I knew Joe, Graham and Mark had their hearts set on building a company. But we didn't think we could get luckier. Like, 'Let's not push our luck.' "
McIntyre: "As soon as we smelled money, it was like, 'All right!' "
Reinfried: "The other option [building a start-up] seemed riskier. And we'd been working hard for a year-and-a-half."
Van Haren: "And no one had any money."
Spencer's "couch" argued that two seasoned VCs--Khosla and Yang--were willing to work with them while no one was sure about the soundness of Verity's future. (In fact, the company's stock soon plunged.) McIntyre, Lutch and Reinfried took a walk, came back and announced, "We're in!"
It was 2 a.m. They wanted to celebrate by flying to Las Vegas. "We called my father, he's got the official airline guide, and woke him up," laughs Reinfried. "But there were no flights left. So we settled on Denny's for ice cream. It was the only place open."
Khosla began serving as both mentor and coach for the boys, the youngest group of entrepreneurs he'd ever taken on. His Lamborghini started pulling up in front of the house, sparking jokes that the neighbors probably thought they were drug dealers--up at all hours with odd visits from guys in $80,000 sports cars.
"I had to develop a complete business plan," Khosla says.
"Being a navigation service for the Internet wasn't originally on the list of what they wanted to do." He prodded them to research the concept. And they pursued his leads, zeroing in on a web search engine as a marketable product.
Khosla was struck by the group's practical, down-to-earth camaraderie. But he urged them to reconsider their division of corporate equity: All six had equal shares. "I said, 'You all must come out of it with something proportionate to what you put in. Otherwise, you'll have hard feelings down the road.' " Khosla suggested that Spencer get the biggest chunk, next Kraus, and the rest get an equal split.
That brought on another couch moment. The six guys--who'd always operated on the basis of equality--pulled up the couches for another tense discussion. They agreed that Spencer deserved more. But how much more? And how could they calculate Kraus's value?
Reinfried: "He had a different job from the rest of us."
Lutch: "We could all look at the code and see that Graham wrote nine times as much code. But it was harder to determine what Joe was doing."
McIntyre: "We all said, 'Joe's been our only external representative.' "
Reinfried: "We were the technical entrepreneurs, and he was the marketing entrepreneur."
Van Haren: "And we realized that without someone doing that stuff, we couldn't have gotten our foot in the door. That showed us he was worth a lot."
The end result: Spencer, 600,000 shares; Kraus, 400,000 shares; Lutch, Reinfried, Van Haren and McIntyre, 200,000 shares each.
In December of '94, the shares were just Monopoly money. Fifteen months later, with Internet fever sweeping Wall Street, the Excite gang was ready to take the company public.
But not before rejecting another offer put on the table by Khosla. The Yahoo! founders, David Filo, MS '90, and Jerry Yang, '90, MS '90, had come to Kleiner Perkins asking for backing. But since KP already was committed to Excite, Khosla suggested merging the two promising search-engine start-ups. Talks between the competing Stanford entrepreneurs stalemated. "We each thought we were worth more than the other, so we didn't come to terms," Spencer explains.
While Excite still was building its product, the Yahoo! guys had their website up and running, making headlines as the first Internet search engine. They had a one-year jump on Excite--a huge amount of time in Internet years.
By the time Excite was ready to go public in April 1996, what should have been the company's big Wall Street moment was overshadowed by the impending initial public offering (IPO) of Yahoo! Suddenly, Yahoo! seemed to be on every magazine cover and on the front page of every major newspaper. Wall Street investors, who saw gold in Internet companies, predicted that the Yahoo! IPO would be hugely successful. It was. Filo and Yang were hot, with the international press fighting over them for interviews.
It bugged the Excite guys that everyone was hyping Yahoo! In their eyes, Yahoo! was making its name by using existing technology to catalog websites and create a directory instead of developing breakthrough technology. "Yahoo! really leveraged its brand name to be successful," Spencer says. "To us, that felt very different. We really struggled through this whole process." Van Haren puts it more bluntly: "It's like Ronald Reagan being an actor and then becom-ing a politician." The group cuts up with laughter. McIntyre: "And we wonder why Yahoo! doesn't like us?" Van Haren continues, "Like Stanford magazine put those guys on the cover. [Actually, former University president Richard Lyman was on the cover of the September 1995 issue, which featured Yahoo!] We all came around at the same time."
Yahoo! might have stolen the limelight, but it couldn't steal the magic moment when the Excite men watched themselves become millionaires.
April 4, 1996: The six Excite founders huddle around a computer on the 25th floor of the Bank of America building, the trading floor for Excite's IPO investment banker, Robertson Stevens.
Lutch is wearing his "You are shit" T-shirt for the occasion. They all watch the first trade on the screen. Excite opens at $17 a share. As the price climbs, the trader tells them, "That's a lot for this much stock." It reaches $21, then settles at $20. McIntyre: "I used Ben's cell phone to call my parents and in a very cool tone said, 'Hi, we're millionaires.' That was weird." The guys toasted with champagne, enjoyed a private lunch . . . and went back to work.
A year later, Excite stock stands at about $10.That makes Spencer worth about $6.1 million; Kraus, $4.1 million; Lutch, Reinfried, McIntyre and Van Haren, $2 million each.
On paper. They can't get at the bulk of their wealth until they're vested in August of 1998. Have they splurged at all? Kraus bought himself a BMW, true to the dreams of every born marketer. But what about his lower-profile partners?
Lutch: "Ryan and I took a little trip to Europe on the Concorde."
McIntyre: "It was very cool. It has its own customs. We were dressed like scumbags."
Reinfried: "I found a couch for my room but I looked at the price tag and said, 'You can't pay this much for a couch.' Then I went and sat on it again. And it was like, 'Actually, I can.' "
Van Haren: "I bought four cars [including one each for his brother and sister]. I bought myself a $2,000 bike. And braces."
Spencer: "I bought a new car, a Toyota 4 Runner--out of necessity. There just isn't a lot of stuff I need."
Kraus once compared his instant-millionaire status to a Hollywood star's fleeting fame. All the founders know their wealth can perish overnight, victim of some Internet technology upset. Excite stock has tumbled a few times, climbing back again, especially after a joint venture was launched with America Online last fall.
Excite now does much more than help find needles in electronic haystacks. With a full editorial staff, the company offers thousands of website reviews, mini-guides to cities worldwide, live stock quotes, and a constant stream of the day's news. In December '95, the payroll stood at 40 employees. By the end of the year, the company expects to employ 300.
The founders are clear about their business goal: to beat or at least match Yahoo! Excite revenue is surging: $6.5 million in the fourth quarter of '96 compared with $574,000 in the same period a year ago. The money comes primarily from advertisers who buy space on Excite's website. But like most search engines, it still hasn't turned an annual profit. And at the end of 1996, Excite had spent much of its cash on the aggressive acquisitions of two competing search-engine companies.
Thanks to the acquisitions, the founders boast that 45 percent of people on the Internet are using an Excite product. But most analysts still say Excite has a long way to go to knock Yahoo! out of the box. In March, Excite announced a stock offering to raise more cash, sparking a new round of speculation that the company was primping for potential buyers. "It's very expensive to build a brand name for a company like Excite," observes Forrester Research analyst John Robb, who considers America Online the logical suitor.
Excite CEO George Bell, 40--who came on board in January of '96 when snowboards, guitars and juice cans cluttered the musty office hallway--shoots down acquisition rumors. "We went public so we could stay independent. We still think that's a good path."
As they down the last of their beer at Rosita's, the Excite gang isn't talking about buy-outs but about their battle to beat Yahoo!
Spencer: "We ran an ad campaign that really made them mad. They haven't forgiven us. It said, 'It's '96. Are you still with the same old Yahoo!?' It's not like we said, 'Yahoo! sucks.' "
Yahoo! sent Excite a cease-and-desist order.
Lutch: "Which we summarily ignored."
For their part, Filo and Yang are taking the high road, at least publicly. "I have a lot of respect and admiration for the Excite guys," Yang says. "It's unfortunate they feel that there is anything personal--I certainly don't think there is anything personal on our part."
The Excite founders, marking birthdays of 25 to 28, have no plans to quit--certainly not before their stock is vested. Kraus, Spencer and Van Haren still live together in the same rented Cupertino tract house. They're considering a move to shorten the commute to Redwood City, the new corporate headquarters. None of the founders is married; only McIntyre is engaged.
It's hard to imagine that even marriage could bust up the Excite men. Spencer describes a typical week: "Ben, Martin, Ryan and I took a trip to L.A. [to see The Empire Strikes Back]. Mark and I went to the movies a few nights ago. Joe and Ben have been over to my house a few times in the past week."
After four years, one company, an IPO and millions in paper riches, the Excite founders are a long way from their freshman dorm. But they still prefer hanging together.
Tia O'Brien writes about technology, business and politics. E-mail her at firstname.lastname@example.org.
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