ArsDigita: From Start-Up to Bust-Up by Philip Greenspun

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If you've been hanging out around courthouses in Delaware lately, you may have heard about some legal acrimony involving ArsDigita's venture capitalists versus the ArsDigita co-founders. This letter explains how it came about (from the perspective of one of the defendants).

Note that 99 percent of the information in this document is irrelevant to the lawsuit. The lawsuit has to do with the rights of the shareholders to control management based on some technical points of law and contract. In other words, the questions of who is best qualified to run the company and whether business decisions have been correct are largely irrelevant.

Background

Let's go back to 1993. That's when we started developing the domain knowledge that led to the ArsDigita Community System product. Most people who've made money in the software business are those who wrapped their minds around a problem earlier than others. You can't base a business on "we'll be better programmers than the folks at Microsoft and Oracle"; each company has enough computer science PhDs and expert software engineers to bury 100 competitors. You can, however, base a business on "we'll attack this problem a few years before Microsoft and Oracle notice it and recognize it as a problem."

Adobe is a good example of a small software company that has thrived despite possible competition from much larger companies. Check out http://www.adobe.com/aboutadobe/pressroom/executivebios/johnwarnock.html and http://www.adobe.com/aboutadobe/pressroom/executivebios/charlesgeschke.html You can see that these two guys, who have managed Adobe since its inception, spent a lot of time at Xerox PARC and Evans and Sutherland grappling with substantially the same kinds of problems for which Adobe provides solutions.

Adobe's engineers and founders aren't smarter than Microsoft's; they merely started thinking about graphics and publishing before the Microsoft folks did.

Fast forward to 1998. We have contracts with a few big companies: AOL, HP, Levi Strauss, Oracle. We are recognized as thought leaders (publication by Macmillan of Database Backed Web Sites) and market leaders (our open source software for online learning communities). As GE's Jack Welch will tell you, it is a lot easier and more fun working for a company that is #1 or #2 in its market. For one thing, customers will knock on your door.

By 1999, customers were knocking like crazy. A good example was Siemens. They had a critical business problem that could be solved by the ArsDigita Community System. Recognizing the goodness of fit between our product and Siemens's problem, Boston Consulting Group brought them to our old HQ (603 Franklin) and within two weeks we had a contract.

We expanded. We were still small, though, and we avoided direct confrontations with heavily financed competitors. They were closed-source; we were open source. We'd undermine them by creating a world-wide open-source standard rather than try to outshout them with full-page ads in Business 2.0. We laughed at most of the small closed-source companies, asking "What's their marketing slogan? We're just like Microsoft and Oracle but without the market leadership and profits? And how does that slogan work for recruiting?"

By March 2000 we had grown to 80 people. I was still CEO and beginning to feel nervous that, for every task in the company, I could not say exactly who was supposed to do what and by when. But we were profitable, with monthly service contract revenue coming in at a $20 million/year rate. We'd paid nearly $1 million in income tax on our profits for calendar year 1999. Not so bad considering that we built everything from a $10,000 investment.

We'd never sought venture capital but our revenue and profits were bringing some of the top East Coast firms to our door. Most of the time these guys were being forced by the frenzied times into investment in a company and figuring out how to get revenues later (and profits much much later). ArsDigita looked a lot better than than the typical "wing and a prayer" bunch of guys with a fancy spreadsheet. Despite 1000 percent annual growth, we had cash. Most of our revenue was recurring. Most of our customers were happy and loyal.

Companies don't like to rely on enterprise software from small companies. There is too much risk that the vendor will go bankrupt. Open source ameliorates this risk to some extent but the tendency to stick to IBM, Microsoft, and Oracle is strong. We tried to present a face of financial invincibility to the world. We bought a Ferrari to give away to any employee who recruited 10 friends. In reality the car only cost $2,000 per month, the person who won it only got to drive it for as long as he or she was employed, and the cost of a Ferrari is much lower than 10 headhunter commissions. But sitting in the parking lot it gave us the appearance of extravagance while inside the building we were living the frugal life--in a world starved for software development talent, it would have been hard to lose money paying MIT-educated programmers $50-85,000 base salaries plus an end-of-year bonus based on accomplishment and the firm's performance. We had a couple of other Ferrari-like schemes up our sleeves. One was a beach house on Cape Cod where teams of programmers would go to work and write. Another was ArsDigita University, a tuition-free post-baccalaureate one-year computer science program. These things sounded outrageous, gave people a way to remember who we were, gave journalists a reason to write about us (and they did), all while costing no more in total than our 1999 profit (i.e., practically nothing if our revenue had continued to grow).

At the end of March 2000 we closed a venture capital financing with Greylock and General Atlantic. By the time a couple of small checks arrived we had an extra $38 million to put in the bank. We figured that we could use the extra money to place some bets on product development and marketing. Under the product development rubric we thought we'd not make the client teams carry the full weight of ACS development on their shoulders. If they found a client whose needs were similar to what we wanted in the product, we'd do the job for a low-ish price to get experience with that problem (see the "domain knowledge" sentence above) and develop reusable code to enhance ACS. Under the marketing rubric we'd expand our "education marketing" program. Finally, we wanted working capital. A company with $20 million in revenue really needs to have about $10 million in the bank in case a customer doesn't pay, the economy turns soft, an important project is late, etc. Because we'd been growing 1000 percent per year we never had more than a couple of million dollars in the bank.

The terms of the venture capital investment were that the VCs purchased stock that gave them about 30% of the issued shares. Under standard corporate governance, a minority ownership interest such as this would give the VCs little or no control over the direction of the company. So we also had a stockholder's agreement that required the existing shareholders (myself and Jin Choi) to vote for a board of directors that consisted of

1 Greylock person
1 General Atlantic person
3 senior officers from ArsDigita, including the CEO
2 outsiders

So the VCs would have 2 out of 7 board seats. The shareholders would elect the rest. Plus the VCs got veto power over certain kinds of big transactions, such as the buying of expensive capital equipment, the selling of the company, the acquiring of another company. Finally in the event that the company was sold, they were entitled to the first $38 million off the top of the deal (note that this makes all of the common shares theoretically worthless in the event of a sale for less than $38 million). The terms we'd been offered from the three other serious venture capitalist bidders were similar. They wanted "a seat at the table" but nobody was asking for absolute power over the company going forward; the firms proposed to help ArsDigita's founders do what we'd been doing successful already.

In parallel to all of this VC stuff we'd been trying to recruit an "outside CEO". Based on my conversations with successful business people around the world, I now believe this is a fundamentally bad idea. Even the most able person will need a few years to learn about a company's market, challenge, mission, culture, and people. A fresh-from-the-outside CEO might be successful at a 50-year-old company with a huge bureaucracy that manages itself (cf. George W. Bush taking over the Federal Government). But young enterprises don't have that kind of inherent stability.

Anyway, as it happens we recruited Allen Shaheen on the recommendation of Chip Hazard, a Greylock employee who would ultimately represent the firm on our Board. Allen came from Cambridge Technology Partners (CTP) where he managed a large group of consultants in the overseas division of this IT services firm. I knew that Allen had no background in the software products business and that he had not been responsible for establishing overall strategy and thought leadership at CTP. In short, he had always worked for someone else and in a less competitive business than software products. Still, the other candidates we'd interviewed had been either very poorly prepared (one from Lotus) or were very aggressive and in-your-face and my top managers at the time didn't think that they could work with them. Allen seemed like the kind of guy who would work well with the difficult personalities populating the companies' far-flung offices. He had experience managing a multi-national services business. So the plan was that I'd keep responsibility for engineering, education, and evangelism; Allen would build the rest of the business.

Within a few weeks of Allen's arrival, I found people telling me that I had no power at all, pointing out that Allen and the two VCs could vote as a bloc on the Board. We had not yet filled the two outsider positions so this point was tough to argue. 3 out of 5 = absolute power. Period.

April 2000 through March 2001

For roughly one year Peter Bloom (General Atlantic), Chip Hazard (Greylock), and Allen Shaheen (CEO) exercised absolute power over ArsDigita Corporation. During this year they

1. spent $20 million to get back to the same revenue that I had when I was CEO
2. declined Microsoft's offer (summer 2000) to be the first enterprise software company with a .NET product (a Microsoft employee came back from a follow-up meeting with Allen and said "He reminds me of a lot of CEOs of companies that we've worked with... that have gone bankrupt.")
3. deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn't figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)
4. created a vastly higher cost structure; I had 80 people mostly on base salaries under $100,000 and was bringing in revenue at the rate of $20 million annually. The ArsDigita of Greylock, General Atlantic, and Allen had nearly 200 with lots of new executive positions at $200,000 or over, programmers at base salaries of $125,000, etc. Contributing to the high cost structure was the new culture of working 9-5 Monday through Friday. Allen, Greylock, and General Atlantic wouldn't be in the building on weekends and neither would the employees bother to come in.
5. surrendered market leadership and thought leadership

How could these three guys have achieved such dreadful results? For that it is worth looking at what kind of leadership is required for a software products company. First, you probably want someone who has previously founded and run a company or been CEO at a company founded by others (i.e., not someone who has been an employee his or her whole life). Second, you probably want someone who has previous experience as an executive in the software products business. Third, you probably want someone with domain knowledge. Fourth, you probably want someone with technical knowledge.

Whatever strengths Peter, Chip, and Allen may have, all three were 0 for 4 on the qualifications listed above.

Software products is a rough business because it moves fast and attracts smart people. Furthermore you have companies like Microsoft where people work nights and weekends backed up by a cash hoard of $20 billion and a global brand. As an investor, you never want to send your company up against the Microsofts of the world unless your managers are smart, hard-working, and have the right experience. If they don't, you need to look for a less competitive business. Maybe you can offer training or admin services for a Microsoft or Oracle product. Or maybe you should get out of the IT business altogether and apply your capital and employees to something like party equipment rental (you don't see too many table and chair rental companies with $20 billion in the bank and MIT PhDs working nights and weekends trying to put their competitors out of business).

At this point you might ask "Hey, weren't you still on the Board?" Sure. But for most of this year Chip, Peter, and Allen didn't want to listen to me. They even developed a theory for why they didn't have to listen to me: I'd hurt their feelings by criticizing their performance and capabilities; self-esteem was the most important thing in running a business; ergo, because I was injuring their self-esteem it was better if they just turned a deaf ear. I'm not sure how much time these three guys had ever spent with engineers. Chuck Vest, the president of MIT, in a private communication to some faculty, once described MIT as "a no-praise zone". My first week as an electrical engineering and computer science graduate student I asked a professor for help with a problem. He talked to me for a bit and then said "You're having trouble with this problem because you don't know anything and you're not working very hard."

A seat on a Board of Directors that never meets

After December 2000 they stopped having board meetings altogether. Instead they had "investor meetings" that were attended by Allen, Ern Blackwelder (the COO, who'd already been told that he was going to be replaced), Greylock, and General Atlantic. In other words, all five board members except me would meet.

Board-level decisions were made not only without the chairman having an opportunity to vote but without the chairman (me) even being given notice. For example, after that final December 2000 board meeting, Allen, Ern, and the VCs (a) decided how much bonus to pay the CEO and COO for 2000, (b) named Jim Jordan to be Chief Financial Officer (see http://www.arsdigita.com/news/), (c) decided to eliminate me as Chairman and announced to the press that I was already gone (implying that I'd resigned though it was untrue), (d) hired and appointed Richard Buck as Senior Vice President of Engineering, (e) hired and appointed Dave Menninger as Senior Vice President of Marketing (again, see http://www.arsdigita.com/news/ ), etc.

What about the two outsider seats?

At this point you might ask "Hey, what about those two outsider seats?" At various times during the rule of Greylock, General Atlantic, and Allen I would push for the nomination of someone with software products experience. Nobody was ever approved. On November 22, 2000 I emailed Bill Helman and Bill Kaiser, two other Greylock employees who'd pitched ArsDigita, trying to set up a meeting to discuss getting a couple of good outsider board members:

... As an investor in the company, though, I'm concerned that ArsDigita is
left without a single engineering expert on the board or on the
management team.  I'm not sure what your experience is but mine is
that it is tough for tech companies to succeed without some
engineering expertise at or near the top. ...

They were reluctant to get involved, saying that normally everything should be piped through the Greylock employee actually sitting on a portfolio company's board, in this case Chip Hazard, the very person whose lack of engineering experience was contributing to ArsDigita's bleed. Kaiser agreed to meet me, however, after a couple of weeks. We walked around the MIT campus for 30 minutes. When I explained the problems with the product and the financials, Kaiser said "Isn't it possible that this is just your opinion, that Allen and Chip would see it differently?"

Relativism. It was impressive in a way to see Protagoras's sophism alive and well after 2500 years. But the "all points of view are equally valid and supported only by someone's opinion" ignores the fact that it is easy to measure the correctness of business beliefs: some people are losing money and some are making money; some companies are gaining market share while others are losing market share.

We gave up on the idea of finding any help from the Greylock corner.

With no voice in company operations and with a board seat in a company that did not have board meetings, it seemed that there was no longer anything that I could do to express the co-founders' wills as shareholders. Keep in mind that ArsDigita had been running in exactly the opposite direction from the way that we wanted it run. We started aD slowly and carefully. We ran it profitably. We placed small bets. We handled money conservatively (though we tried to give the appearance of wildness and fantastic prosperity to the outside world there is actually nothing extravagant about having a fancy beach retreat for a team of programmers that is excited and working 6 days/week, 12 hours/day). We made sure that we were working as hard as teams at Microsoft and startup companies.

By contrast, Allen, Greylock, and General Atlantic presented us (Common shareholders) with a strategy of "here's this spreadsheet that shows us going bankrupt in one year unless a big stream of license revenue starts coming in." And, oh yes, the revenue would be coming from a product that had never been built, purchased by customers to whom we'd never sold anything.

Do these kinds of risks bother venture capitalists? Having a first-time CEO with zero experience in the industry? Staking everything on a to-be-finished software product? Perhaps not. General Atlantic has $10 billion under management, according to their Web site (gapartners.com). If they point ArsDigita in a direction that leads to tankage, they can fall back on their $9.98 billion in other investments. What about the Common shareholders, though? We never signed up for this kind of risk and we don't have substantial other investments. I put 8 years of my life into ArsDigita Community System. Jin put in 4 years. We would be unhappy to see the company spend through its accumulated profits plus $38 million in capital merely so that three guys in suits could learn a little something about what it is like to run a software products company.

March 2001: The Final Shove

March 2001 was a dark time from our shareholder perspective. Some of our greatest assets were pushed out the door. David Rodriguez, for example, a man who had worked like a monster and delivered huge projects to happy clients. Did he refuse to implement abstract URL on the World Bank knowledge management system until I nagged him via email from Australia? Yes. Did he say that ACS 4.0 was unusable? Yes. Did he tell Allen "You talk like a press release"? Yes. These things disqualify dvr from diplomatic service. But as shareholders we didn't like to see someone who had personally delivered more than $1 million in revenue while costing us perhaps $200,000 being pushed out the door. To a non-owner manager, it might make sense to get rid of someone who'd offended you with a harsh word. You're still going to get more than a third of a million dollars in base plus bonus, even if the shareholders take a beating. But as an owner-CEO I would let an employee vent his spleen at me, secure in the knowledge that at the end of the day this guy was building the value of my shares.

Our co-founder Aurelius Prochazka was also axed in the March 2001 massacre. Have Jin and I had to clean up some of his code in the past? Yes. Was Aure rather discouraged and unproductive in the past few months as ArsDigita's financial and market position slid and he reflected on the fact that unqualified people were managing the firm? Yes. Was Aure too quick to criticize highly paid executives whose intellectual abilities fell short of the standards he absorbed at Caltech? Yes. But what kind of a company can you have when you fire someone who is (a) a founder, one of the people who built a $20 million profitable enterprise on capital of $10,000, (b) someone who'd previously built a successful business and sold it, and (c) responsible for the innovative ideas and interface behind some of the ACS's most interesting modules (e.g., file storage)? Aure's PhD is in engineering and not in charm. But if shareholder value were related to average employee charm, Microsoft shareholders would be rather poor indeed.

So what were the shareholders doing in March 2001? Planning some research projects at MIT and Orange/France Telecom. Giving some one-day courses in Thailand and India. Revamping our Software Engineering for Internet Applications course at MIT (recently accepted by the faculty into the core curriculum and renumbered 6.171). In short, getting on with our lives and personal technical goals, working full-time for other companies. We cried if we thought about ArsDigita's financial performance but mostly we tried not to think about it.

Sing, O goddess, the anger of Achilles son of Peleus, that brought countless ills upon the Achaeans. Many a brave soul did it send hurrying down to Hades, and many a hero did it yield a prey to dogs and vultures, for so were the counsels of Jove fulfilled from the day on which the son of Atreus, king of men, and great Achilles, first fell out with one another.
-- Iliad, Book I

Peter Bloom, the General Atlantic employee representing their interest on our board, was not crying in March 2001. He was angry, as he had been for many months. Though Agamemnon had not taken his prize girl Briseis to replace the daughter of the priest Chryses, Bloom's anger was not less than that of the great son of Peleus. My habit of pointing out that he'd accomplish more if he picked more important opponents (e.g., Microsoft and Oracle rather than a 37-year-old living in a 2-bedroom apartment in Cambridge) did not cool him down. What really sent him over the edge, as far as I can tell, was when I related my response to a member of the Harvard faculty who asked me what it was like to watch venture capitalists and professional managers run ArsDigita (I replied "like watching a group of nursery school children who've stolen a Boeing 747 and are now flipping all the switches trying to get it to take off").

Peter Bloom sent me an email message on March 28, 2001: "Since you are so troubled by the direction that the company has taken, you can choose to resign from the board before our next meeting. This is your decision to make, but it is a course of action open to you to avoid the public humiliation and significant professional impairment of being removed as Chairman from a board of directors. ... The actions you have taken and the written communication you have directed at individuals has now gotten you in very serious trouble and you need to turn to someone you trust for counsel. I sincerely hope that your trusted confidants will tell you the truth about the impending consequences of your recent communications and accusations before you irreparably impair your reputation and financial future."

Shortly after I received the email message, I stopped by ArsDigita HQ to pick up Alex from Eve. My card key no longer opened the door.

When a company with $10 billion in assets threatens "irreparable impairment of one's financial future" it is time to see a lawyer. So, thanks to Peter's initiative, I trundled down to see Sam Mawn-Mahlau and Paul Mahoney at Edwards and Angell. They prepared a "shareholder's consent" that would change the company by-laws so that, until ArsDigita went public, the CEO and president would be directly elected by the shareholders. The next item on the list was the election of Philip Greenspun as CEO. Another item in this shareholder's consent was to elect two existing vice-presidents of the firm, Tracy Adams and Eve Andersson, to the board. The stockholder's agreement said that the three insiders on the Board had to be "senior executives" so we promoted them to "Executive Vice President" just to be safe.

The effect of this shareholder consent was to trim the venture capitalists back to what they'd bargained for, i.e., two board seats plus veto power over major transactions.

Our shareholder vote happened to occur on the same day that CNET carried a story about how ArsDigita would henceforth abandon its open-source strategy in favor of traditional licensed software and how Philip Greenspun, the "former chairman", had left the company. The next morning, April 6, a courier arrived at 80 Prospect Street (ArsDigita HQ) with a letter for Allen notifying him that he'd been demoted from "President and CEO" to "President". I telephoned Allen to assure him that I didn't want to make any major personnel changes immediately, that I'd be happy to consider the entire last year as water under the bridge and work with him under our original agreement (I'd keep responsibility for engineering, education, and evangelism; Allen would build the rest of the business). I said that I wanted to spend the next few weeks just coming up to speed on the status of the product, the customers, and the company. Allen told me just what I wanted to hear and I was encouraged by the idea of working through him.

April 2001: Allen and the Venture Capitalists File Suit

On April 11, 2001, the following lawsuit was filed in Delaware chancery court:

ALLEN SHAHEEN, ERNEST		)
BLACKWELDER, GENERAL ATLANTIC	)
PARTNERS 64, L.P., a Delaware	)
limited partnership, GREYLOCK	)
X LIMITED PARTNERSHIP, a	)
Delaware limited partnership	)
and ARSDIGITA CORPORATION,	)
a Delaware corporation,		)
				)
		Plaintiffs,	)
				)
		v.		)	Civil Action No. 18821
				)
PHILIP GREENSPUN, EVE A.	)
ANDERSSON and TRACY E. ADAMS	)
				)
		Defendants.	)

As you see from the caption of the case, the lawsuit was filed by Allen, Ern, the VCs, and the corporation itself. We were quite confused by the form of the case, given that this is fundamentally a dispute between two groups of shareholders (the VCs versus the founders). So we'd not expected the corporation itself to have any interest in the case one way or the other.

A conversation with ArsDigita Corporation's corporate counsel, Jay Hachigian from Gunderson, shed some light on the matter. It seems that Allen dipped his hands into the company checking account and scooped out a quarter million dollars to pay the venture capitalists' attorneys in this matter. Jay cautioned the group that this was perhaps not the best idea but they apparently went ahead anyway. Thus we now have the spectacle of a group of shareholders trying to increase the level of accountability of a management team who has, in their view, been doing a bad job. That group of shareholders is being sued by the managers who want to avoid accountability. The lawsuit is being funded with the defendants' own money!

The crux of the plaintiffs' case is that Jin and I signed various agreements promising to do various things, e.g., always vote for a Greylock and General Atlantic representative on the board. The closing documents for our financing formed a stack about the size of a Manhattan Yellow Pages. Supposedly somewhere within this stack it is said that the Board of Directors of ArsDigita won't amend the corporate by-laws without the consent of the venture capitalist members. Nowhere does it prohibit the shareholders from doing this, however. Greylock and General Atlantic would like to read this interpretation into the documents. If memory serves, those documents were drafted by Paul, Weiss (paulweiss.com), General Atlantic's lawyers. So under standard legal doctrines, ambiguity ought to be construed against them. Of course, I'm not a lawyer and nobody can say what another human being, in this case a Delaware judge, is going to do. I personally think it would be a bit shocking for the judge to rule in favor of Greylock and General Atlantic. The effect of such a ruling would be to make the shareholders' voting rights worthless, i.e., the judge would be saying that the VC firms could exercise absolute power forever as if they'd bought the voting rights on our Common shares at the time of the investment.

So, that's the story. Keep in mind that most of what is in this document may well be irrelevant to the outcome of the lawsuit. A court generally does not want to decide which group of people is likely to make better business decisions. A court looks at issues such as "What rights do the owners of a majority of the shares of a company have to control its direction?" or "Can the venture capitalists add extra restrictions, a year later, to an agreement that they made and that is reflected in documents drafted by their own lawyers?"

It will take a couple of months to take everyone's deposition and get through discovery. Then we'll have a trial, maybe in June 2001, in front of a judge in Delaware. The judge might decide the case based on just a few documents, in which case all of the discovery will have been a waste of time.

Why I wrote this

Generally people try to say as little as possible during litigation. However, I've been getting progressively more and more annoyed listening to other folks' characterizations of the lawsuit. ArsDigita management was running around the building telling folks that "Philip sued the company", something that was plainly false. Allen was telling people "the venture capitalists have a very strong case" (how come he needed to pay a retainer of $250,000 of the shareholders' money to defeat a couple of individuals if the venture capitalists have such a strong case?). Reporters were making it sound like this was a dispute about ego and control. In a way that was true; Allen, Chip, and Peter did not like being characterized as fools whose ignorance was costing the company $millions. But as far as Jin and I were concerned, the reporters' spin was not true. We'd have been delighted to be passive shareholders in a successful profitable company. What we didn't like was being passive shareholders in a company bleeding cash.

There were some simple practical motivations for writing this article. One of the beauties of the Web is that it can save one from having to repeat oneself. On any normal day, I get 50 email messages from readers of photo.net and philip.greenspun.com asking various questions. A few times every week, a reporter will email or telephone to ask a question. After Greylock and General Atlantic filed suit, the stream of questions about photography and computer science was supplemented by a flood of questions about the lawsuit. If I hadn't written this article I might have gotten RSI in my wrists simply from typing "no comment" 200 times every day.

Finally, there are customers who've adopted ArsDigita Community System to consider and friends that we recruited to work at ArsDigita, the company that made a profit every month. These folks have a right to a better explanation than they're going to get from a 500-word newspaper story or a corporate press release. The company's birth and growth were public, chronicled in Chapter 2 of Philip and Alex's Guide to Web Publishing. The folks who were kind enough to pay attention and support us are entitled to know how the rest of the story unfolds.

More

• http://unicast.org/arsdigita/ (full text of the legal filings in this case)
• Greylock corporate site: http://www.greylock.com/
• General Atlantic corporate site: http://www.gapartners.com/
• Charles Dicken's Bleak House: Project Gutenberg | Amazon

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Text and pictures copyright 2001 Philip Greenspun. Most of the photos are from India and were taken with Nikon D1.

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philg@mit.edu

Reader's Comments

The story from the outside:

It was sad to see the company slowly being destroyed. It was as if all the life was being sucked out of the company and we had no idea why. Everything that made ArsDigita what it was slowly disappeared until all that was left was just another buzzword-spewing faceless corporation. ACS users moved on, joining in support for projects like OpenACS that still had the spirit of the former ArsDigita.

Meanwhile, aD corporate slowly began to shut down programs, including the one that got me to be an ACS user in the first place: ArsDigita Prize. One day a small message appeared that said simply "The prize has been cancelled for 2001." That was the last straw.

I emailed Philip to ask what had happened. He said that despite his pleas, the board had cancelled the program. I emailed Allen (the CEO at the time) he said that they were working hard to bring the program back. This went back and forth several more times without a clear resolution. Finally, aD Corp decided to take the program over from the foundation. They seem to be providing the funding, but volunteers are ending up doing the judging.

I sure hope that aD gets put back together. Best of luck, Philip.

-- Aaron Swartz, April 24, 2001

I think it's sad when a company and its founder don't get along. That's one of the reasons I counsel entrepreneurs to really get to know the VCs before they take the money. Too often they don't and assume that the VCs are investing in their vision. Later on it's a surprise when they have to fight for the right to do what they wanted to do when they got the VCs backing. I wish Greenspun the best of luck, and hope they get back on track at Ars Digita.

-- Dave Winer, April 24, 2001

The story from a student/developer's point of view:

I started following ArsDigita in 1999 through recommendation of a friend who had been following the company and using its products for years. Read Philip's book in a couple weeks. Read through the teaching materials, and learned a lot.

I wanted to use ACS, but couldn't afford Oracle, so I asked about porting it to PostgreSQL, and from there, Ben Adida, Don Baccus, Lamar Owens and Dan Wickstrom joined in and OpenACS was born.

In our Free Software & GNU/Linux Forum, ArsDigita was present and I was happy to see it, and I gladly spoke for it, made advertisement for its products and gave away aD briefs to those attending our Building Reliable Web Services With Free Software workshop, where I spoke alongside with Uday Mathur (an aD employee, and very nice person, along with Adam Farkas).

ArsDigita was the company I dreamed of working for when I graduated. I was (still am as of April 2001) a CS undergrad student, and ArsDigita's philosophy, culture and products fascinated me. It put it apart from other brochure-ware but product-less companies, or companies that didn't have such a culture, such goals, and that were not as developer-friendly as aD.

In 2000 everything began shifting. ACS 4 seemed an excellent thing, and everybody was excited, but it was never finished and then everything just turned to Java. Nothing against Java, but even I know that you can't sell a product that's not here yet. What happenned to the culture? None of the names and faces we knew posted to the bboards anymore. A few aD faces posted regularly, but mostly we saw a bunch of people only posting questions about the products they should be familiar with, and sporadically. Allan Shaheen only addressed developers twice, in what seemed to be posts typed by his secretary. ArsDigita's website turned to being a brochure more than anything else, which is not bad if you don't forget other things.

I wish you best luck Philip, and hope aD can get back on track.

-- Roberto Mello, April 24, 2001

I do not know the facts of this case except as presented here. However, the form and nature conform precisely to the pattern one expects from the venture capital process, and therefore is likely to be entirely accurate in its details. (Read High Stakes, No Prisoners, for a similar account - eerily similar, in fact.)

What I'd like to publicly question is: can anyone cite instances in which venture capital companies took control, brought in outsiders, and turned a business into a rousing success? There must be such cases, but the literature lacks richness in this area.

If you read any of the biographical tomes (High Stakes, Burnout, Startup, etc.), the central figure of the founder admits their own hubris, but marvels at the behavior of the VCs. And rightly so.

I look at Amazon.com as a wonderful case to the contrary: Bezos got Kleiner Perkins to take a board seat, bring in other good board members (Scott Cook, etc.), and give them a tiny bit of money which helped establish their reputation at the IPO. They never put themselves even barely in a position in which a VC could try to take over.

I guess the lesson learned from this tale is to be sure that the power structures are in place before signing the deal. The two shareholder board members should have been elected by bylaw and never had those positions free. That would have precluded the situation that occurred.

-- Glenn Fleishman, April 24, 2001

At the risk of sticking my neck in the guillotine, I'd just like to remind everyone that there are two sides to this story. Yes, this is Philip's site, and he can write whatever he likes. And he does paint a descriptive portrait of the happenings at aD over the past year.

But I think that it's important that this case not be tried in the court of public opinion, especially because the other side is keeping mum (as is typical protocol when a case is in litigation..)

Again, I have no interest, personal or financial, in seeing either side win. It makes zero difference to me, as i'm just watching this from a distance like everyone else. (Though it does sadden me to realize that there probably won't be any winners here, regardless of the outcome of the case.) I've admired much of philip's work, and I also have a great deal of respect for many of the folks that I worked with at aD.

I just don't like to watch lynchings, virtual or otherwise. Please consider keeping an open mind, until everything is laid on the table.

I'll get off my soapbox now.

-- Adam Farkas, April 24, 2001

FWIW,

I don't know how issues related to Arsdigita will turn out. And it's certianly none of my business.

However, I **DO** want to share that I for one think Mr. Greenspun has performed a distinguished public service in sharing the fruits of his intellect and efforts as he has -- many many times over many many years. He is certianly one who I think quite highly of and admire.

Just today, like many days, I printed off some of his writings at work -- to bring home and read to further my IT education and understanding. Earlier this evening, as I was reading his writing, I was impressed at how well he gets his major conceptual points across -- with flair, class AND in a lively and entertaining manner.

As a professional programmer/analyst for the last 12 years, I've always found that it was having a good conceptual framework and understanding that has helped me to do so well in IT compared to many of my peers who simply try to remember commands and "how to's". Communicating and sharing such is a major theme that flows forth thru his prose as I read his writtings.

This goes beyond just being admirable. I'm not even sure what words to use.

Like many here, I am much better off due to Mr. Greenspun's sharing with the world. Besides what I've had the pleasure to learn from his works, I also met and married my wife -- who I met thru his software. She and I are very, very happy.

I don't know you personally, Mr. Greenspun. But I **do** thank you -- for lots of things -- and so does my sweet, wonderful wife, whom I dearly love...

Lots of people have and will post many things thru this time period. I for one wanted to weigh in with a thank you and my support for Mr. Greenspun -- because he deserves it -- and has earned it!!

Sincerely,

Louis Gabriel

-- Louis Gabriel, April 24, 2001

What I'd like to publicly question is: can anyone cite instances in which venture capital companies took control, brought in outsiders, and turned a business into a rousing success?

If I'm not mistaken, Cisco is in fact such a case: VCs came in, the founders got kicked out, and—despite their troubles in the first few months of this year—I'd still consider the company a moderate, if not rousing, success.

Funny thing is, at one point, Philip read The Cisco Connection, a book about Cisco the business, and talked a lot about the lessons from Cisco that ArsDigita should copy. But he never seemed to mention this little fact :-)

-- Lars Pind, April 24, 2001

Philip,

I've been horrified by the news from aD since the rumblings started a few weeks ago. Having had the opportunity to meet Eve and Tracy and Aure back in 1999 and have you teach a half-day class at my former employer (a very large Japanese car company in SoCal) I count myself very lucky indeed. I fondly remember dinner in Pasadena and meetings at Aure's house.

Realizing that I'm only hearing one perspective on this situation, I can report that my best friend who's net startup was funded by VCs is thoroughly disgusted by the VC firm's actions since last fall. While his experience may not mirror yours, the end result is the same: broken hearts and broken dreams. However, the VC partners walk away relatively unscathed. I don't know how those people sleep at night, personally.

I have noticed that great companies (and I don't mean that necessarily by Wall Street standards) get started by passionate individuals. VC firms seem to be made up of people with a love for money above all else. The two cultures don't seem to mix well often (certainly not in the financial environment post April 2000.)

Please know that I think of you & Eve and Tracy & Aure often and I hope for the best for all of you personally first and aD second.

Your impact (individually) and legacy was formed long before you ever started aD and I just wanted to voice my support for you in what may be trying times.

Best wishes,

Gen Kanai

-- Gen Kanai, April 24, 2001

I think it's fairly clear when you read a lot of content on Photo.Net and Philip.Greenspun.Com what sort of person Philip Greenspun is.

He regularly gives to charity and encourages others to do the same.

He regularly gives credit where credit is due.

He sees incompetence fairly clearly and isn't afraid to point it out when public opinion goes another direction (see Bill Gates).

When it comes right down to it, I know Philip Greenspun is honest with himself and the people that admire him. This so-called 'one-sided' account of affairs is (I'd put my reputation on the line to back it up) very, very accurate.

Full disclosure: I have sent email to Philip Greenspun about 5 times, and have gotten at least three responses. I've sent email to Eve Andersson about three times and have gotten at least one response. Maybe this means I'm so close to them I'd put my reputation on the line for them. Or maybe, just maybe, they're decent people in a nation of greedy bottom-feeders.

-- Philo Vivero, April 24, 2001

Philip, thanks for telling us your side of the story. It is all too similar to most of the other VC stories one hears.

I heartily agree with you about the unfinished condition of ACS 4.x. We (furfly) have lost at least one prospective client because of it, perhaps more, and the project we're working on now is waaaay behind schedule, much of which is due to our stumbling over ACS 4.x issues. This is not to say that it is unusable, or unfixable, but only that it is unfinished - I don't want to disrespect the hard work that went into it, only the decision to release it before it was ready.

-- Janine Sisk, April 25, 2001

First, let me express my thanks to you, Tracy, Eve, Jin and the other arsDigitans who helped create the ACS community. I've enjoyed working with the ACS, and I've learned a great deal from your writing in particular.

With respect to the current conflict, have you considered splitting aD in two? Please note that what follows comes from a sympathetic, but ignorant, outsider. Take it for what it's worth.

Here's the scenario: you form a second company--let's call it aD2. Any current aD employees may come and join your company. aD2 would also get some seed capital (perhaps equivalent to aD's capitalization before the VC's came on board plus interest). aD2 would also get any existing clients who wanted to switch to the new company. Both companies would get equivalent copyright ownership rights to the existing code base.

In exchange, you would drop your fight for control of aD. aD would also get, say, a 20% non-controlling stake in the new company.

If you're right, then aD2, under your leadership, should be profitable and grow. The value of your shares in aD2 will depend on your own abilities, not the abilities of managers you believe to be incompetent. The VC's still win though, because they will own 20% of the new company.

If you're wrong, and the original aD goes on to grow and become profitable, then you still win--you will still presumably retain your 60% ownership of aD.

If you're both right, then you will both expand the community as a whole.

If you're both wrong, well, perhaps one of the other ACS based companies will take up the lead.

Why split the company? As it stands now, it seems to me, whoever wins the outcome of this battle for control of the company will likely enjoy a Pyhrric victory. While the fighting goes on, it seems likely that aD employees, instead of putting their energy into writing high-quality code, seeking new clients, and providing excellent service to existing clients, will be distracted by clashes between management, and contradictory directives from the competing factions. Under such conditions, how willing will potential customers be to trust their web services to aD?

Why might the VC's go for a split? To date, aD has been almost a 100% service company--as far as I know, it has very few capital assets to speak of, and those that it does have (primarily computer hardware) depreciate rapidly. Therefore, the principal value of the company derives primarily from the people who work there.

Already, you, Aure, David Eison, Adam Farkas and others have left--all individuals who, from the outside, seem to have been very valuable assets for the company. If Shaheen and Co. win, even more employees will likely exit. What's the point of purchasing a services company, if you drive out the people whose services led you to fund the company in the first place? With a non-controlling interest in aD2, they still benefit from your unquestioned skills, without having to deal with the differences of opinion that led to the split in the first place.

Why might you go for this? Let's assume that you win this particular lawsuit. I still don't see the VC's giving up control--there's too much money at stake. I would expect even more lawsuits. (I would also bet on the VC's to win this lawsuit--after all, the VC firms have probably funded dozens of companies in their history. No doubt problems like this have arisen before. It seems unlikely that they would've signed a contract which did not give them the legal control they're now exerting.)

I also don't see you and Shaheen working together well in the future--whatever differences in competence, management style, vision, or personality caused you to split initially will likely arise again. And there's no guarantee that a new VC-appointed manager would do any better. Even if you can override the VC-appointed people, it will likely be an ongoing source of friction.

With a new company, you get to build it the way you think it should be, with people that you trust, instead of watching helplessly as the VC-appointed management drives aD into the ground. (Assuming that your assessment is correct.)

Whatever happens, I wish both you and the people at aD success.

-- Christopher Rasch, April 25, 2001

This is definitely a sad story. But it seems to be the norm from the VC and acquisition world since the burst of the Internet bubble. What I find sad about it, is that they assume that since some of the business models were bad then all of them were bad including the profitable ones! So they quickly resort to the known failures of corporate culture because they ooze of CEO control. My favorite form of CEO interference is hiring freezes when you have lots of openings with paying customers. And then they give you shit for not realizing their sales goals. What am I shipping? Promises? They sell real well right now!!

-- Bill Thecat, April 25, 2001

Thanks Philip!

First, I have been a Philip and Alex fan since the first few chapters were posted and I have a lot of respect and admiration for Phillip but I have to question whether this suit is worth winning. Phillip paints a pretty clear picture of what it takes to survive in the software world. I wonder how many 6 day programmer weeks have been lost or wasted so far. I wonder what the competition has been doing during this time. I wonder if this is an itch that has been suficiently scratched. Then I wonder what is the "next big thing" and whether it's best developed by ArsDigita or by something else like PhAlexCo? I wonder if there will be any cash left to resurect ArsDigita when this is over? My guess is that ArsDigita management won't be very popular if ArsDigita tanks. This may make ArsDigita management do irrational things. There may not be much left of the company once this has played out. I don't want to suggest that ArsDigita is doomed. I just hope it has a fighting chance once this is through because whoever controls ArsDigita when this case is over will likely be blamed for its final outcome.

-- Scott Patten, April 25, 2001

I admire companies that have motives other than just pure profit. Having goals other than maximizing shareholder returns can often be an impediment to a company's competitiveness, but that doesn't mean that it is not useful or good in the greater context. I support the culture and goals that I think ArsDigita used to support: open source software, a free and open dialogue between people. The aD university sounded like a great idea.

However, it is only possible for a company to maintain that kind of ulterior (i.e. non-profit) motive so long as the people in control of the company share those motives. The average shareholder, and even more, the average VC, I think has only one goal in mind: making money.

In some ways, I think aD was a victim of it's own success. Explosive growth necessitated bringing in outside management and capital to keep up, and control was lost. I wonder if this really could have gone any other way? Could you have held on to the company without external support? Would turning away business because you couldn't keep up with demand have killed the company as effectively as bringing in outside capital and management? I'd like to think so, but I'm not completely sure...

(I'm mostly interested in this saga because I knew Eve when we were both undergrads at Caltech)

-- Zane Crawford, April 25, 2001

From Tokyo, Spring Rain day.

Life is more interest than Novel. I had received the e-mail from philg on July 1999, after knew aD bootcamp through photo.net. Can I join the Boston bootcamp? Philip reply me OK. So I made a business trip plan, and got approval to USA from my boss, of cource, my itinerary was not to Boston.

Ohh, I asked him the recommendation to find the Hotel in Cambridge, he replied me "I am not a travel agency".

The BootCamp was very impressed me, there were Free Lunch. What for serving us Free Lunch?

May 2000, I had visited Boston again, with CEO, so this time is OK, 250 USD Hotel.

Nice aD office and Piano, photo. How come these nice place to work!!!

Oct.2000, Philip Sensei come to Tokyo, we had two seminars and visited Waseda Univ., and Toshiba, Nikon,etc. Folks!!, the Philg's secret is Diet Coke, 'cause sugar make him thirsty.

Don't give hime a "Piece of Cake" life with sugar.

Good Luck and Arigatou Gozaimasu

-- Teruo Miyagawa, April 25, 2001

The question that comes to my mind is why VCs were brought in at all if aD was making $20M/year. If additional management was necessary to track projects and tasks, then hire it. The careful, controlled growth that built aD originally could have been sustained in spite of market downturns. The typical reason for taking VC money is to expand quickly - scale the business and make the really big money. That's the gamble and that appears to be what did not pan out. The danger of taking someone else's money is their-nose-in-your-business to protect their investment. In spite of the way it was supposed to work out with this arrangement, it obviously did not. I have read and love Philip's online work but I've also been to a CalTech seminar so I know that this article paints a slightly rosy picture of running a tight ship (I heard Philip say that he paid "22 year olds $100,000/year and give them 5 weeks of vacation..."). Perhaps it was just a recruiting statement. If the company had continued privately though, it really wouldn't be anyone's business but Philip's and aD employees. As much as I like and respect Philip's writings, work, and ethics, I do hope his ego loses a bit of volume from this fiasco. It's naive, but I also hope the lawsuit goes away and aD becomes what it had the potential to become: a great open-source design/development company with smart people making good money doing what they love and contributing to the open-source movement. But if Philip isn't there to guide it, I won't be buying any stock.

-- Lee Le Clair, April 25, 2001

For months now, I've been trying to figure out how aD's management can just ignore the ACS community (and the ACSish market) they way they have. Barely speaking to us; releasing incomplete, unscalable, untested software to us; and finally just abandoning the whole thing midstream. And the only thing I can think of is that they are trying to clear out the community, get rid of the community memory, for when they rollout their closed source, java solution.

Maybe I'm just too conspiratorial minded, but how else to explain current management's squandering of a product, of customers, of some of their best developers, and of a wonderfully supportive community? The community. Was there ever a better way to cross the chasm? Was there ever a better way to create/maintain relationships? So was this Plan or Incompetence?

The current ArsDigita is VC deadwood. The current ArsDigita will be rolled into a CRM or ecommerce company in General Atlantic or Greylock's portfolio, or M&A'ed into a Fortune 1000's java unit. Exit by acquisition: it's not kind to any but the top executives. (To current employees: it's okay, your special decorative non-equity stock will still look good hanging on your walls.)

Go Philip, and thanks once more for everything, the online education, the conversation with the community, and your sense of life.

-- jerry asher, April 25, 2001

Unfortunate that a promising company and its founders landed in this. But to the founders, as the common adage goes:

"If it isn't broke why fix it !" , why go VC ?

On the same note an article on a company which also confronted growth, and has managed it WELL, a few words from Lionel Poilane:

 It's important in business to be able to say no 
 when you feel like saying yes would mean losing your soul.

Does that strike a chord with Arsdigita ? The curious thing is that Lionel Poilane is not a PhD from MIT nor a High-Tech executive from Microsoft or Oracle , he is a BAKER! as in Flour, Water and Yeast.

http://www.fastcompany.com/online/44/poilane.html

-- Daniel Rubio, April 25, 2001

Your experience, Philip, mirrors my own experience with VCs coming in and destroying the atmosphere, intelligence and innovation in a company.

While I'm sure it's painful to see your baby go down the toilet, you'll have no trouble starting up ArsDigita2 and getting zillions of clients. The beauty of the GPL is that you can take ACS and move it forward in the direction you desire. Failing that, I'm sure there would be hundreds of companies that would take you on as an independent board member, just in case you enjoy wearing a suit and never coding.

-- Simon Rumble, April 25, 2001

As so many other programmers, every now and then I dream of starting my own firm. So far, I have learned a lot from Philip's writings, but I think now I am learning even more from his writings about starting aD, growing it, and bringing VCs in. If I ever get to start my own company, I know what not to do. A very valuable lesson.

-- Carsten Kuckuk, April 25, 2001

Based on Philip's comments above and others' elsewhere, I'm speculating that part of the reason for going VC was a belief that he was ill-prepared to oversee a company this size and outside execs might do better - but this decision was based on scant to no evidence that the new execs would be competent at running this particular business. (Hiring based on evidence rather than "touchy-feely" intution alone?! Radical concept, isn't it? It'll never catch on.) This is a little like hiring a programmer to work on a critical project without any evidence that they are able to write code - only much worse, because of the control aspect. How can you gather evidence that someone is competent to run a software company? I don't know - but as Philip now recognises, if they have never run a software company before that is one red flag.

Other obvious ones would be if they have caused many key staff to resign in previous businesses, or if they seem clueless about basic principles of customer relationship management in this kind and size of business (as in this case - at least as Philip tells it).

(Being at a much larger, big-name consultancy can lead to an arrogancy about certain client relationships, because some clients *cough*governments*cough* seem to come back again and again to the big contractors no matter how crap their record is. Of course, corruption has absolutely nothing to do with it! [sarcasm] Without much of a corrective in terms of loss of reputation, being turned down for the next project etc., there are plenty of incentives to overcharge, turn in projects late *and* full of bugs - which, surprise surprise, is exactly what we see.)

-- Robin Green, April 25, 2001

This is close to an chapter in a book by Richard P. Gabriel called "Patterns of Software: Tales from the Software Community" where he talks about a compiler company and what happened when they changed upper managment.

celer

-- David Tyree, April 25, 2001

For some histories about why everyone seems to need more and more capital, and so go for venture capitalists' money like ArsDigita did, it is nice to read the articles by Bill Parish, especially summaries like Microsoft Fraud Facts or Microsoft Pyramid Collapsing AOL.

It is a lot of reading and understanding business concepts, but I've found it quite worthwhile.

-- Leandro Dutra, April 25, 2001

I would like to wish you good luck in the upcoming legal wrangle. In my opinion, you are dealing with egotistical bullies who are incapable of understanding or accepting the cluelessness of what they are doing. They are damaging themselves financially, but are clearly prepared to bite off their own nose to spite their face.

This kind of behaviour, which is not untypical in the world of business and high finance, is hopefully a transient blip in the development of humanity. The sooner this kind of thinking is consigned to the dustbin of history where it belongs, the better. The values which you and indeed the open source community espouse constitute a positive step forward and indeed make good commercial sense for humanity as a whole. The entrenched conservative forces of power and money only win at the expense of others. They will not let go without a fight but there are alternative ways for people to do business which create win-win situations.

The open source community are leading the way toward a better future for the majority, not just the select few. The Internet is a real force for political change and can nurture the innate positive and cooperative aspects of human nature. A small portion of overly privileged and intellectually underpowered individuals strive to stop this development but unfortunately for them the forces of evolution are much stronger than they. Leave them to their evolutionary cul-de-sac, the network shall route around. Onwards and upwards.

-- Paddy Ryan, April 25, 2001

Pursuing knowledge in childhood we rise
Until we become masterful and wise
But if we look through the disguise
We see the ties of worldly lies.

Omar Khayyam

-- Sveinn Valfells, April 25, 2001

My summary -- "service companies" can make you rich, but "product companies" can make you obscenely rich, and they thought that their productization of aD would make them obscenely rich because they didn't understand the huge obstacles to such a conversion, being clueless about both the software services business and the software product business.

Actually, the old aD had a product, but it was an open-source product, so they made money on the associated services. To go to closed-source, and expect to make money from directly selling a product that hadn't been developed yet, in the face of entrenched competition, was quite remarkably unwise even by the standards of the dot-com industry.

One lesson I have learned from this is that the most valuable product anyone could possibly invent would be a foolproof evil-detector for evaluating prospective business partners. (Stupidity-detectors already exist, and Philip made the mistake of not using them seriously enough, but the reason he is really screwed now is that the current aD management was not simply clueless but deceptive and vicious. My favorite Dilbert comic strips are the ones where the pointy-haired boss shows that, though he is brain-dead regarding anything technical, he understands corporate infighting and power-grasping far better than the naive engineers who work for him. It's too bad Philip didn't see the Greylock/GeneralAtlantic suits in this light early enough.)
Image: dilbert2001040261058.gif

-- Joe Shipman, April 25, 2001

I take strong exception to Warnock's contention that Greylock is usually right. I think his choice of words is poor - my experience is that Greylock is rarely insightful (right?) but ALWAYS arrogant. They never have any ideas, they just follow the money.

I did technical due dilligence on several occasions for one of the partners at Greylock back in the early 90s (Roger Evans) and I helped put him into several deals that helped make him millions. I have also heard him downplay and even deny that I played any role and later he wouldn't even take my phone calls (he acted like he didn't know who I was!). But these guys are not unique, it has been my experience, to a person, that VC are scum. Sometimes they are polite and well-heeled scum - but always scum.

-- Mark Bennett, April 25, 2001

Just the other day I was lending a co-worker a copy of Richard Gabriel's Patterns of Software, with reference to his essays "Into the Ground: Lisp" and "Into the Ground: C++", which discuss the career of Lucid. A different market, a different world, but some of the same lessons.

-- George Jansen, April 25, 2001

From Philip's writing above, it appears that the reason for accepting outside investment was to give AD greater credibility as an "enterprise software vendor".

I don't have enough knowledge about the kind of work AD was seeking to be able to confirm that this was necessary. Philip compares AD to Microsoft, IBM, and Oracle in terms of needing to be perceived as "safe". But given that he was in a pretty different market (certainly from the latter 2), I'm not sure I agree with him.

A big part of the issue is what different people's goals and expectations were. Would they have been met running a smallish yet profitable consulting company? Would those MIT guys have continued working 6 days a week without a financial windfall (which would probably only come from an IPO, which is where the enterprise/scale/VC thing starts...)? Did Philip want a more external proof of his "success"? Or a desire to see some liquid benefit of his ownership of a "profitable" company? (Note that with a small, growing, private company, being "profitable" doesn't help the owner much if all the profit goes back into working capital to handle the growth.)

Difficult questions, difficult choices. As much as I'm wary of outside money, it would have been a tough call...

-- Bill Seitz, April 25, 2001

As another who has followed the fortunes of ArsDigita I have found myself a bit depressed about the turn of events. Although as Adam says, there are two sides to any story, the evidence of what has happened has been apparent for a while. In the end it seems that the quest for "growth" has been yet the downfall of another promising company. At least Philip is in good company; after all, Steve Jobs brought in outside help for the same reasons and ended up on the street.. but came back too.

The truth is MBA's and other business school trained people suck at running companies but are very good at running up their fortunes. They pursue the big lie, which is "profit is the goal". Even though I am too far out of the Boston/NYC/LA/SF mainstream to have found a position at aD , it was a company which was founded on a set of strong fair principles and operated that way, like Philip himself. (well, except for the non-compete clause which may now come back to haunt them). Since there are so very few companies that are not run on the pure pursuit of management profit (notice I didnt say shareholder), aD was a shining light that we could look to. I worked at Vignette which also aimed for "hypergrowth" but then axed left and right when reality hit. They are the closed software vendor that the current aD management seeks to emulate even though they still have yet to turn a solid profit. Of course Greg Peters and company made millions off of shareholders which is why Shaheen seeks to emulate them.

I believe that a service revenue based company with open soure software and education is a good and successful business model as Philip demonstrated and one I hope we see more of. I have always believed though that the staff should work reasonable hours and build the company as a enjoyable , profitable and worthwhile place to work and drop the idea of big windfalls. It is often things like greed which drive us to do wrong things.. and by sticking to those principles of software professionalism that Philip so ablely stated, we can build long term strong successful companies, even if they are small companies.

In the meantime, I see the OpenACS project as the future of ACS and I hope to see the developer community move there. I was always a bit uncomfortable when the developer stuff left photo.net for ASJ.. seems like the development community site should not be the arm of a profit driven company.

-- Jamie Ross, April 25, 2001

Philip: You took aD from $10,000 ($'93) to $20M in Revenues ('00), right? I'd bet you could get over $100,000 to restart, you'd already have a sterling reputation, you could probably get a few REALLY good programmers to work for you, and (the key part) keep the current Open Source version of ACS to build upon!

Then, let ArsDigitsSpent keep doing what they are doing with what they have, do what you would love, and kick their butt!

Sounds like the aD episode is a case of spreadsheet-blindness: the numbers that one can produce on a spreadsheet are not necessarily rooted in reality. When the numbers fail to take into account "irrational" or "touchy-feely" aspects (such as relationship building, trust, a sense of community, educational opportunities, or charitable giving), then the numbers are random in nature. The sad thing is many companies/people use these numbers to bet the firm every day...

-- Donald Wynn, April 25, 2001

Two points: first, when comparing his managment year against the VC's, Philip needs to acknowledge the change in economic conditions between 1999 and 2000. I'm sure he still did a good job, and the VCs still did a lousy job, but the comparison he gives is not valid.

Second, VCs have a different vision than founders. Founders are like parents, saying "keep my baby alive!" VCs swing for the fences, and hit alot of outs along with the homers. To the VC it's not a baby, it's just another baseball.

The reason for a successful $20 million a year company to hire a VC is to position itself to grow to $20 billion a year. So my guess is the reason Philip went to the VCs was because his ambitions included growth on that scale. Those who know Philip know he has an enormous ego, so it wouldn't surprise me if he wanted to join the ranks of Steve Jobs and Larry Ellison.

Now I'm not arguing Philip's facts or his evaluation of the management they put in place - my guess is he's right about all that - but it's much easier to see the disconnect in light of the differing goals. Philip says "you're taking on all this risk!" The VC says "swinging for the fences is inherently risky!" Philip says "you're running the company completely differently!" The VC says "we have different economic conditions, and anyway you only know how to run a small company!" Philip says "don't kill my baby!" The VC says "maybe if I swing even harder I can hit the home run. And if not with your company, maybe with the next!"

So I'm not saying the VCs made the right decisions, only that it's not so hard to see how they could ignore Philip - different goals, different conditions, different notions of what's at risk (Philip's note touched on the risk issue, but not the other two). And I suspect that part of the disconnect here is that Philip, understandably, wanted to have it both ways. He wanted to keep his baby alive, and he wanted to swing for the fences. The VCs should have understood this, of course, and they should have understood that they have no company without the vision and the culture built by the founders.

Personally I'm a "keep my baby alive" kinda guy, so now I know to make that abundantly clear, should I ever be in Philip's position. But my main point is that even the most talented VCs might have ignored Philip's advice and taken on a lot more risk than he liked. But any VCs ought to make that clear from the outset.

-- Lee Campbell, April 25, 2001

I think what might become one of the more interesting points from this lawsuit is how Graylock and General Atlantic's reputations come out of this. Their actions may very well serve to sour the attitutes of the multitude of engineers out there that actually start companies. Graylock and GA peeving a whole class of people that have brought them all this wealth can't be good for a long-term business perspective. When another engineer has an interesting idea for a startup and needs funding, he or she may think two, three, even five times before taking money from either of these firms.

Then again, maybe that's just my naivete and a lot of wishful thinking.

I wish Philip and Eve and Jin (and the rest of the crew) good luck!

-- Nicholas Barry, April 25, 2001

I think Mr.Greenspun's article on aD was interesting, but I think the U.S. would like him to stop fooling around with aD, and figure out what he's going to do with interest rates during the next Fed meeting.

Thank you.

-- Mook Merkin, April 25, 2001

Ok.. had more thoughts on the way into work which might be a separate topic if Philip is interested (after all this is his site)

I was struck by how close aD was to being the model engineer's company and how the "growth" issue was ultimately its downfall. So I was thinking there are other models for growing a business other than the VC approach (with its obvious pitfalls).. its just we are looking in the wrong place. I think what we need to do is use the VERY successful "franchise" approach. In a sense Philip did most of the key elements anyway, developed a basic toolkit/procedures, provided free education etc.. What was missing was the final step. While we have several consulting groups based on ACS development (FurFly, Ybors, OpenForce) we are all still seen as small separate vendors and lack credibility in the enterprise space. If aD or its sucessor grew by franchising its name and marketing in return for a percent of the revenue for instance to qualified groups , then it could grow as a collection of independently operated consulting groups using a common approach, principles and toolkit while providing lots of developer input back into the ACS development itself. Criteria could be set (such as completing bootcamp course etc and demonstrating some project management experience etc) to get a franchise as seems appropriate but it would harness the opensource developer community and give us a larger "footprint" which would provide more credibility.

Its just a thought.. but I wanted to put it out there as a follow-up to the "Bust-Up" on how we can take advantages of the lessons learned

-- Jamie Ross, April 25, 2001

I just wanted to say thanks to PG for his contributions to the photographic community. I remember reading "Travels with Samantha" in 1994-5, then being turned on to photo.net a few years later. Good luck.

-- Chris Meiering, April 25, 2001

I've always admired ArsDigita for their refreshingly pragmatic and solidly technical approach to the software business. How unfortunate that a poster child for enlightened open source software product development could be so badly mangled unenlightened executives.

MBA wielding morons like these guys are the scourge of corporate America. They calcify the operation of large corporations with their incessant empire building and wreak havoc in small ones as illustrated in Philip's depressingly sad tale. I wonder if Shakespeare would have gone easier on lawyers if MBAs had existed in Merry Old England.

-- Ward Harold, April 25, 2001

I'd like to agree with the previous posters on their positive comments about Phil. At the same time, it could be that Phil can benefit from the following observations.

Phil Greenspun looks at the world differently from most of us. Everyone would agree that he's a very smart guy and gets a lot done. He made a mistake with VC. Often VC is a mistake. On the other hand, I've seen firsthand the devastation caused by a certain types of leaders in an organization. Many times such leaders neglect lesser talented team members in favor of the highly talented few. The true measure of a coach is his ability to take a group of ordinary people and make them into an extraordinary team. I don't know whether that was a problem for Phil or not, but it can be a real problem that causes all sorts of organizational pathologies. I thought this might be a problem for Phil because of comments I've read that extol selected staff. That's a tip-off.

This was a timely email for me. I didn't know that all this was going on and was preparing to invest time into using the ArsDigita platform for some development.

-- Greg Wilde, April 25, 2001

....and Atlas shrugged...

-- chris barney, April 25, 2001

So, there Philip is, exploiting his employees with long hours and low wages, seducing them with gimmicky benefits and the opportunity to do something cool. Rather than be satisfied with a small, successful, profitable company, he decides, for whatever reasons, to play with the big boys (Gates). So he starts growing the company by getting more wage slaves. Soon, he feels a bit out of control. The Invisible Hand is tapping on the shoulder, reminding him that you can't be a colleague and a feudal lord at the same time. Rather than getting the message, Philip decides to grow harder and faster. He brings in the evil VCs, who, in a ridiculously simple maneuver enshrined in countless Hollywood movies, wrest control of the company using a ploy that Gates would have seen through when he was still in the womb. The Invisible Hand has just bitch-slapped him back into the Ivory Tower. Now he wants to regain what he lost. But the old aD was just another exploitative company with a veneer of geeky Open Source coolness. You reap what you sow.

-- Bruce LeSourd, April 25, 2001

Some of the above comments seem to be critical of Allen Shaheen for being a slimy, incompetent, "MBA-weilding moron" with no qualifications whatsoever to run a software product company. As someone who has worked with him, I'd just like to set the record straight: Allen does not have an MBA.

-- Ex ArsDigita, April 25, 2001

I've always wondered, and hearing this saga I wonder more, about the "swing for the fences" versus bootstrap tradeoff.

If you build a company and enjoy what you're doing enough to do it for twenty years, isn't slow growth a reasonable option? You do have to grow a bit to accumulate some capital to survive the lean years (or a change in the business environment requiring re-direction of effort and capital expenditure), but maybe not that much.

I suspect that "swing for the fences," "get big or go home" mentality comes from those who don't really enjoy (or maybe even understand) the real business their company deals in but just want to build empires, then move on after a while to build another (see Jim Clark).

After hearing about a furniture-making co-op where the members buy an (equal) share & pay dues for upkeep, equipment purchase, etc. but keep the profit themselves, I began to think of a software co-op. Not a body shop owned by the bodies (though that's not a bad idea) doing consulting, but a software company (I have my head stuck in 1986) where marketing and the photocopier lease are handled by the co-op but the software is written by the member/owners.

Along those lines, I'd love to use a word processor written by one person who took three years to do it and it going to maintain it for the next 10. Likewise for a web browser, etc. I know this flies in the face of open-source/bazaar collaboration, but I think that for projects small enough for one person to handle if at all possible, that might be the best approach. I feel that all software I've worked on with others has been compromised by lack of solid work in the interfaces (usually due to time pressure).

I know a fellow who writes software sold by a publisher who gives him royalties. On a particular project, they gave him a library written by another programmer. The library already existed, was tested and lived to be a generally-useful lib, not a hacked-together module for one product. That's the kind of collaboration that could work in a PC application co-op. It reminds me of the furniture guys: when one of them has a large job (a BIG conference table), they can pay the others to help (with planing and sanding), but they're generally independent.

I'm impressed that ars managed to wow a bunch of people into thinking that if they couldn't work there, they'd want to work somewhere like it. When I was burning out @ PowerTV (http://biz.yahoo.com/prnews/010314/atw009_2.html), I'd ask my co-workers "if you ran a company like this, what would you do differently?" CVS instead of SourceSafe (they've since switched to Perforce), development on Linux PCs with maybe a few Alpha servers, a real sustaining team to get the new-development guys productive, etc. and 21" monitors for everyone and a flatter management structure. Some companies aren't even that far from being a great place to work, but have the broken parts fossilized so they can never be fixed.

-- Morgan Woodson, April 25, 2001

I whish to thank Phillip for all the work he has put out on the internet. I started looking at photo.net in 1999 and has learned a great deal since.

I have had my own dreams of starting a business on the internet, and recently I stumpled upon the book below.

LLOYD, T 1992 Entrepreneur! Bloomsbury Publishing Ltd., 1992

The part below is a quote ( p. 132) where one entrepreneur recounts a conference about entrepreneurs. ...being invited to a conference about entrepreneurs by the head of the venture capital division of one of the banks that had backed him. The plan was to subject a group of entrepreneurs and a group of bankers to a series of personality tests and then to compare the results to see if there were any significants contrasts.
'He came to me and said, "We know venture capital is about entrepreneurs, so that means that after due diligence it's all about backing horses. We want to analyse entrepreneurs to see if we can improve the odds. Will you help ?"
'..When I arrived on Sunday morning I parked my Montego next to rows of Porsches.' 'The results of the study were the opposite of what had been expected. Entrepreneurs emerged as very steady, reliable, trustworthy, risk-averse people. Bankers were the opposite.'

Seems like people investing in venture capital funds, should start wondering if they are doing the smart thing...

-- finn knudsen, April 26, 2001

Hey Phil,

From Jeremy Zucker and myself. Sorry you got fucked. Once again, we see the "Triumph of Mediocrity".

YT, Adam

-- Adam McClure, April 26, 2001

It's very sad to see the dreams of Philip go up in smoke by some heartless VCs who don't understand what he was trying to accomplish. I got the sense from the early days of ArsDigita that making $millions was an aside. I recall a soft spoken Philip on web cast talking about how web servers were objects; how better software could make a better society; how training kids to make useful web services was important; how open sourcing his ideas was helping us all to made great strides forward. Those were exciting times! Why must it still come down to $money money money? It's sad that of all the people Philip has evangelized - he couldn't convince the people who needed to love the dream most. I think what the Plaintiffs in the law suit are doing is despicable and I wish they would drop their suit, rehire the people who made ArsDigita what it was and get out of the way.

-- Phillip Harrington, April 26, 2001

This just goes to show: If you want to run a company, you need to run the company. It would be nice to give control to another entity and sit back on your laurels and do nothing, but unfortunately that's not the way the world works.

If you have a blockbuster idea, and the above is your intent, I hope I have the fortune to know you because I will exploit the hell out of you too.

-- FirstName LastName, April 26, 2001

I was a client of aD from September, 1999 to February, 2001. I have been building large web sites since 1993, and had built over 50 substantial sites prior to my experience with aD.

Our first meeting with Philip was in a small house in Cambridge where Tracy had to kick all the Diet Coke cans off the sofa for us (the senior management team of a new startup) to sit down. I came away with four conclusions after several hours of conversation with Philip and Tracy:

1. These people really knew what they were talking about and were practical - no litany of industry buzzword BS from them
2. arsDigita operated by hiring very smart people, expecting a lot from them without burdening them with lots of process, and providing real technical mentorship
3. Philip is highly opinionated, but can be communicated with readily if you have something worthwhile to say
4. Suits were not comfortable with Philip (or Tracy)

Once in the cab, I told the CEO we should hire them immediately - the other VPs in the car looked at me in disbelief. Eight weeks later we went live with a pretty complex web application that won many awards and at its peak received ~650,000 visitors per month.

My main concerns about aD were that the "smart people without process" model would only scale to about 30 or so engineers and that Philip seemed disinclined to change things himself. I was glad they were bringing in outside talent to help them augment the skills in the company. I hoped they would find talent that would understand the need to guide what the founders had built in a humble way.

By the middle of 2000, it was clear that the new management did not understand the mission in front of them. New engineers at our company were routinely complaining about the level of competence and experience we were provided by aD. Communications with the new CEO were unreasonable and frustrating. Contacts at aD went from programmers to project managers to sales VPs. All these people were trying hard, and in some cases doing pretty well - but aD had lost the things that made it unique and successful.

Finally, in fall of 2000, the bottom really fell out of the dotcom sector and VC funds dried up as the Nasdaq cratered. I think that no matter who was running aD, they would have downsized and run into cash flow issues during these difficult times in the private equity markets. That said, aD is left with little to build from without the core team that got the thing in motion.

BTW - I had not heard about the MS/dotnet opportunity before. That is really an inexcusable error...

Good luck Philip with pulling things back together!

-- Josh Stella, April 26, 2001

VC's aren't the sole force that can distort a company out of its original shape. Boom-engendered greed can be such, as can be timid reversion-to-the-mean (in all senses) corporate behaviour once a company has gone public.

I see any of these as a crisis in sincerity: from the point of view of the law, the purpose of a for-profit company is to make money¹. If you don't, or if you merely don't do the things other people do in the apparent pursuit of making money (no matter how little sense they make) you can be sued.

If, however, your company should also have other purposes of some sort enshrined in its articles, say "writing cool software and treating employees as if they were human beings" and an officer of the corporation acts in such a way as to obviously undermine them, I really doubt that he [usually] could be successfully sued or otherwise legally sanctioned. I'm sure there will eventually be a test-case where the executive in question has publicly stated, "I don't think we can make any money being cool, let's do boring stuff and be mean to our employees to boot." If the suit in question has instituted obviously profitogenic directives such as being at one's desk by 9a.m., or never insulting an executive, he 'd probably be well-insulated from effective legal action (and would be able to use the company's resources for his defence)².

However, the upshot of it is that it is very hard for a company to be sincere about anything beside being greedy; maybe that's why one reason why Redmond does so well. It is a problem, though, when what one does directly affects people's lives, programmers or cleaning staff or open-heart surgery patients. You can talk all you wish about the Most Holy Market sanctioning awful behaviour and correcting itself, but It can't correct the permanent damage it has encouraged in the first place--there is such a thing as human hysteresis.

Then again, even though I can't remember which rabbi (Hebrew for 'sifu' or 'sensei') said something like, "Even though you can't succeed, you are not exempted from the obligation to try," I still think it bears repeating. In any event, Eve (uh, "DEI") and Phil and all, I'm sorry to hear of aD's problems, and I hope it or some heir or assign thereof prospers and develops into its own best self. The market could use a good example, for morale's sake but also to use as evidence that right action can lead to profit.
---M.T..

¹ If I wanted to sound more hard-headed than I am, or as if I really knew of what I spoke, I would say "to turn a profit."
² Perhaps this is as it should be: I don't know that I want the courts to decide who's cool and nice and who isn't. However, they regularly decide whether someone has financially mismanaged a company without any notable competence in that sphere, either....

-- Michael Turyn, April 26, 2001

As someone who has a succesful consulting company I looked long and hard at taking VC $$$ in the last couple of years. I could never come up with a business model that made sense to the VC's. They want home runs--not a series of singles and doubles that will win the game.

As the crash of last year has shown the VC's model of Start-Spend-Explode does not replace Start-Learn-Grow. Money is not a substitute for industry knowledge, customer knowledge, methodical testing of markets.

-- Sanjay Nasta, April 26, 2001

Sorry to hear about the mess, Philip. I've been friends with Jin Choi now for 10 years, and I've also admired you and aD for several years, and so I'm sorry to hear how it all turned out.

-- Mark Hurst, April 26, 2001

With regard to this comment:

"deprecated the old feature-complete product (ACS 3.4) before finishing the new product (ACS 4.x); note that this is a well-known way to kill a company among people with software products experience; Informix self-destructed because people couldn't figure out whether to run the old proven version 7 or the new fancy version 9 so they converted to Oracle instead)"

Philip is absolutely correct as my experience with aD confirms. I went to the website recently trying to decide between various systems including ACS and Enhydra. When I saw the rather uninformed choice between the 3.x and 4.x products on the aD site that I was going to have to make, I went with Enhydra. Having worked for 3 sizable software companies previously and grappled with this issue, the point is particularly poignant and should not fall on deaf ears.

Also, having participated in the (startup) development of similar software products in the past and then having to watch some gigantic corporate monolith destroy the product reminds me of how painful it is. It's often the emotional attachment to the product and the process that keeps you there till 3am and that makes it that much harder to see it killed.

Keep up the good work. The web design book is the most compelling read I've had in ten years and I'd be using ACS right now if it weren't for these VC people getting in the way.

-- David Watson, April 26, 2001

I went to one of aD's one-day seminars last year (where they gave the awards to the kids