[Chapter 42: Mortgage Loan]
Zach noticed that John hadn't said much, seeming lost in thought, so he didn't press him. They made their way to the airport, bought tickets, and soon the three arrived in San Francisco.
"John, are you still deep in thought? We're already in San Francisco, and if you're thinking like that, it wouldn't look good when you meet with Michael and the others."
"Oh, no, I'm fine now. I'm just not sure what's going on, and I wonder if Sequoia Capital can help me."
"John, it's no big deal. Even if they're not willing, you could always just get a loan yourself. It's not a huge amount."
Hearing Zach's practical words, John couldn't help but smile. Why worry so much? Everything would work out in time. Looks like his training still had gaps -- he was starting to get anxious over uncertainties.
He then relaxed and started chatting and joking with Zach and Bob.
---
This time, they didn't rent a car. They hailed a taxi right outside the airport and headed straight to Silicon Valley. It was just a few dozen miles, nothing far.
They didn't stop much upon arrival but drove straight toward Sand Hill Road, famously known as "Venture Capital Alley."
As John stepped out of the taxi, he saw Michael Moritz coming out alongside Jerry Yang and David Filo.
"Jerry, David, looks like you two are here too."
"Heh, since you're putting up Yahoo! shares as collateral, they figured they should come check it out. Probably they were just worried about you," Michael Moritz explained, noticing the slightly awkward expressions on Jerry's and David's faces.
Obviously, although Jerry and David had approved of John's plan to mortgage his Yahoo! shares, they still weren't completely at ease.
"I value my Yahoo! shares highly. In fact, I'm waiting for Yahoo! to go public. So Jerry, David, rest assured -- I'm not giving up those shares."
John didn't try to hide the facts -- he couldn't, especially since he was planning to invest in Netscape soon. No point in keeping secrets.
"All right, Mr. Valentine and the other partners are waiting for you inside. Let's go have the talk," Michael Moritz suggested with a smile.
Looking around at the wooden two-story cottage and similar quaint houses partially hidden among the trees, John couldn't help but feel a bit amazed.
Most people wouldn't expect that those venture capital firms lining Sand Hill Road -- the so-called "Wall Street of the West Coast" -- were headquartered in these rustic-looking wooden homes.
He nodded to himself and then the group entered the Sequoia Capital headquarters.
---
Led by Michael, they entered an office where, besides John's old acquaintance Don Valentine, several other Sequoia partners were waiting. These were basically the firm's key decision-makers.
After introductions, John got straight to the point. He knew dealing with these seasoned veterans called for a direct approach.
"Gentlemen, you're likely aware that I've proposed that Sequoia Capital -- or perhaps one or more of you personally -- assist me by using my Yahoo! shares as collateral for a bank loan. Before making this proposal, I had already reached agreement with Jerry Yang and David Filo about it, and they are on board."
He glanced at Jerry and David, who nodded in acknowledgment.
"Here are two options. First, Sequoia Capital could guarantee a loan where I put up $50 million worth of Yahoo! shares as collateral, with a one-year term. Second, if Sequoia Capital is willing, I could directly pledge the Yahoo! shares to Sequoia, which could then loan me $50 million for one year. I'd pay 20% interest -- a total of $60 million due at this time next year."
After delivering the proposal, he noticed the surprise on their faces but said nothing, simply waiting for their response. Actually, with the combined shares John and Zach held, even at the initial $400 million valuation, $50 million was well within their stake's worth. So no one was really shocked by the amount.
Initially, John had thought about pledging both his and Zach's shares, but then realized his own stake alone surpassed $50 million in valuation, so he dropped the low-priority idea about Zach's shares.
Originally, John planned to seek a bank loan, but he reconsidered. Sequoia Capital was flush with cash anyway, so a direct loan -- even with a higher interest rate -- made sense. Hence, the second option.
"Mr. Leighton, well, to be honest, I've been around a long time, but I've never met anyone your age who talks about borrowing $50 million so casually. Since we've gotten to know you, your ambition has been surprising but not unexpected. And let's consider the rest of us here -- what were we doing when we were seventeen? Meanwhile, our 'Saint' here talks about loans like it's nothing."
Don Valentine joked, shaking his head. The room burst out laughing.
"Frankly, Sequoia is inclined to help you. Based on your Yahoo! shares, $50 million is no stretch.
But I'm curious -- what do you plan to do with the money? Of course, if it's confidential, you're under no obligation to say."
All eyes turned to John, eager to learn more.
Besides Zach, Bob, Jerry, and David, everyone else at the table was an investor. John was the earliest Yahoo! investor, and with Yahoo!'s skyrocketing value, everyone was eager to find out what he intended.
"Well, that's exactly what I want to talk about next, including how I discovered Yahoo! and my investment strategy. But first, I'd like everyone here to agree that what's discussed today remains confidential. I asked Zach to prepare a non-disclosure agreement for this meeting, and I hope you'll take a moment to look over it. What I'm about to disclose involves trade secrets."
John signaled to Zach and pulled out a pre-prepared confidentiality agreement. Since he'd also need their support for contacting Netscape later, secrecy was a given.
The agreement simply stated that everything discussed today should remain confidential, nothing more.
After reading it, everyone was fine with it and signed -- Jerry and David included.
Everyone was anxious to hear how John was the first to uncover Yahoo! and what he planned to do with this sizeable loan.
"Before I get into how I discovered Yahoo! and my investment plans, I want to start with a bit of background. Think of this as the foundational context for my strategy. Feel free to listen."
Though John wasn't a technical expert, his understanding of the internet was second to none, thanks to his unique perspective as someone reborn with advanced knowledge.
"I want to talk about market formation. The simplest rule is that you need a large user base. Only then can a market thrive.
Now, the internet had existed for some time before it really took off. Why didn't it flourish earlier?
In my view, because too few people used it. Non-experts didn't understand computers or the internet -- they were tools mainly for labs and specialists. For the average person, computers were just too distant.
We might owe a debt to companies like Cisco -- I believe Cisco is one of Sequoia's portfolio companies. Also, operating system companies like Microsoft have made great strides. Modern OSes made computers user-friendly for everyday people without technical know-how -- opening the market up.
Then the World Wide Web appeared -- free software that made the internet accessible. These laid the groundwork for internet growth.
Have you noticed that since the internet's appearance, only a few specialists used it for decades? Before 1994, at most a few million Americans were online.
But now, things have changed drastically. Jerry and David can attest to this. As computers have become household staples, the number of internet users has exploded. As far as I know, there are almost 20 million internet users in the U.S. today.
That means tens of millions of new users in just over a year. What caused this surge?
Two main factors: First, the foundational improvements I mentioned before -- user-friendly operating systems, widespread networking devices, the rise of the Web. All these paved the way.
Second, the introduction of web browsers, especially graphical browsers. They display all online information visually on screen, effectively opening the doors to the internet.
Only when ordinary people start using the internet in large numbers can it become a true virtual world.
Whether it's easier-to-use operating systems, the World Wide Web's arrival, or the advent of browsers, these all laid a solid foundation.
At this point, the unique advantages of the internet start to show, and it begins to affect real life.
As more users come online, the internet naturally grows and thrives. I think everyone here agrees with that.
Before '94, the internet was mostly dominated by professionals because it was complicated to access. But now..."
John shrugged and looked at everyone, then fell silent.
The group couldn't help but think John's explanation made sense. Hearing him frame it like this, it sounded like the internet's golden age was just beginning.
Little did the Sequoia partners realize that this very idea would soon make them a fortune in the early days of the internet boom.
*****
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