Chapter 101: The Number in the Cell
[Monica's office Gardner Analytics, Folsom St, SoMa Monday, January 12, 2016 2:40 PM]
The comps tab had been open for forty minutes before he looked at it properly.
Three companies. Three AI documentation startups that had raised in the last quarter on Gardner's coattails, each one priced against the others in a daisy chain of borrowed multiples. The first had $1.2M in ARR and a $28M post. The second had $800K and a $22M post. The third the one that made him stop scrolling had $400K, a $30M post, and Russ Hanneman's name on the cap table.
Russ had bought into all three. Simultaneously. With the confidence of a man who'd arrived at a gold rush by missing it and was determined to overpay for proximity.
Monica's blazer hung over the chair. She was at the desk with two laptops open, the comp model on the left screen and the pitch deck on the right. The red cell WIRE/TRAINING OVERLAP was still there from last week. She hadn't cleared it.
"Russ Hanneman put money into three companies that compete with each other," Ethan said.
"Yes."
"On the same day."
"Same wire."
"Does he know they compete with each other?"
"Russ thinks AI is a sector." Monica didn't look up. "Sectors have multiple horses."
One of the three Meridian Docs, the $30M post had already cut its enterprise pricing to undercut Gardner on two accounts Hooli hadn't touched. Self reinforcing noise. Hooli's price war was compressing the top of the market. Meridian was compressing the middle. The comps were getting worse because the comps were causing the comps to get worse.
Ethan sat in the chair across from her desk. The one that was always slightly too low. He'd never adjusted it. The spreadsheet was on his laptop now, shared from hers, and he could see the formula in the valuation cell. It pulled from the median of the three comp set entries. The median was $27M post on $800K ARR. Gardner's $5.5M ARR discounted to a revenue multiple against that set produced a number. The number was $160M.
Not $200M.
He'd known it before he sat down. He'd known it since Thursday, since the Honda, since Monica's two tab spreadsheet on his phone. But the cell turning from gray to black the model committing to a number instead of displaying a projection was different. It was the difference between a weather report and rain.
"$160M," he said.
"Right."
"From $200M."
"From $200M."
The arithmetic arrived on schedule. Forty million dollars. Twenty percent of the company's paper value. His own stake diluted, but still majority reduced by roughly eight million in net worth. Not money he'd spent. Not money he'd lost. Money that had existed in a cell and now existed as a smaller number in a different cell.
"Forty million is " he started, and stopped. Not because he didn't have the sentence. He had three. Forty million was 2.5 quarters of runway at current burn. It was six senior engineers at market comp for eighteen months. It was the difference between a Series B that bought optionality and one that bought survival.
Monica's pen touched the desk. Once. The suppressed excitation tap.
"Don't," she said.
"Don't what."
"Turn it into a spreadsheet."
He looked at her.
"You're about to tell me what forty million dollars is in runway terms. Or headcount terms. Or quarterly burn." She closed the comp model on the left screen. The pitch deck stayed open on the right. "And then you're going to say 'the numbers work,' and then you're going to tell me what we do next. And I'm going to sit here and listen because that's what I do. But I need you to hear yourself do it first."
The office was quiet. Downstairs, the freight elevator engaged with its bearing issue. Through the floor, the faintest trace of pastrami the late afternoon shadow of Manny's lunch rush.
"I'm not " he said.
"You are. You do it every time. A number moves and inside one sentence you've already turned it into hires or runway or a plan. You've been doing it since the Series A. Since before the Series A. Since the first time something went wrong and I watched you turn it into a problem to solve instead of a thing that just hurt."
"It is a problem I can solve."
"It's also forty million dollars gone."
He didn't have a response for that. He had seven operational responses and zero personal ones, and the gap between the two was what she was pointing at.
"I need you to sit with it for four seconds," Monica said. "Don't do the arithmetic. Don't turn it into a plan. It's one hundred and sixty now. It was two hundred. The difference is forty million dollars of your company. Just hold it."
He held it.
Four seconds was a long time. In four seconds at the keyboard, he could model the dilution differential between $160M and $200M at the round size they were targeting. The option pool refresh the lower post would require, the hiring plan revision that would cascade from it he could calculate both without trying. Taking $160M now instead of $200M in six weeks meant three fewer weeks of Prometheus exposure and less legal spend burned on diligence already done. That was the faster close math, and he could price it in his head before she finished the sentence.
None of it happened. He sat in the chair that was slightly too low and held the number instead.
"It feels like eight months," he said.
Monica looked at him.
"Eight months of runway that isn't there. Eight months of hiring I can't "
She closed her eyes. Briefly. Not dramatically. The reflex of someone who had just confirmed what she'd hoped was wrong.
"You did it in two seconds."
The call with Andrew Lau was at four.
Andrew dialed in from Sequoia's Menlo Park office. The connection had the particular flatness of a conference room that cost more than the building it was in.
"Sixty million post was a different market," Andrew said. "The comps are what they are. The question isn't whether one sixty is right the question is whether you want to spend six weeks fighting for two hundred against a comp set that's going to get worse before it gets better."
"Two hundred was what we pitched."
"Two hundred was what you pitched in October. It's January. The quarter was flat. Hooli took two of your flagship accounts. There's a copycat with Russ Hanneman's money undercutting you on price. The comp set says one sixty and the comp set isn't wrong, it's just "
"Stupid."
"I was going to say 'noisy.' But yes."
Ethan's laptop showed the pitch deck. Monica's revision. The $200M on the cover page had been changed to a bracketed placeholder [POST], awaiting a final number and the inside pages were unchanged. The deck didn't know yet. The deck remained a October document pretending to be a January one.
"If we take one sixty now," Ethan said, "we close faster."
Andrew paused. "That's the trade."
"Faster close. Less diligence exposure. Less Prometheus window."
"And you stop trying to defend a number the market already moved away from." Andrew's voice was careful. "One sixty with clean margin and a defensible growth narrative is a better story in 2017 than two hundred with a bought quarter. You know that."
He did know that. He'd known it before Andrew said it. The consolation was accurate and it landed like a verdict. Accurate consolation from a board member is just a well dressed instruction.
"Okay," Ethan said. "One sixty. But the close moves up. Two weeks. If we're taking that price, we take the calendar."
"I'll talk to Rebecca. She'll want the technical milestone covenant tightened, but she'll agree. She'd rather have it done."
The call ended. Ethan sat in Monica's office with the laptop open and the comps tab showing three companies that would not exist in twelve months. The $30M Meridian post Russ's McLaren money was pricing his company down. A man in a car that cost more than Gardner's first office was compressing his valuation by existing.
Monica was watching him.
"What does one sixty feel like?" she asked.
The question was the same one she'd asked eighteen months ago, standing in a different office. That was when the Series A had closed at $60M post and she'd still been at Raviga. What does sixty million feel like. And he'd answered automatically, without thinking "like eight months of runway and four senior hires and one less thing to worry about at three AM." She'd laughed. It had been funny. It had been the thing she liked about him: the way a number turned into a plan, before it ever turned into a feeling because feelings didn't build companies.
"What does one sixty feel like?" she asked again, and the question was the same and nothing else was.
He started to say a number. Eight months. Six hires. Two quarters of
He stopped.
Halfway through the word "months." The syllable died between his teeth. He felt it go the automatic motion of the habit, jaw already shaping the next conversion, the arithmetic already loaded and he cut it deliberately. It was a flinch, pulled back hard, the kind that comes after the burn instead of before it.
The silence was worse.
Monica didn't fill it. She sat with her two laptops and her closed comp model and her blazer on the chair and she waited. Not kindly. Not unkindly. With the patience of a person who had modeled twelve versions of this conversation and was now watching the thirteenth and least predictable one.
"It feels like less," he said.
It was the first time he'd answered that question with a word that wasn't a number.
She held the look for a moment. Then she nodded, once, and opened the pitch deck.
"Two week close," she said. "I'll need the revised hiring plan by Wednesday."
He stood. The chair scraped. In the doorway he turned, half a sentence forming something about the wire window, or the training overlap, or the comp set's noise and he cut that too. Stood in the frame with nothing in his mouth.
Monica typed.
He left.