War is Peace. Freedom is Slavery. Ignorance is Strength.

In his novel 1984, George Orwell forecasted a dystopian society 36 years in the future, in which an all-powerful state uses advanced technology to exert totalitarian control over the thoughts, words and actions of its citizens. Ubiquitous two-way “telescreens” watch the individual’s every move and emit an endless stream of sinister propaganda. Big Brother is watching you. The Ministry of Truth is the only source of information. The Thought Police control what you think. As citizen Winston Smith learns to his cost, resistance is futile.

The allegations that the NSA has apparently been collecting the cellphone and Internet records of everyone in the United States (if not the world) has catalyzed fears that Orwell’s terrifying future may finally be materializing twenty-nine years late. Sales of 1984 are up 9,500%. Was Orwell right? Is technology in the hands of the state enabling our subjugation as he predicted?

In one key aspect, Orwell was absolutely right. Like Orwell’s telescreens, security cameras increasingly monitor us from every street-corner, but we also carry smartphones that log our every physical movement, and meanwhile a host of tracking technologies record our virtual movements across the Web. As a recent WSJ OpEd by Sen. Rand Paul proclaims, “Big Brother Really Is Watching Us” — and he’s using technologies far more powerful than Orwell could have imagined back in 1948. The implications of this surveillance are profoundly disturbing. While we may trust the current administration’s assertions that they’re only watching us in order to protect us, who can be confident that future administrations or less benign overseas governments will not use these tools to track and persecute whomever they deem to be an enemy of the state?

In another fundamental aspect, however, Orwell was dead wrong. In a paradox worthy of 1984 itself, the same technologies that enable Big Brother to watch us are rendering it ever more impossible for him to control what we know and think. Far from ending up in control of all knowledge through the Ministry of Truth, today’s governments have effectively lost the ability to control our access to information. In Orwell’s time, the state only needed to censor a few newspapers and a handful of broadcasters to effect total information control. Today, we carry access to hundreds of global news sources and tens of thousands of bloggers around in our pockets, most of them beyond our national government’s reach. If the New York Times won’t publish it due to a secret FISA court order, the Guardian will. If we don’t trust the Turkish government’s account of events in the streets of Istanbul, we can turn for the truth to thousands of cellphone videos or tweets from the people themselves. SMS, Twitter and Facebook have become the means for citizens to organize resistance to abusive government power, and for the rest of the world to witness it. No wonder Prime Minister Erdogan recently declared Twitter and its ilk “the worst menace to society.”

Moreover, technology is exposing the state itself to scrutiny in ways that Orwell never foresaw. Even in China, these days it only seems to take a flurry of critical comments on Sina Weibo for the government to change its policy on luxury cars for officials or to give in to villagers demanding the removal of a corrupt mayor. In what’s become a recurring nightmare for Western governments, leaks spread instantly and uncontrollably in the world of smartphones and Twitter. Whether you agree or disagree with their tactics, it only takes one “whistleblower” to shine the blinding spotlight of the global Internet on controversial top-secret government programs. And just as our personal use of technology lays a trail the government can follow, so too does government’s use of technology create a record that can be used to scrutinize the actions of the officials involved and hold them to account. If there is a “smoking gun” associated with the IRS Tea Party affair, it’s likely to be found somewhere in a trove of internal email. Like Nixon with his tapes, the day will inevitably come when a national government is brought down by its emails.

So, Orwell was partly right. The state uses ever more advanced surveillance technology to watch us, and our own ever-greater use of personal technology makes it possible. On the other hand, technology has fundamentally destroyed the state’s ability to control our access to information, and exposed its bureaucracy to unprecedented scrutiny. This may be the death of privacy, but perhaps it’s also the death of secrecy and impunity. In that respect, fortunately, Orwell was wrong. Thanks to technology, Big Brother may be watching us, but we’re watching him too.

Great engineering talent is the life-blood of the innovation economy. Startups across the nation, from New York to Silicon Valley, are in an all-out war for the workers they need for their ideas to thrive. Over the next decade, we believe there will be one million more technical jobs than the domestic workforce can fill. Comprehensive immigration reform is an opportunity for our nation to invest in her innovation engine.

Current immigration policy already stacks the deck against small, innovative companies who don’t have the resources and hiring flexibility of corporate behemoths or offshore outsourcers. Today’s paper-choked H1-B system only accepts visa applications once a year in April, and, if you are lucky enough to win one, finally lets you hire the candidate six months later. (If you aren’t, tough luck. Wait a year to restart the process, pushing out the earliest start date 18 months.) That level of inflexibility and delay is simply not an option for startups, for whom every hire is mission-critical and every day counts. Perhaps as a result, less than two percent of H1-B visas currently go to employees of young venture capital-backed technology companies.

Unfortunately, the Senate’s current reform proposals would create new hurdles for startups without addressing the fundamental process flaws in the current system. Although increasing the number of H1-Bs is a step in the right direction, the new accompanying red tape all but ensures that startups will be squeezed out entirely. Startups have to be lean and nimble to survive. Forcing them to prove they’ve exhausted domestic options before making a foreign hire, or limiting their subsequent ability to make staffing changes, will further hamper their ability to compete. So will requiring them to meet minimum salary levels set for large corporations, since startup employees often happily accept lower salaries in return for equity upside.

Regulations embedded in current reform proposals punish startups for the sins of the outsourcer. Our young technology companies are hiring as many Americans as they can, not pushing valuable jobs offshore or replacing U.S citizens with lower-paid non-citizens. According to a Silicon Valley Bank survey earlier this year, nine out of ten employers in consumer internet and enterprise software said it was a challenge to find qualified workers to fill open positions. Similarly, a recent analysis by the Brookings Institution found 46 percent of job openings that go unfilled for one month or longer require science or technology expertise. Moreover, growth in the tech sector means hundreds of thousands of new, high-paying jobs for Americans. A recent study by the Bay Area Council Economic Institute finds that for every new high-tech job, 4.3 others are created in the local economy.

Rather than reinforcing a broken system, here are some concrete proposals that will level the playing field and turbocharge American innovation:

First, exempt startups (defined as companies less than five years old with fewer than 500 employees) from the H1-B cap, or at a minimum allocate a separate quota to allow them to compete fairly for talent.

Second, allow startups to apply for and use H1-Bs throughout the year to reflect their need for agility.

Third, eliminate requirements for “recruitment” or “non-displacement” attestations or minimum pay levels for startups.

Fourth, create a new “Startup Visa” that allows foreign-born-born entrepreneurs who raise at least, say, $250,000 of funding from qualified U.S. investors to live and start their business here.

And finally, simplify and bring the entire H1-B process online for everyone. (I’m sure there are plenty of startups that would jump at the chance to help with that last objective.)

As the Gang of Eight’s immigration package winds its way through committee, let’s not miss a once-in-a-lifetime opportunity to accelerate American innovation, by funneling the world’s best and brightest to our country’s best and brightest young companies.

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, Andreessen Horowitz.

Alan Bradley: [holds up his pager] I was paged last night.

Sam Flynn: Oh, man, still rocking the pager? Good for you.

- TRON: Legacy

Here’s my card. It’s got my cell number, my pager number, my home number and my other pager number. I never take vacations, I never get sick. And I don’t celebrate any major holidays. 

- Dwight Schrute in NBC’s “The Office”

As Software Eats the World and more and more of our daily activities move online, we depend ever more on IT infrastructure. In a day spent emailing, tweeting, catching up on the news, checking Facebook, shopping on Amazon, watching a movie on Netflix, banking at an ATM — it’s all too easy to forget that underlying all of these “mission-critical” activities are servers, routers, load balancers, switches, storage and millions of line of code.

In a world where we’ve come to view the Internet as a utility, a major website outage is almost as serious as a power outage — and usually affects far more customers. Amazon Web Services had several major outages in 2012, taking down Netflix, Reddit, Heroku and many other sites in July and December. In October, it was the turn of YouTube, Dropbox, Tumblr and Google AppEngine. GoDaddy’s September outage affected up to 5 million hosted websites and 50 million domain names for six hours.

In addition to negative publicity and customer dissatisfaction, downtime now has an enormous financial cost. A 2010 study reported that U.S. businesses suffer an average of 10 hours of downtime per year, at a cost of $26.5 billion. Another analysis suggests that one hour of downtime costs the average business $300,000. If there had been a major outage on our most recent Black Friday, it would have jeopardized $1 billion in online sales.

Dealing with downtime

Of course, modern IT infrastructure has been built for redundancy and is extensively instrumented. Automated tools such as Nagios, Keynote, New Relic, Pingdom, SolarWinds and Splunk monitor every element of the stack and alert engineers immediately to urgent or emerging issues. In fact, today’s machines are very good at detecting and reporting incidents. It’s when those incidents get handed off to humans for remediation that things sometimes break down — because the humans are still using processes and technology that haven’t changed much in ten to fifteen years.

When I was at Loudcloud back in 2001, everyone carried a pager. A small team in our 24/7 Network Operations Center (NOC) would watch for critical monitoring system alerts on big screens and then page the administrator on duty, no matter what time of the day or night. If the administrator couldn’t resolve the issue, they would escalate to developers, who also wore pagers. The process was labor-intensive and error-prone, involving emails, phone-calls, written duty rosters and escalation schedules.

While most other aspects of IT have changed dramatically, incident management in many IT organizations looks remarkably like it did back in 2001. The cloud has done away with the need for many NOCs, and the move to DevOps may mean developers are more directly involved in issue resolution, but the processes are frequently still manual, cumbersome and inefficient. Moreover, today’s large complex systems are never the responsibility of just one person — database administrators, developers, and system administrators all have a role to play — and the more people involved, the more complex and error-prone the process becomes. Reporting of incidents and handoffs from person to person are often done manually via email or SMS. Escalations and problem descriptions are handled via person-to-person phone calls. Engineers consult spreadsheets to see who’s on duty at a particular time. I’m aware of at least one major cloud service provider whose ops people still wear pagers.

PagerDuty

Having studied software engineering at the University of Waterloo and then built and supported large-scale systems at Amazon.com, Alex Solomon, Andrew Miklas and Baskar Puvanathasan set out to bring IT incident management into the twenty-first century. The result is PagerDuty, a modern SaaS-based platform for incident tracking, alerting, and on-call management.

In a nutshell, PagerDuty collects alerts from a customer’s existing IT monitoring tools and alerts the on-duty engineer if there’s a problem. PagerDuty doesn’t replace any particular monitoring tool. Instead, the system sits on top of existing monitoring systems and aggregates all of the errors generated by these tools in a single place.

incidents PD

PagerDuty allows each engineer to configure his or her own customized notification chain. Engineers can opt to receive incident alerts using any combination of phone calls, SMSes, emails and iOS push notifications. So, for example, you could opt to get a push notification immediately when an incident occurs, then an SMS 2 minutes later, then a phone call 5 minutes after that. PagerDuty also allows the on-call engineer to acknowledge, escalate or resolve a triggered incident directly from his or her mobile phone. The company utilizes multiple redundant data centers and SMS and telephony gateways to guarantee reliable message delivery across more than 100 countries.

Incidents in PagerDuty are routed according to an escalation policy. A policy specifies how incidents should be escalated within each team. For instance, you can configure a sysadmin policy to route incidents to a primary on-call engineer and automatically escalate the incident to a secondary on-call if the primary doesn’t answer within 20 minutes. Escalations are crucial to incident response because they add redundancy and ensure nothing falls through the cracks.

escalations PD

PagerDuty lets you build different on-call schedules for each specialization within the organization. For example, you can create one schedule for your database administrators, and another for your network engineers. Incidents can be easily configured to alert the appropriate on-call specialist, ensuring that problems are always automatically dispatched to those who are on-duty and best able to handle them. No more spreadsheets!

on call sched PD

Getting customer feedback on PagerDuty proved to be very easy, as it turned out that a large majority of our portfolio companies were using the product — and they were overwhelmingly positive about how it has dramatically simplified and improved their IT operations management. In fact, the company already has several thousand paying customers, including web giants such as Microsoft, Electronic Arts, Adobe, Rackspace and Intuit as well as a growing number of enterprise IT organizations. Overall, PagerDuty has achieved a remarkable amount on about $2 million dollars in initial funding, including generating a substantial and rapidly growing amount of recurring revenue. With a market of almost 10 million infrastructure and application specialists worldwide and multiple ways to expand within the multi-billion dollar IT Service Management segment, this company has a lot of potential.

In closing

The world’s inexorable transition to cloud computing and modern large-scale mission-critical IT systems is creating the opportunity for an exciting new generation of software companies like PagerDuty to play a critical role in its enablement. Many Andreessen Horowitz portfolio companies, for example GitHub, MixPanel, GoodData, CipherCloud and Snaplogic, are members of this class.

As veterans of IT systems management and automation ourselves, we are excited to lead a $10.7 million investment round for PagerDuty and welcome them to the a16z family.

Living in silos

As software continues to eat the world, we spend an ever-increasing portion of our time online. Worldwide, we pass over 35 billion hours a month in the digital world, with US Internet users spending an average of 32 hours online monthly. As the Web has evolved, more and more of that online time is spent in specialized venues such as Facebook, Instagram, Twitter, Pinterest, LinkedIn and Foursquare. While these are fantastic applications, they have a downside, in that they largely exist as parallel, unconnected containers for our personal data. Trapped in their respective silos, our posts, photos, tweets, pins and checkins are largely inaccessible to us from outside. Moreover, creating useful connections between one application and another is far beyond the average user. Sure, most of the most popular web applications now have APIs, but they’re written for the benefit of developers, not people. (Take a look at Instagram’s API documentation, for example.)

Announcing IFTTT

Andreessen Horowitz’s latest investment, IFTTT, (for If This Then That) is out to change all that. IFTTT (rhymes with “gift”) is a simple yet powerful way to create connections between any two web applications, triggering an action on one every time any event you specify happens on another. For example, when I post on App.net, my post instantly appears on Twitter too, thanks to IFTTT. Every time I post a photo (or am tagged in one) on Facebook, IFTTT downloads it to my Dropbox without my even having to think about it. Here’s what that recipe looks like:

Facebook > Dropbox

Looking for a short-notice ski rental property in Tahoe used to mean checking Craigslist several times a day – this week I just had a simple IFTTT recipe call my cellphone the minute the one I wanted showed up. I no longer check for new movies on Netflix – IFTTT does it on my behalf. While I go about my digital life, IFTTT is in the background, quietly watching out for me.

Like all of a16z’s investments, this one starts with a compelling founder. Linden Tibbets, IFTTT’s co-founder and CEO, started working on IFTTT from his San Francisco apartment in 2010, after three years at design firm IDEO. Struck by how instinctively we know how to use physical objects in creative ways, he set out to enable us to be just as creative with the applications we use in the digital world. To quote Linden, “Much like in the physical world when a 12 year old wants a light-saber, cuts the handle off an old broom and shoves a bike grip on the other end, you can take two things in the digital world and combine them in ways the original creators never imagined.”

“Digital duct tape”

What resulted is IFTTT— described by a recent interviewer as “an idea so alarmingly simple and amazingly powerful… it makes you wonder why nobody thought of it before.” True to Linden’s design roots, IFTTT is visually appealing, approachable and easy to use. In Linden’s words, “IFTTT isn’t a programming language or app building tool, but rather a much simpler solution. Digital duct tape if you will, allowing you to connect any two services together. You can leave the hard work of creating the individual tools to the engineers and designers.”

IFTTT allows people to create “recipes” that connect “channels” (e.g., Instagram, Dropbox, Twitter and 56 other apps) so that “ingredients” on one (e.g., an item with the description “dog painting” appears on Etsy) become a “trigger” for an “action” on the other (e.g. “Add a new line to my Dog Paintings spreadsheet on Google Docs ”).  A glance at some of IFTTT’s channels:

IFTTT Channels

With virtually no promotion, IFTTT has nevertheless achieved remarkable traction since its beta launch two years ago. Its mission statement is to “enable everyone to take creative control over the flow of information.”  People have created over 2 million individual “recipes” to connect their favorite websites and apps in ways that meet their own unique needs. There are tens of thousands of shared recipes for common use cases. Three million recipes are executed every day, addressing individual interests as varied as “Text me if Apple stock drops below $500” and “Post my App.net posts tagged #a16z to Yammer.

Looking ahead

Although Linden and his tiny team of seven have achieved an amazing amount already, the best is yet to come. With Andreessen Horowitz’s investment, 2013 will bring more and simpler recipes and exciting mobile apps. A new developer platform will enable application developers to create services that connect their application to others in new and powerful ways, opening up new functionality to users with virtually no diversion of internal engineering resources. Perhaps most exciting of all is the role IFTTT can play in the emerging Internet of Things. As everyday objects from fridges to shoes to weighing scales become equipped with communicating smart sensors, individuals’ need to create useful connections and information flows between them will far outstrip their developers’ capacity to build them. I don’t know exactly when my fridge will be capable of knowing I’m running low on milk and contacting Safeway to order more, but there’s a pretty good chance an IFTTT recipe will be involved when it happens.

Every aspiring CEO has heard of David Ogilvy’s famous admonition, usually paraphrased as “Hire people smarter than yourself” or words to that effect.  In my case, following that good advice has not been hard.  Applying that criterion has meant that I’ve had an enormous pool of qualified candidates to choose from.  As I’ve progressed in my career, however, I’ve come to believe in the importance of another, less discussed principle as the company grows:  Hire people who are different from you, and who will have the courage to challenge you when it matters.

Time to step up:  Hiring the VP of Sales

For the technology founder-led companies we love to back at Andreessen Horowitz, recognizing the need to “hire different” is particularly important when the company is transitioning from initial product development mode into sales mode.  If you’re an a16z founder, you’re very likely an engineer or computer scientist.  Virtually all of your early hires will have been engineers or developers.  While you’ve hopefully hired people who are smarter than you, they may not be that different from you.  Now you’ve got a product, it’s time to hire a VP of Sales.  Prepare to hire different—very different!

A typical sales culture is different from a typical engineering culture in almost every aspect—from personality types to values to dress code to working hours.   Introducing sales DNA is highly likely to clash with your engineering culture.  That prospect will feel quite uncomfortable, but is absolutely critical if you’re serious about building a real company.

While on an intellectual level you may recognize the need to hire an executive who’s different, it can be really hard to act on it in practice.  Most of us are naturally more comfortable with people who are like us.  If as a first-time tech founder CEO you feel entirely comfortable with that VP of Sales candidate, she’s probably not the right one.  The right candidate will feel risky to you from the cultural fit point of view.  So, you’ll want to know what the team thinks.  However, the interview feedback from the team is likely to make you even more uncomfortable.  Here are some real examples of technical team feedback from interviews of highly qualified sales candidates:

I’m worried that he’s rough around the edges and would clash with our people.”

“His tone was very A-type salesman.”

I fear for the culture if she were to come aboard.

He had very limited understanding of our product.

“I don’t think he has much idea of what we do and how we do it.”

“I think he could generate massive revenue, but he’d destroy the culture by building a Salesforce-type sales organization.”

So, hiring the right sales leader will involve not just overruling your own emotions, but rejecting the strongly held opinions of several members of your team.  Remember you’re not recruiting her for her knowledge of the company, but for her knowledge of the outside world.  As my partner Ben puts it: “Generally, you want product leaders with superior internal knowledge (knowledge of the code base, knowledge of the culture, knowledge of the people).  With sales people, it’s the opposite—they need to have external knowledge (knowledge of customers, purchasing processes, customer org structures, customer cultures, . . .)”.

Two-way street

While you and the team are trying to evaluate this unfamiliar animal and assess whether you can handle it in your habitat, don’t forget she’s evaluating you too.  Just as you’re asking yourselves things like, “Will this person destroy our culture?”, she’s asking herself, “Are these guys serious about building a business, and will I get the support I need to build a winning sales organization?  Will this CEO have my back with the company and the board?”  She won’t need everyone’s buy-in day one—a good VP of sales will earn that over time—but she will need full and sustained support from you and the board to put in place the processes, people and sales culture that can transform a great product organization into a great business.   This is your time to lead.  The way you handle the recruiting process will speak volumes about whether you’re the leader she wants to bet her career on.

Hiring different at Opsware

At Loudcloud/Opsware, we went though three VPs of sales in the first four years of the company.  Each one of them was well liked and an excellent fit with the culture, but not one of them was able to consistently hit our quarterly sales targets.  By 2003, looking for our fourth sales leader in as many years, we met a guy named Mark Cranney[1].  He seemed very well qualified, and he gave us several pages of references to call if we wanted proof.  However, virtually everyone who interviewed him had similar feedback:  “He might be a great sales guy, but there’s no way he’d fit here.  Way too risky.”

Ben Horowitz and I called every one of his references.  They confirmed that Mark was an exceptional sales leader who had consistently achieved great results.  But could we take the risk of introducing such a culturally different executive into Opsware’s strong culture?  Only Ben and I seemed to think so.  We hired him.

Hiring Mark, and the many sales professionals he added to our ranks, was indeed a shock to the system.  It created significant tension in the company at times, as sales culture met engineering culture.  It was a tension that we badly needed—a healthy tension between the demanding outside world of customer needs and competitive pressures and our sheltered inside world of PRDs and predictable development schedules.  Mark was unreasonable—he told it like it was, not how we wanted it to be.  It stretched every part of the company, from engineering to marketing to legal to finance.  Gradually, we became a more customer-driven organization and we started making our numbers.  Over time, cultural discomfort shifted to mutual respect and even to affection.  In the years that followed, we won hundreds of the world’s most demanding enterprise IT accounts, met their needs with market-leading products, outpaced a brutally tough competitor, and grew bookings and revenues at a rapid pace.  For Opsware, hiring different was the key to unlocking the company’s true potential.

The courage to challenge

Strong leaders don’t just hire people who are smarter than them, or different from them.  They also look for people who have the courage to challenge them, and they create a culture that encourages people to do so.  Ironically, being surrounded by lots of smart people makes it harder to speak up, particularly for more junior team members.  “If all of these smart people think X makes sense, who am I to challenge them?”  The more senior you are, the less likely you are to be challenged, and the more you will have to work to encourage it.  “She’s the CEO—she must know what she’s doing.  I’m not going to question it.”  I don’t know about you, but if I were the emperor, I’d want someone to tell me before I walked down the street naked.  Like the emperor, you won’t hear diverse opinions if you don’t actively solicit them—and resist the temptation to slaughter them with your ferocious intellect the minute they’re expressed!

At Andreessen Horowitz, we’re fortunate to have a lot of very smart people, more senior and more junior, around the table when we talk about companies we’ve just met.  It takes real courage to speak up when everyone else seems to love (or hate) some opportunity we’ve just seen, but we particularly want to hear that different view.  We work hard to encourage people to speak up.  The best investments are often controversial, and vigorous debate leads to better investment decisions.

The same applies to business decisions.  As CEO, it’s your job to make the call.  Having people around the table with the background and the courage to be controversial makes it more likely you’ll make the right one.  As your company grows, recognize that you’ll need to hire different, and strive to build a culture that encourages and rewards constructive challenge and diversity of opinion.


[1] Mark now runs the Market Development function for Andreessen Horowitz, connecting the firm and our portfolio companies with the world’s top corporations.

The Challenge of Sustainable Development

I just came back from a short stay in Rio de Janeiro, Brazil.  Like its fellow BRICs China and India, Brazil has experienced a massive economic boom over the past decade.  While the boom has lifted tens of millions of people out of economic misery (40 million have entered the middle class in Brazil alone), the increasing challenge for the world is to sustain such growth without intolerable pressure on the earth’s increasingly scarce resources. While I was in Rio, the city hosted over a hundred heads of state for “Rio+20”, the United Nations Conference on Sustainable Development. While the conference has passed, the immense challenge of sustainable global development remains—and sustainable agriculture is a particularly critical imperative.  As the UN’s Rio+20 website puts it:

…Right now, our soils, freshwateroceans, forests and biodiversity are being rapidly degraded. Climate change is putting even more pressure on the resources we depend on, increasing risks associated with disasters such as droughts and floods.  Many rural women and men can no longer make ends meet on their land, forcing them to migrate to cities in search of opportunities.”

The Green Revolution – Part I

Forty years ago, the world was faced with the similarly daunting challenge of feeding the exploding populations of India, China and other developing nations.  A 1968 bestseller predicted that “India couldn’t possibly feed two hundred million more people by 1980″ and “hundreds of millions of people will starve to death in spite of any crash programs.”  In fact, technology saved the day, in the form of extraordinary, new high-yield grains and seeds, powerful new fertilizers and modern agricultural management techniques.  Far from succumbing to famine, India and its peers became first self-sufficient and then net exporters of food, as a technology-powered “Green Revolution” enabled a massive increase in agricultural productivity.

The Revolution’s Serious Costs

Although the Green Revolution was a tremendous success, it was not without serious costs that are being felt with ever-increasing intensity today.  One of these costs is the excessive and indiscriminate use of chemical fertilizers around the world, with severe consequences for arability and for air and groundwater.  (For example, nitrogen causes algae blooms that deprive water of oxygen and kill marine life.)  China provides a case study: While farm yields in China have increased 40 percent since 1980, chemical fertilizer use has increased by 225 percent.  Chinese farmers now use over three times as much nitrogen fertilizer per hectare as U.S. farmers, but produce 30 percent lower yields.  Regulatory restrictions are proliferating worldwide.

Meanwhile, the challenge of feeding the world is back on the front burner.  The same UN report says:

A profound change of the global food and agriculture system is needed if we are to nourish today’s 925 million hungry and the additional 2 billion people expected by 2050.

The Green Revolution – Part II

The key to meeting this challenge will be to achieve further dramatic increases in crop yields, but in a sustainable way.  American farmers are leading the way, in a new technology-powered Green Revolution, investing in ultra-modern tractors equipped with smart devices that automatically control seed and fertilizer dispersal.  According to a recent fascinating Wall Street Journal article, “These modern tractor cabs have come to resemble airplane cockpits more than the seats of old-fashioned tractors.  Farmers can plant or fertilize a whole field without touching the steering wheels, and yield data from sensors in combines—the vehicles that harvest crops—help refine the plans for the next season’s planting.”

Introducing Solum

Solum, Andreessen Horowitz’s latest investment, is poised to play a fundamental part in this exciting shift to data-driven precision agriculture.  Founded by three brilliant young men with PhDs in Applied Physics from Stanford and ties to the American Midwest, Solum has invented a radically more accurate technology for testing farm soil, enabling farmers to measure actual nutrient content and apply fertilizer on a targeted and highly granular basis.  Solum’s platform enables farmers to correlate nutrient measurements and fertilizer application to actual yields, in a constantly improving feedback loop.  Over time, the result for farmers should be a “virtuous circle” of increasing crop yields driven by ever-smarter and environmentally sustainable use of fertilizer, water and other precious resources.  In essence, Solum’s technology will provide the data to drive farmers’ new intelligent machines, and the software to manage their application on a large scale.

While the potential societal and environmental benefits are enormous, a powerful profit motive will also drive global adoption of precision agriculture technologies such as Solum’s.  According to an expert in the WSJ article, “Improving how the seeds are planted and the soil fertilized can increase corn yields by several tens of bushels per acre.  At current prices of near $6 a bushel, every 10-bushel-per-acre increase in the yield on a farm of 2,000 acres would translate to $120,000 in additional revenue.”  The potential is truly global.  In its quest for more sustainable agriculture, China’s Ministry of Agriculture plans to test fully 60% of its arable soil over the next five years.  Brazil, which is rapidly becoming the world’s breadbasket, is investing heavily in advanced agricultural technologies and increasingly determined to make its remarkable advances sustainable.

“Software Eats Dirt”

In his 2011 Op Ed piece “How Software is Eating the World”, my partner Marc Andreessen vividly described a dramatic and broad technological and economic shift in which software companies, often based in Silicon Valley, are transforming almost every sector of the global economy.  As economic sectors go, agriculture is enormous—in fact, agriculture is the single largest employer in the world, providing livelihoods for 40 percent of the global population.  In our internal discussions, our affectionate codename for Solum was “Software Eats Dirt”.  We believe this is a company with the potential to revolutionize agricultural production literally from the soil up. I’m excited to be joining Solum’s board and we’re honored to support such an ambitious and important mission.

But screw your courage to the sticking-place, and we’ll not fail.
—William Shakespeare, Macbeth

In my last post, I described how, at Opsware, we would step back from the fray about once a year to go through a strategic review of our situation with the board. In November 2005, our conclusion was to keep on building an independent company, but in early 2007 another review led us to a different conclusion. Our business was strong, but meeting quarterly expectations was difficult and the market wasn’t rewarding us for the growth and leading market position we had achieved. We were at a decision point: Plow even more money into R&D and sales expansion or explore a sale. We decided to explore a sale, but only if we could achieve a top-dollar price for our shareholders.

The dance begins: May 2007

Our February update meetings with the major enterprise IT players had piqued their interest and led to several follow-ups.  The key was to get someone to set an initial price. On May 22, we went back to the Opsware board with an update. A company we’ll call Company 1 had just offered to buy the company for $11/share. That was a 38% premium—good, but not exceptional. Once again, we discussed the opportunities, risks and shareholder value implications of continuing in the business. We debated long and hard: What was our number?

We decided to send a strong message to anyone considering us as a target: We told Company 1 that the Board had rejected its $11/share offer and would not give serious consideration to any new offer below $14/share. For good measure, we took the opportunity to notify the other companies who’d followed up with us (HP and several others) that we’d received an offer but were not interested in discussing any deal below $14. Since that was a 75% premium over our current price, Company 1, HP and everyone else told us they were out. We sent all of them letters requesting the return or destruction of any information we had shared. Those brief dreams of exit seemed to be just that—dreams. We went back to the slog of making yet another quarter.

Then, almost a month later, the CEO of Company 1 came back offering $13.25/share. Yes! We were getting close to our magic number! We reconvened the board for a serious, fact-based discussion of staying the course versus selling in this price range. Our analysis suggested we would have to grow revenues at least 75% annually to exceed $15/share. That seemed impossible—Wall Street consensus was 28%.

In addition to upside opportunities, we discussed the risks of staying standalone. (Note #6, macroeconomic slowdown: We had no idea how real a risk that would turn out to be just months later.)

It was clear: We should exit. We decided to stick to our guns and drive for a deal at $14/share, leveraging competition and urgency to get there. The first step was to get Company 1 to $14, which we did two days later. Then we notified the others, notably HP, that we had an offer at $14. A whirlwind of meetings and calls followed with the various contenders.

While we had discussions with 10 companies, by July 18 it became a two-horse race between Company 1 at $14.05/share and HP at $14.25/share, each acutely aware of the other’s interest. To keep up the pressure, we negotiated detailed agreements with both in parallel right up to the end, with a real prospect of getting to $15 or more. Although exhausted, we were on a massive emotional high—this was going to be a fittingly impressive end to an eight-year odyssey!

Crisis strikes: July 18

Then, with 24 hours to go, we had an inconceivably ugly crisis. In diligence, Company 1’s auditors, Ernst and Young (EY), challenged the way we had accounted for three customer contracts, despite the fact that EY was also our auditor and had ordered this accounting. Unbelievably, two regional offices of EY were disagreeing with each other. Called to arbitrate, the national office sided with Company 1’s regional office and informed us we would have to restate our publicly-filed financials for the past several years! While the issue was entirely technical and the amounts immaterial, the prospect of a restatement was horrifying. Not only had our glorious deal suddenly vaporized, but by chasing it we’d triggered something that might panic investors and cut our stock price in half. In the blink of an eye, our likely outcome had plummeted from $15/share to maybe $4/share. We were devastated.

Company 1 was seriously spooked and asked for a couple of days delay. We knew we’d have to tell HP. We put the best face we could on it—“technical issue, immaterial amounts, no impact on value, etc.”. Hearts in our mouths, we waited for their reaction. To our intense relief, they reacted with concern but didn’t walk. However, our leverage was gone and our deal seemed on the brink of collapse.

Our only hope was to get the three customers to agree to a minor change in their contract language that would enable the original accounting treatment. Theoretically possible, but we were almost out of time, and these were huge corporations. Working through the night in a hot stuffy conference room, we started emailing and calling our executive contacts. Unbelievably, in a testament to the strength of our customer relationships, all three mustered their attorneys and got it done in 24 hours. Restatement avoided! We were back on track—but with only one bidder currently left at the table. Could we still get it done?

Psych test: July 19

Perhaps sensing advantage, HP execs suddenly dropped their offer to $13.75 in a tense 3 pm meeting the next day with Ben and me in their executive offices. We were furious, but we had come this far and we had no other live bidder. Maybe we should just suck it up and accept that EY’s ineptitude had cost us a few hundred million dollars?

Then, thinking on the fly, we realized it wasn’t that simple. How we reacted would be critical, not just to the deal price but to the very survival of the deal itself. Anything less than an unequivocal rejection would signal to them that they were in the driver’s seat. If we were now willing to accept $0.50 less per share, then why not $1 or $2 or $3 less? If there was really no one else at the table, why not drag out the process and wear us down? After all, this was a very expensive deal—why not terminate and restart at a much lower valuation?

We knew HP was the only one currently at the table, but they couldn’t be sure of that. We knew it was time to “screw our courage to the sticking-place”. We informed them that we had scheduled a final board meeting for 6:30 pm and we would not be recommending the deal with HP for anything less than the original price.

With Company 1 still AWOL and no word from HP, we started the board meeting. What the hell were we going to tell the board? Had we killed our deal over 50 cents a share?

We needn’t have worried. By 6:35 pm, my cellphone was lighting up with calls from HP’s M&A guy, worried they were about to lose the deal. We made him wait. When I finally called him back about 7 pm, he told me they were willing to offer $14.05. Ha! Although some board members and fellow execs strongly urged us to take it, we resolved to go back for the final 20 cents as a matter of principle and to preserve the crucial psychology of a hard-won deal. Fifteen minutes later, we had an agreement to sell Opsware to HP for $14.25/share in cash. We were drained, but elated. Our eight-year journey was at an end.

In summary

Although we never built Opsware with the intent of selling it, acquisition ultimately turned out to be the best outcome for our shareholders and our employees. While the company was clearly an attractive target, the significant premium we achieved in the sale was also the result of the company’s ongoing investment in strategic business development and a tightly executed deal process. And in knowing where the exits were.

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