That is, until the venture capitalists arrived on the scene. Lying to customers and employees became commonplace. Greed replaced philanthropy as each of the company's unique programs was dropped. But, this is a company, and the goal is to make money -- any positive impact on the world is secondary, right? The real question is: how much money did they make?
The technical and managerial incompetence of the VCs and those they hired drove the company into the ground. All but 10 of the 240 employees were fired, laid off, or quit. All of the $40+ million in venture capital was squandered. The monthly operating profit turned to loss as more talentless executives were hired who threw out the company's old, useful products and put their blind faith in engineers who spent millions building complicated software that solved no business problems.
This is a story that will teach you something about building a software product, about profitably running a company, and about what can happen if unqualified organizations obtain control.
Our band of programmers, called ArsDigita ("Digital Arts"), was profitable from the beginning. We had no office, no marketing staff, no letterhead. But we did have a few thousand dollars' worth of computer equipment and our five motivated selves.
Every site we built needed:
We distributed the ACS free and open-source, not merely to be altruistic, but because it made sound business sense. If you are doing professional services, the best way to get your name out, have more clients find you (yes, free marketing), and improve the code base is to share it with the open-source world.
The ACS began as a small core of functionality, but more opportunities for code reuse quickly arose. Many of our clients wanted discussion forums. Quite a few needed ecommerce. Polls and portals and intranets and calendars and address books were repeatedly requested. It would have been foolish to build this functionality one-off for each client. It would have been a wasted opportunity to build this only for ourselves and not let our work reap the benefits of an open-source release. Hence we began the release of ACS modules that could run on top of the core. Dozens of useful modules were created, and that is what led to the adoption of the ACS by programmers and companies world-wide.
And grow we did. At first it was difficult to hire people because developers don't feel safe working for a company with no office or regularly-scheduled payroll. So, in the fall of 1998, we moved into an office. It didn't cost us much to rent a lovely old house in Harvard Square (complete with showers and kitchen, both which were well-appreciated after nights of obsessive coding). In January, we began a payroll system so that people's paychecks would no longer be tied to when our clients paid the invoices. Even if people were earning a bit less than before the structure was imposed, they were happy with the change. We were still earning a large profit each month. And now it was easy to hire people.
On January 1, 1999, ArsDigita had 5 employees. By January 1, 2000, we were up to 57, almost all of whom were developers. We had very little overhead and profits were rising. Around this time, we started looking in earnest for venture capital in order to accelerate growth and to allow ourselves the luxury of taking developers off of paying client projects so they could work full-time on our core product, the ArsDigita Community System (ACS).
By the end of March 2000, we had 110 employees (almost double what we had 3 months previously), 7 offices, healthy profits, plenty of cash in the bank, and $20 million in annual revenue, with the revenue figures still on an upward trend.
During the growth, we never gave up on our fundamental priciples. These principles that we lived by made the company a fun place to work where the opportunities for learning were enormous. It's easy to sleep at night when you know you are doing good things for your clients and for the world. And when the good things you're doing are also contributing the bottom line, directly or indirectly, you know you've got a winning company.
Some of our principles:
"ArsDigita University was one of the primary reasons I decided to join ArsDigita Corporation."
- Allen Shaheen, early April 2000, less than a year before deciding to shut down the program
Our level of confidence [in ArsDigita] is high. We're pretty fundamental believers that, 10 years from now, a lot of corporations will look at closed software as a way of the past.
- Chip Hazard, Greylock partner and ArsDigita board member, as quoted in digitalMass, October 23, 2000
ArsDigita is clearly positioning itself to generate annual revenues in the hundreds of millions of dollars very quickly.
- Cameron Laird, SW Expert, December 2000
The future looked incredibly promising.
It became increasingly clear to the employees, the customers, and the outside developer community that the VCs and those they had put into management had no idea what they were doing. They discarded the practices that had made ArsDigita a profitable company, destroyed the company culture, and showed their complete technical incompetence by throwing out the ACS, which had been repeately used to solve real business problems, and replacing it with new, partially closed-source software package that was hard to use, had serious performance problems, and met only a small fraction of the business needs that the ACS did.
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.
- Josh Stella, former ArsDigita client, April 26, 2001
One of the reasons I joined ArsDigita is its inspiring mission statement, which states that we do not ever lie to customers. The mission statement goes on to say that companies who lie to their customers need to spend time training their employees in the official lies before they can talk to customers, thereby making lying unprofitable.... This week, we were not honest with our customers about the severity of the security holes we discovered in the ACS. We employees even had to sit through a training session so that we would know how to discuss the security holes with our clients. This is a serious contradiction of our mission statement.
- Walt Mankowski, former ArsDigita employee, July 14, 2000
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."
- Aaron Swartz, past ArsDigita Prize winner, April 24, 2001
It is easy to locate marketing copy on ArsDigita.com. However, it is difficult to get to the information that is actually interesting to anyone building or running an online community, or deciding whether to hire ArsDigita's services.
- anonymous user of arsdigita.com, September 4, 2000
ArsDigita was the company I dreamed of working for when I graduated... 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.
- Roberto Mello, computer science student, April 24, 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.
- Jerry Asher, developer, April 25, 2001
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, Furfly co-founder, April 25, 2001
ArsDigita, an e-commerce company in the midst of layoffs and a major product overhaul, is bucking the trend of comrades selling open-source software... The change will allow the company to reach profitability by the first quarter of 2002... The company laid off 29 employees in the last week.
- CNET, April 5, 2001.
Philip's harsh words displeased the other board members (Allen, Chip Hazard from Greylock, Peter Bloom from General Atlantic, and ArsDigita's COO, Ern Blackwelder) so much that they stopped having board meetings after December 2000. Instead, they had "investor meetings" where all the board members except Philip (the chairman) were invited. In March 2001, Peter Bloom sent Philip an email, threatening public humiliation if Philip didn't resign from the board. Philip went to visit his lawyer who reminded him of his rights as majority shareholder.
It was time to regain control of our mis-managed company before it became nothing but a shell. On April 5, Philip Greenspun and Jin Choi, together holding a substantial majority of ArsDigita's shares, had a shareholder vote that gave the founders majority control of the board. They demoted Allen from President and CEO to only President, elected Philip CEO (one spot on the board is reserved for the CEO), promoted Tracy Adams and me (both already Vice Presidents) to Executive Vice President and placed us on the board as well, removing both Allen Shaheen and Ern Blackwelder. The two venture capitalists retained their seats on the board. But we had control.
Yes, it had required drastic measures to ensure that our ideas would be heard, but we were willing to now work hand-in-hand with Allen and the VCs to return ArsDigita to a state of health. But we didn't get the chance. Six days later, on April 11, 2001 Allen Shaheen, Ern Blackwelder, General Atlantic, and Greylock filed a lawsuit against Philip, Tracy, and me:
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. )
Now, I'm not a lawyer, but I never understood how it could possibly be legal for ArsDigita Corporation to be listed as a plaintiff, since that would have (obviously) been against the wishes of ArsDigita's majority shareholders. And how could it be legal for General Atlantic Partners, Greylock, Allen Shaheen, and Ern Blackwelder take hundreds of thousands of dollars out of ArsDigita's bank account and use it to pay their lawyers to sue ArsDigita's majority shareholders?
The case came very close to going to court but, at the last possible moment, the plaintiffs came to a settlement agreement with Philip. Perhaps the plaintiffs were afraid they would lose the case because the judge had looked at their "evidence" and said that he was uninterested in approximately 90% of it. The plaintiffs' lawyers had wasted their time and, more importantly, ArsDigita's money, preparing a case about Philip Greenspun's personality instead of thinking about whether someone's personality gives one a right to try to illegally seize control of a company.
In the settlement, Philip received $7.6 million. In return, he gave up more than half of his stock, resigned from the board, promised not to attempt to execute any control over the company, and signed a non-disclosure agreement. Before the settlement, Philip owned more than half of ArsDigita's stock. Now that the VCs owned more than half the stock, they had no need to settle with any of the other defendants.
The VCs poured a few more $million into ArsDigita so that it could take a few more gasps of air before collapsing.
In March, 2001, Jin Choi, the company's 2nd-largest shareholder was fired. Jin didn't seem to mind so much because he has never had any tolerance for anyone he deems stupid.
Around the same time, the VCs pushed out Aurelius Prochazka. Aure had built up most of ArsDigita's west coast operations. Most of the clients were there because of Aure. He had trained most of the developers. He had personally built some of the most important modules of the ACS. He could construct an enterprise-quality site himself that would normally take a team of 4 or 5 developers to create.
Aure's crime was that he cared about the company. When he saw ArsDigita executives making poor decisions (or no decisions at all), he wouldn't just sit there and let it happen. He tried to explain to them why other paths may be better to take, and when they ignored him, he wrote to the VCs. Apparently, the VCs didn't care that Aure generated millions of dollars for the company; they were more concerned about not being questioned. They told him that there was "no place for him at ArsDigita" and fired him.
Around this time, I was a member of the product team, led by Richard Buck, an Oracle refugee, recruited by the VCs. Richard Buck's arrival gave everyone great hope (could he revive the software so poorly mismanaged by Michael Yoon that it was way behind schedule and didn't meet any of our clients' needs?). Unfortunately, Richard Buck had a detrimental effect on ArsDigita by:
Naturally, the VCs and Allen adored Richard Buck.
In my typical, non-political way, I tried to make the best of the situation and worked hard to improve the software and the processes. Richard Buck was very impressed with my work and told multiple people that I could do as much work in one day as most people do in two weeks. Given what I've written about Richard Buck so far, one might be disinclined to lend much credence to his opinion of my work. But my performance reviews have concurred: dedicated, brilliant, super-efficient, "capable of doing anything she sets her mind to," extremely high standards, a "tough but fair" manager. So I was certainly no slacker by anyone's standards.
So why did ArsDigita decide to fire me? Could it have been my candid response during my deposition when I was asked what I thought of Allen Shaheen? (I had replied that the economic downturn couldn't possibly be responsible for all of ArsDigita's ills.) Or might it have been because I was dating Philip Greenspun?
On July 2, 2001, about a week and a half after the settlement was finalized, Allen and I had a little talk about my future at ArsDigita. He "suggested" that I take a leave of absence, after which he -- and he said this with the utmost sincerity -- would try his best to find a good place for me at ArsDigita. I said that was fine; I would spend three months traveling. Allen and I agreed to talk again on October 9 and explore my options together.
Did Allen truly intend to "find a place for me at ArsDigita"? There is evidence to the contrary. On July 16, two weeks later, a terminated employee was FedEx'd an "exit package" by the Human Resources department, as is the standard practice when people in remote offices are terminated. Along with the exit package was a list of Employees Selected For The Termination Program. One may assume that HR did not mean to include that list; somehow they had accidentally put it in the FedEx envelope with the other materials. I do not know the purpose of the list. All I know is that I'm right there on the list ("VP, Operations 27"), which means I had been selected for some termination program on or before July 16. And thus, Allen had no intention of brainstorming with me on October 9. Another case of ArsDigita lying to its employees.
On October 9, Allen was "unable" to meet with me. Same for October 10 and 11. On October 12, I met with Allen in his office. We had a pleasant chat about my vacation, and I saw that he had a copy of my recently-published book Early Adopter VoiceXML (Wrox Press, August 2001) on his shelf.
Allen then handed me a packet of papers, the first of which was a letter dated October 11, 2001:
As you are aware, ArsDigita has decided to realign the organization to better achieve our revised corporate strategy. As a result of this decision, a number of positions will be eliminated. The purpose of this letter is to notify you that your position is among those that will be eliminated and that your employment with ArsDigita will be terminated on October 15, 2001...Given that I was qualified to do more than half of the jobs at ArsDigita, I know that I did not lose my job because of a re-org. The true reasons are obvious.
Lying to the employees and to the press:
Tech startups aren't exactly on the front burner nowadays in the market for initial public offerings, but ArsDigita is steaming ahead anyway with plans to go public next year... The four-year-old Cambridge, Mass. Web software company is hoping to kick off its initial public offering some time in 2002... If it keeps growing and building its customer base, and the IPO market continues its gradual comeback, ArsDigita will be able to take itself public, Shaheen figures.Firing people, spending money:
- Steve Gelsi, CBS.MarketWatch.com, May 24, 2001, a few weeks before Allen Shaheen admitted during his deposition that he didn't think ArsDigita would ever be able to go public
Beginning Thursday, ArsDigita Corporation has cut a confirmed 24 (from 165) employees and announced plans to close the Berkeley, CA, office. Rumor from several connected inside sources has the final tally climbing to 67 (or higher) over the next few weeks. Late last week the CEO was demoted by the VCs and replaced with Dan Keshian (http://www.greylock.com/team/DanKeshian.asp), one of Greylock's partners, while they wasted another $10 million (reportedly) on the company, presumably to help it stumble along to a fire sale. Those not yet gone are those in engineering, upper management, or are working on billable projects. Those on billable projects will be terminated upon project completion. Standard severance is reportedly 1 month salary plus unused vacation.Building products that nobody wants to use:
- FuckedCompany, October 11, 2001
When the VCs and Allen Shaheen seized control in April 2000 the company had revenue, profits, a customer list of AOL, HP, MIT, Oracle, Siemens, etc., a $160+ million valuation, $41 million in cash. In about 1.5 years the same company had a product that nobody wanted to use (though it was based on more fashionable tools), no profits, no cash, and few customers. Despite the infusion of more cash and a new CEO, a Greylock partner, in the fall of 2001, the company continued to spiral downward. Now they are dead and RedHat is buying some bones.And trying to make some money for themselves out of the scraps:
- FuckedCompany, February 7, 2001
ArsDigita, a privately held software company in Cambridge, was shut down on Tuesday. At least some of the company's assets, primarily from its professional services division, will be sold to Red Hat Inc., an open-source Linux software company in Durham, NC, according to sources close to the company... Dan Keshian, a venture partner at Greylock, became ArsDigita's CEO in the second half of last year to lead the company to profitability. Keshian was not present when the shutdown and sale were announced to employees.
- Jeff Miller, Mass High Tech, February 7, 2001
What can we learn from this? Be clear about control. Don't assume that people with MBAs know a thing about business, let alone technology. Don't throw out your prime source of revenue before another one is in place. Fashionable programming languages don't equal useful software. Don't lie. And steer clear of General Atlantic Partners and Greylock.