SM: Knowing you have a two-year run up front provides a lot of security.
KX: It was. When we started NetScreen, the largest hurdle we faced was credibility. Even though we had a prototype developed, when we went out to raise money we did not have credentials behind us. We did not have business experience. We needed to show that the company was worth investing in.
The first round we only raised $1 million. We each put in $50,000 ourselves and gave up our really good jobs to take a job with minimal pay of $1,000 to $2,000 per month. We then convinced 20 angel investors to invest the rest.
SM: How did you find all of these angels?
KX: Networking. We approached anybody we knew who had started a company and asked them to introduce their investors to us. We just showed potential investors where we were and the technology that we had. We also set reasonable terms so that we could maintain control of the direction of the company.
SM: How much of your company did you give for that $1 million?
KX: Each of the three founders had 1 million shares. Our goal to set the first round at $1 per share, and we ended up selling 20% of the company.
SM: So you ended up giving 20% of your company for $1 million?
KX: Yes. We had 3 million shares reserved for the founders, and we reserved 2 million shares for the employees. The other 1 million went to the investors. We already had a prototype, so in six months sales started taking off. Our first sales were to a small local company. They had previously been a client when I was doing consulting work.
SM: Where you able to leverage any contacts at Healtheon to get them to be a customer?
KX: No, they were too big. That is one of the concerns when dealing with the larger companies. Those companies are a lot more conservative and don’t really appreciate it when you bring them a prototype product. They are a lot more worried about sustainment.
We found success focusing on smaller companies that already knew us to some degree. We then tried to get them to focus not only on our product but also on our service. We told them we would be there right away to fix any issues. Soon after we started there was a testing competition between us, Cisco, and Checkpoint. We came out number one. Sales really started taking off after those results came out.
SM: Did you only raise one round of capital?
KX: No, once sales started we did a B round. That was $2 million, $2 per share. The B round consisted primarily of the same group of angel investors; once they saw the company running they were very committed. We established schedules early and we met all of those schedules. That gave investors a lot of confidence. That was parallel to our goal of having a high valuation in each round.