OK Labs Story (2): The CEO

Sometime during 2004 NICTA employed two entrepreneurs-in-residence. Their job was to identify spinout opportunities among NICTA projects. One of them was Steve, who showed up at my door as soon as word got around that we were getting significant consulting income from Qualcomm. He talked about setting up a company, and I essentially told him to go away, as I didn’t think that you could make enough money from selling operating systems.

Steve persisted and got involved, and effectively became the commercial manager of the Qualcomm project. Concurrently, new momentum developed: we were approached by TI, Ericsson, Apple and later Samsung and did paid projects with each of them, and a number of other potential commercial users had discussions with us. While this is exactly what I had predicted when I first started the ERTOS program in NICTA in 2003, namely that the classic unprotected RTOS-technology was reaching its use-by date, I was still surprised when it started to happen so quickly.

The Samsung case was, in hindsight, interesting in its own way. The folks who approached (and paid) us were the ones who had done the port of Xen to ARM, and were trying to promote this as a solution for virtualisation on phones (totally unsuitable, as I explained at length in a paper some time later). In hindsight it is likely that they only engaged us to better understand this competitor technology in order to keep it out of Samsung. This went as far as sabotaging any attempts by folks at their San-Jose-based lab to build things on L4.

Not all of the various prospects were in the mobile space. Some (including Ericsson) were producing network infrastructure (mobile base stations, routers etc), and yet others were for point-of-sale terminals. With this wide range of options, Steve eventually convinced me that there was a business opportunity. Once I made this step, it was also obvious that we had to be able to move quickly to seize opportunities, and take business risks. Neither of these are possible in a taxpayer-funded research institute, so it was clear that we had to create a spinout.

I had zero experience in this, and was happy to leave the lead to Steve, who obviously had the experience. He was on top of what was required to set up a company, and the network to hire management and sales staff. He also created a business plan and financial models to present to the NICTA board. I was surprised how full these were of assumptions plugged out of thin air, but hey, I had no clue, and presumably that’s the way it is done.

However, what we needed in order to build the company and ramp up staffing was either external investment or a degree of stable revenue. We had a revenue stream from Qualcomm, but this was on a work-for-hire basis, with people working as requested by Qualcomm, and we would invoice monthly based on actual hours worked. While the general trend of the volume (and revenue) was upward, we needed more predictability. And it was Steve’s major achievement to re-negotiate the contract with Qualcomm for a fixed amount over 12 months, invoiced quarterly. The actual amount was a big increase over what we had invoiced the previous year (and would increase further in following years). We had what we needed to spin out!

But before that we had to negotiate a deal with NICTA, mostly concerning IP conditions, rent for the use of NICTA facilities, and NICTA’s share of equity. The eventual deal involved NICTA transferring all its rights to existing IP (which was mostly open-source code, much of it developed from open-source code created by Karlsruhe and my UNSW team prior to NICTA’s creation). It also involved exclusive licenses, with a buy-out option on achieving certain investment milestones, for the IP still under development: seL4 and its formal verification.

During the spinout negotiations I got to get to see Steve’s negotiation tactics – he considers himself an excellent negotiator. They were based on huge land-grabs, which he then defended viciously, trying to extract concessions on every bit of ambit territory “conceded”. Whenever he could establish that the other side had a hard deadline of sorts, he would only pretend to negotiate when in fact playing for time in an attempt to force concessions. He would also systematically and deliberately push for concessions he knew the negotiators on the other side couldn’t make, in order to force the decision up to the CEO of NICTA.

This “worked” to a degree, and he did end up with some surprisingly good deals. NICTA, being a young organisation with high expectations from its stake holders, needed runs on the board, and was keen to see companies spun out, and was as such a relatively soft target. Also, the attitude on NICTA’s side was to be supportive of its startups. Thus Steve managed to get a very good deal, much better than I thought possible (or even reasonable). Although, as I learned later, some of the hard-found concessions were needed by the company (but others were pretty sweet).

Steve’s tactics created a few excellent deals in a number of other cases. However, there was a high cost. Many negotiations ended in failure when they should (and could) have been successful. And many bridges were burnt in the process.