Capitalists 'R' Us
CacheFlow: The Life Cycle
Of a Venture-Capital Deal
1. Birth of CacheFlow Inc.
March 13, 1996 - First, an idea. Then, the angels...
wants quicker access to Web pages. Michael Malcolm, former president
CEO of Network Appliance, envisions a new company to do just that. The
idea spawns CacheFlow
Inc. The key: provide local storage, or "caching" -- hence the
name -- of frequently used Internet data via an appliance added to
computer networks that helps them access most-used Web sites. He and
Joe Pruskowski raise $1 million in seed capital loans from a dozen
investors in San Francisco and Seattle.
August 1996 - Though CacheFlow has cash, venture firms
its door trying to get a piece of the action. Benchmark Capital
"were pretty aggressive," Mr. Malcolm recalls.
2. First financing from a venture-capital
October 1996 - Benchmark takes the lead in the first
financing, buying 3.2 million Series A preferred shares at 87.5 cents
For its $2.8 million, Benchmark gets about 25% of CacheFlow. The angel
investors turn their loans into Series A shares at the same price.
the founders, angel investors and a handful of employees own the
75% of CacheFlow's shares. The money will be used to hire managers and
develop the product.
January 1997 - Stuart Phillips, a senior executive at Cisco
Systems, joins the board as an outside director, invited by Mr.
who had worked for Mr. Phillips as a consultant in the late 1980s. Six
months later, Mr. Phillips leaves Cisco to join U.S. Venture Partners,
a VC firm.
June 1997 - Mr. Pruskowski steps down as president and
CacheFlow for personal reasons, but keeps his 58,572 Series A shares.
Malcolm becomes interim CEO.
August 1997 - The company begins getting feedback from
testing its prototype product. But there's still no sign of revenues. A
possible initial public offering seems far off.
3. Testing of products
November 1997 - After product tests, CacheFlow seeks
marketing. Mr. Phillips convinces his new partners to pitch in some
December 1997 - Still no revenue. But U.S. Venture
17% of CacheFlow in return for $6 million. Benchmark chips in $1.8
to maintain its stake at 25%. The Series B shares are priced at $2.26:
the company's value is up 158% in 14 months.
May 1998 - Finally, revenue! CacheFlow's sales total
in the next three months. Its client list grows to include Xerox,
Air Lines and Goldman
June 1998 - Investment bankers start to woo CacheFlow's
Objective: an IPO. A successful IPO would mean big fees for bankers --
and big returns for the venture investors.
March 1999 - Mr. Malcolm hires veteran tech executive
as CEO. In his second week, Mr. NeSmith talks to venture capitalists
more financing. Technology Crossover Ventures pays $4.575 for Series C
shares, or $8.7 million for 7% of the firm. Benchmark invests $3.4
U.S. Venture Partners $2.1 million. But their stakes are cut to 18% and
12% after stock option grants to CacheFlow executives.
4. Board interviews bankers
July 1999 - Before selecting bankers, Mr. NeSmith uses
to hire new managers. Michael Johnson, another tech company veteran,
as chief financial officer. "I'd been here three weeks when Brian tells
me we're taking it public," Mr. Johnson says.
August 1999 - CacheFlow's directors begin grilling
in leading their IPO. Goldman Sachs is ruled out early: It has an
commitment to rival Inktomi.
By September, the team is chosen: Morgan
Stanley Dean Witter will be in charge of the deal (CacheFlow likes
its analyst, George Kelly) with
Suisse First Boston as co-lead (Mr. Johnson has ties to Frank
technology banking group). Dain Rauscher is a co-manager. Left on the
Lynch and Robertson Stephens.
September 1999 - The company files a registration
the Securities and Exchange Commission for the sale of five million
or 15.6% of CacheFlow's stock. It reports that in the year ended April
30, it had revenues of $3.8 million, but a net loss of $13.2 million.
the quarter ended July 30, revenues were $2.2 million but losses
$6 million. It has about 120 employees.
5. CacheFlow goes public
November 1999 - Underwriters say they'll try to get at
$13 a share. Marc Andreesen -- co-founder of Netscape -- joins the
The buzz around CacheFlow increases, along with the demand for
infrastructure investments. Now, underwriters want $20 a share. The
is finally set still higher, at $24. The IPO is completed Nov. 19. The
stock closes at $126.375 a share the first day of trading. That gives
A investors a 14,342% gain, Series B investors a 5,491% gain and Series
C holders a 2,662% return. After the IPO, Benchmark owns 14% of the
U.S. Venture Partners 9%; and Technology Crossover Ventures -- which
more shares in the IPO -- 6%.
February 2000 - CacheFlow's stock now trades at
$112.875 a share,
up 370.3% from the IPO price. The stock for which Benchmark paid $8
in three stages is now worth $536.9 million. U.S. Venture's total
purchased for $8.1 million in total, is now worth $351 million; and
Crossover Ventures' $8.7 million investment in the third and thus
financing round, is now worth $213.3 million. Meanwhile, Mr. Malcolm's
5.1 million shares are now worth $575.7 million.
-- By Suzanne McGee, The Wall Street Journal
February 22, 2000