Our story so far:  Our hero, Frank Adversego now understands where the name "Alexandria Project" comes from, but hasn't been able to figure out much else yet about the mysterious cracker whose exploit threatens the Library of Congress.  Read the first chapters here, and follow the Further Adventures of Frank on Twitter.

Frank fidgeted by the cheese and crackers, looking helplessly for his daughter Marla in the crowd.  He hated social events with a passion, and especially having to speak to people he didn’t know.  He was sure that every phrase that came out of his mouth came across as a non sequitur. 

But fair was fair.  Marla had kept him company at the Library of Congress holiday party the weekend before, and this Wednesday it was his turn.  Marla was finishing up an internship with a local high tech company, and at the last minute, her date had come down with the flu. 

“Please, Dad,” she’d said over the phone, “There’s this guy at work that’s been hitting on me all week.  It’ll do you good to get out of your crummy apartment, and how can you turn down a request to protect your little girl?”

How could he indeed, he had thought at the time.  But now, all he wanted to say was, “Where the hell are you?”’  But be fair, he told himself as he nursed his Dos Equis.  Marla had started looking pretty green around the gills on the way over, and had disappeared into the Ladies Room almost immediately after they arrived.  Like enough she’s coming down with the flu, too.  Wasn’t everyone?

Frank sighed again, holding his beer in one hand and drumming against the wall behind his back with the other.  Across the room, someone was making an entrance.  Oh joy, Frank thought.  That must be iBall’s CEO. 

Frank snorted with derision.  iBalls!  What a lame concept!  He thought he’d seen everything during the madness of the Internet bubble years – companies formed to sell dogfood over the Internet; year-old startups spending millions on 30 second Super Bowl ads; companies going public without a dollar in sales.  After the bust, he had assumed it would be decades before high tech saw that type of insanity again.

But no - things seemed to be heating up once more, and maybe worse.  Now that Twitter had re-legitimated the no-revenue business model, the venture capitalists were charging back in, hoping to raise mega-funds once again that were far too big.  Too big, that is, unless they started firehosing money down the maws of companies with nonsensical business plans, just like before.

Frank gave a short, humorous laugh.  That was just the right metaphor, wasn’t it?  VCs were like French farmers - force-feed the goose until its liver turns to pure fat, and then sell the bird before it dies of its own absurd excess.  Pâté de foie gras startups!  Frank felt pleased with himself.  The comparison summarized the inanity of venture capital just perfectly.

Frank had seen that type of nonsense first hand, back in the day.  He remembered when a couple of guys he was working with quit their jobs in 1999 to launch a startup.  Of course, they never bothered to put a real business plan together – that was so last decade by then.  Just a handful of PowerPoint slides was plenty to get you funded, as long as you could talk the talk and call yourself an Internet-something company.  The VCs just swarmed around them, like flies around a fresh load in a cow pasture on a hot summer’s day – which was about what their business concept was worth, Frank reflected. 

Still, a couple of months later his buddies had closed on an A round of $25 million.  And a year later, they pulled in a $100 million B round at triple the A round valuation.  It was only a month before their initial public offering (IPO) was scheduled to come off when the music stopped, in December of 2000.  Six months later, the B round cash was all gone, and their VCs had shut the company down.  Suddenly, his friends were just another couple of Internet startup hobos – with no jobs, no money, and no prospects.  They thought they’d caught a ride on a VC rocket to fame and fortune, but it turned out to be just a freight train that ran off the rails – no big rock candy mountain cashout for them.

It was pretty bloody for everybody who’d had their face in the trough after that.  But Frank always marveled at how the VCs got away scot free, in public, at least.  While Enron was flaming out and Arthur Anderson was collapsing, while Congressional subcommittees were humiliating Wall Street bankers before CSPAN TV cameras, the VCs simply melted back into the shadows and rode it out. 

No headlines pilloried them, and few of their performance numbers leaked out, either.  After all, VC funds were all privately held.  They ran silent and deep, protected by the nondisclosure agreements (NDAs) that they made even their own investors sign.  So people who weren’t in the game might guess, but couldn’t really know how hard a hit the VCs – and their investors - might have taken.  Meanwhile, the investment bankers that had promoted and sold the IPOs of companies that later went bust took the heat.  Everyone seemed to forget that it was the VCs that had tied these often laughably inappropriate companies up with shiny red bows for the investment bankers to sell.
 
Of course, no one spoke up who really knew what a huge part VCs had played in the pump and dump charade that had driven the NASDAQ index ever higher.  Say you were a pension fund gate keeper.  You’d made money with VCs in the past, hadn’t you?  And the best funds were hard to get into, right?  So you still wanted to get into the next fund, no matter how ridiculous recent VC investments had been.  Best to keep mum, so as not to offend.

Well, how about if you were a high tech lawyer or accountant?  You still needed the VCs’ business, didn’t you?  And if you were an entrepreneur, well, it’s not like you wanted to go back to work for IBM.  So everyone just kept their mouth shut while the ugliness all got unwound behind the scenes. 

And ugly it was.  When investors experienced unexpected cash flow problems as the markets collapsed, some balked at meeting their capital calls (investors pay in their committed funds in three installments spaced out over the first few years of a fund’s life).  So sorry, the VCs said, reminding them of the punitive terms in the documents they had signed to get into the fund.  Don’t feel like paying?  Then you’ll get diluted out the wazoo by the money that does come in as promised. 

Meanwhile, some investors threatened to sue the VCs who couldn't honor the “clawback” terms in the documents they had signed that required them to return early profit distributions if the fund didn’t end up making a profit overall.  Some VCs even sued other VCs - especially when they were thrown overboard by former partners who were trying to keep their leaky funds afloat, and their BMWs paid for.

The VC funding scene should have gotten back on a healthy foundation after that, Frank thought.  But that could only happen if the VCs had returned to the rules of the old days, when a $200 million fund was a big one.  Then, as now, a VC fund would invest in about 25 companies and share the risk each time with a couple of other funds.  After a few rounds, when a portfolio company was ready to be sold, all of the VCs combined only had $12 or $15 million invested in it.  If the VCs owned 75% of the stock when the company sold for, say, $60 million, or better yet went public at a valuation of $100 million, the VCs could make a helluva return for their limited partners. 

More important, they could invest in all kinds of companies, because startups in a broad range of niches might yield an exit of that size.  So there were plenty of promising companies for VCs to invest in without bidding the price up against each other.

And the rules were different, too.  Back then, VC’s didn’t take any profits out until their investors had gotten 100% of their money back first.  Sure, that meant the VCs had a long wait till they got their big payday – 20% of all of the total profits when the fund was liquidated after ten years (their so called “carried interest"), but along the way they shared an annual management fee that was generally equal to 2% of the fund value.  So a $100 million fund yielded $2 million a year for salaries and expenses, and that number grew as the value of the fund portfolio grew.  Three or four partners could live pretty well from the start on that kind of money, if they weren’t greedy.  And if they did a good job investing, their carried interest would pay off handsomely - double your investor’s money, and you and your partners would have $20 million to divvy up among yourselves.  Of course, if you had raised a $200 million fund, then you could pay yourselves $4 million a year, and split up $40 million at the end.  Where else could you make that kind of money and be that unaccountable and independent for a whole decade at a time?

Not bad.  But apparently not good enough, and the reason was obvious.  If you could get 2% of $100 million, why not get 2% of $400 million?  Or how about 2% of $800 million?   Hell, why not make it 2% of an even $1 billion?  Some VCs did.  And once the management fees reached $20 million a year, VCs could become wealthy without ever making a dime for their investors. 

But no, that still wasn’t good enough.  After all, why should a savvy VC have to wait ten years to take his 20% of the profits when he hit a home run in an early inning of the game?  Why not take his carried interest right then and there, and just drop an IOU in the cash drawer pledging to pay it back seven or eight years later if the fund didn’t end up with a profit overall at the end of the day?  Anyway, that would never happen, would it?

Maybe things never would have gotten so crazy if Netscape had never happened, Frank thought.  Netscape Communications Corporation had been founded in April of 1994, and only 17 months later it went public in one of the most successful IPOs of all time.  But unlike Apple Computer, which had raised more money in its IPO than any company since Ford Motor had gone public, Netscape was only just starting to produce revenues.  Still, the stock ran up from $28 to $75 on the opening day.  After that, everyone wanted to play the VC game.  And that allowed the funds to balloon in size. 

Soon it wasn’t unusual for a fund targeted at startup companies to raise $600 million, $900 million, even a billion dollars – and then even more.  In a rational universe, these  new megafunds would have hired more people, and done more  investments.  But what sense would that make for the VCs?  Then they’d have split the profits with more people.  And gosh knows, they were too smart for that.  Better to stick with 25 investments and drive their portfolio companies to hire 100 employees the first year, even buy Super Bowl ads if they couldn’t spend your money fast enough to justify an IPO before the bubble burst, just as everyone knew it eventually must. 

But also as everyone wanted to ignore.  After all, what would you do with your billion dollar fund then?  Without a crazy-insane market for IPO stock, how could you double the investors’ money - and your carried interest - in a fund that big?  What kind of company could you possibly pump $50 or $100 million into and then take public or sell for a billion dollars?  Not many, was the answer, and maybe none, in a rational market.  Now, everyone was chasing the same companies, and even they weren’t good bets for that kind of exit.  Predictably, VC returns plummeted.
 
And a good thing, too, Frank snorted.  Still, now we’ve got “iBalls!”  His finger drumming was beginning to turn heads.

Just then, someone tapped a glass held high in the air.  It was iBall’s twenty-something CEO, Chad Derwent.

“Quiet, everybody, quiet!”  Chad called.  “Welcome to the iBalls holiday party – I’m delighted you could all make it.  It’s been a great year for the Company, and next year we’re going to knock the old iBall right out of the park!”  Those in front chuckled obligingly, while the rest began to quiet down. 

“I’ve got two really big pieces of news for you tonight,” Chad continued.  A hush suddenly fell, because a rumor had been rampant that week that everyone was hoping would be confirmed.  “The first is that we filed our S-1 Registration Statement with the Securities and Exchange Commission today!  That’s right, everybody, we’re going public!”  A collective cheer erupted among the lower level employees, while senior management, already in on the good news, smiled smugly.  Chad waited for the hoots to die down a bit, and then started tapping his glass once more.  But to no avail, because every employee in the room had stock options, from the receptionist up to the C-level managers.  Frank groaned at the recurring absurdity of it all. 

Finally, Chad succeeded in shushing the crowd.  “And now for my second announcement:  we’ve got a very special guest tonight.  I’m sure all of you have heard of Josh Peabody – one of the founders of TrashTalk LP – the hottest VC fund in Silicon Valley.  No one’s got a better nose for a top company than Josh - without him, there’d be no MyPuppies.com site to help you find names for your pets that will go great with the names of your kids (or, hey, even the other way around!)  Or any MyFace.com, where you can find a future spouse who looks as much like you as possible (how can you help but fall in love then?)  Who else do you know that thinks like that?”  Frank’s blood pressure by now was rising dangerously.

“Anyway, when Josh offered us a term sheet, we knew the rest was going to be easy.  It took us a long time to convince him to let us keep the name “iBalls” instead of, “My…“ well, you can guess “My What”, but...”  Laughter drowned Chad out.

Frank already knew the rest.  Josh’s fund persuaded iBalls to take $50 million in exchange for 70% of the company’s stock, but who cared?  It would be smooth sailing with a triple A tier fund like TrashTalk backing iBalls.

Just then, the crowd began to split like the Red Sea to let Peabody stride through, shaking his clasped hands over his head like a victorious boxer.  This being the Beltway, most people at the party were pretty dressed up, but Josh was resplendent in his own VC Valley way, wearing a tailored sports jacket, black shirt, pressed jeans, hand-tooled boots and a haircut that John Edwards would have envied. 

After he shook hands with Chad, it became clear that the great VC would grace the crowd with a few words of his great wisdom.  Josh wasn’t very tall, so he hopped up on a chair with microphone in hand so that everyone could see and hear him.

“Let’s hear it for you iBallers!” he shouted, and everybody cheered happily; those that had made the most diligent use of the open bar pumped the air with their fists. “Settle down, settle down,” Josh laughed, but waited them out.  “You know, I just can’t tell you how pumped we all are back on Sand Hill Road about iBalls.  iBalls!  It’s got to be the greatest, purest concept I’ve ever heard of.  Within one minute of when you guys started your pitch, I turned and whispered to my partner, ‘We’ve got to get this deal!’”

Everyone cheered again.  “No really, people, I mean it!  I mean, in the early days of the Web, it was all about eyeballs – getting people to visit your site.  The hell with revenues – if you could get the eyeballs, you knew – you just knew – that somehow the dollars would follow.  And they did!  Netscape ended up having to give their browser away, but how much did AOL pay to snap them up?  $4.2 billion, that’s how much!  And how about Google?  Sergey and Larry didn’t have a clue how they’d make any money for years, and now look at them!  And hey, how many of you use Twitter, anyway?”  The response indicated that a great many of those present indulged in the occasional tweet.

Then Josh paused for effect, and the crowd grew quiet.  “So just how do you beat that?  Where do you go after Google and YouTube, MySpace and Facebook?  None of them had revenues until they’d blown through a fortune, and look at them now.  How do you top that? “

“With iBalls, that’s how!” he shouted.  “It took a couple of geniuses like Chad and Vinod here to get that Web 3.0 isn’t going to be about traffic at all – it’s not going to be about getting potential customers to you – it’s going to be about you going to them!  We’ve all heard the phrase “virtual company” before, but no one had ever thought of making a virtual company totally virtual!  And how can you be more “all about your customer” than not to exist at all?  Now that’s true genius!

“So no surprise where iBalls can be found today: as of this morning, there were over 1.5 billion iBalls out there, on Web pages all over the world.  By this time next year, Chad tells me there should be an iBall on over 10% of the Web pages in the entire world!  And every day, it costs the Company less and less to put an iBall on a Web page.  That’s because our unique, patented reverse auction process drives our price down farther and farther as more and more Web site owners reverse-bid their way in.

“No wonder that today it’s almost impossible to surf the Web without seeing one of our iBalls winking back at you, no matter where you go.  In just one year, the iBall has become the single most recognizable new brand in the on-line world.  And one day soon, we’ll come up with a way to monetize this amazing, amazing asset.  Let’s hear it for Chad and Vinod – and, of course, for TrashTalk!”  The crowd obediently went wild.

Actually, Frank knew from Marla, paying tens of millions of dollars to people all over the world to put your stupid logo on their sites hadn’t been what Chad and Vinod had originally had in mind at all.  Instead, they just wanted to come up with an array of fun, open source widgets that people would want to put up at their Web sites for visitors to enjoy; the iBall was just one of hundreds of animated graphics they had in mind.  Anyone could download them and do whatever they wanted with them – even delete them, if they wanted to.  All Chad and Vinod wanted in return was the ability to pull back a modest amount of anonymized click information from as wide an array of Web sites as possible, using their widgets as their monitors.  With that kind of data in hand, they could spot usage trends and sell Web analysis services to customers for a profit.

Of course, that would have been far too tame for Josh Peabody and the other cowboys at TrashTalk.  And then there was the fact that Chad and Vinod only wanted to raise $500,000 to get their programming done in India.  After that, their business plan relied on viral marketing to spread the word.  If all worked as hoped, they could then do a second funding round of a million dollars or so to build on the buzz and move out into the broader marketplace.  With any luck, they’d still own most of the stock and be able to sell the Company before the competition moved in.  Selling out for $20 or $30 million wouldn't get their faces on the cover of BusinessWeek, but it wasn’t an unreasonable target.  And it would be enough to produce a great return for all concerned within a few years’ time.

Indeed, everything had even been going according to plan, only better.  They got the first $500,000 from a local angel group for about 20% of the Company’s stock, and completed the programming off shore on time and within budget.  They had a real stroke of luck when a buddy of Vinod’s came out with a killer iPhone app, and as a favor, included a feature that automatically added an iBall to the phone of everyone the app downloader called.  Soon, iBall’s were popping up and winking at mobile phone users all over the world, and everyone wanted to know just what these iBalls were all about. 

That was when the guys at TrashTalk noticed.  They invited Chad and Vinod out to Menlo Park to present their business plan, and even sent a charter jet back East to pick them up at a private airstrip outside Washington.  Chad and Vinod were understandably impressed, and almost before they knew what hit them, their company had $50 million in its bank account, and TrashTalk had 70% of its stock.  Oh - and the Company had a new business plan, too.

That had been one of the conditions to TrashTalk’s investment.  While Chad and Vinod were still in the Valley, Josh had pitched the reverse auction idea – why wait for viral marketing to take the Company to a paltry $20 or $30 million valuation?  Why not conquer the world in record time - go for an IPO at a billion dollar market cap in 18 months?   After all, the TrashTalk fund had $900 million to put to work, so Josh couldn’t waste his time and his investor’s money with any Company that couldn’t soak up its fair share of cash.  TrashTalk money was for big boys, not kids who didn’t have the vision and the cajones to swing for the fences.

Who could blame Chad and Vinod for being blown away?  Only a year before they’d been roommates in college, and now a famous venture capitalist was telling them they were geniuses.  Soon they were being profiled in Wired Magazine – not long after, Chad was even invited to appear on The Daily Show, and how cool was that?

Frank thought he was going to puke.  He remembered Josh from his MIT days, although he was sure that Peabody wouldn’t remember him.  Back then, and for quite a while thereafter, Josh had been nothing special.  But then he’d been lucky enough to be in the right startup at the right time.  It got snapped up by a big company in 1997, and for cash – a whole lot of cash.  All of a sudden, Josh was a rock star.  A few months after the sale, the old-time VCs that had funded his venture invited him to join them as a partner with hands-on Internet startup experience.  Josh’s company had been their one home run to date in their last fund, and they wanted someone like him to lend Internet credibility as they went back to their investors to raise their next one.

And, it seemed, Josh really did have the golden touch.  Before the bubble burst, he brought the fund into some of the only late bubble-era companies that managed to sell for a tidy profit after the crash.  But by 2002, he was tired of being under someone else’s wing, and contacted a couple of up and coming young Turks at other West Coast VC funds.  The smart money liked what they were pitching, and low and behold – TrashTalk LP was born.

All that could be learned from the extremely complimentary Wikipedia profile that Frank was sure Josh had paid someone to write.  About the only detail it contained that didn’t scream money and success was the fact that Josh was gonzo over cats. 

Venture capital and cats….Frank suddenly remembered a sardonic idea he’d had years before, just as the Big Man from Silicon Valley himself appeared at the cheese and cracker table.  On impulse, Frank shot out his hand.

“What a pleasure and a privilege it is to meet you, Mr. Peabody.  I mean, it’s really great to see you – I’ve heard so much about you.”

Josh gave a half-polite smile, and tried to side step his way past Frank to the food.  But Frank matched him side-step for side-step.

“Say, let me get you a drink while you fill your plate,” Frank said.  “What will it be?”

“Scotch and soda, thanks,” Josh said with resignation, realizing he’d been snagged for at least a minute or two.

Frank gave the order to the bartender, and turned back to Josh. “Say, I’ve got an idea that I’ve always thought could be a real money maker.  Let me take just a minute of your time to tell you about it.”  Josh hoped the bartender would hurry.

“You know, I heard what you said about volume now, revenues later, but I think having a revenue stream is still a pretty good thing – in fact, I believe that in difficult times like these, you really need two – and three revenue streams would be even better.”

Josh’s drink was ready now, but Frank was too quick for him.  He grabbed it from the bartender and held on tight while Josh dropped his arm, itching to make his escape.

“So here’s the idea – I don’t need you to sign an NDA, do I?  No?  Great!  It’s all about cats.”

With that, Frank thrust the drink into Josh’s hand.  Against his will, the VC found himself wavering between the desire to flee, and curiosity over what kind of cat-centric business plan this lunatic might have in mind.

“So here’s the idea – the first revenue stream, that is.  Everybody loves kittens, right?  I mean, they’re cute, they’re playful – who can help loving a kitten, even if they don’t really like cats?  But hey – everybody knows what happens with kittens.  Before you know it, they grow up to be fat, snotty blobs of fat, and what do you have then?  Just a big, arrogant furry doorstop, that’s what!

Josh was turning desperately away when Frank stopped him in his tracks.  “So I asked myself, what if you could invent a perpetual kitten?”

Josh’s love for dollars got the better of him, and he turned around again.  “And, uh, did you figure out how to do that?”

“Yes – sort of, anyway.  Here’s how:  we breed a line of genetically identical cats, just like they do with lab mice.  Each one will be black, with cute little white mitten paws – maybe even six toes, for people that go in for that sort of thing – and we call every one of them “Fred” so they’ll always answer to the same name. 

Frank paused for effect, and then hit Josh with the clincher:  “And instead of selling them to people, we rent them.

“Rent them?” Josh asked blankly.  “Why rent them?”

“Because that’s how you get a perpetual kitten, of course.  Once your energetic, darling little Fred starts showing symptoms of morphing into a blob of hairy fat with an attitude, you trade it in for a new Fred, and Presto!  You’ve realized the magic of the perpetual kitten!  It’s really just like pet cloning, except much easier and cheaper - instead of paying a fortune to clone your kitty at the back end, you breed an endless supply of identical ones at the front end.

Against his will, Josh found himself listening more closely.  “That’s kind of an interesting idea, in a totally weird kind of way.  But you said there were three revenue streams?”

“Absolutely!”  Frank suddenly looked at him suspiciously “Say – are you sure I don’t need you to sign an NDA?  No?  Well, you are a VC after all, so I guess I can trust you.  We'll need the customers to sign NDAs, though, and that brings us to the second revenue stream.”

Frank looked to his right and then to his left to be sure no one could hear him, and then leaned closer to Josh.  “Here’s the second revenue opportunity,” he said in a conspiratorial whisper.  “So now we’ve got all of these superannuated Freds, right?  But what can we do with them?  They cost money to feed, and you couldn't get much from someone who wanted to grind them up for fertilizer.  Luckily, though, there’s always a big demand at medical laboratories for cats to run experiments on, and it turns out they pay pretty good money if you can provide the pedigree of your pussies.”

A look of vague horror began to spread across Josh’s face.  He took half a step back.

“Don’t worry, don’t worry,” Frank laughed, pulling him back with an arm around his shoulders.  “We won’t really have to sell the kitties to the nasty doctors - or at least not too many of them, anyway.  Mostly, that’s just a story we tell people when they come back for a Fred exchange. 

“You see, when the customer asks what’s going to happen to ‘ole Fred after they turn him in, that’s when you casually mention the cat lab – and how cool is that?  I mean, how often do you get to use a word like “vivisection” as part of a marketing pitch?  Anyway, when the customer hears that, they’ll almost never want to give poor Fred up to the guys with the scalpels.”

Josh waited, aghast.  What could possibly come next?

“And that’s when you tell the customer about the lease buy-out option.  It might have been cheap to rent-a-Fred to begin with, but if you don’t turn him back in, it’ll cost you a bundle!”

Frank stopped abruptly, beaming with triumph.

“So what do you think?”

But Josh was already backing away in shock, bumping into someone and spilling his still-full drink down his shirt.

“Hey, wait a minute,” Frank called, “I haven’t even had a chance to tell you about my other idea – you see, you pair the parents of thirty-something couples who don’t have the decency to give their folks grandkids with single parents that never get a weekend of peace to themselves.”  But Josh had finally succeeded in escaping into the crowd.

Frank was still chuckling to himself when Marla, looking pale, found him, still standing where she had left him by the cheese and crackers.

“Sorry to leave you alone so long, Dad, I know how much you hate events like this.  Did I see you actually talking to someone?”

“Yes indeed,” Frank said.  “And this time around, I think you really would have been proud of me.” 

Read the next chapter

Read the last chapter

Email this chapter to a friend
Follow Frank's Further Adventures here and on