Neoforma Matches Healthcare Equipment Vendors with Clients Via Unusual Website.
When Jeff Kleck and Wayne McVicker started Santa Clara–based Neoforma Inc. in 1996 . . . they didn’t know they’d be at
the forefront of an emerging market: business-to-business electronic commerce . . .
The Business Journal, January 22, 1999
The New Internet Market Makers
“The main shift that the Web has brought about is the shift of power from sellers to buyers in the markets,” says Finnie. Take Santa Clara, Calif.–based Neoforma as an example . . .
Forbes, January 6, 1999
Our software developers had worked almost nonstop for two months— and straight through the holiday season—to get our new website under control. Fortunately, our customers and investors had been largely quiet during the end-of-the-year holidays...
Roy had been one of my toughest hires. He had a challenging, well-paying job in a large software company. He was about to take a long-delayed sabbatical. An operations job at a healthcare software company was a poor fit to his vision of the future.
About halfway through 1998, Jeff and I finally admitted that the company couldn’t survive in our cramped quarters for much longer.
Neoforma’s presence in our building had grown from a single small office to six offices of assorted sizes, scattered disjointedly about the building. We had twenty employees, along with servers and file cabinets, in an area that could uncomfortably accommodate ten. We had three or four people jammed into offices meant for one. Jeff and I shared one of the smaller offices with Steve. If we leaned back in our chairs, we bumped heads. To make matters worse, Steve had one of the loudest voices I had ever heard. And he liked to use it.
At first, these tight quarters were invigorating. We fed off of each other’s energy. Communication was very efficient, since everyone could hear what was going on everywhere.
But not everyone could get along with everyone else in such tight quarters. As our activities became more frenzied, tensions began to build. And these small rooms had not been designed for such high heat loads. Tempers got shorter as the temperature rose each day.
The premium price we had paid at the office suite had been very cost effective when we had only had one or two offices. Now the costs were very high compared with other locations.
Then there was another small detail: we planned to fill thirty job openings by year’s end.
Had I envisioned this situation years before, I would have seen myself as the empowered architect, preparing to modify or construct the ideal space to house, nurture and express the company I had helped create. In reality, this was just one more distracting thing to do.
I calculated that we needed about ten thousand square feet of space to accommodate our projected growth for the next two years.
We contacted a pair of commercial real estate brokers who had been recommended to us. Ron and Brad were trim, clean-cut youths. They were clearly basking in the glow of an increasingly robust economy.
They informed us that we should not set our expectations very high, considering how little we were willing to pay and how narrow an area we were willing to consider. Our employees were scattered equally north, south, east and west from our current office. We wanted to minimize the disruption that a move would cause, so we drew a seven-mile circle around our building and defined it as our search area.
It turned out that the type and size of space we were looking for was exactly the one that was most popular at the time. Just a month earlier there had been a glut of such spaces on the market, but the sudden rise in venture-funded start-ups had snapped up most of the desirable starter-size spaces.
Prepared for the worst, Jeff and I hopped into Ron’s Mercedes and viewed an assortment of available spaces. I had definitely not lowered my expectations adequately. What they showed us was dramatically below what we’d expected.
Seeing our reactions, Ron and Brad encouraged us to look at slightly pricier locations or expand our search radius. During several tours, we caught sight of the vapor trails of companies ahead of us on the dotcom path. We walked through the dark, vacated offices of WebTV, which had been acquired by Microsoft. We visited the buzzing, soon-to-be-vacated offices of Hotmail, which had been acquired by Microsoft.
We did see a couple of buildings we liked in the higher price range, but they had already been leased by the time we agreed to pursue them the following day.
The way I figured it, I’d rather have forty-nine employees sharing a pleasant space than have fifty employees sharing a dark, uncomfortable space. That was the financial difference between the desirable and the undesirable spaces we had seen.
JP, Alexander and Bret from Venrock saw it quite differently. In my scenario there would be one less person working toward a return on their investment. Bret was indignant, “We need to spend every possible penny of our money on people—not space!”
I briefly visualized an idyllic office space with happy, fulfilled employees skipping around with youthful energy. It was a brief moment of weakness. But, measured against our other priorities, I realized that the minimum space would have to do. There were more important things for me to focus my attention on.
During a rare visit by Bret, Jeff and I summarized our frustration to him, as well as JP and Alexander, at not being able to find a suitable home for Neoforma. Bret said, “What about Arrillaga? He must have some space available that would suit you.”
“Who is Arrillaga?”
Alexander frowned. “He has more than fifty million square feet of office space in the Valley.”
I wasn’t sure, but I thought I saw something unfamiliar in Alexander’s eyes—something beyond respect, something like intimidation. Alexander was never intimidated.
I did some research.
The Top 25 Power Brokers in Silicon Valley JOHN ARRILLAGA, 60
As dealmaker for one of the area’s top landowners, the secretive developer calls the shots when it comes to doling out precious office space. Normally, he only provides facilities to companies that can pay cash. But if Arrillaga senses a winner, as he did when Sun Microsystems and Quantum were start-ups, he gives lenient terms — and then collects rents as they grow . . .
BusinessWeek, August 25, 1997
Jeff had been told by Ron and Brad that Arrillaga was an avid and dedicated supporter of Stanford University. So Jeff called Arrillaga and chatted about various things, including the fact that since receiving his MBA at Stanford, Jeff had continued to be active in the Engineering department. He was able to up an appointment for us to meet with Arrillaga.
Alexander cautioned us, “If Mr. Arrillaga likes you, he’ll be able to get you just about anything you want. If he doesn’t like you, he will have nothing available.”
Beyond that, he did not coach us, which was quite uncharacteristic. He usually had VERY specific advice about everything. But this time, he was restrained. And I had never heard him refer to anyone else as “Mister.” My curiosity was piqued.
We had an obligation to contact our brokers, Ron and Brad, and tell them that we were meeting with Arrillaga. After bringing them up to date, we asked, “Why didn’t you tell us about Arrillaga?”
They paused, looked at each other, and said, “Um . . . Mr. Arrillaga does not get along well with brokers, but we’d like to come along to the meeting . . . so that we can help you negotiate with him.”
Jeff and I thought it made sense for them to come along. After all, they had put a lot of time into showing us various buildings.
Ron and Brad drove us to Arrillaga’s non descript, tilt-up, concrete industrial office building. We walked into a small, simple reception room and announced ourselves.
Ron and Brad seemed very nervous. That made Jeff and me nervous. We were perplexed that a man of Arrillaga’s stature would be meeting with us simple folk on short notice, without our being screened by someone else. I guessed dropping the Venrock name had some influence on that.
After a short wait, the receptionist led us into a large, elongated office. At one end, facing the door, was a large wooden desk. Stacks of files and papers were scattered on and around the desk. Apart from the fact that the room was decorated in rich, dark wood, there was little formality about the office.
Behind the desk was a large man who wore his sixty years comfortably. He was speaking loudly into a phone, gesticulating wildly. He was expressing his displeasure about something. His tone was firm and polite. I thought I sensed viciousness under the surface, but maybe it was just confidence, as if he knew that he was holding all of the best cards.
Mr. Arrillaga waved us to his desk, smiling. Ron, Brad, Jeff and I stood awkwardly in front of his desk. There were only two chairs.
Arrillaga spoke into the phone for a few minutes longer, seemingly oblivious to us. After hanging up the phone, he stood and vigorously shook hands with Jeff and me. He did not acknowledge Ron or Brad.
“Jeff. Wayne. Sit down.” He nodded his head toward Ron and Brad and, keeping his focus entirely on us, said, “Oh, and those two can sit in the chairs over there. They won’t be participating in this conversation.”
He pointed to chairs in a nook at the far end of the room, at least fifteen feet behind Jeff and me. Ron and Brad obeyed, but I knew they were seething at the indignity. Gone was their fantasy of using this visit as an opportunity to get tight with the infamous Arrillaga.
He sat down, leaned forward and said, “So, tell me about yourselves and this company you’ve started.”
Jeff and I took turns giving our well-practiced biographies and company description. Arrillaga was the first person of position who seemed genuinely pleased when I said I was an architect.
He asked us a few pointed questions about Neoforma. “I suppose you’ve put a bunch of money you don’t have into your company, rather than simply relying on those venture guys.”
We said, “Well, yes. We have a great deal of our own skin in this game.”
He said, “You know, it’s people like you that make this Valley so great . . . not useless predators, like those guys in the back of the room.” Ron and Brad, who could easily hear us from their exile, squirmed some more, avoiding eye contact.
He paused, leaned back in his chair and looked each of us deeply in the eyes. His manner changed entirely from charming interviewer to efficient problem-solver. Then he said, “Okay. What kind of space are you looking for?” I described the type and size we needed. He said, “Oh. There aren’t very many places that size available.”
I said, “We know.”
He called in an assistant and asked her about the status of several of his buildings. He said to us, “I have some great buildings just being completed in San Mateo. I can give you a good deal on those.” I told him that San Mateo was outside of our search area. He was disappointed. “You’re sure? They beat anything you’ll find around here.”
I said, “Yes, we’re sure.”
Then he told us about the Scott building, which he thought would best suit us. It was just across the freeway in the very heart of the Valley. There were a couple of other buildings he wanted us to see. He described the buildings to Ron and Brad, acknowledging them for the first time in awhile. He said, “And show them the Menlo space. It might just appeal to these guys.”
Ron protested that he didn’t think the Menlo space was a fit. Arrillaga interrupted him and issued a stern order: “SHOW THEM THE SPACE.”
That afternoon, we saw the buildings Arrillaga had suggested. As we parked in front of the Menlo space, Brad apologized for taking us there. “Arrillaga has been trying to lease this space forever. You’ll see why when we go inside.”
The building, a particularly poorly designed, single-story, tilt-up building, didn’t look promising from the outside, but the location was good. I remember thinking that we could live with it. But we didn’t enter the front door. Instead, we walked up some stairs in a vestibule at the corner of the building and entered through an unlabeled doorway.
The building’s attic had been converted into office space. Since it was not designed to be a two-story building, the ceiling was about seven feet high. The only light that entered the warren of arbitrarily placed walls came from the top two feet of the widely spaced narrow windows that protruded through the floor at the edges of the building. The acoustic tiles that had been glued to the ceiling were chipped and discolored.
Much to the chagrin of Ron and Brad, Jeff and I kind of liked the space. I saw why Arrillaga had directed us here. It was so bad, and so cheap, that it appealed to the sensibilities of our pre-funding days. It reminded me of my old beachfront nook.
Our consideration of the space was short-lived, though. Once we left the building, we realized that our new crop of employees might not appreciate our eccentricities.
The last building that we saw was the one that Arrillaga had considered the best fit. He was right. It was very middle-of-the-road. Neither opulent nor dilapidated. With a little work, it would do just fine. We were very tired of the distraction of looking at buildings and we were approaching thirty employees. Several people had to work from home. The rest were getting grumpier by the day.
I met Arrillaga alone the second time. “The Scott building looks okay. But $2.95 per foot is a bit over our target price.”
He paused, took a deep breath, and said, “What do you want to pay?”
I tried to sound firm as I said, “$2.50.”
He glared at me with an expression that could have been irritation or admiration. I held his gaze, with great effort. He said, “Okay. I can do $2.50 . . . under one condition. When you grow out of the building, you come to me for your next building. If I can give you what you need, I’ll give it to you at a fair price and you will not go elsewhere. If I don’t have what you need, then you can look anywhere.”
Because he seemed to be the only guy in the Valley that had space available and because I felt that I could trust his word, I accepted these terms. We shook hands. I told him, “We need it as soon as possible. We have already spent far too much time finding a place.”
“Don’t worry about that.” He called in his assistant. “Get me the plans for the Scott building.” While she was locating the plans, he swept the clutter on his desk toward the edges.
After the assistant handed him the plans, he unrolled them on his desk, pulled a pencil and an architectural scale from a drawer, and said, “Okay. So you say you need about fifteen offices, three conference rooms, a server room and a lunchroom. You’ll need about half of this building.”
As he spoke, he efficiently drew lines on the plans. I liked his hands-on approach. I was in very comfortable territory. I knew the applicable building codes and how to efficiently share aisles and such. We worked well together.
I told him, “We need to have adequate space in the lunchroom for a ping-pong table.” This was one Silicon Valley stereotype I was determined to fulfill. I justified it by pointing out that we would need extra space for larger gatherings and presentations.
Within fifteen minutes, we had a floor plan. He asked me, “Will this suit your needs?”
“Yes, it will.”
He picked up the phone and dialed a number from memory. “Mark, get a crew to the Scott building. Have them clean it up. I’ll get you some plans on the tenant improvements later today.”
He made a copy of the plan for me to take. “Alright, we’re done. Let me know soon if you need any changes to the layout. They’ll start new construction tomorrow. You should be able to move in about three weeks.”
I was stunned. This type of project usually took months. I asked him how he could get permits that quickly. He shrugged, smiled, and said, “Let me worry about that. You have a business to run.”
I asked about the paperwork. “Don’t you need some kind of application and financial statement from us?”
He said, “Our handshake is enough to get things going. Let the brokers take care of the lease papers. They should earn at least a small portion of their commission. You’ll find our terms to be very fair.”
In my excitement, I drove straight from Arrillaga’s office to Neoforma’s new home. I wanted to visualize how it would look based on the plans we had just drawn up. When I arrived there, not fifteen minutes after parting with Arrillaga, several construction crews were already busy doing demolition work. When I walked inside the fore- man greeted me, “Hi. Are you the new tenant?”
“Um . . . Yes, I guess I am.”
We started with half of that building. Later, we would take over the entire building. And then the one next door.
I was stunned by how easy the process was. Since the inception of Neoforma, Jeff and I had been required to submit our personal financial statements with every credit or lease application and personally offer our assets as collateral. This time, a whisper from one of our investors had been enough. Things were changing. One more fiber connecting me, the individual, to Neoforma, the organization, had been severed.
And with that, my need to take full responsibility for Neoforma’s protection had been eased. I pursued our open positions for people to take over our operations with renewed vigor. By the time I’d found Roy, his position was so important, so personal to me that I threw every hiring technique I had learned at him. He didn’t have a chance. My efforts were handsomely rewarded. He was very good at what he did. I never worried about Neoforma’s home again.