What's the Big Idea?

Sabeer Bhatia built his company from daydream to $400 million buyout in two years. It took one hot concept -- and a very cool head.

September/October 1999

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What's the Big Idea?

Photo: Glenn Matsumura

From the first moment I met him, Sabeer Bhatia gave credit to the power of the idea. The idea was so powerful that when his friend and co-worker Jack Smith called Sabeer from his car phone to brainstorm the pregnant thought that had just occurred to him, Sabeer heard one sentence and said, "Oh my! Hang up that cellular and call me back on a secure line when you get to your house! We don't want anyone to overhear!"

It was so powerful an idea that when Jack Smith did call Sabeer back 15 minutes later, their minds melded as they talked, completely in sync, leaping from one ramification to the next as simultaneously as the steps of two soldiers marching side by side. It was so powerful that sleep that night was impossible for Sabeer Bhatia, with the idea now in his head, exploding, autocatalytic, a bonfire of the mind. He stayed up all night writing the business plan.

The idea came about this way: Sabeer, MS '93, and Jack had wanted to start a company, and they had been brainstorming possible business ideas for a few months. They wanted to e-mail each other notes, but they had been afraid that their bosses might glean their e-mail and accuse them of spending their working hours on personal projects (an accurate accusation). The budding entrepreneurs had personal America Online accounts, but these couldn't be accessed through the office network. Jack Smith had been frustrated all day by this problem. Then it occurred to him:

Free e-mail accounts that can be accessed anonymously, over the web.

In overcoming their obstacle to coming up with a business idea, they came up with just such an idea.

Any disgruntled employee who had ever worried about an employer reading his e-mail could have had the idea before Jack and Sabeer. Anyone could have had the idea. You could have had the idea. I could have had the idea. In this new era of the Internet, to come up with a good idea you don't have to be an übergeek who understands fiber-optic switching and site mirroring and massively parallel processing.

And the best ideas are right under your nose.

Nowadays, meet Sabeer at a party and he will tell you only that he works in high tech, like hundreds of thousands of other young people in the Valley. Sabeer is just 30 years old, and he has a regal air -- a deep listener, gentle giant. He wears metal-rimmed eyeglasses and chambray shirts over a stocky frame. Push him for more detail about his job and he'll say he works at Hotmail. Ask if he's an engineer and he'll say no, he's the president. He's not being reclusive or coy; it just hasn't sunk in that he might be special.

What is Hotmail but e-mail on the web?

In just under 2 1/2 years, Sabeer has built Hotmail's user base faster than any media company in history -- faster than CNN, faster than America Online, faster even than the audience grew for Seinfeld. By the summer of 1998, with 25 million active e-mail accounts, the company was signing up new users at a rate of 125,000 a day.

So is he great, or is he lucky?

Eleven years ago, in September 1988, Sabeer Bhatia arrived at Los Angeles airport at 6 one evening. Cal Tech, which had offered him a very rare transfer scholarship, had sent him directions that said, merely, "Take a shuttle to campus," but Sabeer didn't know what a shuttle was. He was 19. In his pockets he had $250. He didn't know a single person in all of America.

Sabeer intended to get his degrees and then go home to work, probably as an engineer for some large Indian company. India is a very bureaucratic country, so kids like Sabeer grow up presuming that starting a company is impossible unless you are a superhuman.

But as a graduate student at Stanford, when most of his classmates would toss a Frisbee on Roble Field during lunch, Sabeer was drawn to the basement of Terman Auditorium for brown-bag luncheons. The speakers were entrepreneurs like Scott McNealy, MBA '80, Steve Wozniak and Marc Andreesen. Their fundamental message was always the same: you can do it too. Sabeer knew that famous people always say such things. They want to be inspirational. But Sabeer's impression was that these really were fairly ordinary smart guys, no different from him and his classmates. Sabeer was catching the bug.

When he graduated, Sabeer did not want to go home. So he took a job at Apple Computer, as did Jack Smith. Sabeer had started attending cocktail parties of TIE, The IndUS Entrepreneurs, mostly older men who had come from India and succeeded here. And again, they seemed like such ordinary guys! Sabeer got swept up in the decade's fever: you haven't lived until you've gone solo. Every morning Sabeer would come into work and stop by Jack Smith's cubicle and tell him yet another story of some guy who'd sold his company for millions. "Jack! What are we doing here, wasting our lives!?" Jack was a shy person and had a wife and two kids to think about. Starting their own business was daunting; they were just two cubicle dwellers buried in the Apple bureaucracy. What did they know about running a business? But Sabeer wore him down.

In mid-1995, Sabeer began shopping around a business plan for a net-based personal database called JavaSoft. Venture capitalists were skeptical of the software market, though -- too hard to get good distribution and rise above the fray. When Jack and Sabeer came up with the Hotmail idea in December, JavaSoft became, in effect, the front for Hotmail.

Sabeer knew that Hotmail was such an explosive concept, he didn't want a less-than-ethical VC to reject him, then turn around and copy his idea. He kept showing JavaSoft, and only showed Hotmail to those VCs he had gained respect for. "I got to see how their minds worked. If they rejected JavaSoft for stupid reasons, then I said thank you and left. If they rejected it for the right reasons, then I showed them Hotmail."

At Sabeer's first presentation to Steve Jurvetson of Draper, Fisher, Jurvetson, things weren't going well -- but Jurvetson was rejecting JavaSoft for the right reasons. So, late in the hour, Sabeer played the Hotmail card. He mentioned it, ever so subtly, characterizing it as a marketing tool. Jurvetson wasn't fooled -- he saw the pot of gold.

Jurvetson, '88, MS '89, MBA '95, remembers, "Sabeer brought in these revenue estimates showing that he was going to grow the company faster than any in history. We dismissed Sabeer's projections outright, but he insisted, 'You don't believe we're going to do that?' He had hallucinogenic optimism. He had an unquenchable sense of destiny. But he was right. He grew the subscriber base faster than any company in the history of the world."

One might have presumed that since Sabeer had been rejected by 20 previous VCs and was virtually a nobody, he was grateful to accept Draper, Fisher, Jurvetson's $300,000 on their terms: 30 percent ownership on a $1 million valuation. Sabeer held out for double that valuation -- their $300,000 would buy just 15 percent. Negotiations got nowhere, so Sabeer shrugged and walked out the door.

Tim Draper, '80, and Steve Jurvetson relented; they called back the next day to accept their 15 percent.

It took an off-the-charts degree of confidence to do what Sabeer did -- first, to hide his real idea, and second, to hold out for the valuation he thought the company deserved. But Sabeer refuses to give the credit to anything other than the culture of the Valley itself: "Only in Silicon Valley could two 27-year-old guys get $300,000 from men they had just met. Two 27-year-old guys who had no experience with consumer products, who had never started a company, who had never managed anybody, who had no experience even in software. Jack and I were hardware engineers. All we had was the idea."

The $300,000 was intended for the proof-of-concept version, usually a software system that works on a small scale without all the bells and whistles. But Sabeer, adamant about not giving up more of the company than he had to, stretched $300,000 farther than it has ever been stretched. Still obsessive about secrecy, they needed a paper-shredding machine, so Sabeer bought the cheapest one he could possibly find, for $15. Without any collateral, Sabeer convinced Imperial Bank to loan him $100,000. Then he convinced McLean Public Relations to represent Hotmail in exchange for stock, even though he didn't have a product, and he insisted that they couldn't get started on the PR yet because he had to keep it secret.

In June, with the product ready for launch in a month, Sabeer was running out of money. But he knew that if he launched the service first, he would keep all the leverage over investors. He convinced all of his first 15 employees to work only for stock options, not a very common occurrence in the Valley, where the unemployment rate is nil and most jobs come with pay and stock.

"My greatest accomplishment," Sabeer says again and again, "was not to build the company, but to convince people that this is their company. I showed people how this would ultimately benefit them. I didn't do the work. We initiated the avalanche."

They launched on July 4, 1996 -- Independence Day. It was a fitting date, because Sabeer and Jack believed free e-mail was a great populist tool. By then, everyone who owned a computer had e-mail, but with webmail you could log on from a McDonald's in Czechoslovakia or a café in Taiwan. That morning, Sabeer and Jack wore beepers programmed to flash every hour with the tally of new subscribers. The first users found it all by themselves, then told their friends. A hundred in the first hour. Two hundred in the next hour, 250 in the third. The idea was so intuitively powerful that 80 percent of those who sign up for Hotmail say that they learned about it from a friend.

When Microsoft came bidding in the fall of 1997, they came as a small army. Six at a time, they flew down from Redmond, Wash., and sat in Hotmail's small conference room across the table from Sabeer. They offered a figure, something that would have put tens of millions of dollars in Sabeer's pocket. Sabeer rejected it, and they stormed out. A week later they were back, and every week thereafter for two months.

They asked Sabeer to fly up to Redmond. He took Jack Smith and another Hotmail manager, Steve Dowdy. They were escorted around campus, had lunch with a senior vice president. Their meeting with Bill Gates was scheduled for 2 p.m. Gates had just got back from Russia, and was wearing a brown sweater and very thin-soled Italian shoes. He had with him two senior managers, including Laura Jennings. They all shook hands. There was no 10 minutes of get-relaxed time, chatting about the flight, the lunch -- Laura Jennings just dropped the ball right on Sabeer. She said, "Sabeer, why don't you tell us about your company?" Sabeer wasn't quite prepared. He launched in nervously. He couldn't believe it; here he was talking to Bill Gates. After about 15 minutes, Gates began to ask questions. Gates was legendary for his Socratic method of picking on the weakness of business ideas.

"But his questions were very normal strategy questions," Sabeer says. "The same things I had been asked by investors all along, from day one. And it suddenly occurred to me that Bill Gates is not superhuman either. He's human, he's flesh and blood, same as me. He's very smart, yes. But not superhumanly so."

With this understanding, Sabeer became very relaxed. He was completely reoriented, and the meeting lasted until 3:30.

Sabeer took a straw poll among his investors to see what purchase price they might be able to anticipate for Hotmail. At Menlo Ventures, Doug Carlisle's figure was the lowest of the group, $200 million. Privately, Sabeer had half-jokingly been saying he wanted a billion dollars, so he challenged Carlisle's figure: "You don't think we can get more than that?" Carlisle, JD/MBA '83, laughed and rolled his eyes and said, "Sabeer, if you ever reach even my figure, then I'm going to build a life-size bronze sculpture of you and put it in my front lobby."

Sabeer went back to Microsoft with the price of half a billion. "You're crazy," his adversaries shouted, following it with expletives. "You're out of your mind! You've blown it!" But Sabeer knew those were only tactical outbursts.

As a kid in Bangalore, Sabeer had watched family servants haggling over groceries at the bazaar. He knew every trick. The vendors would counter a low offer by saying, "Oh, I'm sorry, is that all you can pay? You must be very poor. I feel sorry for you. I want to give you a few rupees out of my own pocket so you have enough money to pay." Tensions were rising as Microsoft piled cash on the table. $200 million. $250 million. Carlisle took to saying, "It's Statue Time!" $300 million. Several times, Microsoft's negotiator pounded the table and stormed out.

Sabeer's venture capitalists, who stood to realize gigantic returns on their investments, urged him to be careful. vc Steve Jurvetson joked with Sabeer, "You don't have to sell now. Why don't you wait until you're big enough to buy Microsoft, rather than their buying you?" All the while, Hotmail's lead over its imitators was only increasing.

When the negotiation team offered a figure of around $350 million, though, Hotmail's management team took a straw poll in favor of accepting, and Sabeer was really alone now. He cannot give the credit for this one to his talented employees, or to Silicon Valley's culture.

"Saying no to that offer was the scariest thing I ever did," Sabeer says. "Everybody had told me, 'This is on your head if you screw it up.' "

On New Year's Eve, 1997, the deal was announced. Sabeer is prohibited from disclosing the price, but the S-3 registration stated that the ownership of Hotmail had been exchanged for 2,769,148 shares of Microsoft -- at the time worth a walloping $400 million. Throughout the Valley, the gut reaction was complete shock: the raw figure seemed out of proportion, and on its face unjustly deserved -- no matter how smart Sabeer may have been, no matter how hard they worked, no way was two years' work worth $400 million. There was a sense that Microsoft had gone wacko. Who the hell was this kid, Sabeer Bhatia, and how the hell did he do it?

There's no doubt that Sabeer's success has provoked furious jealousy. People here need to believe in the meritocracy, they need to believe success is possible for themselves, and so they will insist Sabeer is no better than anyone else around town even though they've never met him and don't know his story. When the Valley learns how Sabeer stood up to his venture capitalists, and then stood up to Microsoft, the verdict of history will be kind.

Doug Carlisle is holding true to his word about the bronze statue -- he has commissioned a bust by an artist in Los Angeles. Doesn't it make Sabeer uncomfortable? No. "It is an honor. My hope is that, just as I was given inspiration at those brown-bag lunches in Terman Auditorium, when entrepreneurs come into this most prestigious address on Sand Hill Road, it will give them inspiration."

As much as Sabeer makes out that he is just ordinary flesh and blood, no one has ever questioned his leadership. He is one of the few Valley entrepreneurs to remain his company's top executive beyond the 100-plus employee level. With Microsoft's financial muscle now behind the company, Hotmail's juggernaut appears unstoppable. At breakfast one morning, I asked Sabeer if he felt at all powerful, considering he runs the world's fastest-growing media company.

"That is such an odd, foreign concept to me," he said slowly, trying to think in that old paradigm. "When you say 'power,' that conjures to me control, such as having people do what I want them to do. It is just absurd. It is the nature of this medium that if something is a success, it is wildly successful. If you can come up with something that is of great value for just two people, then it is very likely it will also be of value for 90 million people."

Only eight months after the New Year's Eve announcement, Microsoft's $400 million price tag looked like a bargain, particularly considering Hotmail had more than tripled in size since it was purchased. Everyone's buying into the story now. Nobody thinks the price was unjust anymore.

"In retrospect, I'm not sure that a billion dollars wasn't the right figure," says Steve Jurvetson.

Sabeer Bhatia has a three-year commitment [through 2000] to head Hotmail for Microsoft, but there is no doubt he relishes entrepreneurism more than management. His passion for the big risk, the gargantuan mission, is unmistakable.

The last I saw him, it was 1:50 a.m. on a Monday, and he was boarding a Korean Air 747 to start a flight halfway around the world -- first to Seoul, then Bombay. He would meet with business leaders in Delhi and later deliver a speech at Internet World there.

Sabeer had thought hard about what he wanted to say to the country he had left 10 years before. He had started to get a vision of how India might be transformed. The level playing field of the Internet had convinced him that, in the future, young ambitious people won't have to leave home.

"India is ready for the Internet revolution. You don't have to get a permit to start a business on the Internet. In India, just to open a little restaurant, you have to get 18 permits."

Sabeer's vision involves TV, which in India is much more common than phone service. First, install a fiber-optic cable from London to Bombay. Second, use TV cable networks to provide local access points. Third, make available a sub-$50 net device, somewhat like WebTV's. He estimates the project would take about $200 million.

"It's a herculean task," he admitted, "but the prospect of changing the destiny of a country motivates me."

Po Bronson, '86, is a San Francisco journalist and author of two novels.

From the book The Nudist on the Late Shift by Po Bronson. Copyright © 1999 by Po Bronson. Reprinted with permission of Random House, Inc.

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