Before aQuantive sold to Microsoft for a cool $6 billion in cash, the Seattle online advertising company had to navigate a roller coaster decade of ups and downs.

A tanned and relaxed aQuantive founder Nick Hanauer recalled that wild ride with stories from the early days in a talk Thursday in downtown Seattle. Interestingly, Hanauer said the company showed its true colors during the dot-com bust — a period when aQuantive’s stock dropped below a buck and investors were clamoring to liquidate.

Using aQuantive’s story as a guide, Hanauer offered a particularly timely talk given the current economic climate. His thesis: In good times, companies get sloppy. In tough times, they get discipline.

aQuantive — founded in 1997 just before the dot com euphoria hit — had some of both.

Hanauer started his talk recalling some of the dumb things aQuantive did at the turn of the last decade. Those included a vice president who thought it was a good team-building exercise to buy tequila shots and lap dances for customers and employees at a strip club. And then there were the pub crawls in Seattle in order to try to find workers.

"If you could sit up straight in one of those Aeron chairs, we would hire you," quipped Hanauer, adding that the easy fundraising and customer acquisition climate made aQuantive "lazy." In addition, he said aQuantive rolled out "tons of stupid products that no one wanted" and signed up customers who didn’t even know what a banner ad was. 

"It was fun while it lasted, but as I said it made us incredibly sloppy," Hanauer said. "It was amusing at times, but a lot of misplaced energy and a lot of wasted money."

Then, he said, the good times ended and the money dried up. The stock dropped from a high of $89 to 70 cents, with Hanauer saying some of the venture capitalists involved in aQuantive were pushing to liquidate the company for its cash.

"Some of our venture backers literally wanted to distribute all of the cash and let it be done," said Hanauer, now a VC himself at Second Avenue Partners. "I am pleased to say that not only did we turn it around, but those particular people made no money on our sale and got out at insanely low prices."

aQauntive was able to survive through "intense focus," with Hanauer drawing a comparison to the board game Risk. In that game, he said it makes no sense to spread troops over a number of countries. Instead, you have to amass large forces in certain geographies.

It was next to impossible for aQuantive to "outspend" its larger competitor at the time: DoubleClick. It had ten times as many people and ten times the market cap, said Hanauer.

"In these circumstances, you certainly can not outspend or outlast a larger competitor," he said. But, he said, you can "outfocus" them.

"The only way to do that is to narrow your focus at a decisive point in the strategic terrain," he said. The key for aQuantive was repositioning the company to serve the needs of advertisers, rather than publishers.

That allowed aQuantive to end up focusing on customers that had money to spend. As part of that effort, aQuantive dumped some customers. That’s not an easy task for a startup company, but Hanauer said some customers can be "as harmful as they are helpful."

"We fired a lot of customers," he said."If a customer is not profitable for you, it is probably God’s way of telling you that you shouldn’t do business with them."

The company also fired a lot of people, cutting the staff nearly in half. That was a painful decision, but Hanauer said it was necessary in order to right the ship.

Having a smaller, more focused team was a key decision in getting aQuantive through the dark times, he said. In fact, Hanauer noted that nearly all of Second Avenue Partners’ new Internet startups have no more than four or five employees.

"It is amazing how much easier it is to run a company the fewer people you’ve got," he said. "I am no engineer … but I swear to God that the smaller the team the quicker stuff gets done."

Also, key to aQuantive’s success was leadership. Hanauer cited executives Brian McAndrews, Clark Kokich and Michael Galgon who set an example of how to operate a company in tough times. Executives flew coach and parties consisted of a few pizzas.

Hanauer cited the auto executives of today who continue to fly around in their private jets, noting that the extravagances set a bad example for the rest of the employees.

"There is a culture that starts at the top which doesn’t recognize this fundamental precept of leadership during tough times which is all for one, and one for all," he said.  "Like, if you are flying coach, I am flying coach full stop. We are all staying at the Holiday Inn. We don’t have Four Season people and Holiday Inn people during tough times."

Overall, Hanauer said it is bad times that define good leadership and good companies where winning strategies emerge.

"Being optimistic about the difficulty is … extraordinarily useful," he said. "Remember, that everyone is hurting during a retraction or tough times, the question is will you be hurting slightly less than them?"

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and This weekend: LinuxFest NW  

In tech circles, Washington state may be best known as Microsoft’s stomping grounds — but it’s also home to a thriving community of people devoted to Linux and other open-source programs. That community is gathering Saturday and Sunday in Bellingham for one of its big annual events: LinuxFest Northwest, now in its 10th year.

Just don’t ask how many people will be there. Admission is free, there’s no need to register in advance, and conference organizers haven’t made a habit of tracking attendance in years past.

“I wish I could tape some of the meetings where we’re discussing this, because there are people who say, ‘No we don’t care — we really don’t care how many people,’ ” said Carl Symons of the Bellingham Linux Users Group, which organizes the event. He laughed as he explained the logic: “If you want a number, then this isn’t the place for you.”

Welcome to the world of open-source software.

LinuxFest Northwest this year offers a deep schedule of sessions on topics ranging from cloud computing and open-source farming to Linux host intrusion detection systems and the physics of computer security. And there will be plenty talk about in the hallways, following Oracle’s agreement to acquire Sun Microsystems and Canonical’s release of a new Ubuntu Linux version, "Jaunty Jackalope."

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and Startup Opscode raises $2.5M funding led by Draper Fisher  

A new Seattle startup called Opscode has raised $2.5 million in funding and is developing a service to automate the management of so-called “cloud computing” services. Draper Fisher Jurvetson, a Silicon Valley-based venture capital firm, led the funding. Bill Bryant, Draper’s Seattle-based venture partner, also made a personal investment in Opscode, as did the company’s law firm, Perkins Coie LLP.

Many startups use cloud computing services from companies such as Amazon.com, tapping computing power from remote servers via the web. Opscode is working on a product that automates management of cloud computing services in various ways — making them work with a company’s software and scaling them as needed.

This automation eliminates the tedious and time-consuming process of managing cloud services by “typing in a bunch of commands by hand,” said Opscode CEO Jesse Robbins.

Adding and scaling up cloud services quickly can be critical for companies that get sudden media exposure, Robbins said. He pointed to the example of Twitter, the microblogging service, which recently saw a huge traffic surge following a demo on Oprah Winfrey’s TV talk show.

Opscode has already released a free, open-source software tool called Chef that provides some of these automated functions, and plans to introduce paid services that work with Chef later this year.

Opscode is not alone in this area of infrastructure automation. Companies like RightScale, Scalr, Reductive Labs, ControlTier, Engine Yard and Elastra are developing services to help companies manage their use of cloud computing services.

Opscode CEO Jesse Robbins declined to get into specifics on the company’s future paid services, but said but the open-source Chef platform has a rapidly growing community of contributors and adopters.

He said Chef is already being used by Engine Yard, which helps companies using the open-source “Ruby on Rails” internet application framework; 37signals, a internet application company (a partner there created Ruby on Rails); and Wikia, a web hosting service for wikis, started by Jimmy Wales, best known for his founding role in Wikipedia (Interestingly, Amazon.com is an investor in Engine Yard and Wikia, and Amazon.com CEO Jeff Bezos is a personal investor in 37signals).

Robbins is himself a veteran of Amazon.com, where he was responsible for ensuring that the online retailer’s web sites were available at all times (his business card read “Master of Disaster”). Christopher Brown, Opscode’s vice president of engineering, was formerly a lead developer on the Amazon’s core cloud computing service, Elastic Compute Cloud (EC2).

That Amazon pedigree was clearly a draw for Bryant of Draper Fisher.

“The founding Opscode team is comprised of experts who have built and operated some of the Web’s largest sites and supporting infrastructure services, such as Amazon EC2,” he said in a statement.

Opscode grew out of a local technology consulting group, HJK Solutions. HJK’s principals Adam Jacob, Barry Steinglass, and Nathan Haneysmith are all founders of Opscode, along with Robbins.

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Entellium: A costly lesson in corporate governance  

More than $50 million in venture capital down the drain. Over 200 people out of work. And two Internet executives — both fathers — going to federal prison.

That’s the ugly aftermath of Entellium. Last month, former CEO Paul Johnston and former CFO Parrish Jones were sentenced to two and three years in prison, respectively, for inflating revenue figures over a period of four years at the Seattle software company.

The case, which has left a lingering black eye on the Seattle startup community, has raised questions about the role of the board. Why didn’t directors discover the fraud sooner? Where was the audit? And when the board’s audit requests were denied, why didn’t they push harder?

Corporate attorneys in Seattle say the case has served as a wake up call for directors at privately-held companies. And they say it has reinforced the importance of financial oversight and audits.

"I find it difficult to understand how something like this could happen if the board is properly executing its oversight function," said Stephen Graham, an attorney at Fenwick & West in Seattle. "You want to be pretty darn sure of yourself before you decide that you are not going to require audited financials. And if you have a situation where you have asked for them and you are not getting them — and this goes on for some period of time  — isn’t that a red flag? If this is any kind of a watershed moment, I think it is more of a vivid reminder that boards have real jobs and jobs that need to be taken seriously."

James Judson, an attorney at Davis Wright Tremaine, agreed.

"The key is never to back off from vigorous inquiry," said Judson, who sits on a number of public and private company boards.  "Management will sometimes regard board persistence as insubordination, but nonetheless, all information must be thoroughly vetted.  Popularity is not required."

The responsibilities at public and private company boards are virtually the same, said Graham. And he said it is surprising how often directors don’t take the job seriously.

"Broadly speaking, there are many, many directors out there who see sitting on a board as more of a privilege than a job," he said.

But no matter how hard directors work, Graham said they still can fall victim to fraud.

"With any relationship there is some element of trust, and if you are dealing with people who are bent on defrauding you, more than likely that is going to happen," he said.

That was a key argument in the Entellium case. Carl Blackstone, the Assistant U.S. Attorney, argued that Jones and Johnston abused their positions of trust by lying to the board.

"When they’ve got the CFO in their board room telling them these are the revenues of the company, do you really think the company needs to say: ‘Well, maybe the CFO is lying to me?’ Of course, not," said Blackstone. "They trusted him, they relied on him and he abused that trust."

Defense attorneys for Jones countered in court documents that the responsibility fell on the shoulders of the board, including representatives of Ignition Partners which held two seats.

"If any of the investors had even glanced at Entellium’s financial statements, much less completed an audit, the misrepresentations would have been immediately exposed," they said.

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