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Note: This interview has been transcribed from a live recorded interview. Therefore, the style is as one would speak and not necessarily grammatically correct at all times. A few edits have been made for clarity.
Note: Items which we have deemed especially helpful to the entrepreneur or businessperson have been marked in dark red.
Stratus is a 22 year old company that has been focused on one class of products since its inception – servers that don’t fail. Our products are the hardware, the software, the adjunct devices, and the consulting services that allow a customer to deploy a system for mission-critical computing, and remedial services for helping the customer to deal with problems.
I joined Stratus in 1994 as Vice President of Engineering. About a year later, the job of Vice President of Marketing was added to my responsibilities. Both of these were things I had done at other companies previously.
We had developed some interesting technologies for the telecommunications market. A Telecommunications company that had developed a very high market cap was able to use the currency of its stock to buy us at a very substantial discount to what the company had previously been trading for.
Stratus was of no interest to this acquirer except for this one technology and some Telecommunications customers, and so there was an ongoing business with customers, employees, products, and services that was either going to be scrapped or was going to be in some way saved. I believed very strongly that the company’s assets had a lot of value, and that these were not going to be valued by the acquiring company, Ascend Communications. So I proposed to Ascend’s CEO that I would like to lead an effort to create a leveraged buyout; to organize the assets of the business they didn’t care about and at the same time eliminate liabilities that Ascend would otherwise face.
We wrote a business plan and then went and presented this plan to ten private equity placement firms using a Wall Street investment bank to facilitate this process. We had bids from all ten, so it was a sensible business plan. We elected to go with one particular firm in March of 1999, about six months after the whole process started.
We launched the company as an independent company, having acquired the assets from Ascend Communications, and having capitalized with a mixture of debt and equity. At that time I became the president and CEO of Stratus.
I was an undergraduate studying liberal arts. In my sophomore year, the brother of my then-girlfriend gave me a book titled How to Program a 7090 (he was at the time a research scientist at IBM Research). I was working that summer in New York City commuting from New Jersey and read the whole thing cover to cover in a couple of days. I was fascinated, doing the examples in the back, and I loved it.
So I decided I wanted to get into the computer programming field. It was very early days in that industry, in the mid 60s, and only one or two universities had curricula that addressed computer science. So I was advised by my girlfriend’s brother to major in math. I switched to math with the intention of eventually going into computers.
Absolutely. At the time I was working at a bank in Connecticut where I was going to undergraduate school. They had offered to make me a Vice President of the Bank as soon as I had my degree. Taking the path of least resistance I might very well have gone in that direction or might have applied to other high-tech companies in the Southern Connecticut area. I think IBM hiring me made a big difference in that it put me in the mainstream of the computer industry at a time when it was exploding (something I didn’t know at the time).
This was a time when IBM was trying to double its technical population every year. They were creating ninety-day wonders. They were operating their own programming schools and putting very large numbers of people through them. Because they were so desperate for people, frankly, they didn’t have a high wash out rate. So it wasn’t all that demanding. But on the other hand I was driven to succeed. I had a young family by the time I graduated from undergraduate school.
I was financially driven but also driven by the work ethic I had picked up from my parents. I worked probably an average of 70-80 hours per week during my first four years there. With a young a family, if I had it to do over again, I would have done it differently. I didn’t really have a balance in my life; it was not a very healthy thing, but was effective in accelerating my progress. I stood out from the crowd so to speak and through accelerated promotions was appointed to a management position by my fourth year, which was the next major step in my career. I was 25 and it was a great experience because IBM did a really thorough job of training its managers, and I got a great educational grounding in management.
By the time I was in my early thirties, I had been identified by IBM as a manager with very high potential and was sent on a headquarters assignment where I was working for the top people in the management ranks there. As a result of that experience I was nominated for a Sloan Fellowship at the Stanford University Graduate School of Business.
So I was sent on a year and a half program to get a Masters degree in management at Stanford with 41 other classmates in the same situation, that is, people in mid-career identified as having strong potential by their employers, and sent on a full scholarship basis (everything paid for, including housing expense in California).
I finished first in my class, which did have a significant impact on my employer. Stanford sent a letter to my IBM executive sponsor, who would in a couple years become president of IBM. He decided to further accelerate my career by giving me some big, “over-my-head” jobs. He started by making me the lab director responsible for developing a strategy for scientific computing for IBM. IBM had been an early leader in that market, but had been pushed aside by Cray. So I was given the opportunity to develop a business strategy and start implementing a strategy for IBM in that market.
I was successful in doing that and was promoted to Site General Manager, which made me responsible for all of the activities within Kingston, New York that IBM had. IBM in Kingston had 3,000,000 square feet of space, 7,000 employees; and shipped over $10 billion of revenue out of the manufacturing plant there. So it was a big job on paper. In practice, I felt it was mostly a job of mediating between decision makers, and I was not one of them. It was a fairly bureaucratic, centrally organized company and I was frustrated. So when I was approached by a smaller company, Prime Computer (no longer in existence, but at the time a one billion dollar computer server company), I jumped at the opportunity to join them as Vice President of Research and Development.
The next step after that came when I was approached by a group of Venture Capitalists, who had decided to fund a supercomputer startup that was being organized in Colorado. They offered me the job of CEO and I accepted that. I went to Colorado and ran that company for about eighteen months until it failed. It failed because the technology that is was predicating wasn’t actually ready yet. It was one of many failures within the supercomputer industry during that time.
I had an offer to work for the guy who had been my mentor at IBM for many years. He had joined Honeywell, which was trying to figure out a way to exit the computer business. He talked me into joining Honeywell-Bull, that later became Bull, a French company that turned out to be one of the more difficult experiences of my life. It was hard working for a French company as an executive based in the US.
I got out of that to become the Chief Technology Officer for another startup that was doing interactive television based in Reston, Virginia. But the company required more capital than any reasonable person would provide. It was a flawed business plan but unfortunately I did not have the sense to see that going in. It was fun technology and I enjoyed it but it did not make any economic sense.
Fortunately, Stratus was in the market for a Vice President of Engineering at the time, so I jumped and was able to make the transition in a relatively painless way. From there, as I’ve pointed out, I took over as President primarily because I was willing to step up to organizing the leveraged buyout that would keep the company going.
Once we went to look for money, the first thing we had to do was have a business plan; the second thing we had to do was to build a management team. We had an exciting technology that we had been developing for a few years – an Intel-based fault tolerant computer that could be sold for a tenth of what the fault tolerant computers at the time were selling for. I believed very, very much that this product could effectively reposition Stratus to be a high-volume growth company rather than being a niche company that would only sell to a very narrow application base.
Well, that was our business plan. What turned out to be important with that business plan was having a stable business that leveraged off technology and markets that were already proven, in fact a category of product in the market that didn’t have a lot of competitors. But what really sold the business plan was the quality of management team, because we had experienced people who had all done this before, so there was low-risk in terms of the management – usually not the case in a technology startup.
Secondly, we had the benefit of a very attractive price. When you look at investor dynamics, probably the most important thing is the valuation the investor has to pay. Their ability to get return is a function of being able to get a multiple on the investment, so if you have a high valuation to start, it is very hard to get a return. If an investor can get in cheap it makes it quite attractive. And because the assets we were purchasing had virtually no value at all to the seller, we were able to get the assets at a fraction of what one would reasonably expect to pay for them. What really made us successful in the first couple of years was the fact that we bought cheap.
And because we bought cheap we were able to set expectations for our business performance based on a realistic set of expectations, and yet would produce sufficient value creation to provide a substantial return. One trap that a lot of entrepreneurs fall into is having to promise the moon in order to make the investor successful. And investors, when they see that the moon is not coming, tend to pull out their guns and (figuratively) shoot people. A lot of corporate deaths occur because of overset expectations. Managing these expectations is very important.
Also, equally important was to take the medicine of sizing the company to what we thought a conservative plan would allow. We did not want to take financial risk, and as a company that was financing itself partially with debt, we had to worry about defaulting on that debt and losing everything in bankruptcy.
So we had a very conservative spending plan. We resized the company down to something we felt was going to be low risk in terms of having predictable earnings based on a conservative outlook on our revenues. As it turns out, we were more conservative than we needed to be because when we built this plan in 1998 we didn’t forecast the boom that occurred in the IT industry during 1999, 2000, and early 2001. We were able to score some good points during this time and grew the business substantially beyond the expectations that had been set.
In the process of doing that we were able to sell a small portion of the company’s stock for several times what we capitalized in the first place. So we were able to get a valuation step-up of about 3X a short eighteen months after having done the purchase. And on that valuation we were able to have our initial investors recover all of their money times two and still own 50% of the company. For them it was a home run. So, make your investors happy is one of the first rules of business, and when you can do that you buy yourself a lot of rope.
Well, we needed rope because one year later we ran into one of the worst retrenchments in our industry’s history. The IT industry literally collapsed and the category in which we were operating f ell 50%. We had a horrible year, the year ending 2001.
We once again needed to set a new conservative business plan and resize the company so we could meet or exceed investor expectations. This time it was a little different because we didn’t have a seller selling cheap and still had to provide value to our existing investors. In the course of doing that we had the advantage of having gotten past a lot of the risks in our previous business plan by successfully developing our product and launching it in the market. While the market risk of finding acceptance of the product still existed, we no longer had the technology or financing risk.
We now have a new plan with happy investors and are just in the process of completing the second quarter of 2002 and it looks like we will for the second consecutive quarter exceed our plan, not by a wild margin, but in a down economy that says a lot.
I started out with responsibility for operational control of the company as well as strategic vision. I had authored the strategic vision with the help of a colleague and sold the management team on it. The management team was responsible for carrying out the execution, but I was responsible the ultimate results. So I was acting in a supervisory capacity for all the key functions of sales, engineering, and so forth. Especially early on, I felt we were in a risky position where we had to execute to win the confidence of our investors. So I really focused more on execution more than anything else.
Over the last couple of years, I have reached the conclusion with my board that it was important to groom another executive in the company that could take over for me, as my own personal plans were not to do this forever. So that we could have an orderly succession, we agreed to hire someone who could be groomed to be my successor. And in February of 2002, we appointed that individual as president, and I changed my job from being responsible primarily for the execution of the company to delegating that and being responsible for being what I call Mr. Outside; to develop the strategic framework for the company’s continued operation and to sell the company to our external stakeholders (including potential new investors, which is important for our exit strategy), as well as to sell the company’s vision to our major customers and prospects. I think of myself as the chief salesman for the company, selling not the product but the company itself.
10. What was it that you and your board looked for when selecting your successor? And, more in general, what it is that you look for when selecting an employee to move up the corporate ladder?
That’s a good question. Well, the criteria for executive success in our industry starts with having a pretty good intellectual grounding in the content of the industry. It’s very much a tech industry, and if you don’t understand some of the implications of the technology you’ll probably fail. It’s not something one can manage without understanding the technology constraints, limitations, and leverage points.
So my first criteria for a CEO for a Stratus was someone who had enough of a technology background to be able understand some of the subtleties; something that someone coming out of a Nabisco generally would not have.
Number two, strong management skills. Anyone that is going to take responsibility for managing hundreds or thousands of people needs to be able to get things done through other people; needs to have very strong personal leadership characteristics and the ability to organize work and manage through other people.
Third, integrity. You can find people that have the prior two categories that do not have integrity that are more of a liability than an asset. You have to be able to trust people when you are putting something as important as your company’s future in their hands. You’ve got to be able to rely on people to tell the truth and to deal with integrity in good times and bad. That’s usually something you’ll get from references, from personal experience, or from the experience of people you trust.
Certainly coming to the forefront in the last six months is a major lack in some businesses. And it is a problem when you are in a business that has a significant potential equity play. Greed can get in the way. It can become a major obstacle and has caused some people to make very foolish decisions.
We do a process annually of identifying emerging high-potential people. This also forces us into the discipline to determine what the succession plan would be in the event that any of our executives were to be hit by a truck or leave. We don’t always get to conclusions, but we learn things such as what our bench strength is. And this has caused to look at recruitment differently. So for example, when you identify that you have a strong VP of Sales but the person’s successor is not in the group that reports to that person, it makes you want to promote someone into a role from the next tier down that would have that upward mobility, or go outside your company to add that talent.
With executive development, I think it is important to challenge your first-level management to identify stars early so you get the mentoring and get visibility in place, which is hard once a company gets above fifty people.
Senior executives can develop altitude sickness, where they become so distant from what is really going on that they no longer have an accurate assessment of what is happening. So developing linkage points to the ground level is very important for any senior executive.
You also have to realize that there are some human things that happen where a mid-level manager who may not have the strongest potential themself, may for reasons of jealousy or fear try to hide a high potential individual in their organization so they are not threatened. So you have to be cognizant of that sort of thing and have many different perception points within your company.
Well actually I had hired Dave into the company when I was head of Engineering before our leveraged buyout. I hired him as a vice president reporting to myself. Then when we were acquired by Ascend, he decided to go with them rather than with me. I respected that decision and understood his reasons.
Nonetheless, he was not completely happy after he had been doing it for about a year, so I was able to attract him back. So I was actually hiring someone I already had a lot of confidence in and had already had the opportunity to evaluate from personal past experiences.
In my experience, individuals go through plateaus of skills where at the transition from one plateau to the next you effectively have to throw out a lot of skills you’ve acquired and acquire new ones. You also accumulate a lot along the way especially in the area of people management.
There are exceptions. There are people who follow the Bill Gates model who are able to be wildly successful who have skipped a lot of the intermediate steps. But I’ve also worked with an awful lot of people who have tried skipping those steps; I met them at business school or worked with them in various settings; and it is quite common to see flameouts. When someone skips managing a group within the complex environment of a larger company and becomes, for example, the president of a company with two people and tries to grow it to one hundred people, they don’t have a lot of the organizational skills that they would have otherwise developed and they end up stumbling over that missing part of their portfolio.
Now there are people who do extremely well at starting companies and handing them off to other people. They are basically idea people who are good leaders but perhaps do not implement well. Different people have different strengths. The most important thing in my mind is to know where your limitations are.
And frankly, a lot of people don’t get to see where their limitations are without experience. There is some minimum experience needed to accurately gauge whether you are going have the skills required.
People can do the traditional course of experiences at different speeds, but some variety of this experience and curriculum is needed in the vast majority of cases. There are some cases in which people are able to abstract the experience out of other people’s experience by hiring more experienced people.
15. Can some of this knowledge be conveyed from reading?
A lot of that does not convey out of books. A lot of the books will leave you with a false sense of security, especially on the soft side. You can learn from a book how to do a business strategy or Profit and Loss statement, but it is hard to learn how to get people do to the things they need to do and how to really evaluate if things are getting done in the right way in the larger organizational context.
What I’ve found in my experience it that the most difficult things is to get the right questions. If you know what things you don’t understand you’re in a much better position to navigate the holes and acquire the knowledge you need.
Very early in my career, it was suggested to me that I get a compilation of Harvard Business Review articles on management. I remember reading through them in my latter twenties and got a lot of value out of them; not that it taught me how to be a general manager, but it taught me a lot about some of the things that are involved in general management and gave me a framework of questions to ask. It didn’t give me the experience I needed to be able do a lot of this stuff, but it gave me a much better appreciation.
So for example, I read one article about a day in the life of a CEO. It described a continuous sequence of two-minute transactions dealing with all the different dimensions of the enterprise anywhere from the strategic to basic execution. So that was eye-opening. It gave me a much different way of thinking about what an executive position was like.
Peter Drucker was another source and was an important author for me that gave me common sense advice about leadership. On the strategic side, Porter’s book on Competitive Analysis had a lot of influence of me, and to some extent Tom Peters‘ work was influential as well.
Also, early in my management career, Machiavelli and Management was a book that talked about how to get things done in management. It got to the soft side of management and told effectively how to manipulate people, events, and circumstances in an organization to get things your way. A lot of it had to do was how to play the politics. You have to know where the power centers are, and you need to know how things really get done as opposed to how things should be done. If you get stuck in how it ought to be done you’re going to find yourself on the losing end of most decisions. Because it generally doesn’t get done the way it ought to, it gets done the way it does – often based on individual self-interest, and by making deals and brokering decisions, similar to politics.
Typically, a department manager is going to focus on getting results. If you want to get something out of that manager for your own department you better find an area of congruency in your goals. If you don’t, it may make all the right sense for your company, but to get a department manager to think about the company first, it’s pretty unusual.
Yeah. You really have to put yourself in the shoes of the other guy. Very often, financial incentives sharpen the edges; people may have bonuses that are dependent on meeting certain divisional or group goals that are a small subset of the company goals. It may be that what you want that division or group to do for you is much more important that what they’re going for, but you may need to get their goals changed or work within their framework in order to be effective.
Well, we formed the company by collecting a group of stakeholders who were motivated to see the company succeed, but also, frankly, to see it have an exit strategy. We distributed shares to all employees, and a significant number of options for senior managers. And we had professional investors that had an expectation that within five to ten years they’d see significant return on their investment. All of that speaks to the need to develop an exit strategy where the private shares we have become liquid, where they are easily sold to someone else.
There are two ways to do that. One is to sell the company lock, stock, and barrel to a strategic acquirer much as Stratus had been sold to Ascend Communications in 1998. The other is to take the company public. You cannot control a strategic acquisition, it either happens or it doesn’t.