Making of a CEO Part 5

Jan 23, 2017

I felt very good and confident about things as the 1985 drew to close. Company had established itself as a profitable venture with a very sharp market positioning. We were the go-to company if you needed to network your heterogeneous environment. We had gone from $5. 2 million in revenue and $2.5 million in losses in 1984 to $10.1 million in revenue and  $100K in profits in 1985. Additional $5 million of revenue had produced additional gross margin of $2.6 million. We had a high spirited holiday party that year. I expected the growth to continue and profits to in 1986. The board even talked about going public in 1987.

So it came as a big shock when board talked about bringing in a new CEO. This time to dress the company for an IPO. The Wall Street was not used to seeing Indian CEOs back then. We needed a new CEO not because the company had done poorly but because it had done too well. The thought was to consolidate the value by going public. No body wanted to risk a failed IPO. I was asked if I wanted to risk my net-worth just because I wanted to stay the CEO. Board was extremely diplomatic and did not want to risk alienating me. I had done what they thought was impossible. A potential write off for the VC firms had turned into a potential 10X return. I was to be made the chairman of the board.

As expected Excelan kept growing and improved its profitability. We transitioned from the survival mode to growth mode. We loosened the hiring and increased the marketing spend.  A virtuous cycle had set in. The board hired C. Richard Moore, the GM of HP’s Calculators division as CEO. HP under David Packard had a tradition of promoting only tall people to senior management positions. David himself was 6′ 8″. At 6′ 5″”, Dick Moore looked the role. He joined us in April of 1986.  I stepped back and had all my direct reports, report to Dick. I did attend our staff meetings but let Dick drive them. It was not that long before Dick started to see a slow down coming. In the summer I took a much needed vacation but when I returned the company’s mood was decidedly downbeat. While I was gone, Dick had put in a hiring freeze and cut back on the marketing in anticipation of the slow-down. Sure enough a slow down materialized. I found this very interesting as our incoming leads had slowed to a trickle just as we cut back on the advertising.  I told Dick that I saw growth returning and overrode him to increase the marketing spend. Within days the leads started to flow in growth resumed. It was much later a I realized that so called GMs from HP were nothing more than product line managers. Financial control and management was with the corporate. Most of the GM’s had no P&L responsibility. I was very disillusioned by the situation but the company was on its way to going public. I had resumed the reins behind the scene and Dick was fine with that.

Company went public in February of 1987. It was a very successful offering. Excelan had done $22.3 million in revenue and had produced $3.5 million in profit in 1986. I wished we had not slowed down the company on purpose for a couple of months. Right after the IPO We acquired Kinetics, an Apple networking company. Open Macs were selling like hot cakes and we had to have a solution for them. Rest of 1987 continued with growth as usual. Stock Market crash of October 1987 and cut our stock price to below 7 from over 21. Company had gone public at $12/share. In 1987, our revenues topped $39 million and we made $6 million in profit but we were now worth one third the value in the market.

Dick was coasting as I was running the company. It was not that long before a scandal broke involving  Dick. We had just gone public and for the Wall Street Dick was still our CEO. Board decided to sell the company rather than fire Dick. NET made an offer to acquire us with no premium over the market price. I went along with it but made it very clear after the deal was signed that I was moving on. NET did not want Dick as a part of the merger so he was let go by the board. After I got to know NET and its management better and before the merger was closed, I told my board that I did not trust NETs books. I felt that they were cooking the numbers. We broke the merger. A few months later, NET scandal broke in public and their stock price dropped by 90%. Our merger was stock for stock and we had been saved from a disaster by a whisker. I became the CEO again and this time I was truly in charge. For the first time, I was not an interim CEO or behind the scene CEO. The company went on to do well. Doing $69 million  in revenue and $10 million in profits in 1988.

In spite our tribulations we kept improving our position in the market. TCP/IP had emerged as a winner in the protocol wars. Both Novell and Microsoft became our partners. In the middle of 1989 Novell made an offer to acquire Excelan with a 50% premium over our NASDAQ price. We became a part of Novell in late summer of 1989. I joined the Novell board and was made CTO of Novell.

 

Making of a CEO Part 4

Jan 19, 2017

Although, picking TCP/IP proved to be the right decision ultimately, it was any thing but easy decision at the time. TCP/IP was seen as tainted protocol, developed by DARPA ( Defense Advanced Research Projects Administration) for long haul, slow and unreliable networks using phone lines and was seen as unsuitable for high speed reliable networks like Ethernet . It had very little industry support. Xerox PARC had developed XNS as lean mean protocols to go along with Ethernet and most of the networking start-ups were adopting them. Most of the industry groups were adopting ISO protocols as their favored protocols. IBM and DEC had their proprietary networking protocols (SNA and DECnet) that they were selling and promising a future move to ISO. Big customers like Boeing and GM had lined up behind ISO too.

The problem we were faced with was very simple. How do we sell enough of hardware and software in a very short order to survive as a company. We knew customers have an immediate problem of connecting a plethora of computers they had bought. How to knit them in to a working network? Xerox had put XNS protocols in the public domain but had decided to hold back applications. Various start-ups were developing their own proprietary applications, essentially making them non-inter-operable with with others. ISO protocol were in early stage of development with no working implementations. IBM and DEC were too happy to pay lip service to ISO protocols while trying to lock-in customers in to their proprietary networks.

We figured that a working solution is the need of the moment. TCP/IP offered that. It had implementations on all sort of computers and operating systems. It had two very useful ready made applications: FTP (File Transfer Protocols) and Telnet (Virtual Terminal Protocols) that customers could use immediately. We also figured that though they were designed to work in slow and error prone networks where response times were slow and extensive recovery routines were needed to make network work reliably, there was nothing inherently wrong with protocols so they would have trouble on high speed reliable networks. The error recovery software would not burden the network if there were no errors.

Excelan was a technology supplier to OEMs when I took over. We had over 30 OEMs but none was taking the volume. I decided to go to the end-users directly by packaging solutions for IBM PCs, DEC VAXes and UNIX Machines and promoting them directly to the end users. The packages included every thing customer would need to connect his computer to the Ethernet networks. All the hardware, software, cables, nuts and bolts were included in the box. Customers were offered full satisfaction or money back warranties. We had priced in 10% dissatisfaction where we may have to fly out a technician at our expense to make the network work. Solution was an immediate hit. Only 1% of the customers needed help initially and it went down from there as we improved our documentation and process.

Initially, we thought our target market would be scientific computing market. This meant research labs, engineering departments and universities. That’s where we focused our marketing energy. We were surprised to see Wall Street emerging as a largest market. As a matter of fact we were not able to identify any one industry that preferred our solution, we were getting business from all sort of customers in all sort of industries. Networking was one of those horizontal capability that everybody needed and we were the only game in town if you had a heterogeneous environment.

We were feeling very good about our business and counted marquee names as our customers. But press and industry associations were forecasting an immediate  demise of TCP/IP and mass adoption of OSI Protocols. Boeing and GM, both of them a very large customers of Excelan, joined hands to form  an association to promote MAP/TOP (manufacturing automation protocols; Technical oriented protocols) built on OSI protocols. Most of the European companies lined-up behind this effort. Siemens, an OEM of ours, had forbidden us to claim them as a customer as they were a big champion of MAP/TOP. GM corporate networking Czar summoned me to come visit him in Detroit. I was told in no uncertain term that I had to drop TCP/IP and move to OSI protocols if we werw to keep GM as a customer. Excelan would be black listed soon and there would be no more business from GM unless we publicly announced that decision.

It was a strange quandary as our business kept getting stronger while disparaging of TCP/IP was reaching a crescendo by the fall of 1985. I was getting more convinced that TCP/IP would be an eventual winner as it was a working solution that was being adopted widely. While other protocols were being hyped, TCP/IP was improving and getting battle hardened under real use. It was hard for me to imagine that customers will rip out their working networks to install some unknown new protocols.

Among all this confusion, we got our largest PO (purchase order) from GM. I realized that corporate Czars have a luxury of indulging in their fantasies while operating managers need working solutions. It was a sure  sure sign that time had changed when Siemens came back to ask for the relief from the agreement that neither Excelan and nor Siemens, could publicly announce the relationship.

It was another couple of years before TCP/IP was widely seen as the future of networking and another 10 years before the emergence of the browser and the Internet. Even though very lonely as the only champion of the TCP/IP in the industry, I felt secure in my decision to bet the company by those in coming POs!

Making of a CEO Part 3

Jan 7, 2017

Excelan was by and large a technology supplier to OEMs. These OEMs were tbuilding super-microcomputers using a plethora of Micro-processors and busses. Most of them ran a version UNIX, many of them were packaged as engineering workstation with CAD applications bundled in. By the time I became CEO in March of 1985, Excelan had signed 30+ such OEMs. We had every body but Sun Micro-system, the eventual winner, as our OEM. These OEMs were to bundle our TCP/IP and Ethernet boards to network enable their boxes but none of them was generating any volume for us. With money running out and no certainty that any of them will break loose any time soon, I took the drastic action of packaging networking solutions for end-users so I could bypass these OEMs. There was a three month crash program to effect this change.

There were eventually four OEMs that came on line and took significant volume. They included NCR, Sperry, Siemens and Masscomp. I had actually stopped focusing on this business, when we got a call from NCR saying that they were ready to take volume. We had a very elaborate contract with them. They were getting 60% discount on the hardware and software. They were to buy boards in lots of 200, they were to give us a 90 heads up for an order so we could secure parts and a firm order 60 days before the shipment date. I took a chance and built 200 boards in anticipation. It was a risky move as it cost about $60,000 just to buy parts. 90 days passed but no firm order came. I was feeling very foolish for spending the cash to build the inventory.  Then out of the blue, 2 days before the end of May they sent us an expedited order to ship 200 boards by federal express. As per our agreement, they were supposed to pay us expediting charges and fedex shipment charges. When I reminded the buyer that our deal required then to pay these additional charges, he threatened to cancel the order if I insisted on that. I was in no position to do that as this order alone was to make our month. I sucked-up and expedited the shipment. Anticipating that they may need boards again in June, I went ahead and built boards again. Again no firm order till two days before the end of the month. I had to suck up again and make the expedited shipment.

By July, our end user business had taken off.  I had gone ahead and built another two hundred boards for NCR in anticipation of the month-end order. Order came two days before the end of the month but this time I refused to ship without expediting charges and extra charges for fedex. The buyer on the phone blustered about cancelling the order on me. I was unmoved and told him to go ahead and do it. We had enough end-user business to make our monthly numbers. Buyer was stunned to hear this and pleaded with me to ship as I had done previous two months. I told him that I was not going to ship without extra charges as stipulated in our contract. Later I got a phone call from a senior manager at NCR asking me if there was a problem. Why were we not shipping the boards as they are a big customer. I told him that I appreciated them as a customer but we had a contract and they were not living up to it. He was surprised to hear that. After understanding what was going on, he apologized and agreed to pay the extra charges as required by the contract. I released the shipment. NCR started giving me two months notice of firm orders and we never had any problem with them any more.

I had come to realize that every business relationship has a power balance. One has to know which side of the power equation one is on. When I needed the business in May and June, I was in no position to enforce my rights. In July, I could have lived without the NCR business and it was a perfect time to enforce the contract. I knew that they have to ship two hundred system to make their numbers and I could stop them from making their numbers.

My management team and Excelan board watched in awe how I played the game. I had become a hard-nosed CEO playing the game as it should be played. . We were making our numbers and business was growing nicely month on month.

We had done $5 million in revenue and had lost $2.5 million in 1984. We finished 1985 with $10 million in revenue and about $250K in profits. It was a great turn around and we were on our way. Further, all the talk of me being an interim CEO also muted down.

Making of a CEO Part 2

Jan 3, 2017

As I took over as the Interim CEO in March of 1985, we were hemorrhaging cash badly. We were selling Ethernet boards at a list price of about $2000, though average selling price after discounts was about $800.. Cost of the manufacturing boards at volume was about $350. So hardware was fairly priced and had a healthy gross margin of 56%. Software was priced at about $60 per copy after discounts., It seemed as a healthy price because it had almost no associated manufacturing cost. We had revenue of about $5 million in 1984 and cost and expenses had added to about $7.5 million. We had lost about $2.5 million in the previous year. We were still losing about $150K a month when I took over and had about a million dollar in the bank. Situation was pretty dire , with roughly about six months of runway. VCs had told us in no uncertain terms that we should not expect any more money from them. As I mentioned before I immediately cut the expenses by one third, thereby extending runway to about 9 months.

After I simplified the business and put a very sharp focus on our goals, I had time to reflect on things. We had a plan to sell about about 10,000 units of hardware and software in 1985. we were going to barely break even with that plan. Software was going to produce a revenue of $300K while hardware was going to have $8 million in revenue. I had 12 software and three hardware engineers. It dawned on me that even if I sold 20,000 units, software business was not going to be profitable. Software had been priced to help sell hardware.

We already had quality problem with our software and most of the incoming customer support calls were for software. I realized that it was not possible to do quality job and provide quality support for our customers at those prices. Situation just did not make sense to me at all. I remember from my childhood a saying ” Mehenga roye ek baar; Sasta roye baar baar ( expensive stuff makes you cry once but cheap one makes you cry over and over)”.  I decided to raise software prices 10 fold over night. Every body, including my board thought I was crazy. But I felt I had to do it to provide quality that customers deserved. New prices stuck, though some customers whined about them no body dropped out. Very soon I was able to improve quality  of the software and also improved the customer support substantially. couple of months later every body felt good about it; we were seen as a quality vendor and we were being paid to be a quality vendor.

Our business had also been transformed from OEM to end-users. End users were buying from us directly to connect their PCs to their UNIX boxes and DEC minicomputers. It just did not make sense to price software equally for all those machines. PC’s were priced at about $2000, Unix machines about $15,000 and DEC minicomputers around $75,000. I noticed DEC was charging about $30,000 for the DECnet connections as against our price of about $2,600. Functionality and utility was same. I had my answer. If DEC users were willing to pay $30,000, why can I not charge them $15,000? So instead of selling components I bundled networking connections in to a box and put a single price on it. Customers will buy a box that will include every thing they needed: Hardware, software, transceivers, mounting plates, cables etc. I also upped the guarantee to full money back if the customer was not satisfied. These boxes were sold at $2,500 for PCs, $5,000 for UNIX and $15,000 for minicomputers.

It simplified the business further, improved the margins, increased customer satisfaction. In process, I had increased software prices almost 100 fold.  Every body, including myself and my board, was feeling like a winner.

The main lesson I learnt was that price has nothing to do with the cost. It is the value pricing that wins the business and value is in the eyes of customer!