Grand Junction Networks

In September 1995, Grand Junction Networks was growing out of its skin.

How can you call the news good - even if it means you're going to be rich - when the bearer seems to be in such pain? How can you call the news bad - even if it hurt - when it makes so much sense?

In September 1995, Grand Junction Networks was growing out of its skin. The market for its products - digital switches that made Ethernet networks run 10 times faster than anyone had thought possible - was exploding. Projected annual revenues were nearly $32 million, more than four times as much as the year before. The company had moved from a shabby warehouse in the drive-by town of Union City to a respectable building in Fremont.

As the company's senior parts buyer and planner, Debra Pelsma faced demands on her time that were as insatiable as the demand for Grand Junction's products. Fourteen-hour days were common. "My husband had been through a startup," she says. "He understood that I was getting wrapped up in it. We were going to kick butt. It was the price of a dream, a part of the equation."

At the center of the equation - weaving the dream - was Howard Charney. Charney, then 47, was already a notable figure in Silicon Valley. He was a cofounder of 3Com, a leader in computer-networking systems. But after 10 years there, after having fun at almost every big job in the company, he had started having less fun - and walked away.

The move was consistent with his character. Charney is as soulful as he is successful. His dark eyebrows rise dramatically above his glasses, like the dorsal fins of a sailfish. His voice is full yet gentle, like the rocking of a boat.

Pelsma, then 42, met Charney in the summer of 1993 and immediately became a disciple. "He was so optimistic, so sincere, so genuine," she says. "I decided I'd follow him anywhere." Charney is "the kind of guy people walk through walls for," confirms Kathryn Gould, one of Silicon Valley's top-producing female venture capitalists and the lead investor in Grand Junction.

Charney left 3Com for complex reasons. As the company got bigger, the turf battles got more ferocious, and he just didn't want to fight. "A corporate gladiator I am not," Charney says. "I walked into [CEO] Bill Krause's office and said, 'I'm going to retire.' He said, 'Should I try to keep you?' I said, 'No.' He didn't say much else. We'd been together a long time."

Charney shed 3Com - but he couldn't shake the entrepreneurial bug. "I began to miss the really smart people, the great human beings," he says. "I was no longer tuned in."

So a year and a half later, he started calling these smart people. Would they like to drop by and talk? In his living room and kitchen, high-octane thinkers, six or seven at a time, began meeting every few weeks. They threw out all kinds of wild ideas, most of which they dismissed. "Then," Charney remembers, "we're sitting around one night - this is in September 1991 - and one of the guys says, 'Maybe we can make Ethernet go 10 times faster.' We spent the next several hours trying to knock the idea down. It seemed so simple."

The idea was simple - and brilliant. Charney explained it to Gould, then a partner at Merrill, Pickard, Anderson & Eyre, a premier West Coast venture-capital firm. Gould got very interested. Charney got more than $1.5 million in seed money.

Grand Junction was born shortly thereafter - in February 1992. The company exhibited few pretenses of prosperity. The office in Union City was shabby, even by warehouse standards. Margot Gangola, now 34, took one look and said no the first time Charney invited her to join. "Howard had a great reputation," she says. "But the company seemed too small, too high-risk." Charney persisted. He wanted her to be on his engineering team. Eventually Gangola relented. "It was incredibly hard work," she says. "I knew I'd live through long days and nights for at least 18 months, just to get up and running. But we had an amazing team."

More venture capital came in - and so did revenues. First-year sales were $4.5 million. In the second year, 1994, revenues increased to $7 million. Things got even hotter in 1995. Charney was beginning to tell people, "We think this thing is going to take off."

Other people were thinking the same thing. Back in 1993, when Grand Junction was shipping its first product, Cisco Systems was already a Silicon Valley powerhouse. And every year since, Cisco had grown richer. By 1995, the San Jose-based giant had revenues of more than $2.2 billion. But Cisco was missing something - low-end, fast-Ethernet switching products. That's what Grand Junction built.

Quietly, secretly, Cisco started looking at Grand Junction. How much business would the young startup do in 1996, Cisco's financial wizards asked themselves, if it operated as part of Cisco? Their stunning answer: $119 million. That was 17 times what Grand Junction had made in 1994.

Charney and his team were making their own projections, and they decided it was time to file for an IPO. On July 31, 1995, Grand Junction chose Goldman Sachs to be its lead underwriter. Charney scheduled meetings with lawyers and accountants. Grand Junction drafted its notice to the SEC.

"There was wealth on the horizon," Gould remembers. "But up until then, no one really knew how to calculate it."

Then Cisco called. Charney remembers the opening gambit: "We would like to discuss your products and how we might sell them," said Mario Mazzola, a top Cisco executive. "Can we talk?" The savvy CEO didn't need an interpreter: "I couldn't imagine that he just wanted information."

Cisco kept calling - and each call became more direct. Charlie Giancarlo, who had helped run Kalpana Inc., a LAN-switching company that Cisco had bought, praised Kalpana's deal. He told Charney that his operation now had more resources to work with - that it had done in one year with Cisco what it might have needed three or four years to do on its own.

A few weeks went by. Grand Junction was set to drop its smashing third-quarter results into its SEC filing. Plans for the road show were firmed up.

Then John Chambers called and asked for a meeting. Cisco's CEO got right to the point: Why take Grand Junction public when Cisco was ready to offer $200 million in Cisco stock? Charney relayed the offer to his board, which recommitted to an IPO. But then he and his board started asking some tough questions. What if Cisco bought a rival company, armed it to the teeth, and tried to blow Grand Junction out of the water?

Chambers raised his offer: $225 million. Then he raised it again: $275 million. "Finally," Charney says, "he asked, 'What will your board take?' I said something in the neighborhood of 5 million shares." Chambers called back: "John said, 'I'm not paying more than 5 million shares.'" Cisco was trading at $65 a share. That came to $325 million. Charney said, "I'm not selling for one share less!"

Chambers left the country on a business trip. Cisco's stock rose to $70 a share. Great, Charney thought. But what if the share price moved the other way? The two CEOs discussed a standstill accord: 5 million Cisco shares at $69 a share - or $345 million. Cisco had made an offer that Grand Junction couldn't refuse.

A few days passed, and then came the weekend. On Monday, Charney called the impromptu staff meeting with Pelsma and her colleagues. "Here we were just weeks away from an IPO," she recalls. "It was like something was being dangled and taken away." Charney softened the news as best he could. But the bottom line was that they were Ciscotians now. "Howard was not exactly jumping up and down," Pelsma remembers.

The Fremont speech took place two years ago. Howard Charney has just delivered another speech - this one to half a dozen executives, all big-time customers of Cisco Systems. John Chambers had been scheduled to give this state-of-the-technology presentation, but something came up. So Charney took his place. "I meet as often as once a week with companies that have an international presence," he says. "It's a Who's Who of the industrial world."

Not bad. In two years, Charney has gone from being the CEO of yet another Silicon Valley startup to standing in for the CEO of the third most valuable company on Nasdaq. He is sitting in his office, which is not much larger than an oversized cubicle. He works on Cisco's San Jose campus in Building M, headquarters of the Small/Medium Line of Business, which he runs in his role as a Cisco senior vice president.

Maybe selling out isn't so bad after all. "I'm still running an operation whose mission is managing lives and technology," he says. "But I don't worry about cash flow. I don't worry about having enough R&D money to keep up with the big boys. We are the big boys." Charney reviews the other benefits of the Cisco transaction: "There were 40-plus millionaires created," he says. "We gained wider distribution channels. Cisco projected we'd do $119 million the first year. We did $124 million. We'd never have done that on our own."

So goes the short answer. The long answer is more textured. It starts this way: "Any company that acquires you, and says you're going to stay autonomous, is giving you a crock." Charney understands that the people who work for him aren't energized by the strategic advantages that Cisco offers. They care about what it feels like to be at the office. "What do people come to work for?" he asks. "To be successful. To be appreciated." Engineers, he adds, share one all-consuming goal: to ship great products. And shipping products is different at Cisco.

"At Grand Junction, it was 'Ready, set, go!'" he says. "Going from R&D to 'out the door' took weeks. At Cisco, transferring a product from engineering to manufacturing is a big deal. There are international standards to be followed. There are integration issues to be concerned with. The software, the manufacturing - we have to give it all a common look and feel."

Charney's people experienced the new realities even more than he did. "The game had changed," says Margot Gangola. "At Grand Junction, we only had time to deal with really important matters. Now we're part of a bigger organism. And sometimes we ask, 'What is our contribution?"'

Debra Pelsma offers a similar view: "We lost spontaneity. Everything we did involved asking permission from the Mother Ship." But Pelsma, now a program manager for new products at Cisco, also sees the bright side. She still reports to her former boss at Grand Junction. "I'm fortunate," she adds. "Cisco is not really like a giant company. There's a startup atmosphere here."

Still, something is missing, and Charney is honest enough to confront it. "I've traded away things," he says. "There is an edge to creating something from nothing. There is excitement in the ebb and flow of a little company. There is beauty in getting one product to market. Cisco's product catalogue is half an inch thick."

He sinks back into his chair: "I liked being the CEO. You can't call me an entrepreneur now. And that's okay." His voice trails off. Then he leans forward: "But I tell people I'm an entrepreneur at heart."

Pat Dillon pdwolf@aol.com wrote the cover story "Money Changes Everything" for the June:July 1997 issue of Fast Company. His new book, "Lost at Sea: An American Tragedy," is a nonfiction account of the nation's worst modern fishing disaster. it will be published early this summer by The Dial Press.

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