Company Builder

Atiq Raza was in position to become CEO of one of Silicon Valley's old-guard giants. But he left to create Raza Foundries, a company that helps build other companies. Just don't call it an incubator.

Alok Sharma knows he's lucky. He got a second chance.

Sharma, 36, is a former member of the Hewlett-Packard team that is developing the architecture for Intel's 64-bit Itanium processor. Most recently, he road-mapped a next-generation Internet platform that aims to expand network bandwidth, smoothing the way for rapid delivery of telephony, video, and high-speed Internet access. He spent the summer of 1999 attempting to make the big leap from engineer to entrepreneur, serving up his business plan to venture capitalists like Sequoia Capital and U.S. Venture Partners.

Last October, Sharma took his best shot at a chance to build his own company: He lined up a follow-up pitch meeting with Atiq Raza. A luminary of the chip world, Raza, now 51, led Advanced Micro Devices's ambush of Intel by bringing the K6 family of processor products to market and laying the foundation for the development of the Athlon processor.

Raza, who at the time was AMD's president and chief operating officer, was reportedly next in line to become CEO. But he shocked the chip-making industry when he abruptly left AMD in August 1999, citing "personal reasons." Through Silicon Valley's VC network, however, Sharma learned the real reason for Raza's move. In the fall of 1999, Raza quietly began to assemble a new enterprise, dubbed Raza Foundries Inc. (RFI), a high-intensity "meta company" that seeks to invest in broadband networking and communications startups, and then turbocharge their growth by providing technical and executive strength.

Sharma's first meeting with Raza had ended with a rejection in record time. "Atiq threw me out after just 10 minutes," reports Sharma, cracking a bemused grin at the memory. "He said that my proposal was not a multibillion-dollar play. He told me that if I wanted to make a big play, I had to think about the entire end-to-end network. I had to bring the customer and the network together."

So Sharma went back to the startup lab. Working with a team of optical-engineering experts, he cobbled all of the components into the architecture for the broadband system. Then he made himself a promise: He wouldn't blow a second meeting with Raza. He labored over his PowerPoint presentation. He rehearsed his pitch. On the day of reckoning, he drove to an apartment that Raza keeps in San Jose, set up his laptop on Raza's kitchen table — and never got past "hello."

"Atiq just grabbed my laptop and flashed through the presentation himself," Sharma recalls. "After 10 minutes, he turned to me and said, 'I like it now. I'll invest in you.' " Before the day was over, Sharma got a $100,000 note on $1 million in funding; met with Raza's attorneys to sign off on the deal; and took off on a fast-forward race to build his new company, Pacific Broadband Communications Inc. At every turn, the catalyst in that race has been Atiq Raza himself.

As Sharma would soon learn, RFI attempts to do more than invest in broadband networking and communications startups. Its goal is to help build these companies. RFI brings in a SWAT team of top-flight engineers to work side by side with its partner companies, helping them cut time to market. Its senior team of engineers delivers instant credibility to unknown startups, enabling them to recruit top talent and to form strategic partnerships with big-time vendors and customers. Above all, RFI brings to bear a hard-won set of best practices for accelerating the phases of a company's evolution — and for navigating the speed bumps that often trip up startups.

It sounds like a highly credentialed Internet incubator, right? Don't tell that to Atiq Raza. "We call ourselves a 'foundry' because we are doing something difficult," he says. "We are creating hard-to-build companies that will be substantive. We are not betting on probabilities. Just as traditional foundries cast ingots and steel, we are casting a template for building breakthrough companies."

Raza's support doesn't come cheap. On average, RFI takes a 25% to 50% stake in its client startups. But RFI has already scored one success: YuniNetworks Inc., a company that is developing multi-terabit switching-fabric technology for Internet routers.

In December 1999, YuniNetworks's two cofounders, Kenneth Yun, 43, an electrical-engineering professor at the University of California at San Diego, and his sister Kay Yun, 37, a former VP of corporate finance at Goldman, Sachs & Co., signed on with RFI. YuniNetworks ramped up quickly, growing from 4 employees to 30 in just four months. Applied Micro Circuits Corp. (AMCC) was so impressed by YuniNetworks's technology that it made a bid to buy the company when it was just six months old.

"They told us that Yuni looked like an 18-month-old company," says Raza. "So we told them that they'd have to pay for an 18-month-old company." RFI's 2.25 million-share stock deal for YuniNetworks was worth about $250 million. RFI reaped $100 million.

Take the Hard Road

RFI is situated in an unfoundrylike corporate office building on North First Street in San Jose. There's nary a tattoo or a pierced body part in sight. Rather, RFI is staffed by grown-ups — an ethnically diverse group of veteran engineers and businesspeople who have led startups and worked in senior positions at such global heavyweights as Cisco, IBM, Intel, and National Semiconductor Corp.

At 8 AM, Atiq Raza dashes over to his scribbled-on whiteboard and quickly erases names and numbers for his next round of funding. Outfitted in a blue Oxford shirt and a pair of khakis, Raza instantly evinces a technophile's love of gadgetry. He is a power user of PowerPoint. He flashes a laser pointer. He fires up video clips from his Sony Vaio notebook computer. This is a performance in the guise of an interview: Raza speaks in complete paragraphs, and he's determined to make his case.

The first question hits a sore spot: What's the difference between RFI and all of the Internet incubators out there today? Raza avoids the "I" word as much as possible. Incubators have been hammered since dotcom fever broke this past March. Besides, Raza displays an engineer's contempt for the incubator model: It's all too easy, and there's no barrier to entry.

"Companies in the dotcom world are too simple to form," he says. Warming to his theme, Raza grabs a sheet of paper from his desk and recites a rundown of some of the portfolio companies at Internet incubator CMGI: CarParts.com, Dialpad.com, GoFish. com, MyFamily.com, Snapfish.com.

"Not our cup of tea," he sniffs.Why not?"Because these are epiphanies. They might be great ideas, but the ideas define the company. In our case, a process defines the company — a process that captures the combined knowledge of the founders of the company, the experts at RFI, and a network of outside experts."

Customers Define Your Product

The first stage in building a company, says Raza, is to crystallize the company's product definition. It doesn't have to be cool. But it must be compelling. "A compelling product is something that target customers really, really want," explains Raza. "It's something that solves an economic problem." And how do you ensure that your potential customers need your Next Big Thing? You get them to help define your product.

Such was the case with YuniNetworks. By all accounts, the Yuns' pitch meeting with Raza went extremely well. "Ken and Kay were phenomenal," Raza recalls. Still, he was troubled. The prototype for Yuni Switching Fabric, developed by Ken Yun and his team of graduate students at UC San Diego's computer labs, hadn't quite jelled. So Raza and the Yuns took the prototype to a potential customer (a company that Raza declined to name).

They flew to a remote site, where the un-named company's R&D labs are located. Raza and Ken Yun outlined the technology for the company's network architects, who proceeded to "rip the plan to shreds."

"But the top manager told us not to get discouraged," says Raza. "He said that this was a critical technology, and since it was important to his company, his team would help us integrate it with the rest of the system. I told him if that's the case, then we'd deliver this product faster than he'd ever seen a product delivered."

Raza returned to San Jose and called a leading network architect at another company that was a potential customer. In one four-hour session with Raza's team of engineers, the second architect made great progress in mapping out a solution to the technical problems that had already been identified. Many more meetings took place over the next several weeks until the "product definition" had crystallized — that is, until the group had forged a blueprint for a switching fabric with a clean interface. And that was Raza's great innovation: By getting the two companies to help YuniNetworks spec out a faster, better product, Raza locked in two of YuniNetworks's biggest potential customers — before the company's product hit the market.

Use It and Reuse It

According to Raza's worldview (and he certainly is not alone in this), communications has become the new frontier for the semiconductor industry. The increased power of desktops and servers has put huge demands on the world's computing infrastructure. "The economic value has moved from the desktop to the infrastructure," says Raza. "There has been a huge migration from the microprocessor world into the broadband-networking world." RFI is focusing on that world with laserlike intensity. If it isn't broadband, Raza isn't interested.

But RFI isn't exactly swimming in a small pond. Many of the domains that Raza is pursuing — optical-networking systems and components, routers, traffic-engineering systems, wireless broadband — are practically industries unto themselves. Each field is ultra competitive. Still, it's not as if RFI is taking on a score of pet-food portals. Raza figures that by competing exclusively within the high-barrier-to-entry domain of broadband, RFI can relentlessly innovate during the other critical phase of a startup's evolution: product development.

Bill Hunt and Waqar Shah are the key engineering executives for getting products on a fast-track growth cycle. Shah, 46, who does product-development work at RFI, held top engineering and management posts at AMD, National Semiconductor, and Trilogy Systems Corp. Hunt, 33, who oversees all things silicon, worked in similar key positions at Avanti Technolgies Inc., IBM, and National Semiconductor. Part of Hunt and Shah's mission at RFI is to give partner companies the freedom to put their time and energy into real product-design work.

Because RFI focuses exclusively on broadband, it has found a way to reuse many of the core designs of enabling technologies. "One thing that we've all got to do is build boxes and systems," says Shah. "It takes a minimum of three to six months for a startup to develop the foundation for these systems. Our goal is to install this foundation technology, such as a best-of-breed CAD system for designing complex asics, in each of our companies. When I was at Trilogy, we had to develop all of this stuff from scratch. At RFI, there's no need to spend an infinite amount of time inventing stuff. We improve it, and then we reuse it."

Hunt and Shah are fanatical about cutting time to market, and they apply a time metric to every step of the product-development phase. First, they find out when the customer needs the product. From that deadline, they create a work-back schedule, starting at the ship date and ending at day one. That master schedule typically covers more than 800 items.

Startups fall behind schedule, says Shah, because they never put together a real-world schedule in the first place. "Even smart entrepreneurs don't make good program managers," he says. "They've never run large programs before. Most of the entrepreneurs I've seen are very good technically in a particular field. They may have deep knowledge of a particular algorithm. But they're clueless about issues like testing for manufacture. So we invest the time to develop a scheduling template, and in the long run, we save them time."

As this issue of Fast Company went to press, none of RFI's partner companies had shipped product. But several of them say that they are on pace to hit their release date before the year is out. Now ensconced at AMCC, YuniNetworks's first chip was taped out in July; its switching fabric is due out by December. Sharma says that Pacific Broadband's first two products will hit the market by year's end.

"The window of opportunity doesn't stay open for very long," concedes Hunt. "That's why as soon as we've defined a compelling product, we devote all of our energies to blasting through that window and getting the product to market. We put a minimum of 10 engineers on the project. We hold weekly check-ins to ensure that we're hitting our internal milestones. Get the product to market, and you can live to innovate another day."

Are You Scalable?

Raza never intended to build a 21st-century business foundry. He had a different plan in mind when he left AMD: He would launch a small fund and invest in broadband startups. But he was too successful. His goal was to raise $5 million. The fund closed at $100 million. Though a small figure when compared with the billion-dollar funds that some big venture capitalists are raising, that $100 million exceeded even Raza's loftiest expectations.

Still aglow with his success, one morning Raza had breakfast with Bruce Dunlevie, general partner at Benchmark Capital. "I told Bruce that the fund was going incredibly well, and he asked me who my partners would be," Raza recalls. "I gave him the names of two people." Dunlevie proceeded to rate the two, using Raza as a baseline. By Dunlevie's reckoning, both candidates rated below Raza. (Presumably, the unnamed candidates would have had a different take, but they never got the chance to voice it.)

Then, says Raza, Dunlevie made his point. "He said, 'Collectively, the three of you are less attractive than you alone. So the problem that you have, Atiq, is that you are not scalable.' And I must admit, he stumped me."

During the next few weeks, as Raza wrestled with Dunlevie's challenge, he thought about his own journey through the world of work. He had come a long way since 1979, when he arrived in the United States from his native Pakistan. He had spent seven years in various engineering and management positions at high-tech firms. Then in 1988, he became VP of engineering at NexGen Inc., a microprocessor company. Eight years later, then president, CEO, and chairman of the company, he sold it to AMD for $850 million.

The most critical lesson that Raza had learned during his tenure at AMD was to manage without dictating, to give the leaders of AMD's business units the freedom to lead. It was a tough lesson: By his own admission, his tendency is to micromanage.

"But I learned that the only way to scale from a small company to a large company is to create a dynamic process that allows people to form their own domains — and that allows me to keep each of those domains coordinated," he says. "We could succeed only through our unity, but our unity depended on our respecting the ownership of each of the leaders within AMD's organizations."

And therein lay his answer: He would build a model that would enable him not only to take a stake in companies but also to form partnerships with them. And he would approach each of these partner companies as if it were a discrete business unit at AMD. He would give each company the tools, the contacts, the expertise, and the support structure to succeed. And then he'd get out of the way, offering assistance but leaving the decision making to the individual companies.

"If I were to make myself CEO of these companies, I'd be robbing them of their most important symbolic leadership decision — which is exactly what incubators do," says Raza. "They rob entrepreneurs of their control over their own companies. And when that happens, the locomotive that's going to drive the company to success isn't the entrepreneur — it's you.

"So my biggest challenge is to work with the nominated leaders without intruding on their sense of ownership," Raza continues. "If there is a disagreement between RFI and the leader, the leader is right. We are never right. We will express our opinion. We will give advice. But the leader of the company is the one who makes the call."

Raza lined up a second meeting with Dunlevie. While the two men had allocated an hour for the meeting, they needed just 20 minutes: They already had arrived at the same solution, independent of each other. Two days later, the Benchmark partnership voted to invest in Raza's model. Soon after, RFI was born.

Looking ahead, Raza anticipates that his company will grow to 50 employees by year's end. In the next 12 months, he aims to double the firm's partner-company base, bringing it from 10 to 20. Those partner companies will work out of a six-story building that RFI is leasing in north San Jose. Other RFI locations are slated to open in Boston, Europe, the Far East, India, and Israel. It's a wonder that Raza, who's already running in overdrive, can keep pace with such torrid growth. But at least for the moment, he has cracked the code. He has made himself scalable.

Bill Breen (bbreen@fastcompany.com) is a Fast Company senior editor. Learn more about Raza Foundries Inc. on the Web (www.razafoundries.com).

Sidebar: Leadership Lessons

Raza Foundries Inc. is more than a grooming shop for broadband startups. It is also a post-graduate school of sorts for newly minted CEOs — the people who are leading the companies that RFI invests in. Here are three lessons that Kay Yun, president and CEO of YuniNetworks Inc., and Alok Sharma, president and CTO of Pacific Broadband Communications Inc., have gleaned from the master, Atiq Raza.

Never take a dollar at face value. "Atiq showed me that in investing, it matters very much where that dollar comes from," says Sharma. "If I accept a dollar from you, I have to figure out what that dollar buys me. Does it buy me just a dollar's worth of goods or does it buy me credibility? It might sound weird, but the money is really secondary. It's the relationships that help you build a great enterprise."

Deal with the customers who count. "We spent a lot of time strategizing about how we were going to approach customers," says Yun. "You don't have to spend your time visiting everybody. Just see the customers who will give you good feedback."

Focus on the deliverable. "Atiq's meetings are very decisive and very short," says Sharma. "He's not interested in how many lines of code you've written. The whole conversation revolves around hitting the key milestones and how we're delivering value to the customer. His lesson: When you see a problem, make a decision right then and there."

Contact Alok Sharma (alok@pacband.com) or Kay Yun (kayyun@amcc.com) by email.

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