IPO

Startup companies are the contemporary incarnation of the American Dream. Things have gotten too complicated for one guy to create something in his basement and get rich on the idea. But a small team of dedicated, driven engineers? That is still within reach.

Becoming a successful startup is kind of like becoming a Hollywood star. It requires a combination of talent and luck. Few succeed and many fail.

You have to come up with an idea that people want. You have to have both the skill and imagination to make that idea into a product. And it has to be the right idea at the right time. People have to want it; they have to need it; and to be really successful they have to love it.

Once you head down the startup road there are generally only three outcomes:

Failure: Sadly, over 90% of startups fail without ever turning a profit.
Acquisition: Being bought by a larger company (say, Microsoft) is an "exit strategy" many startups seek. The purchase infuses the company and its founders with both cash and stability. But once a company is acquired it is no longer the master of its own fate. And the youthful zeal and flexibility are frequently lost to corporate bureaucracy and culture clashes. Often, startups are acquired for their technology and the original product disappears from the market.
IPO: The final and most difficult exit strategy is to become a publicly traded corporation, listed on some stock exchange that gets mentioned in the evening news. The right of passage for becoming a public company is the IPO -- Initial Public Offering, a one-day event that requires months of planning and piles of legal documents. It is the most difficult exit strategy because you have to actually make a profit before people will want to buy your stock. A successful IPO can make the company's founders and other employees rich. It is the El Dorado of Silicon Valley.

Some startups carefully choose an exit strategy and groom their company for that outcome. Others claim not to care which way it goes.

I work for a company that successfully achieved both strategies..

I'm sitting in the company cafeteria (that first opened only yesterday) on a campus that is so new the landscaping is not in, along with a thousand other employees, eating a vegetarian omlette wrapped in a tortilla (so California!).. Oh, yes, and drinking champagne. I'm watching a projected video image. We see a diminutive woman standing on a platform surrounded by men in business suits. At precisely 9:30 a.m. EDT she presses a button and a clanging sound is heard but soon drowned by screaming applause from the people around me.

The woman is Diane Green and the clanging sound is the opening bell of the New York Stock Exchange. Diane was given the honor of ringing the opening bell because today is the day VMware "goes public". We have IPOed! (It is perhaps another sign of Silicon Valley to take an unpronounceable abbreviation and turn it into a verb.)

I remember being at a meeting of the Windows SIG (Special Interest Group) of the Software Developers' Forum back in the late '90's. The presentation of the evening was a new product called VMware. The speaker (one of the founders? I don't remember.) was explaining that the product he was demonstrating created a "virtual machine," a software emulation of a computer. He explained that you could run a second "guest" operating system within VMware. More importantly you could run multiple virtual machines and thus multiple operating systems at the same time on one "host" computer.

I already knew what he was talking about. I hard worked on IBM's mainframe virtual-machine product in the early '70's when it had been called CP-67, and later VM 370. I knew the power of being able to run multiple computers within a single physical computer. I wanted VMware. But at that time the price was too high to justify for hobby use or to satisfy my tech-lust.

Scholarly papers had been written about VM 370. They showed, among other things, that the Intel X86 (the processor chip used by Windows and now the Macintosh) didn't have what it takes to do a virtual machine--at least not the way IBM had done it. So VMware found a different way to do it, a better way.

I continued to pay attention to the company over time. I even interviewed with them in 2002. They were still a startup.

In 2004 VMware was acquired by EMC. VMware had successfully exited "startup mode".

Some acquiring companies completely swallow their acquisition. Others keep their new subsidiary more at arm's reach. EMC did the latter. It's generally a more successful strategy and it worked for EMC/VMware.

Somewhere between then and now companies with large number of server computers (i.e. almost any large company you could name) began to realize that they could get much better reliability, flexibility, and cost savings by by using virtual machines. This is partially because of technology that VMware developed, and partly because it was the right technology at the right time. Talent and luck. "Virutalization" became a new buzzword. VMware wannabe's began to spring up. Microsoft came out with a free competitor. Still, VMware's products continued to be the best and most popular.

In early 2007 I interviewed again with VMware. This time I was hired. My own personal example of talent and luck.

It was right around the same time that EMC announced it would sell a 10% interest of VMware on the open market. Thus VMware would become an independent, publicly traded company. VMware's growth had been so great that by selling this 10%, EMC would make back their entire initial investment.

As I joined the company the excitement around the IPO grew. We began filing document with the SEC. And revisions. And more revisions. A range of IPO dates and initial prices began to be announced. The date got pushed back several times; the price got pushed up. The final official date and price were only announced yesterday: August 14, 2007, $29/share.

So now we're sitting crowded into the cafeteria. The market has opened, but not VMware (NYSE-VMW). They're waiting for the price to stabilize. The reporter on the screen announces the tentative price periodically; it keeps creeping up. $35. $45. $50. $52. Then it drops back to $50. Finally it opens at $52.

Diane Green is interviewed by the reporter. She seems a bit dazed. I would be too. What must it be like for her? What was it like in the beginning? I can imagine her husband (the "brains" behind the VMware technology) and his friends talking about the idea of making a company that made virtual machines--based on research they had been doing at Stanford. I can imagine them saying, "we need a CEO for our company--Diane, you can do it--you're a manager." Did she know when this started where it would end up? Did any of them know?

Some people come to Silicon Valley to get rich. Others come to make great new technology. It's usually the latter who actually get rich. I think it's a kind of karmic justice.

Will the VMware founders get rich on this IPO? Will I?

Now the celebration is over--it's 7:30 am. We stream out onto the walkways through the maze of still-present construction fences back to our offices. I'm sure it's the first--and possibly the last--time this campus was so full of people this early in the morning. Techies tend to be hard workers, but not necessarily early risers.

When I get back to my office I buy 10 shares of VMware on the open market at $49.95. Whatever happens to the stock price, I won't get rich on those shares--I plan to hold them as a keepsake.

Now I have work to do. I believe VMware has a great product; we gotta keep working to make that continue to be true. That's what brings me to work in the morning--not the money. Still it's been an exciting morning.

Bloomberg Story

CNN Story on IPO

VMware Home Page

Photos of New York Stock Exchange on IPO day