When Sandy Lerner and Len Bosack created a device that enabled computer systems based on different networking technologies to be linked together, they recognized the device’s commercial potential and founded Cisco Systems in 1984. After the company went public in 1990, it became phenomenally successful as the equipment vendor of choice for the Internet revolution.
In 1984, several different types of computer systems had been deployed at Stanford University. Each system had its own usage model for remote access, and so all of these systems provided islands of computing to the university’s different departments. Acting on a request from Ralph Gorin,
Recognizing the commercial potential of the device, which they called the “multiprotocol router,” Lerner and Bosack incorporated Cisco Systems. Although the couple requested and were denied permission to use Stanford’s technology at their new company, the multiprotocol routers they were soon constructing in and selling from the Atherton, California, home they shared bore a striking resemblance to the “Blue Box,” the nickname given to the device built earlier at the university. Battle lines began to be drawn between Stanford and the new company, and Lerner and Bosack soon left their academic jobs behind to work full-time at Cisco.
Although it engendered much ill will among the people involved, both sides recognized the need for an agreement to end the conflict. Cisco’s employees saw that a clean break from Stanford’s technology would lend legitimacy to the company’s products. Similarly, Stanford officials in charge of licensing recognized the opportunity for a settlement and chose that option rather than facing the risk of a legal battle. On April 15, 1987, a deal was reached. Stanford licensed the router software and two computer circuit boards to Cisco, receiving in return $19,300 in cash, $150,000 in royalties, and some product discounts. Stanford was offered Cisco stock in lieu of cash, but the licensing office turned the offer down as a matter of policy.
Meanwhile, Cisco Systems shipped its first products in March, 1986. Lerner and Bosack, having spent their savings and maxed out their credit cards getting Cisco off the ground, began looking for an investor to put money into the company. Unfortunately, the pair, with their eccentric appearance and lack of college business degrees, were turned down by no fewer than their first seventy-six prospects. The seventy-seventh, however, made them an offer. That prospect was Don Valentine, a venture investor at Sequoia Capital.
Valentine saw that, despite Cisco’s potential, it would not achieve maximum success with the current management in place. Virtually all of Cisco’s sales had been made to Lerner and Bosack’s peer groups at other universities. Selling Cisco gear as business computing equipment would require a chief executive officer who had closed these types of deals before. Through a contact made by a headhunter, in 1988 Valentine met John Morgridge, then chief executive officer of Grid Systems, a struggling laptop computer maker. Morgridge was convinced that the next big opportunity in the computer industry lay in advancements in connectivity rather than in computing capability, so when Valentine offered him the top job at Cisco he accepted. Morgridge received stock options for about 6 percent of the company’s total shares as part of the package.
Between the original founders, Bosack had emerged as the technical visionary and Lerner as the intense, customer-focused driver. From the moment Morgridge was on board, he and Lerner began to clash. Shortly after joining Cisco, Morgridge began to hire a management team for the company, with Bosack installed as chief technology officer and Lerner as head of customer advocacy. Lerner was infuriated by these actions, and with each new business executive Morgridge hired, she felt more disenfranchised. Despite the conflict, Morgridge’s actions paid off, with sales zooming from $1.5 million in 1987 to $28 million in 1989. With sales and profits skyrocketing, Cisco Systems was ready for an initial public offering (IPO).
On February 16, 1990, Cisco Systems went public, offering 2.8 million shares at $18.00 each. The stock finished the day at $22.25, with 3.3 million shares traded. Lead underwriters were Morgan Stanley and Smith Barney, Harris Upham & Company.
By the summer of 1990, the tension between Lerner and the new management came to a head, and several Cisco managers presented Morgridge with an ultimatum: Either Lerner goes or we go. On August 28, 1990, Morgridge asked Lerner to leave Cisco, and she and Bosack departed shortly thereafter. In December, 1990, the two sold all of their Cisco stock, pocketing $170 million. Lerner and Bosack later separated. In 1991, Bosack founded XKL Systems, a communications engineering company in Seattle, Washington. Lerner left the technology industry completely; in January, 1996, she launched Urban Decay, an alternative cosmetics business.
Cisco’s IPO set the stage for the company’s historic climb to the top of the computer networking industry. As the company transformed itself into a vendor of business networking gear, it became perfectly positioned to capitalize on the consumerization and commercialization of the Internet during the following decade.
Responding to customers’ desires for a unified networking product line from a single vendor, Cisco embraced an aggressive acquisitions strategy, repeatedly buying small companies with point products and folding them into the Cisco product line. Following this strategy, Cisco acquired seventy companies between 1993 and 2000. This phenomenon underpinned the Silicon Valley technology boom of the late 1990’s as businesspeople, engineers, and investors scrambled to start companies and achieve the dream of instant wealth through a Cisco buyout. Others struggled to compete, attempting to match Cisco’s intense customer focus and emulating its acquisitions strategy. All the while, Wall Street provided the capital, driving Cisco stock up to the point where on March 27, 2000, the company was briefly the largest in the world by market capitalization, at $555.4 billion.
All of this competition and innovation in Silicon Valley rapidly produced the equipment needed to network the world. Whether the device needed to be fast, small, low power, inexpensive, quiet, or anything else, Cisco responded, buying and developing the technology needed to produce the blocks to build the Internet.
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“Cisco Powers to Top Spot as World’s Most Valuable.” San Jose Mercury News, March 28, 2000. News article covers Cisco’s overtaking of Microsoft as the world’s most valuable company and how that achievement symbolized the increasing importance of networking technology versus personal computer technology. -
Krey, Michael. “Three Tech Firms’ IPO Experiences Indicate Favorable Market.” Business Journal of San Jose, April 2, 1990. Provides financial details of the Cisco IPO as well as some historical context, mentioning the IPOs of Mips Computer Systems and Verifone Inc. -
Paulson, Ed. Inside Cisco: The Real Story of Sustained M&A Growth. New York: John Wiley & Sons, 2001. Focuses primarily on Cisco’s famed mergers and acquisitions process, but includes a detailed section about the founding of the company. -
Waters, John K. John Chambers and the Cisco Way: Navigating Through Volatility. New York: John Wiley & Sons, 2002. Tells the story of Cisco chief executive officer John Chambers and his navigation of the company to the top of the computer networking industry.
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