Cerent’s “first” CEO, Carl Russo, mulled over all of these options as he took the reigns from Vinod Khosla, acting CEO and partner at Kleiner Perkins Caufield and Byers. Carl signed on for a five percent stake in the company and he immediately focused on finding an exit strategy for Cerent. He relished the task and immediately evaluated his management team and key contributors, ensured the culture was conducive to “winning” (as he defined it), and focused on growth over profitability to wow Wall Street and raise Cerent’s valuation in the process. Carl understood that “the lion’s share of value, which lies in innovation and branding,” is enjoyed by creative upstart startups, a notion described by former state department official Thomas Christensen in explaining how the U.S. will maintain its technological lead over China.
During his entire first year at Cerent, Carl kept two options open as potential exit strategies: 1. Going public, and 2. Being acquired. The latter option he played closer to the vest than the former. At employee all-hands meetings, Carl focused on the potential exit strategy of going public, since it played better to the employees than talk of being acquired by some other entity.
1. Do we really need the money?
Cerent’s management team saw the answer as an emphatic, “Yes!” The company was growing rapidly in terms of new customers, securing repeat orders from former customers, and adding employee headcount to produce the initial releases of the Cerent 454 in volume.
2. Is the money going to be enough?
The planned IPO would’ve raised $100 million, enough, it was believed, until the revenues produced by shipping product with its subsequent cost reductions were able to produce improving profits each quarter. This was a requirement to keep Wall Street impressed with Cerent’s expected future performance.
3. How’s our timing?
The state of the market by early 2000, when Cerent’s IPO was planned, was ripe to embrace an IPO for one of the hottest startups in 1999 that offered optical transport solutions for builders of infrastructure that needed to satiate the demand for bandwidth.
Carl argued, “Yes,” as he had plans to acquire companies such as Ciena to ensure organic growth across adjacent markets, such as long haul optical transport, to complement Cerent’s growing success in metropolitan and regional transport markets.
5. Do we need this for recruitment and retention?
Not really, to attract the cream of the crop, however, employees are more likely to stay and work hard if a liquidity event is in their near future. The carrot of cashing in on stock options was a strong incentive to stay at Cerent.
6. Do we need this for our image?
Cerent’s John Colvin, one of the company’s sales directors, argued that to sell to the Tier 1 Regional Bell Operating Companies starting in 2000 meant that credibility in this market segment would be bolstered if Cerent transitioned from a privately-held to a public company.
7. Do we have the horses?
Yes! Cerent’s CEO was ideal for dealing with Wall Street and ensuring the company valuation would be duly recognized by analysts and the media alike. Carl hired a top notch CFO, a well-know industry name from Lucent, in preparation for going public. Michael Ashby joined a strong accounting team at Cerent, led by Art Widen. And last but not least, Cerent possessed a strong board with telecom industry leaders such as AFC’s Donald Green.
All of the answers to these questions pointed strongly to Cerent filing an IPO. It had plans to do so by early 2000, but then Cisco swooped in.
But Cisco’s arrival is a story for another day.