Jim Dolce

Unisphere "Nearly half of the acquisitions made by big companies in the last 18 months have failed"

May 17, 2000

11 Min Read
Jim Dolce

The Light Reading Interview

In The Spotlight: Jim Dolce, president, Unisphere

Jim DolceDolce’s track record speaks for itself – but turning Unisphere around is by far his biggest challenge to date

Siemens AG http://www.siemens.com had high hopes for Unisphere Solutions Inc. http://www.unisphere.cc when it gave it $1 billion to buy up three networking startups last year. But things didn’t exactly get off to a flying start for the son of Siemens (see Unisphere Trips, Stumbles ).

Now things are beginning to look a bit brighter, as Unisphere “rationalizes its corporate structure” (translation: cans a few people) and starts to ship significant numbers of products.

What’s driving the turnaround? Many believe the difference is Dolce -- Jim Dolce -- who took over as president of Unisphere earlier this year.

Dolce rode into his new job on an impressive track record. Before Unisphere, he co-founded Redstone (bought by Unisphere for $500 million). Before Redstone, he was vice president and general manager at Cascade, which he joined when Cascade acquired Arris Networks -- a company he co-founded– for $175 million.

That’s not all. He’s also on the board of three startups that have recently been acquired for big money:

  • Ignitus (see Lucent Ignites ATM)

  • Qtera (see Nortel Completes Acquisition of Qtera )

  • ArrowPoint (see Cisco Finds A Soft Spot for ArrowPoint)

At last week’s Networld+Interop trade show in Las Vegas, Dolce sprang for the Hilton’s finest room-service sandwiches, and told Light Reading:

  • Why acquisitions fail

  • Why ATM is here today, fading away tomorrow

  • The difference between a spin-in and a spin-off

  • Why Argon isn’t dead

  • Why Lucent hasn’t sued Équipe (yet)

  • His unpleasant Christmas present from 3Com

  • What Jim wants from the Dolce Vita

Light Reading: How are you?

Dolce: Good.

Light Reading:You’ve been promoted?

Dolce: Yes. I’m the president now.

Light Reading: Nice one.

Dolce: Before this I was in charge of Unisphere’s data network group; the Argon and Redstone products.

Light Reading: A lot of people perceive Redstone to be Unisphere’s biggest success. Actually, some people think it’s Unisphere’s only success. Redstone was your company. Is that why they made you president of Unisphere?

Dolce: Well, first of all, I think that’s a false perception. It comes from the fact that all our announcements to date have been from Redstone. Now we’re starting to ship the Castle product. But yes, the fact that I worked for Redstone has a lot do with the fact that I’m now president of Unisphere.

Light Reading: When Unisphere was first set up it had an innovative structure -- a loosely affiliated group of startups. And that structure is widely thought to have failed. Now you’ve taken over you seem to be restructuring it as a conventional corporation. Is that your strategy?

Dolce: It was an innovative idea that the Germans had, but it wasn’t a long-term plan. [The corporate structure] is a work in progress. And to that extent you can’t say Unisphere has failed or succeeded, yet.
I'd encourage you to look at the acquisitions that were made by big companies in the last 18 months. It's clear that nearly half of them have failed. Products have never made it to market, or they’ve been written off. And employees are leaving, not coming. You can consider them total failures, total losses. There are few successes.
If Siemens had come in as a big global conglomerate, worth $80 billion with 440,000 employees worldwide, and purchased these three little companies with 70 or 80 employees apiece and consolidated them into a division of Siemens managed by Munich, then they would fall under that category of total losses today. The fact is, that’s not what’s happened. We’re shipping product, we’re attracting new staff. We’ve made some changes, and Unisphere is on the way towards a success.

Light Reading: Isn’t Argon dead? [Ed.note: Argon was one of the three companies acquired by Unisphere last year. It was developing a combined IP router and ATM switch]

Dolce: No, not at all. I guess Argon overshadows all the successes Unisphere has achieved. When Argon came into the Unisphere fold it was essentially a 40-gig router…Light Reading: ….and an ATM switch.

Dolce: And an ATM switch. Suffice it to say that when we looked at the market and the schedule that the product was on, it became clear to us that if we were to pursue that path we would be late to market with a “me too” 40-gig router. We had to leapfrog the competition. Now, when we do introduce it, you won’t see a 40-gig router, you’ll see something on the order of eight times that capacity.

Light Reading: When will that be introduced?

Dolce: Towards the end of the year.

Light Reading: But the ATM capability has gone now, right?

Dolce: That’s right. We’re focused on IP infrastructure. But I have to tell you that I don’t agree with people who think ATM is going away, for one particular reason: the RBOCs. They have no intention of walking away from ATM. So there is still a very significant market for the technology. However, having said that it’s clear that there is now far more momentum going forward behind IP than there is behind ATM.

Light Reading: Talking of ATM, do you know a company called Équipe [Ed.note: Équipe Communications Corp. is a startup working on a high-end ATM switch. Its core team all debunked from Lucent, where they were working on a similar project (see Équipe Communications Corp. )].

Dolce: I know them very well. I’m on the board.

Light Reading: Really? Why hasn’t Lucent sued their ass?

Dolce: [Laughs] Lucent’s busy with a lot of their own internal problems. I think that’s probably the reason they haven’t sued their ass.

Light Reading: There are an amazing number of lawsuits in our industry at the moment. Would you agree that some companies are using them as a competitive tool?

Dolce: I think it's scare tactics. The legal departments of these big companies that are getting chased by the startups have begun to use the letter as a scare tactic. There are very few cases where that letter becomes a lawsuit.

Light Reading: Any advice on how to avoid those sorts of situations?

Dolce: When a venture capitalist makes an investment in a company, the first thing that he does is to take the entrepreneurs and put them in front of a good attorney. And he instructs the attorney to counsel those guys on how to do it right, how to keep out of trouble. You tell your guys to stay out of their [former employers’] face, and do it by the book. If you do that they’re still going to send you a letter, but nothing will come from it.

Light Reading: Did you ever get a letter.

Dolce: Yeah, From 3Com. They sent it to me on Christmas Eve.

Light Reading: Charming. What happened?

Dolce: Nothing.

Light Reading: I’ve noticed a bunch of companies like Lucent, Cisco, and Extreme, are funding what are known as “spin-in” companies. What’s that about?

Dolce: You’re talking about off balance sheet investments? Light Reading: I don’t know. What’s an off balance sheet investment? Dolce: The idea is that if the staff [of the ‘spin-in’] meet their targets, they get acquired by the vendor. This is what Lucent did with a company called Ignitus. Cisco started doing this stuff several years ago. The vendor participates in the initial funding [of the startup], acting as a VC, and they get an option to buy.

Light Reading: Does Siemens do it?

Dolce: No.

Light Reading: Why not?

Dolce: It was a good strategy several years ago. The deals were done at low valuations – a couple of hundred million. But in the market today you will have a difficult time attracting employees into a deal that has that sort of fixed return ceiling. I believe that engineering folks looking out at startup opportunities are more willing to take a risk on what could be a several-billion-dollar than what is guaranteed to be a two- or three-hundred-million deal. The deals have changed. Now you have second round financing deals today in the three- to four-hundred-million-dollar range.

Light Reading: Does that make any sense?

Dolce: I don’t know if it makes sense, but I can tell you why it’s happening. Actually it’s not just one factor; it’s dozens of factors. It’s a circus.

Light Reading: Go on.

Dolce: Take a look at venture capital funds. Several years ago, a big fund was a couple of hundred million dollars. That same fund today is a billion dollars. And the venture capital guys have to put that money to work. It’s not just that the deals are getting bigger, it’s that the economics of the deals have changed. Remember that there are two sides to their investment: how much they want to invest, and what percentage they get in return for that investment. The percentage they get has stayed the same, but the amount of investment is going up. They’re being forced into paying higher prices for deals because they’re putting together bigger funds.

Light Reading: So they’ve created their own problem?

Dolce: Yes, essentially it’s a problem of their own making. But that’s only part of the problem. The heated stock market is also having an effect. Say you’re an entrepreneur at a startup. And you see companies that are only a year older than yours going public with several-billion-dollar valuations. You’re going to say to yourself: ‘if I’m also going to be a several-billion-dollar company, then I must be worth at least a half a billion dollars today.’Light Reading: What are the other factors?

Dolce: There are a lot of other metrics, including public funds that have moved into cross-over funds. Today, they are not only investing in public securities, they are also investing in to the mezzanine rounds of private companies. In some cases they’re even going into second and first rounds. And those funds are flush with cash because the public market has been a good investment. So you get these cross-over guys coming into the private sector with lots of money to invest and they also have lower investment rate-of-return investments. They’re not looking for 200 times return. They’re looking for ten or twenty times return. And that means they‘re happy to invest more. Which means these guys are also driving up the price of deals.

Light Reading: What do the VCs think about all this?

Dolce: It's driving the traditional VCs absolutely batty, because the prices are getting marked up, and as a result their rates of return are going to be lower.

Light Reading: The stock market has had more downs than ups recently. What effect is that having?

Dolce: Look at the companies that are going public. Last year I saw S1s that were filed with no revenues. That was OK to do six months or a year ago. But now you’re seeing a lot of those offerings being pulled. Everyone’s getting back to basics. In order to go public, you now need to have a track record of strong sequential revenue growth, on the order of 20 percent per quarter, for several quarters, with a clear path towards profitability within four to six quarters after your IPO.

Light Reading: How does Unisphere compare to those requirements?

Dolce: I’m going to pass on that question, for reasons you can probably understand.

Light Reading: OK, let me ask you another. Does the current volatility of the stock market impact your plans for IPO?

Dolce: I can’t answer that either. Preconditioning is against the law. It could delay an SEC approval if we did file an S1.

Light Reading: You’ve worked at big and small companies. What’s left?

Dolce: What I’ve done with my last three companies is to build them from concept, through initial development, to taking a product to market, getting some revenue, and selling the company. After I’ve done that three times I certainly don’t need to do it again for the money. That’s a model that I won’t be doing again, even if I had the opportunity. I want to build a long-term-sustaining franchise.

Light Reading: What about becoming a VC?

Dolce: I’ve had that opportunity, and don’t want to do it. When you’re on this side of the game, you get to shoot up with the excitement almost on a daily basis. When you’re investing as a venture capitalist, you have to take a longer-term view of things. There are long intervals between when you can take the challenge and when you can declare victory.

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