Invest Like the Best with Patrick O'Shaughnessy - John Chambers - Pattern Matching, Playbooks, and Winning Product Categories - [Founder’s Field Guide, EP.6]

Episode Date: November 5, 2020

My guest this week is John Chambers. John was the CEO of Cisco from 1995 to 2015 where he helped grow Cisco from $70 million to $40 billion in annual revenue. In this conversation we discuss the best business lesson he learned from long time GE CEO Jack Welch, his key lessons from acquiring over 180 companies with Cisco, pattern recognition and playbooks, capitalizing on market transitions enabled by new technologies, the value of team offsites, and a lot more. I was immediately drawn into John's magnetic personality and it's easy to see how he was so adept at running a 40,000 person company for 2 decades. I hope you enjoy this great conversation with John Chambers. This episode is brought to you by Microsoft for Startups. Microsoft for Startups is a global program dedicated to helping “enterprise-ready” B2B startups successfully scale their companies. If you’re a founder running a B2B company targeting the enterprise, you should definitely check them out.   This episode is also sponsored by Vanta.  Vanta has built software that makes it easier to both get and maintain your SOC 2 report, at a fraction of the normal cost. Founders Field Guide listeners can redeem a $1k off coupon at vanta.com/patrick.    For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag   Show Notes (2:04) – (First question) – Why companies need a near death experience (6:37) – The way his leadership changed between 1999 and 2003 (11:34) – His career before and leading to his time joining Cisco (17:51) – What Cisco was like when he joined (21:02) – Role that pattern recognition plays in his management (24:16) – Lessons learned from the spate of acquisitions they took on under his tenure (30:46) – Pricing deals and using Cisco’s scale to be successful (33:09) – Lessons he learned in terms of distribution (35:10) – What he learned from his relationship with Shimon Peres (42:08) – His role in helping young entrepreneurs (46:00) – Transformation on his team building trips to Alaska (50:42) – Transitions in the world he is focused on right now (52:542) – Kindest thing anyone has done for John   Learn More For more episodes go to InvestorFieldGuide.com/podcast. Sign up for the book club and new email newsletter called “Inside the Episode” at InvestorFieldGuide.com/bookclub. Follow Patrick on Twitter at @patrick_oshag  

This episode of Founders Field Guide is brought to you by Microsoft for Startups. Microsoft for Startups is a global program dedicated to helping enterprise-ready B-to-B startups successfully scale their companies. The program has been around for a couple of years, but I recently became intrigued when former Invest Like the Best guest, Jeff Ma, took over. Microsoft for Startups provides companies access to technology, including Azure, Cloud, and GitHub, coupled with a streamlined path to selling alongside Microsoft and their global partner ecosystem.

Microsoft for startups has a very compelling approach to working with startups and driving their long-term business value. If you're a founder running a B2B company targeting the enterprise, you should definitely check them out at startups.microsoft.com. To hear more about the program, stay tuned at the end of the episode to hear from me, Jeff Ma and Greylock partner Sam Motamity. This episode is also brought to you by Vanta. Does your startup need a SOC2 report to close big deals? Or do you already have a SOC2 report and want to make it easier to maintain? Vanta has built software that makes it easier to both get and renew your SOC2. With Vanta's continuous monitoring solution, you avoid hosting auditors on site and taking screenshots to prove that you're compliant, so you can focus on building your business.

Vanta partners with audit firms who file your SOC2 report directly inside of Vanta at a fraction of the normal cost. Hundreds of companies, including more than 100 Y Combinator businesses, are leveraging Vantas today to streamline compliance and focus on building their businesses. Founders Field Guide listeners can redeem a $1,000, coupon at vanta.com forward slash Patrick. That's vanta.com forward slash Patrick. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great

businesses. I believe we are all builders in our own way and this series is dedicated to stories and lessons from builders of all types. You can find more episodes at investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaunacy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunsi asset management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaunacy asset management may maintain positions and the securities discussed in this podcast. My guest this week is John Chambers. John was the CEO of Cisco from 1995 to 2015, where he helped grow Cisco from $70 million to $40 billion in annual revenues.

In this conversation, we discussed the best business lessons he learned from longtime GE CEO Jack Welch, his key lessons from acquiring over 180 companies for Cisco, pattern recognition and playbooks, capitalizing on market transitions enabled by new technologies, the value of team off-sites, and a lot, lot more. I was immediately drawn into John's magnetic personality, and it's easy to see how he was so adept at running a 40,000-person company for two decades. I hope you enjoy this great conversation with John Chambers. So John, I was toying with how to begin this conversation for everyone to hear.

And I thought a really neat entry point would be the observation you told me about from Jack Welch, that you need a near-death experience as a company to become a great company. Can you walk me through that idea and the episode for you? Jack Welch at GE was one of the greatest business leaders of the generation in front of me. And I'd say many people would say he was the best. He did many things well. But one of the things he did was benchmark companies, learn from them. And usually when they sent his teams out to benchmark companies, if they got one

idea from the company, it was great. When they benchmarked Cisco, we were shocked. They came away with 22 areas. They wanted to emulate and learn from and direction. And Jack Welch, even though he was not a technologist at all, understood the market transition going on. So we became good friends and developed a trusting relationship. In the mid-90s, and we were on our way to becoming the most most valuable company in the world. I was talking to Jack and he said, John, you've got a good company. And I said, I know Jack that you're baiting me on this. I think we've got a company that is pretty close to becoming a great company. What am I missing? He basically said, John, a near-death experience. And I said, well, I've gone through some tough times and I rattled off the economic recessions,

et cetera. And he said, no, John, until you go through a near-death recession setback type of approach, you will never be a great leader yourself because you have to question your own ability to lead, your friends who suddenly turn on you. You've got to go through that. And your company has to go through it as well. That's one of those things when you hear pieces of advice. You go, Patrick, that was a good advice, but probably not. I'll put it over here to the side. 2001, the dot-com bust. He was exactly right. It was the hardest year of my business career. We had never missed a forecast. We'd create it 10,000 millionaires in our company. We were on a role. We'd run every award imaginable as a company. And all of a sudden, people were questioning, how did we go from the most valuable company in

the world to a company? Should I even be leading the company? It was a tough year for me. We had to lay off 7,500 people, very painful. These were my family. I knew many of them very, very well personally. And so it was the year that I felt that I did not do a good job of leadership him. He called me up at the end of 2001. He said, John, you now have a great company. This may surprise you. You are now a great leader. And this is the best I've ever seen you execute. And I said, Jack, you're probably the only person that would even say that because many people who believed in me before and believed in our leadership are suddenly questioning, can we do the job well or not. He said, no, you'll see this play out. You will have a much stronger company. You'll

come back better than any of your peers. And candidly, you'll be a much better leader. I said, you're going to be the only one that ever tells me this year was 2001 was my best leadership year ever. By the way, he was the only one that said that, Patrick. But his point was a good one. And now I try to do that with my young leaders. I tried to remind them that they would develop more during stress than the good times. And I try to give them the comfort level, even a little bit more gently than Jack did with me, about as you go through this tough time, here's what the ups and downs will be like,

the pits in your stomach where you worry about. Are you the right person to lead this? Your ability to motivate a team once you get your clear vision in place. So that is what leadership is about. And it was something that probably is one of the best pieces of advice I ever got. As both a leader and I guess just more generally, how were you in 2002 the most different than you were in 1999, having gone through that near death experience? Well, if I can expand the question a little bit, how we handled the challenges in 2008, the Great Recession. What I learned from my mistakes in 2000, 2001, that was keep doing the right thing too long, becoming way too dependent upon numbers, which never failed me. I mean, Patrick, I could tell you based on the first week of a month, how the quarter was going

to go and probably how the year would go, based upon pattern recognition that we had seen around the world, number of new orders, etc. We knew every order within 30 seconds that occurred. We knew what the forecast were. We could compare it at the exact same time the prior years. etc. Seems foolproof. However, what we neglected was the psychology side of this, that the stock market was dropping in 2000, that there was an indication something wasn't going right, and I should have spent more time out with the customers around the world to understand it, because once I

did my trip in January of 2001, I realized that it was going to be the 100-year flood. I made the mistake of using that term with the press, which they beat me up on pretty hard, saying it was just Cisco, but as we know, it was not in terms of the direction. So 2008, we were using both data, but a lot more time with customers asking about trends, et cetera. We saw that coming one year earlier in our summer before the economic downturn. All of a sudden, my pattern on my numbers were really good. But one group of key customers, i.e. the financial institutions, suddenly slowed their

ordering down. And only about 20% off the normal order rates, but it was all of them at the same time. And I called up the CEOs, and because I knew I was. well, I said, there's something going on here I need to be aware of. And they said, no, we're just a little bit cautious at the present time. We think everything's fine. Eight out of eight is in caution. That is a trend. So we prepared ourselves for an economic downturn and we froze expenses. We prepared how we would navigate through this. And nine months later, everybody was in that downturn and we had already positioned ourselves for the future and we're already playing offense. And we

came through it with unbelievable strengths, including loaning billions of dollars to the automotive companies at that time no one else would give them money to purchase their equipment. We built a relationship and trust because we had the financial strengths to do it, and we were positioned expecting problems. Long story short, is not only did it navigate through that better, and once again, we broke away from our peers and every downturn we came out of stronger than our peers and gained market share. And we gained loyalty of customers and trust on our culture that no one else.

have and that company Cisco still has that to this day because of how you interface the customers during the toughest time and their survival time in a way that no one else did. Draw a parallel that goes back to my challenges as a young person almost drowned when I was six years old. And I was a competitive swimmer at that age, but my dad and I were fishing in rapids in West Virginia. He said, John, you've got to be careful here. This rapids are really bad. And It's fine for you to fish, but do not get too close to the edge. He said, I'm going to be fishing up here a little bit above you. Never told me to be cautious.

He said, I do want you to be very cautious. What does any six-year-old do? Each time I started to catch a fish or wanted to see if I could get the lure out further, I got closer, and sure enough I fell in. The minute I went in, I knew I was in trouble. I mean, the rapids plummet me, knock me head over hills. And as I finally surfaced for the first time in the rapids, and I was just getting started in them, my dad is yelling.

at me from 100 yards away, hold onto the fishing pole. And each time I'd surfaced, I'd hear you see him running down the side of the bank trying to catch up to me and yelling, hold on to the pole. And I just got knocked up, skimmed up pretty good through there. And finally he got below me and was able to swim out and pull me in. I was a little bit shook. And he sat down and he said, do you understand what just happened? I said, yeah, I helped him to the fishing pole.

And he said, no. What you did is you didn't panic. I use the focus of the fishing pole for you to focus on something you could control so that you let the rapids take its course and then I can come out and get you. He said in life as you fall into these challenges, you focus on what you can control and influence. Do not swim against the tide of the current because you will drown. You have to learn how to get out of this yourself. Once you've been through that, you know how to teach that. You know how to handle the experience of remaining focused on it.

Well, it's an amazing story. I'm glad that I didn't hear it the first time we spoke because it's so poignant and so interesting. I have to remember, I always get yelled at my team for diving right into the middle of these conversations and not giving some framing for those listening and for myself. I'd love you to begin by telling me a bit about what you had done up to the point that you joined Cisco in your career, sort of the formative experiences you had, and then what that business looked like when you got there, because I think what's so unique about your experience is Cisco was there. It was established, but by far the majority of its absolute value market cap happened under your watch. And there's plenty of lessons to, I'm sure, glean from that experience.

But we need the setup. So going into that experience, what were the formative pieces of your life and career to that point? And then what did it look like when you got to Cisco? Your second part of the question was not just your business career. It was your life on it and your experiences. And then the business career that set it up and then what do we find at Cisco? in that sequence. I was a product of two doctors. I learned from the very beginning, the importance of equality in life, and that were all equal in life. So no matter what happened, they knew how to fix this in terms of the direction. But I had a problem reading in the first and second and third grade, and it was severe. And my parents would read with me every night, but much like somebody who is a

play sports, a golfer or shooting a basketball, if you have something, that's basically wrong with your swing or your shot that's really bad. Practicing it more with that flaw only makes it worse and makes it very difficult to ever fix later. And so my parents, once they saw what was happening and in school, kids would laugh at me when I read because I would lose track of where it was. I turned out I was dyslexic. And that means you often read right to left as opposed to left or right. And it's emotional. You lose confidence with an understatement. And I heard the teachers talking one time from the distance that I may not only go to college, I may not graduate from high school. My parents did figure this out and they got a teacher by the name of Mrs. Anderson

to really help me learn how to read effectively. And even though the term dyslexia wasn't prevalent, she knew I had a learning disability and she taught me a series of techniques over two days a week after school for three years, how to deal with it. Once I learned the work around and then later in life learned that you can take a weakness and make it a strength, whether it's in public speaking or the fact that I can't do things serially, but I can go A, B, Z, pattern recognition and outcomes really quickly, picture the whole thing, make it a strength. Second thing, informative years, I grew up in West Virginia where we were the chemical center of the world with carbide, FMC, DuPont, 6,000 engineers in Charleston, West Virginia,

a lot smartest technicians think of that as the Silicon Valley of the world in chemicals. when I was growing up and 125,000 coal miners and a very prosperous state. More millionaires in West Virginia than the whole United Kingdom did. But because we didn't change, we didn't make changes. We fell from grace. Today, we're number 48, 4, 9, and 50 in almost every category. Then I watched the equivalent of Silicon Valley in Boston 128 with MIT at the heart of that like Stanford is out here. and I watched us lead the mini computer industry with deck and Wang and data general and thousands of computer technology companies and feeder systems and supply change groups. And we went from the powerhouse of the world to almost non-existent in technology and computer

industry because we didn't change. All those jobs were lost and gone forever. So I've seen when things don't change. So I went to IBM, mainframes, big iron, proud of it, etc. IBM didn't change, displaced by many computer players, Wang, Data General, DEC, etc. They didn't change, complaced by client servers, the Microsofts, the Intel's the world. They didn't change, replaced by Cisco, the internet. The internet, it evolved to the cloud, etc.

So I'd learned how technology changes, ushered business changes in a unique way, and that doing the right thing too long gets you in as much trouble as doing the wrong thing does. I was a product of all those. So when I came to Cisco, the first lesson learned is I was never going to get the interview at Cisco. When I decided to leave Wang, we were going through a series which had lasted a year of layoffs almost every three months. And I did not feel I could look for a job at the time I was laying off people in my organization at that time I was running the U.S. organization about 10,000 people. When I told the CEO that I'd lost confidence in the direction and it was time for me to leave, I thought all I'd have to do is send out resumes and wait for the offers to come in. It was really a humbling experience. No offers came in. And I had a pretty good track record and experience on it. That teaches you the importance of relationships.

Fast forward 120 days later, I had 22 offers either in hand or close to being in hand. 21 of them came entirely through friends and networking helping me. I had the search firm who had the search for me that ended up having the search for Cisco as well when it turned out one of the Cisco employees who I'd worked with, oh, gee, 12 years before, 10 years before at IBM and I worked with him at Wang. And I helped him out of a tough situation just because it's the right thing to do. I didn't even know you was at Cisco. He called up my wife and said, I know that John's looking here in the valley. He's interviewing at the wrong companies. And he needs to be the CEO of Cisco. I returned

from a growing trip out here on the West Coast. Elaine, my wife asked me how to go, and I said, it was brutal, but we're getting some offers. She said, I've got a job for you, a company called Cisco. I didn't even know what they did. But the takeaway there is your product, your currency is your track record, your relationships, and trust. And when you use those three consciously or subconsciously, that often determines your future. And purely because of how I treated somebody before did I get the job at Cisco.

and purely because of having seen the experiences so much and been through it, I was able to share with the decision makers of Cisco why I should be their next CEO, and they were kind enough to give me the opportunity. At that time, it was only 400 people, 70 million in sales. The group was very effective, very talented group, but it was a leadership team that did not get along and didn't like each other. You almost had to at times get between them in terms of fistfight, but they were very customer-oriented.

I was fortunate enough to understood, having seen the movies of transitions, that we'd need to evolve the leadership team, that we'd need to move rapidly, and I needed to focus them on outcomes and made a bold statement that the internet was going to change the way the world works, lives, learns, and plays, and Cisco's going to be the key player there. People said, you build routers. You do tech-y stuff between researchers on campus. What do you mean? It's going to change the world.

So that's what Cisco was like when I got there. Great product, by the way. but it was more a techie product. I helped to evolve with some really talented people around me. How you evolve the corporation. We developed and recruited some of the best talent in engineering and sales, and we did 180 acquisitions, and we took it from 400 people to 75,000 people,

70 million in sales to 47 billion. Number one or two was our mentality. Stole that from Jack Welch, don't enter a market unless you can be the one or two players sustainingly in it. Most companies are only one or two in one product category. We were number one when I left in 12 product categories. So my experience in life and knowing when to focus on market transitions, not competitors, and technology transitions, again, not competitors, when you get the two combined,

that's when you can really break away. So that's what I learned in life. It's what I learned from the experience. And I learned what you do very well. Tell stories to remember points as opposed to take to the bottom line. line, which I tend to be very net. Here are the five takeaways. One, two, three, four, five.

You got it. Let's go. It's much better if you tell the stories so people understand how you think and how you balance. One of my weaknesses, I will often, when I'm doing an interview like I am with you, with one of my young CEOs, I will show that I have trust in my CEO that I'm sponsoring in a way to be able to share with the interviewer, here are his strengths and here are his weaknesses or here are weaknesses and strengths.

and then I asked the question, what is the one thing or two things you like best about what I bring to you as your strategic partner as well as an investor? And what's the one or two things you need to improve on? All of them were remarkably good on their answers. And I did it one day with one best person shadowing me. Each one of them gave a different point. But the one who hit home, I thought the most, it said, John, you tend to think in outcomes and you connect the odds quickly and you go A, B, Z. you get there so fast that you can lose people along the way and we have to slow you down to tell what should we look for along the way, what changes have to occur. So we need for you to slow down

as you teach us how to go forward on the direction. They were absolutely right. So another lesson learned for the listeners, ask people not only what are you doing right and where you add value, whether it's your own people who report to you, your peers or giving back to society, but also ask constantly what do you need to do to improve? There's so many questions and follow up. The one I want to stick to early is this idea of pattern recognition. You brought it up a few times. I think it's something that you're naturally endowed to be good at,

but also I love the negative lesson of watching places and companies and people that don't change and the impact of that. Can you describe the role that pattern recognition played? Well, the pattern recognition first in the numbers, the ability to be able to see the patterns based upon how a order rate went in a given day of any month, in a given week of any month, any quarter, a given quarter in a year, and see the patterns so accurately that for 40 quarters in a row, we not only didn't miss. We were plus or minus, always at the midpoint or above in the range to the market,

even though 80% of our business was new every quarter. So we not only hit our year forecast, we hit the quarter forecast, always at the number, usually two cents above. People said, well, how do you keep doing that? And I was kind of amazed somebody didn't go to the bottom line, just take whatever forecast we said and add one to two pennies per share. And that's probably what we're going to do. But it was that pattern recognition that allowed us to spend money during the quarter and be able to develop in ways that others did not. pattern recognition that if there was a problem and opportunity, we saw it at the very beginning, which we could then adjust appropriately to.

But it wasn't just at the top. It was all the way empowered down through the various engineering and sales arms. They were able to see the numbers so accurately. They knew what they needed to change to correct ahead of time on it. So that pattern recognition is so key. The pattern recognition, I've always been driven by customers. There was only one Steve Jobs. He just knew what to build.

how he did it and I knew him reasonably well, all of us were amazed at. It still took him seven years. I shortcut that. I get an idea of a market transition enabled by new technology, and then I go straight to customers and say, what do you think? So pattern recognition amplified by listening to the right customers at the right time on what they think either on the issue or the company allowed us to do 180 acquisitions with the highest track record, I think most everyone would tell in the high tech industry,

they're modeled after what we did at Cisco on, we were a machine on acquiring. And we had the playbooks, which we haven't talked about, Patrick, but we ran playbooks on everything we did from acquisitions to be in one or two in a product category, to how you digitize a country, et cetera, in terms of direction. So it is that pattern recognition then put into playbooks that allows you to move a speed that others cannot. A simple issue. Playbooks, pattern recognition, then replicating that pattern, much like a great sports team who runs the West Coast offense or a Warriors team that passes 130 times per game, which is more than anybody has ever done in history and wins 98% of the

games when they pass 130 times on it. Watching the patterns, then replicate it and playing it through and being able to tell those stories again on what works and why it's applicable. You mentioned the crazy amount of acquisitions. I think there was more than a dozen that were over a billion dollars at Cisco during your tenure. I'd love to hear more about this playbook that you referenced, sort of what the mental models were you had for an acquisition. Where should M&A fit in the toolkit and what were the best lessons you learned doing so many? I'll try to go in the reverse order that you ask them. First is when you try to do something that has not been successful in 1993, when we did our first one, acquisitions in high tech had failed miserably. And,

And we knew that when we tried to do it, we'd probably get the same result unless we did it differently. Secondly, there are a lot of smart people who worked hard to do acquisitions that they failed. So if you're doing the same thing they are and think you're smarter, you're just going to be wrong. We did a study of why do we think the company's failed and what would we do different in the approach. And the playbook that came out of was very simple. First is don't do an acquisition that isn't really strategic to you. They're really hard. Secondly, understand what you're acquiring and protected all costs.

If you were Bank of America being acquired by Nations Bank out of the East Coast, what Nations was acquiring was purely brand and geography. They weren't acquiring people. They lost a fair amount of the people, but they achieved their financial goals. When you're in high tech, what you're really acquiring is engineers and market positioning. And if you don't keep those engineers and the sales teams, etc., then it's going to be a bad financial outcome. for you. Most acquisitions, when the companies acquired, their attrition rate after the golden handcuffs comes off, for those that don't have golden handcuffs runs over 20% a year of their people.

So it's a bad outcome. So we would only do an acquisition where we felt we could keep the people. And we looked at it culturally. If there wasn't a match on culture, we walked. And most people don't even think about it, is there a match on culture? If you haven't got a similar culture, you're not going to keep the employees. If what you're acquiring is the employee's next generation product, it's going to be a bad financial result. So we walked from acquisitions that as we got into the evaluation process, we realized their culture was different than ours. They weren't customer focused. We are customer focused to fanatical extent. You could argue is that right or wrong, but for us, it's who we were. Customers first, our family employees, and we are a family second.

We believed in sharing the success of the company with our employees in a very broad range. We could keep that at the top, could have done it easily. But we felt if you share the success, first you're going to be a much bigger and more effective company. And by the way, the senior execs would be taken care of if the company is successful. And so we dealt with that type of philosophy. And I tell every acquisition, I know you've got ugly spots. We'll probably find them.

But don't let us be surprised. So tell us where the problems are and we're going to acquire you anyhow. But don't let us find it ourselves. So in two situations where I found them ourselves, one on post-Azing stock options, and one where they let information out to the market that had to either come from the investment bank or the company, even though both of those would have been good financial deals for us, we walk. And that was a call from the top in terms of the approach. So it is about how you think through these analysis, how you walk that pattern of what works and does not work. One that I missed on, $600 million acquisition of a company called Flip. It was a super handheld camcorder that was so unique in the market.

And I tried the end of the consumer market once before then. I tried once after Flip, failed all three. But with the Flip, I already had the set-top boxes in your house from the cable companies or the service providers bringing it in, that we were working with the content companies on how do you add value to that. I felt that video would be even more home generate in the future. And if you could use the camcorder to tie into the set-top boxes, the architecture was a logical move for us.

And when we acquired the company for $600 million, we ran our playbook, got off to a great start. People got the market fit. Then Steve Jobs held up a flip product on stage and said, this is an amazing, you good product. I want to compliment Cisco on it. And my team says, see, and I said, watch what comes next. He said, I'm going to give this to you for free.

He put it on the iPhone for free, and he had me. And I should have realized that the product differentiatable was not the physical product. It was the software and architecture and the ability to store video in the cloud. And I should have moved earlier to go to all the major manufacturers of phone and say, we need you to put the flip capability into your phones. Let us be the cloud behind this and a small royalty. And maybe we would have outmaneuvered Apple in terms of the execution. So I got knocked down.

Most people would say, well, your growth is still there. Why don't you fight the battle out? I played the chess game out. I could not find a way to win. Apple was just too good. And once they closed on us for free, my business model would not work. So we closed it. I took a $600 million right down on it in three months.

And every time people hold out flaws about Cisco's acquisition strategy, they say, well, the example of failure is flip. And this is why some companies are not good at acquiring Cisco clearly. is not on this one. And I go, wait a minute, I told you, if we do this world class, two out of three acquisitions are going to work, which means one out of three are going to fail. I've done 12 billion plus acquisitions. All of them work at least for the first three to five years afterwards. And after that, it's up to internal development for this. And you're beating me up on a $600 million acquisition. The two acquisitions we did this year, one for $1.1.3 billion, both worked out. It's

two out of three. The best ones worked out. Tell me, again what I did wrong. And I realized at that time, you're always going to be criticized more from your missteps or your mistakes or the ones that didn't work out than you will the successes. That's just part of leadership. Get used to it. That's never going to change. So those would be some of the lessons learned, good and bad, what you need to do and the tradeoffs, etc. I love the idea of the emphasis on retention of the engineers post-acquisition as the key differentiator in a good acquisition. That's a really interesting perspective. But also understand that is in a, issue where what you're acquiring is the engineers and the products. That is not true when one bank

acquires another bank or railroads merge or automotive companies merge. So your key is understanding what you're really acquiring and protecting it at all cost. What did you learn about price and the type of deal, you know, stock, debt, equity, the ability to deploy, you were kind of the 800-pound gorilla at the time, the ability to deploy Cisco scale and size for effective. of acquisitions. Brand was hugely important. Our customers bought into the concept of we build architectures where routing and switching and security and wireless in the cloud and servers work together on those architectures. Therefore, when we did an acquisition, we could say to our customers, here's your outfolds in our direction. They've watched us do acquisitions earlier that

works, so they weren't concerned about what this one work on it. And we positioned it on outcome at a time everybody else was selling products and direction. As basic as that sounds, that's what we did that our peers did not. We had a much higher rate on acquisitions working, but we built them into architectures, which most people couldn't even say the word. Even my engineers originally didn't like the concept. They wanted to build best and class products.

I said, no, we want to build best and class architectures that we can add to and move with speed on. In terms of our branding and market power, we never used price as a competitive leverage. My view is that we were going for the best margins of the industry, that we wanted good competitors because if you got good competitors, they forced you to change. We would not use our financial strengths to price in ways that others cannot keep up. My competitors usually were 10 to 20 percent less expensive than we were with good margins.

So we competed on architectures, outcomes, and benefits to customers. And in the team, we had the best CFO in the industry was Larry Carter. We had the best sales leader in the industry. best engineers leaders in the industry. We had the best business development team for seven generations of business development. The top person at Cisco was the top in the industry on M&A and business development. So we build a machine and a culture that love to play together, that work culturally together. I would take the team up fishing with me to Alaska most of the time, but sometimes the Bahamas at my expense entirely. And we'd build culture of collaboration and

carrying. And you learn a lot about people when they're out in the middle of nowhere and come around a corner and there's 10-foot grizzly bear that could destroy you and it wasn't used to seeing people and how they respond to it and how you adjust. One of the people you mentioned was perhaps one of the more talented sales leaders. You mentioned Steve Jobs. Everyone always thinks about product and obviously product is critical. What gets way less attention, far less sexy, is distribution. But I think a lot of the story of Cisco is an incredible distribution story that you largely helped architect, along with your team. Can you talk about the lessons you learned there about building a great channel and distribution and Salesforce? One of my toughest competitors was a company called Juniper.

It was one of the very few, and I can say this now, that we weren't able to knock out. We always competed like we'd like to be competed against, and we were tough competitors, but we'd never do something to somebody else would have a problem if they did to us. Juniper had a really good product, and so did Wellfleet. But what none of them had was a sales machine. we combined great products with an unbelievable great sales machine and distribution and the juniper leadership several of them literally as recently as five or six years ago said john we just never understood as you did the importance of great products not just selling themselves but the importance of a sales machine that brings value to customers and outcome based and the distribution that goes with it

so we delivered 80% of our product even though we were a direct touch with our salespeople through our distribution channels. And our distribution channels was, one of the secret sauces that many people did not understand. It was one of the key secrets. When Huawei came at us, they offered unbelievable financial incentives, some direct,

probably some not as direct as that, to the companies to switch over. How many of them do we lose to Huawei? None. You treat people like you like to be treated yourself. You focus on how they win and achieve their objective. and you're there for them in the good times and bad times. So that's the fabric that we built our company on.

We made mistakes along the way, and as I said several times far from perfect. But we enjoy competing and we try to compete with the rules that we'd like to be competed against the same way. Can you tell me what you've learned from Shimon Perez? I was fascinated by some of the lessons you shared with me before about your relationship with him. He was originally known in Israel as can only that a lot of the real creative reigns behind developing a very effective defense organization that with a population of only

about six or seven million could take on countries that had in total hundreds of millions of people. He then switched to peace and focused on how do you focus on peace and peace in the Middle East and peace is the only way economically as well as the benefit of his citizens and others for this to occur. And I literally would go with him into the country even during the toughest of times, we'd go into the streets of Upper Nazareth and Lower Nazareth and into the Christian communities, into the Jewish community, and the Arab community. He would just be crushed by people wanting to seem, but if somebody wanted to shot him, they clearly could. And I was right beside him. That fearlessness and that trying to do the right thing and the love of the people

regardless of religion learned a lot. He was inclusive of everyone. He taught me to be more patient with people that perhaps I disagree with. He taught me leadership was lonely. And I said, Shimon, what do you mean it's lonely? I've got 40,000 people around me at this time. We're part of a team. And he said, John, when things get really tough, we need to know you will be by yourself.

Doesn't mean the people won't want to support you, but you will be by yourself. And boy, he was right. When I made my tough decisions, real tough decisions, although people supported me, if they hadn't worked, they would have changed me. And 2001 was the worst. I mean, you sit up on the roof of your house and you look at, are you the right person to do this?

Your stomach's churning. You know you're going to lay off people. You're going to do this quicker than anybody else has ever done it. You're telling people ahead of time that this is a hundred-year flood, which it may not be, but you believe that it is. You're going to get beat up for that. You're going to lay off what ended up being 7,000 people. You're going to announce it and implement it in 51 days. It is lonely, really lonely.

That's just something leaders have to know. The fun thing is now I get to teach these young CEO startups about leadership. And I go, here are the four characteristics of the CEO in terms of vision and strategy for the company, build, develop, recruit the right leadership team to implement that vision and strategy, communication skills, which are extremely important, especially now in the role of social media and culture. And those are the only four jobs you have. And I teach them how do you deal with crisis management. Here are the rule what you do during economic downturns, political challenges,

a real problem with the media, etc. And here's how you manage through that. And then I'll remind them that it will be lonely during this time period when you hit the tough times. And that while your friends and peers will want to help you, some people would turn on you. You never anticipated. The media who could see in your praises one day will come right at you the next day. Usually a different reporter, but the same publication will do it on it.

This is just part of leadership. And you're about to enter, and depending on the situation, a quarter or perhaps even a year, three, four, five quarters of really tough times. And I'm going to tell you it's going to be hard on you and you will be very lonely and teach them how to do that. And then to add a little bit of humor, you remind them that I've seen this and I've done this and I know you're going to go through a tough weekend based on what I just shared with you and planning for what's going to occur. And I'm going to go have a bourbon and ginger and think about you. And the point that I'm making to add a little bit of humor, but it also is what

fun for me now. Crisis management and having seen so many of them, done some of them right, some of them wrong is so helpful to others. But reminding them like Shimon Perez did me, leadership is so lonely. Other lessons. Think like a teenager. Always think out of box. We had him over here in my house. He wanted to come to Silicon Valley. He was constantly benchmarking. And he said, John, I want to come to your home. And this was at the time there was huge friction between Israel and Iran, and there are strong rumors, probably more than rumors, that there may be a defensive strike by Israel against Iran. And so he was a target. I shared with my wife that Shimon had asked to do this, and she said, of course, we knew that probably do the best to protect him

and us while he's here. As it turned out, there were eight different security groups from Israel, the U.S., local sniper crews, people with rifles on the house, people in the woods that looked like a scene from E.T. with lights and everything going on. And yet, when he came to the house that evening, he was meeting with a number of startups, some VCs, and some friends of the biggest companies here in the Valley, he was the most relaxed man around. He immediately started to talk. And as he did so well, within five minutes, all of us that stopped eating, we're trying to find a piece a paper and pencil to take notes, and he was teaching all of us about leadership, about dealing with problems. He was sitting in the safest seat in the dining room that would require the hardest shot

for a sniper from way far off to hit him. He didn't even sweat. He always had a great sense of humor about calmness during the tough times. And he said, John, I understand you've got an electric car. And I said, yes, sir, I do, a hybrid. He said, I want to go see it and maybe drive it. I said, Mr. President, your security team told me I could only have you in the dining room area here and only in this seat and only in the living room area and that I was to make sure you didn't leave this area. He laughed. He said, John, you know I'm the president. I go, yes, sir. I looked over at the security team and they were already scrambling.

So we went down to the elevator. And as we get out there, he looks at this car and he really gets fascinated by it. And he said, John, I want to drive it. let's go. All of a sudden, you see people scramble every which way. How do they get ahead of this? And his chief of staff came over and she said, John, I don't know how to tell you this. He does not have a driver's license. And he hasn't driven in over a decade. I said, this is really going to be interesting. So we got into the driver's seat. I got into the passenger seat. We're sitting there and he's asking questions. He's going through it and everybody scrambling outside with what's going to happen next.

And they said, okay, I just wanted to get a feel for it. Let's go back upstairs and finish the roundtable with your friends. He had a element of making everybody feel comfortable around him. He taught you, he said, I'm 97 years old, but you've got to think and dream like you were a teenager again to really do innovation. And that's why so much of innovation come from the 20-year-olds, they still are thinking like a teenager, but have the education to really take the risk and changes. But he said age is not your issue on innovation. It's thinking like a teenager that is. and it's an important category for all of us to have as we move forward. I'd love to play off that with your relationship with the squadron of young founders that you now work with and spend a lot of your time with.

You mentioned the four areas are the key responsibilities of any CEO. And I think the first you said was mission and vision, which I think if you think like a teenager, maybe you do a better job of that first one. What in those four dimensions do you find your role to be the most effective at helping younger entrepreneurs? course. Originally, I thought the first two would be most important. How do you combine a mission and vision with sustainable differentiation in the market? Because that's how you get your financing. That's how you get the economic results, et cetera. And when people write about great startups and great leaders of startups, they always write about mission and vision. The second element, which the leaders either already understand or learn quickly, it's about having the leadership team that can implement that

vision and mission and work with you effectively and changing part of that leadership team as you grow because it's almost never when you can take your top seven leaders from the startup all the way through and making those changes as hard to do, especially for people you love and you care about on the direction. So I thought that would be where I'd add the most value, teaching them how to scale organizational revolution, when to change people, how do you do acquisitions? Is your vision really tight? Is it sustainable? How does it compare to others? Compete on market transitions? in that vision, not against competitors, et cetera. But actually, the most important elements in that approach is the third and fourth point.

It is communications and it is culture. And especially during the tough times, what gets you through is how well you communicate to the press, to your employees, to your shareholders, to your customers, et cetera, and your culture. What a lot of people really never grasped, the reason Cisco was so hard to beat, it was culture. I mean, we were one family. We took care of each other like. family. We played together as a family. If you didn't fit into that, we moved you outside the

company. And my mistakes were often that I let somebody who was not a cultural match stay in the company too long. Now I remind people of the startups, the minute you get somebody who's not a cultural match, first don't hire them. But secondly, if they're in the company, you've got to face them out of it because the damage they do. The culture and communications is actually where I often add the most benefit to these young CEOs, even though at first, most of them really are not interested in as much in communications. And if it is communication, it's more how do I get people to invest in the company? And then culture is something often you have to spend time on. One of my best examples of that was the CEO of a company called ASAP. New York just recently

came out of stealth mode, amazing artificial intelligence, customer experience company that understood mission and strategy remarkably well. Their average order was like $10 million when they were still in stealth, first time order, et cetera. But culturally, when I'd share with Gustavo, the CEO is just brilliant and really good. He didn't seem interested in the culture. And I finally said, well, you'll learn that every time. And about the time I quit talking to him about it, he said, John, I got a presentation, business meeting this next week to my employee group. Would you mind reviewing it with you? And I said, of course. And it turned out when he did that with me, it wasn't a business review at all. It was a culture review on who they are, how they were going

get there based upon reviewing it with everybody else. And he got it. He understood culture has to be owned by the CEO, not by human resources. Owned by the CEO, human resources is the one that implements it for you. Don't kid about your culture. Don't put things on your culture that you really don't consider really important. Really important. If you are saying family first, then you treat people that way. If you are seeing customers first, then you treat people that way. If it's just through the right thing, then you always make your decision on what's the right thing, regardless the financial implication of it. I believe that every year you take a small group up to Alaska

to be outside together, a group of the leaders you backed or other young leaders. What sorts of transformations happen on a trip like that? They're magical. I did it originally purely as team building. What I didn't realize is how much each of us would learn from each other, how much that would cause the team to stay together long after other teams did not. Out of the group that I did this were at Cisco for 20 years. It was mainly Cisco, plus a few outside friends that we did the trip with.

And then over the last four years, it's with about 10 experienced leaders who have seen the movies from different angles from a supply chain angle, from a sales angle, from an engineering perspective, from a financial perspective, from a human resource, cultural perspective, and combine it with 12 startups. and then having them each go out and in a boat, it's only two people. And you're with that person for either a half day or a full day. You go into remote locations. You really get to know each other well, et cetera.

You fly in on a pontoon plane and they come and pick you up at the end of the day. You get to know each other real well in the evenings. We give toast. I call on different leaders at different times to say what was your day like? What was your takeaways? What was your cultural aspect that you learned? That's practice in their communications. It's practicing them getting put on the spot.

It's reminding them. that you don't want to have more than one drink before I call on you. I don't want to make a misstep there, even though your team will still love you. If you do make missteps, it's building culture. Well, some of the lessons learned on how do you build great engineering organizations or great sales channel organizations. And the mix is about 60% male, 40% female. But one of my favorite sessions is when I had a young CEO, VJ, out of Bend Drop in Atlanta.

And he was learning about. diversity, but he was trying to understand more of the importance of diversity and why diverse teams how to execute teams that look alike and the importance of gender in that diversity. And not from a negative perspective, but he's just saying, teach me and then teach me how to do it dramatically better than others. And so we'd had a full day of fishing and there were five of us there on it and we were waiting for the boat to come and pick us up. And we were on the issue of inclusion and how do lead people and how do you create an environment? where you're going to be one of the most attractive places for females to work

and part of the culture they want to be a part of, and what are the mistakes that you're going to make as a leader, what are the trade-offs? And we're sitting in the water that's only about a foot deep, and we're waiting for the plane to come up and talk with us. And I have three of the top women in the world in their industries, ranging from pharmaceutical to supply chain, operational leadership, etc., to channels.

and they're teaching him. Also, they were teaching me a little bit as a reminder. And the conversation was so good. I just got up and gradually, well, quietly away from the group. And I went back and I took a picture with Vijay, with three of the top women executives in the world in their categories, sitting there completely engaged in the middle of Alaska,

birds in the background. I don't know if there was a bear in the background or we're always away or not. And we just finished fishing. We caught our limit. and that was the picture I valued the most. The three women with their backs to it, VJ, soaking it up and learning. So it is that ability to bring together teams and cultures and really make it happen and build relationships for life.

So when these 12 CEOs go back, they can call up anyone of the more senior people who have been through their movies before and said, how do you handle this? Do you know this person here? What would you suggest, et cetera? And it's also what any good sports teams understand. you are so much more powerful when you build your own company with a team that is completely united with diversity and differences of opinions. But when you build an ecosystem like the channels around you,

consultants around you that others do not have that makes you near unbeatable. What's that worth? Financial return? Almost priceless. Cultural return, unbelievable. And when people talk about what I do, quote is a VC,

I'm not a VC in the traditional sense of the world at all. I'm a strategic partner, a person that helps them grow and scale. I will provide them tough love. It won't always be right, but I'll tell you what I think the tradeoffs are, and I'll form friendships for life, and I will only back you as long as your culture and what you represent is in the areas that I believe that it should be. It doesn't mean my views are right,

but I don't advise companies that have a different culture than I believe that I try to represent, and I try to teach people how important it is. John, you've made a career of pattern recognition, seeing transitions happen over and over again. You mentioned earlier this change that will disrupt the number of jobs available and sort of right now not keeping up with that pace to replace those jobs being lost to automation, et cetera. What are the other major transitions that you are watching in the world right now? I think the biggest transitions is every company and every employee

of every organization will be a digital company, a digital employee regardless of age, and a tech company. It doesn't matter if you're manufacturing, government, defense, retail, technology companies. Understanding that is the core foundation and will completely transform. Secondly, the biggest transition is the speed of change.

I alluded earlier to the speed of job destruction and automation that actually is extorted through the downturn and the pandemic, ways that people might not have thought would occur. Other elements is 50% of the large companies exist today will not exist in a decade in a meaningful way. And understanding back to the point that we both talked about earlier, the importance of a lot more startups that scale. And yet how many government leaders, regardless of your politics, are focusing on startups

as the key economic engine for their future, creating a regulatory environment that is very friendly to startups and very much conducive to the implications of that and use the U.S. as an example. Learning to work remotely, I think Silicon Valley has a wake-up call coming. So does New York City and Seattle, where 81% of the employees of the high-tech companies are saying, I ought to think about should I either live somewhere else or I ought to think about being somewhere else. Understanding that when these transitions occur, they wait for no one.

Just because you led in one generation or for one decade, there's no entitlement. You must change. John, I'm so sad to be at the end of our time together, but I'm forced to turn to my traditional closing question, which is to ask you for the kindest thing that anyone's ever done for you. The kindest thing that's ever done to me were my parents. My dad taught me how to dream, make dreams come true, and how to deal with the toughness that life inevitably deals to you with illness, et cetera. My mom taught me the emotional IQ side of the house, how she never as a young person, never let me go to bed, man, my sisters or others who absolutely deserved it, by the way, regularly about you don't go to sleep, angry. You learn how to forgive. So probably the

kindest thing was how those parents balanced me and my two sisters and taught us the tradeoff in life that has been so unique to partially my success, but also how I've been able to deal with the challenges. Well, John, this has been so much fun. I'm going to have to listen a few times to be able to extract all the lessons you shared with us through great stories. So appreciative of your time. Thanks for doing this. Patrick is my pleasure. You're in our amazing interviewer and you have several questions I've not heard before, which is unusual. It's a lot of fun. Hope your listeners enjoyed it. And I understand that if you agree with everything I said, you and I failed. I want to make you uncomfortable. I want you to learn about leadership and mistakes made. And it's fine to disagree.

I actually think that makes you stronger as a leader and as a nation by having healthy give and take on. issues. Well, thanks so much again. This has been a real pleasure. Lots to learn. I really appreciate it. Patrick. My pleasure. This episode was brought to you by Microsoft for Startups. Microsoft for startups is a global program dedicated to helping enterprise-ready B-to-B startups successfully scale their companies. In this five-part mini-series, we talked to Greylock partner Sam Motamity and Microsoft for Startemite about why companies should partner with Microsoft for startups. In this week's episode, we talk with Sam Motamity, a partner at Greylock, about his initial investment in Microsoft for startup's customer abnormal security. So, Sam, perhaps you could begin by just giving the audience

a bit of brief background on yourself, what sort of investing you do and how you came across abnormal security. I'm one of the general partners here at Greylock. I focus on the enterprise side of our practice. Greylock is a 55-year-old venture firm that primarily invests in consumer and enterprise software. And we invest across all stages. I personally really focus on being the first capital partner to entrepreneurs, whether that's at the CED or Series A stage, and focus on new companies being started in SaaS, AIML, and data infrastructure and security.

Abnormal is a very interesting story for us at Greylock. I think one of the things that's unique about Greylock is we've over the years spent time and been fortunate to actually help initiate new companies from scratch in our offices, Workday and Palo Alto networks historically, and more recently, companies like Sumo Logic, awake security and abnormal security. So it has a little bit of an unusual story. My partner, Ashim and I first met Evan and Sanjay, the founders of abnormal. They were known to us at Greylock because they previously worked at a company called Telepart, which was also initiated at Greylock

by my now partner, Josh McFarland. That company was building high-scale machine learning systems for ad tech use cases. And that company ultimately went on to be a acquired by Twitter. And Evan and Sanjay left that company with the ambition to go start a new company that would take that expertise around building high-scale, highly-performance machine learning systems to solve an important problem for the enterprise. And so what they did over a multi-month period before the company was started, before a line of code had been written, and before we invested, was speak with something like 100 enterprise CIOs and CISOs to do customer discovery and problem discovery.

And that ultimately led them to landing on the idea for abnormal security. The basic premise being email continues to be the dominant channel for business communication, and therefore the integrity and security of email is of paramount importance for enterprises. What's happened over the last five to seven years is attackers have gotten more sophisticated and the threat landscape around email has shifted from spam and fishing to much more targeted spearfishing and business email compromise attacks. And what evidence Sanjay realized was they could take some of the techniques that they had used at Telepart to solve these more advanced attacks and use machine learning systems

to build baselines of what normal employee communication looks like and then catch anomalies and deviations from that and take that approach to build a new email security solution. So we had the chance to sort of ride shotgun with them during that multi-month discovery process. and at the end, they had a 1.0 product document. They had an initial set of customers who were ready to try the product once it was delivered, and they started the company, and we were lucky to partner with them. What are some of the things that when you're investing before a line of code is written, I find that quite an interesting stage to back a company that's then going to be selling into very large businesses?

What was it about the discovery process or the conversations with CIOs and others that made you confident enough that there would be buyers once the thing was built? what are the signals that you need to see as an investor to gain that confidence? I think when we invest before a line of code has been written, we spend a lot of time thinking about the market dynamics and whether those dynamics can support the start of a new company. And so either, you know, if you're starting a new company from scratch, you're either, we think of it in three buckets, you're replacing an existing incumbent, you're exploiting a new market that's just begun to emerge, or you're going to create a new market from scratch.

So I remember when Evan and Sanjay had started this, they had done. mocked up what a prototype could look like. And as you showed this to different CSOs, a very large percentage of them resonated with, hey, this is an important problem around these advanced spearfishing and business email compromise attacks. It's not served well by the existing email security providers. And if, you know, a new solution came out that had the characteristics, you're summarizing, we'd have high interest in trying something like that out. So what Evan and Sanjay were able to do was take some of the customers who got the most excited. and convert them into early design partners.

And those people essentially signed up with something that I argue is even more valuable than dollars early on, which is, hey, if you guys start this, it's so important to us that we will figure out some cadence to sync with you and help drive your product roadmap. So you end up building something that not only suits our needs, but suits the means of other customers like us. And then when that product is delivered, we'll purchase that product. And it's rare to get that depth of signal early on. And I think it speaks to the importance of a problem.

And so when we saw the combination of that breadth and depth, it actually made it very obvious that this was an important market opportunity. To find more episodes or sign up for our weekly summary, visit investorfield guide.com. Thanks for listening to Founders Field Guide.