Entrepreneurs of the Year
Just like Bill Hewlett and David Packard, Janie and Victor Tsao had a garage.
"Everybody starts with a garage," Janie says.
Hewlett and Packard's was a tinker's shed, a rustic hut that to this day whispers of science-fair projects and woodshop dreams. It's the epicenter of technology's sepia-tinged creation myth, the kind of place where you find a stone and brass monument naming it the "Birthplace of Silicon Valley."
The Tsaos' garage, on the other hand, sits on a cul-de-sac in the Woodbridge section of Irvine, Calif.--the preplanned heart of Orange County--and dominates a khaki-colored house that faces a park dotted with bolted-down picnic tables. Framed by brick columns and a basketball-hoop crown, the garage speaks of SUVs, recycling bins, and home repair. It is an unexceptional place: mass market, suburban, retail.
It is in this garage that, in 1988, Victor and Janie founded the company that would become Linksys, the computer peripheral company whose seven-year run on the Inc. 500 list culminated last spring with its purchase by Cisco Systems for $500 million. And if the Hewlett-Packard garage symbolizes the quintessence of an inventor's jolting inspiration, the Tsaos' garage signifies the other side of entrepreneurship, an immigrant story of hard work and calculated risks.
THE ENTREPRENEURIAL CLOCK
Two decades after emigrating from Taiwan, Janie and Victor Tsao have created, in Victor's words, a high-tech version of a "mom-and-pop Chinese restaurant," dividing the work in half and watching costs with the tight fist of someone who turns out the light on leaving a room.
They are both tall and straightforward and they are steeped in the minutiae of their company, even now with 300 employees. They are frugal but not cheap (until recently they drove a 12-year-old car, but it was a Mercedes) and they are willing to let their company permeate their life to an incredible degree. "We never set up any systems or boundaries, like not talking about work at dinner," says Victor.
Most important, they work hard and fast. They don't fancy themselves as inventors; they are popularizers of technology, which means any advantage they have in a price-slashing, commodity market that includes brutal competitors like NetGear and D-Link comes from making the right intuitive leaps, getting out new products a few weeks faster, keeping costs down, and negotiating tough.
Like not a few business owners before them, the Tsaos heard the entrepreneurial clock ticking: They were determined to be independent before they reached the age of 40. Victor was 37 and Janie was 35 when they decided to put to use their familiarity with Taiwan (where they'd met at Tamkang University). They were both working in information technology--Janie at Carter Hawley Hale and Victor at Taco Bell--and with Victor a step higher on the corporate ladder they decided that he would continue to punch the clock while Janie launched the business, a consultancy they named DEW International. The new company mated American technology vendors like Northgate Computer with Taiwanese manufacturers that could make their wares cheaply.
Soon, one of those manufacturers brought them an idea. At the time, the cables used to connect printers and PCs could extend only 15 feet before the data began to degrade. To solve this, the manufacturer invented a setup that used telephone wire to extend the reach to 100 feet. This company needed someone to market the thing in the U.S. "With companies like that," says Victor, "actual English was not their strength." The manufacturer came up with products that connected multiple PCs to multiple printers, and the Tsaos renamed their company Linksys. Victor quit his job in 1991, and within two years Linksys had moved twice, eventually to a 2,000-square-foot office, and each month was selling 8,000 Multishares, as those units were called, through tech catalogs like Black Box. In these early years, the Tsaos invested $7,000 in Linksys, the only capital the company required until it tapped a bank loan for the one and only time, in 2001. (They paid that loan off in less than six months.)
Linksys slowly expanded from printer-to-PC connectors to PC-to-PC Ethernet hubs, cards, and cords, gear that let small businesses and nerdy households connect computers so that they could share data. It was a niche market, and with 1994 revenue of $6.5 million the company was far from a behemoth. But slow growth was the only way the Tsaos could expand without taking on debt or investors. While Victor managed operations and finances as CEO, Janie handled sales in her job as vice president of business development. As Mike Wagner, the company's director of marketing, puts it, "Janie brings the money in, Victor keeps everyone from spending it."
Frugality and a focus on the future were obvious in the Tsaos early on. While taking M.B.A. classes at Pepperdine in the mid-'80s, Victor met Bob Klein, who recalls Victor telling him that someday he would move to Newport Coast, far tonier than Irvine. The Tsaos made that dream a reality in 1997. Klein and Victor's first business lunch occurred at the Japanese fast-food chain Yoshinoya--and they meet at comparable places to this day (though, Klein says, Victor has taken to picking up the check). Indeed, on the night the Cisco purchase was announced, there was no celebration. Instead, Victor ate a $5 dinner box at his desk. "It wasn't good at all," he admits.
With the birth of Linksys, Victor took to working 100 hours a week, with occasional naps on the office floor. He involved himself in every part of the business, dealing with U.S. operations during the day and Taiwanese manufacturers at night, and his employees still know him for his 3 a.m. e-mails. He drew no salary until the mid-'90s--he refers to the preceding years as the "Linksys Peace Corp" era--while the couple and their two boys got by on Janie's salary of $2,000 a month. Linksys operated with comparable leanness. Calvin Liu, a designer who Victor calls "Mr. Linksys Look and Feel," first worked for the company as a freelancer in 1991. As it still does, Linksys produced its own graphics. Liu would photograph the products, scan the photos, send them to the printer, and later glue the labels to the product boxes.
Linksys caught a crucial break in 1995. Until that point, tying computers together with Linksys gear required installing software. But when Microsoft moved from Windows 3.1 to Windows 95, it built in networking functions. Suddenly it was simple for small offices and homes to operate networks. Instantly Linksys' potential market expanded.
Janie attacked sales with tenacity. She went to the opening of a Fry's Electronics store and watched in fascination as customers with full shopping carts queued up a dozen deep at the cashiers. "That really opened my eyes to the potential of retail," she says. By 1995, Linksys was in Fry's and revenue almost doubled, to $10.7 million. Still, if catalogs like Black Box and regional chains like Fry's were good, national retailers were better. They promised the big score. The problem was that they were nearly impossible for a tiny company to crack. Janie wanted to get Linksys into Best Buy, but she called for months to no avail.
Then, in April 1996, she attended RetailVision, a trade show intended to introduce manufacturers to retail buyers. Janie set her sights on Best Buy, and when she wasn't able to make contact with Best Buy's buyer--Wayne Inouye, now CEO of eMachines--at the scheduled sessions, she and a sales associate tracked him right to his hotel room door. They presented to Inouye right in his room and, amazingly, he ordered just under $2 million of gear. Janie kept cool until she made her way from Best Buy's offices to her rented car. Then, in a move that is difficult to imagine for this sensible, focused woman, she started to scream.
NO SECRETS, NO GENIUS
Revenue doubled to $21.5 million in 1996, then leapt to $32.1 million in 1997 and $65.6 million in 1998. Linksys moved its headquarters to a 20,000-square-foot office. But success did not lead to extravagance. To this day, Victor and Janie file vacation forms like anyone else and all new employees--even executives--must endure a 90-day waiting period for benefits. No one is allowed to work from home, with the exception of a small mobile sales force.
"Victor and Janie are willing to let good talent walk away if they're not the right fit," says the company's human resources head, Niki Lee. "We could get the best VP of marketing out there and if Victor and Janie realize that he's not hands-on, he wants an admin [administrative assistant], and he only wants to give orders and not be in the trenches, then they just won't deal with it."
Not surprisingly, this lean, fast, hard-working environment, coupled with a pay scale that in Lee's words is not "top dollar," leads to a young work force (average age: 27) and high annual revenue per employee (about $1.8 million per full-time employee, compared with about $560,000 for Cisco). More surprising is that annual turnover is only 5%, compared with an industry average of 9%, according to Mercer Human Resources Consulting. Glen McLaughlin, vice president of North American sales for Linksys, attributes this to a culture in which employees are allowed to run their own projects. "We'll give you enough rope to either hang yourself or be successful," he says. McLaughlin tells of Victor and Janie letting him switch from 15 regional to three national product distributors in 1996 even though they doubted his rationale. Other than e-mails from Victor demanding updates, they did not meddle. Luckily for McLaughlin, it worked. "Victor and Janie really like to see people execute," says Mike Wagner. "They're not afraid to weed people out."
As home broadband Internet use began to bloom in the late '90s, at costs significantly higher than those for dial-up connections, Victor realized that people were going to want to hook all their small-office or home computers to one line. To do so they would need a router, a high-tech cord splitter allowing multiple computers to hook into one modem. These already existed--Cisco was making its living off them--but at $500 and up they were too expensive and complicated for a non-techie home.
So Victor ordered up the product that proved to be the turning point for Linksys: a $199 four-port router that employed an easy browserlike program to lead people through installation. After introducing the product at a trade show in late 1999--the first sub-$300 consumer router to market by three months--Linksys exploded. The company's share of the networking market leapt from 10.8% in 1999 to 18.6% the following year, according to NPD TechWorld, an organization that tracks trends and consumer sales in the industry, and revenue went from $107.6 million to $206.5 million. "They invented consumer home networking," says Steve Baker, an NPD analyst.
The introduction of the four-port broadband router was in perfect tune with Linksys' personality. The decision to go with it was based on intuition and listening to manufacturers, not drawn-out market studies. Liu handled the product design in-house, the price was cheap, and the technology was off-the-shelf. It was not a futurist's invention but an obvious technology made easy. "Everyone knew in the late '90s of the broadband explosion," Victor says. "It wasn't really a secret."
"I won't say Victor has a vision for 10 years," says Liu. "But I think he has a vision for two, which gives you a good chance to be successful if you do the right things."
With the industry's eyes on them, Janie and Victor had to keep running. Janie continued to sign up catalogs, distributors, and retailers (the list now runs from Amazon.com to Radio Shack). Victor kept introducing products around the four-port broadband router--products such as cards that allowed laptops to connect to routers--while he looked for the next big thing.
He found it in wireless networking. The only thing better than letting people connect all their computers to one modem was to let them connect without a cord. In January 2001, several months after a wireless transmission standard called 802.11b (or, less clumsily, Wi-Fi) was finalized, Linksys launched a system of wireless routers and computer cards. Though Linksys wasn't first out of the gate this time, the brand was embedded in consumers' minds, and in 2001 Linksys revenue and market share jumped to $346.7 million and 34.2%, respectively.
Again the Tsaos had capitalized on a known technology by introducing inexpensive products before most of their competitors. In that way, Victor makes his moves in the open, much as he plays basketball, his only hobby. According to Roger Bundy, his Taco Bell boss, Victor telegraphs his basketball shots with his eyes. "Shorter people could block him because he'd announce to the world that he was going to shoot," Bundy says. The difference here is that Linksys gets off the shot before its competitors get off the ground.
Liu describes an instance last February when a Taiwanese manufacturer was in town. Victor asked him to come to a meeting at 10:30 on a Saturday night. The two men talked about a new design for a small-business product. The basics were decided that night--square instead of rectangular, gray and silver instead of blue and black--and by Monday the design was finalized.
That's not unusual. Malachy Moynihan, the company's vice president for engineering, says Linksys and its Taiwanese partners were recently able to move a product from idea to production in three weeks. Sometimes Linksys even jumps ahead of itself. In fall 2002, while an industry board was finalizing a faster wireless standard called 802.11g, the Tsaos decided that they wanted to have 802.11g products in stores for Christmas, final standards be damned. After a September meeting with chipmaker Broadcom convinced them that users could easily upgrade the 802.11g chips with free software if the final standard changed, they plowed ahead. On December 24, Linksys launched its 802.11g products, beating its competitors by three months. It sold 300,000 units in the first two months.
Again: no secrets, no particular genius. The company was fast, frugal, and right, as it had been before. Victor seems almost proud that his success is not built on something more spectacular. "There's not a lot of difference," he says. "We all went to business school or read books or listened to lectures. We all know we need to work hard, make sure capital is coming in, all these things. Execution is the key."
Linksys now owns 49% of the networking market, and Glen McLaughlin says it is aiming for 70% by 2005. Because the brand is so well known, Linksys products fetch a $20 or $30 premium over competitors' wares. "Their dominance is unbelievable," says CompUSA buyer Doug Lane. Linksys hit revenue of $430.4 million in 2002, and Ehud Gelblum, a JP Morgan analyst, estimates the company will pull in $538 million for the fiscal year ending this June.
But the Tsaos have never stopped sweating the small stuff. Victor still occasionally answers customer-support calls and Dan Sherman, the Cisco senior vice president who led Cisco's investigation of Linksys, was shocked when he brought up complaints he'd read on an Amazon.com message board and Victor not only knew the exact problems but had read the same board and responded to several of the posters.
For her part, Janie continues to supply a straightforward approach to negotiating with retailers. CompUSA's Lane describes her sales force as "definitely not shy," and Todd Magnuson, a buyer at Best Buy, says, "The first time I met Janie, it was a short greeting and right into business. Very focused and very adamant on protecting their market share."
She isn't all steel, though. "Janie impressed me because every year she would call at Christmastime and leave a holiday message," says John Herr, a former Buy.com buyer who had received plenty of holiday cards before but never a phone call from a company founder. "It was a nice personal touch."
Riding an essentially unbroken string of successes, the Tsaos weren't particularly eager to sell their company. But it was--of course--a practical matter. More than 90% of Linksys' revenue came from the U.S. and Canada, and the company didn't have the cash or the infrastructure to expand overseas. More important, Dell, HP, and Microsoft are all aiming for the market, and Victor felt certain that eventually somebody would try to crowd Linksys out. Victor met with bankers from CSFB to examine raising money with a public offering. CSFB instead suggested a sale, and Victor agreed to consider it.
The attraction for Cisco Systems was obvious: With a huge share of big-business networking but no small-business and home-office products, Cisco was hungry for a retail company. Cisco contacted the Tsaos in fall 2002, and by March 2003 a deal had been announced. Cisco would pay $500 million in stock for the company, which, except for a small employee stock option plan, was owned by Janie, Victor, and their two sons. As part of the deal, the Tsaos agreed to stay on for two years and Cisco agreed to let the company remain a standalone unit, something it had never done in its 80 other acquisitions.
"Going forward, their biggest risk is that they stop being Linksys and become Cisco," says NPD's Baker. Victor says he wants to quit if that happens, but so far little seems different. Except for six Cisco transplants, the executives are the same, and the decision-making speed remains that of a small company. Mike Wagner describes going to the company's new vice president general manager, a Cisco exec named Tushar Kothari, with plans for a $600,000 German ad campaign. "Within four days he had made the decision," Wagner says. "Maybe it's not one hour, but it's not six weeks. He's definitely got the spirit."
Linksys has started to sell an 18-product collection of wireless networking devices, including a wireless router and a wireless adapter that lets people link televisions and stereos to a network so MP3 songs can be streamed from computer to stereo and chosen on TV. And Cisco has launched Linksys offices in China, India, Australia, Hungary, and Italy, and has made it possible, for the first time, for Linksys to advertise on national cable and broadcast television.
As for Janie and Victor, they're traveling more to open new markets and Victor is saying he plans to retire in five years and maybe teach, a claim no one believes. "If there's a contest for the most boring couple in Orange County," says Janie, "I think Victor and I would win."
Victor is now 52, Janie 50, and the company has been their life for 15 years. Victor says he has no significant regrets, except in one area: his children. His sons are now in college. Sometimes Victor managed to play basketball with his boys, but too often, quality time together took the form of the kids coming to the warehouse on Saturdays to help ship products. That's what 100-hour weeks will do. "From age 13 to 15, they just shot up, taller and taller," says Victor. "Whoa, what happened?" But the family tries. Victor started to delegate more two years ago, and he's down to about 70 hours a week. Last February he even found time to hook up a home network at his own house.
The Tsaos have even taken a vacation. Last May the family took a car tour of the Grand Canyon. "For four days," Victor says. "The four of us just drove."
Linksys' Irvine headquarters is a modest, two-story structure in a pedestrian-unfriendly office park where people walk in the street because there is a dearth of sidewalks. Desk-high scuffmarks circle the walls where temporary tables were erected at a time when workers had to cram two to a cubicle, before Linksys opened its new warehouse and call center in 2001. An ad hoc photography studio overlooks the old warehouse space, where overflow customer service reps were once housed in temporary heated tents.
In the back, Janie sits in a windowless office unadorned save for four art prints and neat piles of manila folders. In the front, a temporary divider splits the office that Victor shares with Kothari. Wearing a monogrammed white button-down, Victor looks surprisingly lively--considering that less than 24 hours before, he and Janie had returned from a four-day trip to Taiwan. The trek had started after a sleepless night (he'd worked through until morning, with only a 20-minute break to pack) and came four days after he'd returned from another 10-day Asian excursion. Victor's dark office is as unadorned as Janie's, except for a burst packing box on the floor and an AARP cord taped to his monitor in a mocking gesture at age.
Soon Cisco will move the headquarters to something grander. That suburban garage may become legendary yet.
Sidebar: Be Patient
For the Tsos, growth is central, rewards are for later.
Janie and Victor Tsao form DEW International, later to become Linksys, in their garage. The company popularizes technology like this Multishare print server.
Revenue: $1.5 million
Victor quits his IT job at Taco Bell and begins working 100-hour weeks. Linksys outgrows the Tsaos' garage and moves to a real office.
Revenue: $2.2 million
Linksys grows enough in one year to need an office upgrade and moves to a new 2,000-square-foot location.
Revenue: $6.5 million
Victor starts to take a salary from Linksys. He is not the highest- paid employee and will never get a raise.
Revenue: $32.1 million
Linksys debuts on the Inc. 500 list at No. 304. The Tsao family moves to a new home in Newport Coast, Calif.
Revenue: $206 million
Having signed up distributors from Amazon to Radio Shack, Janie moves from a clear plastic cubicle to a windowless office.
Revenue: $430 million
Linksys gets out ahead on the new Wi-Fi standard (and celebrates at a holiday party). Victor cuts back to 70 hours a week.
Projected revenue: $538 million
Cisco Systems acquires Linksys for $500 million in stock. The Tsaos take a rare family vacation: four days in a car.
Ian Mount is a New York City-based writer. His story about the bar chain Coyote Ugly appeared in the November 2003 issue.
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