40-Pound Calculators, the Birth of Ethernet, and a $100 Billion Mistake: A Conversation with Bill Krause

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Photo: MVC

BY MICHAEL V. COPELAND

Bill Krause admits his career plan sounds a bit more orderly now than it really was. An electrical engineering graduate from The Citadel in 1963, Krause figured he’d break down his work life into 15-year blocks. The first was learning about business, which Krause did under the tutelage of none other than Bill Hewlett at (naturally) Hewlett Packard. The second was building a business. With his partner Bob Metcalfe, Krause founded networking pioneer 3Com in 1981 and brought Ethernet to the world. He ran the company as CEO for 12 years, and executive chairman for another three.

Which puts Krause into the third part of his career. He describes it as his giving back phase. It’s in that capacity that Krause is joining the a16z team as a Special Advisor.

Krause has been a part of Silicon Valley since the earliest days of the computer. He was the first “digital sales engineer” at HP, before they dared call what they were selling a computer. Thanks to 3Com, PCs became much more than isolated islands of transistors. And Ethernet? You know you love it, especially when the Wi-Fi goes sideways.

As a CEO Krause has seen it all ­– the glory, and the glorious mistakes – many, many times. After years of sitting on the boards of large public companies, Krause had a hankering to also get back into startups and help the next generation of entrepreneurs achieve their dreams of building great companies.

That is what he will be doing for Andreessen Horowitz. “Nothing would be more satisfying to me then to be able to contribute to a young entrepreneur’s success over time,” Krause says. “Consider me a startup CEO’s sidekick.” Sure, if Batman’s sidekick was another Batman.

If you have Krause around you can’t help but dig into some of the formative companies and characters of Silicon Valley. In an environment that too often looks only a few months ahead, it’s invaluable to involve Krause, who brings the long-view into the conversation.

So we sat down with Krause, and did just that. We covered everything from selling 40-pound calculators, to Steve Jobs’ contribution to Ethernet, what Krause calls his $100 billion mistake, and the data-obsessed entrepreneurs he sees operating today.

Phase 1

Q: After military service and a stint at General Electric building power plant components in Philadelphia, you made your way to California and pretty quickly to Hewlett Packard as a “sales engineer” in 1967. What were you selling?

Bill Krause: I had been working briefly for a company that sold special purpose digital computers. This was 1966, and not surprisingly maybe the company went bankrupt in1967, which led me to join Hewlett-Packard. I was recruited by HP to be what was effectively their first computer sales engineer, but you weren’t called a computer sales engineer, they didn’t have computers back then so I was called a “digital sales engineer.”

Digital sales? What was that in 1967?

BK: My first day at work I found out in the cafeteria. We had just sat down, and a buddy turns to the guy next to me and says, “Bill Krause meet Bill Hewlett.” Hewlett was all excited because, as he explained, I was going to be selling this secret project they were developing in HP Labs. It was the HP 9100A. It was a programmable machine with 16 stored registers, and 196 program steps that you programmed on a magnetic card. Weighing in at about 40 pounds, it sold for $4,900.

It was the first desktop computer, but Bill didn’t want to call it a computer because he felt all the computer guys would reject it because it didn’t look like a computer. So they called it a desktop calculator instead.

Did a 40-pound calculator sell?

BK: It did, especially to engineering firms to do calculations. You could program all the trigonometric or logarithmic functions into ROM, and with a keystroke execute them. But the real advantage for me was that Bill Hewlett went on the early sales calls too. At HP there was a rule that an executive could not make a sales call without a salesperson. I was that guy. Bill wanted to show the machine to all these people he knew, so I went along too. He would do the demo, show off what it could do, and I mostly just stood around and watched. So I was blessed to have very early on to have a great mentor in Bill Hewlett.

From what was essentially a very large calculator, you went on to run the marketing of a massive collection of electronics that was a money loser when you took it over – the HP 3000. How did you turn that around?

BK: The HP 3000 was the size of about two refrigerators, and sold for $120,000. It was a product line that had caused Bill Hewlett and Dave Packard severe embarrassment. The problem was that the system was introduced before it fully met its specifications. Before the hardware was capable of running the software.

When I took over the product line in 1974 it had negative revenues because people were returning the machines they had initially bought. We got the hardware problem solved, and over about a four-year period we went from negative sales to about $1 billion in sales.

But think about the change since then, this is now about 40 years later. The HP 3000 had 256KB of main memory and 40MB of storage. It sold for $120,000. The smart phone I have in my hand is 1,000 times more powerful, and sells for $300 or $400.

What I would tell entrepreneurs today is in their lifetime they will see a similar increase in power and capacity. We talk about Siri now, imagine what it will be like when you have 1,000 times today’s capability in your hand. We haven’t seen anything yet.

The last part of the “learning business” phase of your career, you managed HP’s first personal computer division. What did you learn there?

BK: This was 1980. And it became clear to me very quickly that the challenge wasn’t the personal computer, it wasn’t whether the technology was ready. The challenge was, how am I going to get the attention of the HP sales force to sell them? You had the HP 3000, these $120,000 to $150,000 machines that they were used to selling. How are you going to sell a $3,000 computer one at a time? The answer that I came up with was selling more than one at a time.

What if I networked them? Then I could sell six, eight, maybe 10 at a time, and all the sudden you were talking $25,000 to $30,000 in sales. And that got the sales team’s attention. At the same time, we were doing some research and came upon some technology that had been developed at Xerox Parc called Ethernet.

Phase 2

Which led to 3Com, we now know, but was it obvious then?

BK: I did feel that the clock was ticking. I knew at some point I wanted to start my own company, and as we started researching Ethernet, by coincidence, a friend of mine who had left HP to become a venture capitalist heard Bob Metcalfe was starting a company and needed a CEO. I met Bob at Mac’s Tea Room in downtown Los Altos, it’s gone now. Bob and I were love at first sight, and off we went.

What did you fall in love over? His theories on the value of networks?

BK: We discussed that a bit. But mostly we had the same vision that from the days of batch-processing mainframes and timeshared mini computers, we were about to move to this world of networked PCs.

How did Bill Hewlett take it?

BK: I ran into Bill Hewlett on an airplane flight not too long after. He asked me, “Bill why didn’t you just stay at HP and do what you are doing at 3Com?” And I told him, “Bill I would have, except that HP was Bill and Dave’s company, and I wanted my company.” And he said, “God bless you, all the luck in the world.” He was that kind of guy.

At 3Com you sold networking software that Metcalfe developed initially. Who were the first customers?

BK: Bob had developed the first Unix with a TCPIP stack in it. No sooner had I started at the company when I get a call from this guy in Seattle. It was Bill Gates. He and Paul Allen were our first customers. They wanted to buy the software to network their VAX machines. We spent a lot of time with Gates, and he was always secretive about what he was working on in the back room. Turns out it was DOS.

Our second customer was a young guy in Cupertino by the name of Steve Jobs. And our third customer was a guy by the name of Andy Bechtolsheim.

But it was Ethernet that made 3Com. How did Ethernet beat out competing networking technologies?

BK: Ethernet at the time was very kludgy. It was this big, thick cable that at the time you had to screw a tap into, and then you had another cable that connected to a card that you connected to your computer. The biggest drawback was that and it was about $3,000. Who is going to spend $3,000 to connect a $3,000 computer? How is that to going to work? We knew we needed to get on to a VLSI circuit, a highly dense semi-conductor to quickly bring the cost down, and that was what we ultimately did. So that was one part.

When we did demos we also explained the technology this way: Ethernet worked the same way as human beings having a conversation. We are using the same medium, we are sharing the air. You talk, then I talk. If we start talking at the same time, we both stop, and someone re-initiates one side of the conversation. The reporters got it right away, and understood the advantage over other technologies, but it was Steve Jobs that added a critical piece that led to Ethernet’s success.

We had put Ethernet on a card, and instead of having to screw a tap we had a connector that looked a lot like the one you screw into your cable box and TV. And were all excited about it. We set up four PCs, and we called Steve Jobs who was a good friend and told him, “You have to come over and see this demo.” Steve comes over and we hook it up and show it to him.

It was a classic Steve response: “Who’s the brain-dead asshole that came up with this shit? This is dreck, this is crap. You want to make it easy to install, just plug it into the telephone jack for cryin’ out loud.”

Why didn’t we think of that? No one knows to this day that Steve Jobs deserves the credit for creating Ethernet the way it is today, and it is a part of why it beat out other competing technologies. It was another one of his brilliant insights around user-interface.

We were also very lucky that about the time we came up with this little card that you could put in a machine, HP came out with the Laser Printer and Apple had the Mac and its Laser Writer. These laser printers were $6,500 or $7,000 a printer. Wouldn’t it be cool if you could share your expensive printer? To make the math easy, if you ginned together 10 PCs, you got a printer for $600. That is what jumpstarted things for Ethernet. And once email came along things really started to snowball.

You made Ethernet both easy to use and easy for people to buy. Was selling networking gear on store shelves an obvious decision in the mid ‘80s?

BK: One of our key strategies was how we defined our customers, which were those people who bought PCs. What that meant was that our products would be sold where PCs would be bought, and at the time it meant computer stores. That was heresy. All our venture capital investors thought if you were going to sell networks it had to be done through the IT department. Be we fought that. We were determined to sell our products at computer stores because they were easy to install and use. That turned out to be a big success.

All right, enough victories. As CEO at 3Com what bad calls did you make?

BK: You could say I made a $100 billion mistake. The whole world had evolved around networks of PCs. But in the early ‘90s along came the concept of networking networks – i.e., a little company called Cisco.

We had acquired a company called Bridge that had competing technology to Cisco, but we never could really get it front-and-center because we came from this networks of PCs orientation, not networks of networks. As a result of our slowness to get to the market, Cisco got a chance and got born. And I made a $100 billion mistake.

What that showed me is that innovations aren’t simple, plain and obvious. Sometimes you have to be hit over a head with a 2×4 to recognize that the world is moving on.

Phase 3

How has building a company changed since you founded 3Com?

BK: When we started 3Com in 1981 our initial round of funding was $1 million. We went public having raised $6 million total, at a valuation of $72 million, which was was four times revenue. Before the lockup period ended, we were valued at $150 million. People did very well on their investments, but the point being that we started a major company on $6 million.

Let’s fast-forward 30 years, and calculating for the rate of inflation, that $6 million equates to about $24 million. How many companies get started today from founding to the point of liquidity for $24 million? Not many.

What I find surprising today is a lack of urgency by startups around getting to cash flow break-even. When we started 3Com we wanted to get to cash flow break-even and be independent as quickly as we could.

Another thing that is different is how data-driven every entrepreneur today seems to be. It has its place, but it has its limits, too. Remember, Steve Jobs was completely driven by instinct.

To some degree what I think is happening today with entrepreneurs is they are substituting volumes of data for thinking about what are the key questions I need to ask myself, and then going to find the answers to those questions.

What hasn’t changed about running a company and working with entrepreneurs?

BK: When I was starting out, my friend Gib Myers who was a venture capitalist at Mayfield said he had a formula for investing that involved five rules. The first three were, “It’s the people.” Then it was “product” and “market.”

In terms of my experience today, I can’t make judgments based on the latest technologies. So I have gone back to that old formula. I make judgments based on the quality of the person. First, are they ethical, do they have integrity, ambition and drive? And as Metcalfe used to say, do they have grip? That is what I look for. That is my mantra now.

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