Blog Post

Question of the Day: Tortoise or Hare?

With the roaring IPO this week of virtualization software company “VMWare”:http://www.vmware.com/, there can be no question that the company’s “cofounder and CEO, Diane Greene”:http://www.vmware.com/company/leadership.html, has earned what so many founders aspire to: strategic and financial success. VMWare’s marketcap is already north of $20 billion, valuing Greene’s hard-earned stake at $63 million. (The company’s shares trade under the ticker, “VMW”:http://finance.yahoo.com/q?s=VMW.)

But, as most of you know by now, Greene isn’t the only founder who made good off VMWare’s IPO on Monday. On Tuesday, a three-year-old venture backed competitor, “XenSource”:http://www.xensource.com/Pages/default.aspx was “acquired by Florida-based Citirx Systems for $500 million”:http://www.mercurynews.com/ci_6630304?source=rss. According to some analysts, this acquisition price equates to a valuation as high as *500x on Xen Source’s revenues,* estimated at just $1 million, “according to a Wall Street Journal Online report”:http://online.wsj.com/article/SB118718362916698432.html?mod=yahoo_hs&ru=yahoo today (behind paywall).

*So, you say, $20 billion vs. $500 million. No debate?*

Now conisder that Greene, 52, has been slogging it out in the virtualization space — which VMWare has been credited with forging — since 1998. And the long path to being publicly-traded included VMWare being acquired by EMC, and then spun out again. Read: headache for founders — so much change in control might also explain Greene’s comparatively modest remaining stake in her company of 1.13 million shares, per the S-1. (Not that $60 million is anything to shake a stick at; Greene grossed another $2.5 million on shares she put up for the offering Monday.). The Journal also reports that EMC paid $625 million for VMWare in 2004, a valuation at that time of just 7x on VMWare’s revenues — which makes Citrix Systems’ valuation of XenSource look richer still.

XenSource, as we said, was founded in 2004. I don’t think one needs to think too hard about the possiblity that XenSource’s founders, “Ian Pratt and Simon Crosby”:http://www.xensource.com/about/Pages/management.aspx are the clever hares here. According the startup’s site, XenSource has “5 venture backers”:http://www.xensource.com/about/Pages/investors.aspx through whom the startup raised $45 mililon. They’re all top tier (as in, aggressive, including KPCB and NEA and Accel), but according to reports by our friends at “VentureBeat”:http://venturebeat.com/2006/10/30/xensource-raises-15m-for-open-source-virtualization/, the company raised only three rounds of capital, which leads us to believe Ian and Simon still own a nice chunk of their shop.

Even if Ian and Simon only own 20% of the company today, they’re still ahead of Greene in terms of IRR. Moreover, now people are starting to say that VMWare is overvalued, and there is “criticism of the way the company handled its IPO in the firstplace”:http://techdirt.com/articles/20070814/124357.shtml (Found|READers, if you don’t already read “TechDirt”:http://techdirt.com/index.php, you should.) I know only a little about VMWare from friends who work there, but it’s enough to make me guess that those on the XenSource speed train might have had a bit more fun, too. But none of this is the point.

*All three founders have made good. But who fared better here? Put another way, which founder would you rather be?:*

*The trailblazing tortoise,* who sees a new opportunity, and is credited to history with helping to create a new industry?
*Or the clever hare,* who follows the lead of the trailblazer, capitalizing on the opportunity with more speed and apparent ease?

Tell us what you think.

Some notes:
VMware at a Glance (source: VMWare’s company website)
Founded: 1998; acquired by EMC in 2004; IPO in August 2007 (NYSE:VMW)
Revenues: $703.9 million (FY06)
Customers: 20,000+, including 100% of Fortune 100
Employees: 3,000+
Headquarters: Palo Alto, CA, USA
Locations: 40+ offices worldwide
Partnerships: 200+ hardware, software, network and storage companies; 5000+ resellers, distributors, and systems integrators

5 Responses to “Question of the Day: Tortoise or Hare?”

  1. 500 X of revenues!!! can someone cite some other examples where valuation was done at similar levels??

    I would love to know whats really the reason behind such high valuation!

    Coming to the question about tortoise or hare that Carleen made..well i guess I would rather be the hare…and thats cause i dont think i have the skill set to run a company with 3000 employees and 40 offices. I work best with small teams.

    Its more of a personality trait that decides my choice.}

  2. My POV is that doing a startup is mostly not about the money, but about creating something. Given that, there’s no doubt that creating an entire industry is a much more fulfilling experience than being a follower, albeit a very successful one. The hard work involved in trailblazing simply makes you prouder once you can look back at what you’ve achieved.}

  3. adambenayoun

    Carleen, this is a tough question:

    From one side, VMWare’s CEO and founder created standards and built a company who is leading the industry.
    She not only helped created the industry but she also created thousands of workplace and she mostly win a lot of recognition for the work she has put in.

    She might have worked hard for it, might have been less fun, but she created some value that’ll put her into book history for long time. The money isnt really important here, $63 M is a lot of money.
    My only concern is that she has put so much time, that VMWare will be her only successful baby in her life.

    On another side, there’s XenSource case. Being followers to industry’s leaders ofter mean you don’t need to re-invent something. It also means you will fight very hard against the industry leader and sometime this is very fun to be the underdog.
    Sure they won’t be recognized for inventing [but will be for having a nice EXIT] the industry but they will likely have enough time left to move to other ideas [with lot of money in their bank account] and continue to have lot of fun.

    As an entrepreneur, I’d like to fund as many ideas as possible for the challenges and to diversify my knowledge and experience but I am sure that if I would be presented with an opportunity to invent a new industry, I would hop into the bandwagon immediatly.}