Achieving the Exit  |  The SRS Executive Q&A Series   

SRS has produced this series of Q&A interviews to highlight how great entrepreneurs have beaten the odds to exit their companies successfully. As shareholder representative, SRS works with the world's best entrepreneurs once they reach this milestone. This series explores how they got there and what they learned along the way.

Q&A  |  2Wire (acquired by Pace)

Pasquale Romano
Former Founder and CEO, 2Wire

Pasquale Romano founded 2Wire in 1998 and led the company through a $475 million acquisition by Pace in October 2010. Under his leadership, the company successfully navigated the disruptive broadband technology market. Romano highlights the importance of choosing a market with a big opportunity, maintaining a culture of debate, and staying true to a brand philosophy.

Q :  When you started 2Wire, the broadband residential market was still in its nascent stages. Did your vision change over time as the market developed?

When you're at a major junction in a technology or a market where things are about to change in a dramatic way, you can't get trapped drawing an analogy to the present. If you drew an analogy to the present in 1998 when we started 2Wire, you would have viewed the broadband market as a faster modem in a PC. Fortunately, we didn't view broadband as always-on faster dial-up. We saw the ability to be permanently connected to all of the services that you have coming into your house--voice, video, and data--all coming into your house through a big pipe over IP, not the traditional means. Back in 1998, it was not a foregone conclusion that things were going to go that way.

2Wire stayed true to its original plan more than any opportunity I've ever been part of. I used to joke at company meetings that it must be boring to listen to the strategy slides because, while they evolved over time, the direction didn't change. In fact, on a routine basis I used to pull slides from our original investor decks for comparison. Aside from the technical standards and certain details evolving over the larger part of a decade, we stayed true to our vision.

Q :  How did the founding team get together and decide to start 2Wire?

I got a phone call on a Saturday afternoon and from good friend of mine, Brian Hinman, and his childhood friend, Jeff Bernstein. Brian and Jeff were brainstorming about what Jeff was going to do with the rest of his life, and they decided to conference me in. Broadband came up.

Monday morning rolled around and Jeff, being more conservative, said he was going to stay where he was. When he gave us the news, Brian looked at me and said, "why don't we go do that." So we quit our perfectly good jobs and took the leap. It was that simple.

We ended up with four founders. There wasn't ever any dissent from the four of us on what the company was going to be when it grew up. We had debates and arguments, but at the end of the day, those debates were not about what the business should be, they were more about how to get there. We always practiced having a healthy culture of debate through the whole life of 2Wire. We might decide that we disagree on one point, but commit to the direction that we all agree is likely to have the best outcome. Someone has to make a call at the end of the day. So, there's a leadership hierarchy and you can't always expect there to be consensus.

Q :  Can you give an example of an issue that was hotly debated?

When we started 2Wire, there was no silicon available to build the hardware component that we needed to succeed. We were mostly a software company but needed a completely self-contained, very cost-effective, very high performance delivery vehicle, which would predictably service data through a single pipe with a no new wires approach to a home network. The company was going to be dead on arrival unless we could make a cost-effective product. One of the things we needed was cost-effective silicon. We went off and put together a silicon team.

We were very vertically integrated. That gave us a tremendous amount of flexibility. We could do things other people couldn't do because we weren't building our products out of the same building blocks. When the company was about ten years old or so, the silicon market was beginning to catch up and we could see maybe one more generation of differentiation. Beyond that, the requirements for the silicon weren't going to change fast enough for us to be able to justify what was then becoming a broader scale investment in technology, fabrication and back-end expenses associated with making silicon. We started to question internally whether we should start using commercial silicon from a third party vendor or whether we should continue on our own path and continue to invest in proprietary silicon. That was a raging debate. That was probably the most controversial, emotionally-polarized debate that we had in the history of the company. Ultimately, the numbers prevailed in the end.

I flip-flopped on this. I started out in the no-way, no-how camp. It had been a huge cornerstone for the company and a differentiator for a long time. I was really resistant initially, but we had a culture of debate. Through enough analysis from a lot of people in the company, I changed my mind over time. We decided to find a silicon company that would want to buy our chip unit in exchange for influence on the road map and a pricing arrangement that was advantageous to us for a couple of years. That was the decision we ultimately made. That was a super-charged debate that probably went on for the better part of year before we actually started taking action on it.

Q :  What challenges did you face when selling into the telecom space?

In the early days of a company when you're selling into the telecom space and you're a nobody--a fledgling company--the first thing a carrier is going to want to do is throw a blanket over your brand. So, you've got to say, "my brand is staying on the product." We had a tremendous number of challenges holding that line with our customers. When it came down to features, of course we did customization because that represents a huge piece of revenue. But, you have to draw a line where your core product's personality would be indelibly changed, because you want your products to be associated with a particular philosophy. We never lost a deal by sticking to our guns on that.

Apple is the most extreme example of this. You could try to make a knock off of an Apple product with industrial design, but I could put it in the hands of almost anyone and they would feel the difference. There's so much about that company's personality and approach that no one can define, but everyone knows it when they see it. That's what you have to go for and they've managed extreme success in their unwillingness to compromise in a channel environment. Their products look the same no matter where they come from and what country they're in.

That doesn't work completely with carriers, except for Apple with the iPhone. But, you need to be closer to that than to being a turnkey engineering shop. That will allow you to get the third, fourth, and fifth customer.

Q :  About four years after you started 2Wire the Internet bubble burst and venture funding dried up overnight. How did you still manage to attract capital during that period?

We grew while the Internet bubble was bursting, which was awesome. It's great to be anti-correlated. People loved broadband. Broadband was like heaven, having full-time Internet in your house. That was the buzz back then. We grew through that entire period.

We did a round in 2003 that wasn't an easy raise. The valuations were super heated before and everyone was going through a down round. But, there was broad support for what we were doing because we'd latched onto something and turned out to be right. The first thing we latched onto was having all services going through the same pipe and having intelligence at the back-end and intelligence at the home to make the services attractive for both the carrier and the consumer. The second thing was realizing early that we should focus all of our efforts on incumbent local carriers. Because we had picked right, we were fundable. The question was valuation.

Q :  What's the most effective way to work with your investors?

Investors should not be surprised by anything in a board meeting. You need to have regular communication with your board and keep them apprised about what's going on and also give them context so they understand why things are happening when presented with either good news or bad news. Having a very informal, very collaborative interface to your board members and investors helps them understand what you're thinking so they are more comfortable making decisions. You have to give them context informally so they don't overreact.

Q :  Did you see any fatigue over the twelve-year life of the company, given that investors and founders sometimes look for liquidity in five to six years?

It's an issue for sure. Funds have lives. When you're at the end of a fund's life, the pressure mounts to get out unless there's a much, much bigger differential between the present value versus future value. The pressure shows up in odd ways. VCs don't usually come out and say that in a board meeting. They're usually pretty subtle about it, but you sort of know it's there and it's an unsaid thing.

2Wire had an interesting situation because we had a half liquidity event in 2005, where half the company's shares changed hands, so we gave the employees some liquidity, and we gave our investors 50% liquidity when AT&T and Telmex came in and essentially bought half the company. So, we had a little bit of the pressure taken away because they got a return by taking 50% of their chips off the table. It's like playing blackjack in Las Vegas and putting the money you started with back in your pocket when you're ahead and then your attitude is a little different.

It was also a balancing act because some of the guys had only been there since 2005. So, we had a large split in viewpoints because there were investors that had been around for twelve years and investors that had only been around for five years when we exited. Their goals were different. For a strategic investor like Alcatel or AT&T and Telmex, the pressures on their capital are different. They're not managing limited partners. So, they have a different view towards making investments and participating in the upside of companies that they're helping to build versus venture people that are in a deal for ten years.

SRS serves as shareholder representative on the acquisition of 2Wire by Pace. SRS manages all post-closing matters, including working capital and other purchase price adjustments, tax reviews, earnouts, the handling of claims, disputes and litigation, communications with acquirers and selling shareholders, and management and distribution of escrow and expense funds.

SRS | Shareholder Representative Services is the global expert in professionally managing the post-closing process to safeguard the selling shareholders' interests in private company M&A transactions. As the shareholder representative, SRS manages all post-closing matters, including working capital and other purchase price adjustments, tax reviews, earnouts, the handling of claims, disputes and litigation, communications with acquirers and selling shareholders, and management and distribution of escrow and expense funds.

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