All over America’s technology hubs, new but empty buildings, emblazoned with corporate logos, stand as a testament to millions of dollars grossly mismanaged by ambitious executives.

And yet some companies did successfully manage their businesses through the recent market tsunami. Riverstone Networks is one of the few networking companies that has actually performed well in 2001 — consistently meeting Wall Street expectations, after going public in a market that was already tanking. Everybody wants to know how they did it. A chat with CEO Romulus Pereira reveals that the underlying reasons and management principles behind his company’s success are infuriatingly simple. So what are they, and how did so many companies forget them?

“God willing we will have no arrogance” is Pereira’s cautious assessment when asked about the future of his company. And the words speak volumes about why Riverstone has been successful.

What If It Doesn’t Happen?

Riverstone was spun out of Cabletron at the height of the telecom boom. When other companies were rapidly expanding to meet the projected market explosion, Riverstone, though faced with the prospect of an imminent IPO and large wealth creation, was cautious. Pereira recalls, “We asked, ‘What if it doesn’t happen?’ We’re not going to get into any kind of debt situation. We’re not going to over-hire.” It was a critical decision.

“In a market that’s going really well, the business fundamentals are not as important because you’re getting automatic pull from the market, you don’t have to sell, you’re basically taking orders,” Pereira explains. He recalls the intense focus on technology and building faster networking gear in the market at the time. “All of these people started companies, but didn’t know the basics of how you balance a book, how you make the numbers come together, how you build a sales engine.”

After the success and acquisition by Cabletron of their startup Yago, Pereira and fellow Yago founder Piyush Patel found themselves, actually running Cabletron (Patel would become CEO). It was, as Pereira describes it, “a strange set of twists and turns,” but it gave 35-year-old Pereira a glimpse of large company operations. Drawing on his experience inside Cabletron, he wanted to build Riverstone with the more conservative business fundamentals of a large company, rather than scale indiscriminately, as was fast becoming the norm.

Good Fortune

It didn’t hurt that Riverstone had been able to use Cabletron’s customer base to gauge a very clear market opportunity.

“We had the benefit of seeing the market early,” Pereira admits. “We jumped into the metro market two and a half years ago and we knew it was a goldmine.” The company’s focus on this market has given it the opportunity to avoid the brick wall in sales that some core optical companies like Sycamore and Corvis have run into in the last year.

Pereira was also able to build Riverstone with Cabletron’s money, and grow the company in a mature corporate environment, sheltered from the VC funding binge and market noise that was prevalent at the time.

When the company finally went public in February, one of the few tech IPOs of 2001, the market had already bottomed out and the stock was never afforded the opportunity to reach astronomic heights. Riverstone was able to grow according to more conservative and realistic guidelines, and never had to undergo the crippling “reorganization” and layoffs that plagued so many companies that went public in the late 1990s.

Fundamentals

In the current environment, Pereira explains, “80 percent of the business is operational stability and 20 percent is technology.” For the young CEO, it’s about building a fully balanced company that is financially stable, with lots of cash, and good operating fundamentals.

“There are only two things I get upset about,” Pereira insists. “Not having the best product in the market and not having happy customers. If those are the guiding principles then everything else scales around it.” Talking to Pereira one gets the sense that he is obsessed with making sure his company grows methodically around his customers and revenues. Every brick needs to be put in place with good reason and at the right time.

“You get that much head-room in your P and L and you can grow that much,” he says. “Cash is king and profitability is what sustains ongoing growth. You have to realize that engineering is an opportunity cost and you’ve got to put your engineers where there’s going to be revenue and not just build a great product.” It seems like an often-repeated message over the last year, and yet few companies seem to have been able to execute it. Enterasys, which is essentially the former Cabletron, still has considerable financial problems to deal with, stemming from a time when Cabletron was a struggling entity.

For Pereira it’s about measured growth, and the processes that need to be put in place to grow. Organizations have different structures as they grow. At $80 million in revenues the structures need to be re-thought in order to ramp up to $200 million, and so on. Pereira asks questions like, “When do you put enough processes in? When do you have too much process? When are you top heavy and when are you bottom heavy? When do you need good middle management?”

Every step has to be taken with customer support and shareholder value in mind. Pereira emphasizes, “You can’t build a billion-dollar business on 20 percent gross margins — you’re not generating enough cash. You might reach the top-line revenue but I guarantee you won’t be able to support your customer base.” Flying by the seat of the pants is not part of Pereira’s vocabulary. He repeats the importance of structured customer support like a broken record.

Structuring Revenues

Leaving nothing to chance, Pereira has sought to diversify Riverstone’s product portfolio, as well as the markets that the company sells to, in an effort not to rely too heavily on any one market. He also insists on the importance of carefully choosing which customers to go after.

Making a lighthearted comment about the recent troubles for upstart telecom carriers (CLECs, ILECs etc) he explains “we differentiate beween MLECs or non MLECs — money-LECs or non money-LECs.” As part of the company’s strategy of managed growth there is no value in spending resources chasing customers that could go out of business.

Street Wise

All of these processes lead to predictability, which is the name of the game on Wall Street. Pereira explains, “Our stock symbol is just another product that my CFO and myself sell. We market that product and sell it to a certain set of people.”

Since managing a public company is about setting expectations, Pereira’s emphasis on a predictable and diverse customer base and revenue stream is central to his Wall Street success.

He explains, “You have to work with Wall Street so that they don’t ask you to put in the floors until the cement in the foundation is completely cured.” Again he emphasizes the concept of measured step-by-step growth. So far Riverstone is performing according to plan, although Pereira admits that it’s a tough time to sell products.

Day to Day

So how does it all translate on the operations side? Pereira spends the first month of the quarter with investors, and the last month talking to customers. The middle month is internally focused. This amounts to a triangle of success. If any of these three elements — investors, customers, and employee focus — is compromised, then the sustainability of the business is jeopardized.

The concept on paper is so simple, and yet in the recent past so many companies lost track of one of these three fundamentals in a manner that will be difficult to repair.

Pereira hopes to guide Riverstone through a period of slow sales, on a path of manageable expectations. He is lucky that his caution in 2000 was well timed with the fall of the markets. It is now up to the company to execute and confirm its place as the quiet success story of a year marked by market carnage for telecom.