SM: What was your per-share price for your C round?
KX: Sequoia came in at $3.50. One of our investors introduced us to Sequoia. They became interested in us once we won the head-to-head evaluation against Cisco.
SM: How was your experience as a first-time CEO of a product company?
KX: It was different, and there was a lot to learn. I had to learn how to develop channels and how to develop international customers. Sequoia came in during the summer of 1998. They brought sales and marketing executives with them, and I had to agree to that. I was very good in the technical area, but I needed the experience in sales and marketing.
SM: How big was NetScreen when it was acquired?
KX: It was sold to Juniper for $4 billion in 2004. We had $200 million in revenue in 2003.
SM: How much ownership were you able to maintain throughout the entire process?
KX: Each of the founders carried away 5%.
SM: That is primarily because you managed the early stages very well.
KX: The first two rounds were very important. We only raised enough money to get the company running. The VCs really did not come in until the C round.
SM: Were you still running NetScreen when it was sold?
KX: No, I left in 1999. Once Sequoia brought a CEO, on board I handled the technical sides. My passion, however, has always been to build a better product. At that same time the hardware side of things really started taking off. The hardware can only do the firewall VPN level. The bigger security issues are at the data level.
Content is at a much higher level. None of the firewall layers is sufficient. I looked at changing the hardware to focus more on intrusion, but the company had already focused its sales and marketing on the current product. They were not interested in a new product. At the same time I had personally invested in 20 different companies and was sitting on the board of 10 different companies. It was a good time for me to move on.
SM: What did you do when you left?
KX: I felt it would be better for me to leave and become a small VC. I had a small fund of $150 million called Jedi Venture. I received $50 million from other investors. I found that to be very difficult. Before the market crashed, there was so much money that I had to fight to get into every deal. After the market crashed there were the obvious challenges. I decided to go back to building a product to make better use of my time. We returned the capital and took no margin fees. Everybody was happy with the end. They received some investments free.
I then started Fortinet and used the same financial strategy as before. I raised angel money with a $1 million series A. My investment was again $50,000 and we did it at $0.25 a share. The second round was $3 million at $0.60 a share, and it was all angels as well. They were smart angels. There were some companies that invested, but they were not VCs, they were distributors. The series C was a $9 million round at $1.50 a share, and it was also angel and partner money.
SM: How much ownership were you able to maintain?
KX: We did an IPO last year. After IPO the founders had 30%. My brother was a founder of this company with me. We founded the company in October 2000 and we had the IPO last year. Our IPO was at least three times as large as the NetScreen IPO.