$100,000 in Google of 1998 Equals a Billionaire Professor Today

Stanford’s brainiest students come to David Cheriton for startup advice—and money. Two of them happened to be named Sergey and Larry

Published: Sep 6, 2012 06:35:24 AM IST
Updated: Aug 31, 2012 04:56:32 PM IST
$100,000 in Google of 1998 Equals a Billionaire Professor Today
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It’s dusk on a crisp January day at Stanford University, and David Cheriton is in his corner office waiting for his weekly research meeting to begin. The last slivers of sunlight filter through the windows, illuminating the pages of Superyacht Living & Style, a glossy magazine Cheriton is browsing through with only the mildest of interest. “I once read that a boat is a hole in the water where you pour in a bunch of money,” says Cheriton. He flips through a few more pages and disdainfully tosses it to the floor alongside a pile of keyboards, cables and cords. “I don’t know why they keep sending me these things.”

Burgess, the yacht magazine publisher, knows exactly why: Cheriton is rich. Rich enough to afford the April Fool, 200 feet of steel-hulled elegance listed at $60 million, or New Zealand billionaire Graeme Hart’s Ulysses, priced at $49 million. Or both.

With a net worth of $1.3 billion, Cheriton is likely the wealthiest full-time academic in the world. But yachts are not his thing. The Stanford computer science professor calls himself “spoiled” for taking the occasional windsurfing vacation to Maui. When pressed to recall his latest splurge, the best he can come up with is a 2012 Honda Odyssey (“for the kids”). His act of thinking is often punctuated by the clicks of three different-coloured ballpoint pens that he rotates through his fingers.

The one expensive passion he does pursue? “Startup companies,” he says, as he continues to shuffle his pens. Blue. Click. Red. Click. Black. Click.

When Cheriton uses one of those pens to write a cheque to a startup, he usually ends up more in the black than in the red. Far more in the black. The first two companies he founded were sold to Cisco Systems and Sun Microsystems, respectively, for hundreds of millions. In all he’s spent more than $50 million out of his own pocket, investing in 17 different firms, which range from VMware to his latest, Arista Networks. But the topper was a $100,000 cheque he wrote in 1998 to a pair of Stanford PhD students named Larry and Sergey. That cheque alone is now worth more than $1 billion in Google shares. “I feel like I’ve been very fortunate in investing, but I still have the brain of a scrounger in terms of spending money,” he says.

Cheriton, 61, maintains a low profile. Google searches of his name turn up primitive Web pages in Times New Roman, not the LinkedIn and Facebook profiles that have become Silicon Valley standards. (He doesn’t even tweet.) When I asked random Stanford students about him, several paused to think, then asked if his last name is spelled the same way as the Sheraton hotel chain.

That’s the way Cheriton prefers it. He still drives the same 1986 Volkswagen Vanagon he had before he made his money, lives in the same Palo Alto home he’s owned for the last 30 years and employs the same barber—himself. “It’s not that I can’t fathom a haircut,” says Cheriton. “It’s just easy to do myself, and it takes less time.”

For a man who works 10 to 12 hours a day, Cheriton understands that time is everything. His investment in Google allowed college freshmen cramming for exams to cut through the junk that had flooded search engines like AltaVista. His newest company, Arista Networks, makes a data switch that cuts down the delays between servers, allowing bits to be transferred in less than 500 nanoseconds, nearly twice as fast as Cisco’s fastest switch and Juniper Networks’ best. That gives traders on Wall Street the ability to submit their trades nanoseconds before their competitors and gives doctors the capacity to sequence a patient’s genome in real time.

Cheriton has been working on the guts of its operating system since 2004, when the company was founded. Arista, based in Santa Clara, California, is adding at least a customer a day. The company says it is operating at an annual revenue run rate of $200 million. “Imagine if cars going 50 mph speed up by a factor of ten,” says Cheriton. “It qualitatively changes what you can do.” Arista is that vehicle.

The third of six children of two Canadian engineers who grew up during the Great Depression, Cheriton was always encouraged to pursue his own path, says his father, Ross. The elder Cheriton recalls an independent, “self-sufficient” boy who didn’t indulge in team sports and built his own timber fort in the family’s yard away from the other children.

His father also remembers a gifted son who decided to stay out of Edmonton’s Eastglen High School for the 11th grade because he felt the curriculum was too slow. “He went his own way,” his father says. “We didn’t channel him.” As a boy with broad interests, Cheriton wasn’t chided when he tried to pursue a degree in classical guitar and performance arts, his main passions as a college student. When he was rejected from the music programme at the University of Alberta, he simply pursued another interest, mathematics, and later computer science. He completed his undergraduate studies at the University of British Columbia and then got a master’s and PhD at the University of Waterloo.

In 1981, in search of research funding, Cheriton arrived at Stanford, soon to become the engine room of a budding Silicon Valley. It was at Stanford that Cheriton first met Andy Bechtolsheim, a brilliant German PhD student who was constantly tinkering with a workstation computer he had designed called the SUN, short for Stanford University Network. Looking for someone to develop software for the workstation, Bechtolsheim turned to Cheriton, whom he’d met in the computer science department. The Canadian assistant professor played with the device, then asked for tweaks to the hardware. Bechtolsheim obliged.

Bechtolsheim left to start Sun Microsystems in 1982 but Cheriton continued on as an academic well into the 1990s. He mostly avoided the startup bug that infected so many of his students and colleagues, among them billionaire Netscape cofounder Jim Clark, a former Stanford professor.

When Bechtolsheim left Sun in 1995, he started casting around for someone who could understand the fundamental software problems behind Ethernet connections. He dusted off the phone book and called Cheriton. The two formed Granite Systems, an Ethernet switching company that was bought for $220 million by Cisco after 14 months in existence. In 2001 they tried again and formed Kealia, another networking company, which was acquired by Sun for $120 million. In between their startups, Cheriton and Bechtolsheim made their savviest investment, the $100,000 each forked over to the Google founders.

0,000 in Google of 1998 Equals a Billionaire Professor Today
Images: Samueli: Bruce Bennett / Getty Images; Thiel: David Paul Morris / Getty Images

A couple of weeks after meeting up with Cheriton at his office, I sat down with him on his front porch to see the place where he wrote that cheque to the Google guys 14 years ago. Page and Brin were not Cheriton’s students, but they’d approached him after hearing about his success with Granite, hoping he could impart some wisdom in their quest to commercialise their PageRank algorithm. With his pockets deeper than ever—Cheriton’s 10 percent ownership of Granite netted him more than $20 million—he was eager to help.

“There was a big problem raising money. I didn’t think it needed to be a big problem,” Cheriton says of Google’s earliest days. (Yahoo and Excite had turned down the opportu- nity to license the algorithm.)

Bechtolsheim was there that day, too. It took him only a few moments to comprehend the search engine’s elegance as well as the creators’ plan to sell sponsored links. “I remember thinking in the back of my head, ‘Well, if they get a million hits a day, 5 cents a click, that’s $50,000—at least they won’t go broke!’ ” Bechtolsheim reminisces.

While Bechtolsheim describes himself and Cheriton as “accidental investors”, others have downplayed the role of sheer luck. “It’s not accidental at all,” says Ron Conway, Silicon Valley’s ubiquitous angel investor whom Cheriton introduced to Google for a later investment. “It’s because of the environment that they’ve built around them. They’re such smart and astute engineers that they attract other engineers to share their ideas with them.”

Back at Cheriton’s office, you get the sense you’re in the gravitational centre of Stanford’s hallowed computer science department. So many students have come here over the years in search of wisdom and, if possible, cash.

Sam Liang, one of Cheriton’s former PhD students, was one of them. After leaving Google in 2010, he shared with his former professor an idea for a mobile platform that could track the whereabouts and habits of its users in real time. He has since received more than $100,000 from Cheriton to start his company, Alohar Mobile.

“His standards are extremely high,” says Liang, whose research meetings with Cheriton were the most nerve-racking part of his week. “He tells you, ‘You have to think big. You have to make an impact in the world.’ ” Buried under stacks of old papers and books on Cheriton’s desk is a plaque that reads, “Dr. David R. Cheriton, Chief Superintendent of Saying Important Things.”

Siddharth Batra, a former Stanford master’s degree student who received funding from Cheriton for his company in 2009, appreciated his former mentor’s attention to detail. “Technologists probably find it easier to share things with David, since he will understand a lot more than if you go to a VC who will sort of give you a blank stare and not really understand the promise of what you’re doing,” says Batra.

Cheriton says he avoids pursuing market whims—he considers social networking one of them—and stays focussed on breakthroughs that make measurable improvements to human life, such as the way Google helps a college junior complete a research paper at 3 am. He says he has “a belief that if you are providing real value to the world and doing it in a sensible way, then the market rewards you”.

Cheriton and Bechtolsheim have put in a combined $100 million into Arista, 95 percent of its total funding. Its CEO, Jayshree Ullal, did not disclose financial details but noted that the company is finally now “profitable” after seven years on the runway. Arista is fortunate to have deep-pocketed founders. The networking sector has been lethal for similar startups. “A lot of switching companies never really got a full return on their investment dollar,” says Alan Weckel, a senior networking analyst at the Dell’Oro Group. He cites firms such as Woven, which did not receive a second round of funding and folded, and Force10 Networks, which was bought by Dell in August after being unable to time its products to the market correctly.

“Sometimes it takes a little longer when you’re doing something innovative and creative to get there,” says Cheriton. Arista has doubled its headcount in the last year, and rumours of an IPO continue to swirl. The high-speed switching industry in which Arista competes is expected to grow tenfold to $2.4 billion by 2016, according to Weckel.

For all his brainpower, Cheriton never could have predicted his life would turn out this way. He has worked hard to make sure it remains relatively unchanged. “Some things in life, like net worth, aren’t planned,” he says. “Some investments work out, and some don’t.”

They’ve worked out for David Cheriton.

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(This story appears in the 14 September, 2012 issue of Forbes India. To visit our Archives, click here.)

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  • Madhu G

    Great , so glad to know about such personality in Stanford!. wish him many more success for the new ventures

    on Sep 7, 2012
  • Kunal Singh

    Hatt\'s off to the self made genius Mr. Cheriton I am very pleased to see and feel that thinking different than others always pay and believing in one\'s self are the best assets one have however it takes genius effort to stand by those thinking during tough times to achieve significant milestone in this concrete jungle !! Sir David Cheriton ur the true gem on this planet !! Sir, how about you take on trading business with some trading strategies to beat every market returns !! :p Best,

    on Sep 7, 2012