The Real Story of Cisco's Creation

On this day in business history...

Cisco Systems (NASDAQ: CSCO  ) was founded on Dec. 10, 1984, by Sandy Lerner and Len Bosack, who had developed a groundbreaking new connectivity device called a router while working on Stanford University's computer staff.

At least, that's the simple story.

The real story -- as is often the case when discussing any massive technology company with hardscrabble beginnings -- is a bit more complicated. Much of this story was documented in a 2001 essay by Pete Carey that was published in the San Jose Mercury News, Cisco's hometown paper.

Stanford University's work with computing connectivity began with the very first ARPANET communication in 1969. But the leap to modern routers actually began with the Xerox (NYSE: XRX  ) PARC-developed Alto workstation, a granddaddy of the modern PC. This computer was built to work on Xerox's local network, which necessitated building a new technology: Ethernet networking hardware. Some of these Alto workstations and their companion connectivity hardware were donated to Stanford, where computer-science staff and students focused their efforts on getting the advanced machines connected to the early Internet.

The Stanford computer crew developed a device, blandly named "The Blue Box," that allowed various computers (including non-Xerox models) to communicate with the Internet at the same time. Bosack is among the contributors to its development, but Lerner has acknowledged that there were many other hands that helped create this groundbreaking device. In an email to the Mercury News, she says "The only person I'm certain had nothing to do with it is Al Gore." But by 1984, Cisco had incorporated and petitioned Stanford for the rights to sell the Blue Box, but was rejected. By 1985, Bosack and Lerner were successfully constructing router devices remarkably similar to Stanford's Blue Box while still on the Stanford payroll.

The situation came to a head in 1986, when Bosack was discovered to have sold networking boards to Xerox, completing the circle of networking technology. He had done so in Stanford's name but had not communicated this to the university. Administrators confronted Bosack and fellow computer staff member Kirk Lougheed, one of Cisco's earliest employees, with an ultimatum: Return the work they had done on Stanford time or leave. Bosack and Lougheed resigned, and Cisco became a full-time business.

The university, caught in the position of having developed this potentially lucrative technology without having the means or the mandate to produce it, came to terms with Cisco. A licensing agreement gave Cisco the right to use updated software protocols for its routers for the total sum of $169,300.

Lerner and Bosack quickly found a market for the devices, but financing was difficult. It took the pair nearly 80 meetings with different venture capitalists before they found one willing to fund the operation's growth. They sold a third of the company for $2.5 million, and by 1990 the company went public at a market cap of $224 million. Lerner was fired soon afterward, and Bosack resigned in solidarity. Cisco continued to grow, reaching milestones few could have imagined in 1984. The company became the world's largest public company for a time during the height of the dot-com bubble. By this point, the original Stanford licensing agreement could have bought 0.00003% of Cisco.

Cisco has yet to come close to its dot-com market cap peak, but it has continued to grow as a business, and it also continues to dominate many networking-technology segments: In 2012, it controlled roughly 65% of the Ethernet switching market, 70% of the router market, and more than half of the wireless LAN market.

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