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AUGUST 21, 2002 CLOSEUP By Ben Elgin Leading a Plucky Band at Allegro CEO Dave House is a tech-turnaround vet facing his toughest job: Keeping this networking startup going til customers resurface
House gained great notoriety by pulling off one of the biggest tech turnarounds of the late 1990s. When the 22-year veteran of Intel took over as CEO of Bay Networks in 1996, the networking company was splitting apart at the seams. Formed by an ill-integrated merger of two smaller networking companies, Bay was too busy waging war internally to compete against industry juggernaut Cisco Systems. Employee turnover reached a staggering 10% per month, while sales growth slowed from 47% to 2% in 1997. Despite its woes, House pushed Bay out of its rut. He halted internal quibbling by handing out laminated cards to top execs demanding straight-talk communications. House also axed about two-thirds of Bay's engineering projects, so the remaining third would get proper funding. End result: Bay's market cap nearly tripled in less than the 24 months before House & Co. sold the company to Nortel for about $9 billion in 1998. "Dave gets all the credit for the turnaround," says Dave Rynne, former CFO of Bay. "He did a great job of setting the new priorities for the company." BUYERS NEEDED. If that's considered a striking success, House today needs a minor miracle. San Jose (Calif.)-based Allegro, which makes a new breed of routers for telecommunications companies, hired House as its top exec in January, 2001. Allegro, which was hatched in 2000 and has raised a total of $80 million, says it has enough cash remaining to last about seven more months. Allegro's technology is ready to deploy, but telecoms simply aren't buying -- especially from a pipsqueak hardware maker. The one potential customer kicking the tires on Allegro's product is WorldCom, whose recent bankruptcy all-but obliterated chances for a sale. It's a big blow to a company with promising technology. Allegro makes a multirouter that lets service providers sell slivers of the machine's capabilities to different customers. Essentially acting as a "router hotel," service providers can "rent out" distinct "floors" or "rooms," each boasting its own traffic-directing capabilities. SPENDING DRIES UP. That allows telecoms to sell service to customers who may not want to buy and manage their own heavy-duty equipment. "There's a good, clean business need for it," says Stephen Kamman, analyst with CIBC. "But what House or anyone can't do is create a buyer." It's a sign of the times for the battered networking industry. The Telecommunications Deregulation Act of 1996 sparked a spending explosion in bigger communications networks. But by 2001, it became clear that such networks were overbuilt, and the sector came crashing down amid telecom bankruptcies and slashed capital spending. With telecom spending on new gear expected to drop a further 25% in 2002 and market leaders Cisco, Lucent, and Nortel making far fewer acquisitions, venture capital is harder to come by. This has all but slammed the door on ambitious networking startups. In July, Pluris Inc., a maker of jumbo routers, went out of business after raising $215 million. That same month, networking startups Caspian Networks, Movaz Networks, and Centerpoint Broadband Technologies all joined Allegro in trimming back their workforces. "ON THE BEACH." House didn't see the grisly situation coming. After he stepped down as Nortel's president in 1999, he made personal investments and advised some networking startups. Always intending to reenter the day-to-day business fray, House joined Allegro's board in 2000. The following January, he grabbed the helm as Allegro's CEO -- just as the telecom market fell into a steep nosedive. "If we all knew what this would be like, honestly, I would rather have been on the beach," says House, with his trademark candor. However, he has no plans to trade in his corner office for a cabana. The native of Muskegon, Mich., didn't get near the apex of the networking industry by ducking challenges. After garnering a bachelor's degree in electrical engineering from Northeastern University, House rose through the ranks to become vice-president for engineering at MicroData. He then spent over a decade at Intel before jumping into marketing management, helping the semiconductor giant craft the well-known "Intel Inside" campaign. A LONG SHOT? Today, with numerous employees and investors involved in Allegro because of House's reputation, he feels his credibility is on the line to make the startup succeed. "I made a commitment to these people, and I'm going to follow through," says House, who ackowledges that hobbies such as car racing and helicopter skiing will be limited for a while. Analysts call Allegro's chances of success a long shot because of market conditions. House is more optimistic, giving Allegro better than 50-50 odds. Part of that conviction is founded on the agility that comes with managing a relatively small, 110-person company. Getting everyone on the same page has always been House's forte, but he can do it much more quickly at Allegro. When WorldCom announced it would file for bankruptcy, House gathered managers for a meeting and within hours redistributed personnel to go after Sprint as a potential customer. According to House, the first steps have been successful -- Allegro is about to ship a trial version of its machine to be tested informally by Sprint. "We've got good technology and a great team," he insists. "I like our chances." DEADPAN HUMOR. House is now doing everything he can to help Allegro outlast the telecom doldrums. Last month, he trimmed the workforce by 30%, shearing about $1 million per month from its burn rate. He also started searching for a third round of funding. Another solid round could give Allegro enough runway to compete in sales cycles that have are now 9 to 18 months long, says House. "Everyone in telecom is very constrained in terms of capital expenditures," says Vinton G. Cerf, senior vice-president for Internet architecture at WorldCom. "[Allegro] will have to hunker down through a period of very modest telecom spending." Just as daunting as staying afloat will be keeping spirits on Allegro's staff high. House & Co. has tried to inject a little humor into the dire situation, issuing a recent press release declaring the telecom market "dead" and holding a tongue-in-cheek wake at an industry conference in May. Such irreverance may buoy Allegro's troops. But House may need to pull another rabbit out of the hat, lest the next wake be a real one.  Elgin covers networking for BusinessWeek from its Silicon Valley bureau in San Mateo, Calif. Get BusinessWeek directly on your desktop with our RSS feeds.  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