Ken Xie Builds Second Network Security Star

Ken Xie is the undisputed giant among internet security entrepreneurs, not only because he stands 6-5 in his stocking feet but because he has built two back-to-back multi-billion-dollar companies that make network security products.

Fortinet, his second big success, makes unified threat management appliances that bundle anti-virus, firewall, intrusion prevention and other network security technologies into a single low-maintenance box. Xie’s long-term, multi-layered thinking is evident in the fact that he launched Fortinet in 2000, four years before Netscreen, his other security success, was sold to Juniper Systems for $4 billion. His goal was to build a company that could make a far more comprehensive security product than the ones Netscreen was making.

By the time Xie released Fortinet’s IPO on November 18, 2009 the company was making profits of $7.4 million on annual revenues of $219 million. Its ability to sell subscriptions to a premium security monitoring service on top of its UTM boxes made analysts give high marks for the IPO. The stock enjoyed a healthy pop on its first day of trading, closing at 16.62%, 33% above its $12.50 offering price. Since then it has continued rising. By the time Xie cashed in 90,000 of his over 7.5 million shares on January 18, 2011, it fetched $36.58 a share.

Today’s stock price of around $47.50 gives Xie’s Sunnyvale-based Fortinet a valuation of over $3.6 billion. Its 2010 operating income soared to $55.3 million on revenues of $324 million. The company’s rosy outlook as the clear leader of its segment and one of Silicon Valley’s fastest growing companies keeps its PE ratio remains at an optimistic 75 times earnings. Its global workforce of 1,336 includes employees around the globe monitoring security breaches as part of popular premium subscription service.

Ken Xie was born in Beijing in 1962 to parents who had both spent their entire careers working as professors at Tsinghua University. As a child Xie liked to tinker with electronics. At the age of seven he built a radio. That early interest would ultimately drive him to study TVs, VCRs, and radios when he started college.

“I like to tinker with things and am very hands-on,” he told an interviewer for Sramana Mitra. “That was beneficial later as well. I was able to use those skills to make some money in the summer.”

China began its national college entrance examination system in 1977. The need to prepare for exams forced Xie to decide whether he would go to college or become a professional volleyball player and compete for a spot on the Olympic team. After nine years of volleyball training Xie decided to go to college and began preparing for the entrance exam. He graduated high school in 1981 and was accepted into Tsinghua, one of China’s top universities. He earned his BS and MS in electronic engineering there before coming to the U.S. in 1990 with the thought of earning a PhD at Ohio State University.

“I came to the United States but was not quite sure where I should go,” Xie recalled. He was told about a Silicon Valley company that would be able to hire someone with his skill with electronics. Xie made the move to Stanford.

“I quickly learned how to set up a network and how to build servers,” he recalled. “I found a job local here and made some money. That also made it easy to get a green card quickly. Today, that would take six or seven years. Once I had a green card I was able to do some consulting. I am not someone who studies hard; I am a person who plays around with technology a lot.”

Before actually beginning his studies at Staford Xie spent a year working as an independent contractor setting up and maintaining networks and internet access for about two dozen companies in the area.

“I found out that I could make much more money doing consulting work on the side,” he recalled. “I gave them a pager. I had 20 to 30 companies I supported, and they all gave me a monthly fee.”

Even after he began at Stanford he continued to work as a consultant for six years.

“My parents’ dream was for me to get a PhD,” Xie recalled. “For me, if I do not have my own company, then there was no need for a degree. I felt I was born to be an entrepreneur. After I did various companies, it was just too hard for me to go back to Stanford because I was having fun and experiencing success.”

In 1993, at the age of 29, Xie started Stanford Information Systems (SIS) with classmates and friends to develop and sell a software-based firewall. By this time Xie was married and needed to support his family, requiring him to hold down a full-time job while working on SIS on the side. His co-founders worked on the same basis. It was essentially a learning experience for Xie as he struggled to learn customer relations, marketing, building a team and other aspects of a technology product business.

The experience with SIS taught Xie the severe limitations of a software firefall. His second venture, Netscreen, was also started on a part-time basis while holding down a full-time job and continuing to take a class or two at Stanford. This time Xie teamed up with two Tsinghua classmates with complementary skills. One was a top Cisco engineer. The other was working at Intel. They decided that a true security product needed to be hardware with a dedicated chip and an operating system as well as security software. Xie was able to apply skills learned while working at Healthion. All three had stock options at their respective companies that they were able to rely on to help support them during the year it took to build their first product.

When they completed the protoype in October 1997 all three quit their jobs to work on Netscreen full time. By the time it was sold to Juniper in 2004 it had undergone several rounds of venture funding, and had grown to a large company that posted $200 million in revenues in 2003. Xie and his co-founders had each been able to hang on to a 5% stake. But Xie had left Netscreen in 1999 after Sequoia Capital, the lead venture firm, brought in a CEO whose direction made Xie’s technical contributions irrelevant.

“My passion has always been to build a better product,” Xie recalled. “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. 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.”

He had been nurturing a $150 million venture fund called Jedi Venture by combining his $100 million with $50 million contributed by other investors.

“Before the market crashed, there was so much money that I had to fight to get into every deal,” Xie explained. “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.”

Xie founded Fortinet in 2000 with $1 million in angel funds and his own personal investment of $50,000. His brother was a co-founder. By 2005 the firm was successful enough to win Xie recognition as a Top 5 Entrepreneur by Entrepreneur Magazine. In 2006 he was named a Technology Pioneer by the World Economic Forum and Time Magazine, and a Northern California Entrepreneur of the Year by Ernst & Young.

By the IPO in November of 2009 Xie and his brother together were able to retain 30% a combined 30% stake. Xie’s personally still retains about 16% of the company’s shares.

Xie is a board member of Hua Yuan Science and Technologies Association, and a member of the Chinese American Committee of 100. He also serves in the Silicon Valley leadership group Bay Area Council.