Full speed ahead

As co-founder and CEO of VMware, this year's hottest IPO, Diane Greene is the toast of Silicon Valley. But the future for this techie-windsurfer-sailor is anything but smooth sailing.

By Adam Lashinsky, Fortune senior writer

(Fortune Magazine) -- In 1978, Diane Greene took her master's degree in naval architecture from MIT and went to work for a San Francisco consulting firm that designed "large-jacket structures," the massive four-legged beasts better known as offshore oil platforms.

An avid sailor since childhood - and a future national women's dinghy champion - Greene was eager to go to sea to examine her handiwork. Then she hit a snag: Women weren't allowed on the rig. "My firm told me I couldn't go," says Greene, who quit and moved to Hawaii to take up windsurfing.

Greene takes her favorite toy - a trimaran - out for a spin on San Francisco Bay.
Husband Mendel Rosenblum originated the idea behind VMware.
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Relatively few people tell Greene anymore what she can and cannot do. After nearly 30 years, numerous seafaring adventures, three jobs with staid technology companies, and two mildly successful startups, Greene is president and chief executive of VMware, the most important new business software company in Silicon Valley in a decade. It's creating a whole segment of the software industry, outsmarting the likes of Microsoft (Charts, Fortune 500), and making gobs of money.

VMware's success is all the more unusual because until recently it was a subsidiary of EMC (Charts, Fortune 500), an old-school Massachusetts storage-computer maker.

Thanks to a blockbuster IPO in mid-August that raised more than $1 billion, people who don't hang out in computer-data centers are learning why VMware (Charts) is such a big deal. Since the IPO, VMware's stock has shot up from $29 to more than $80, giving it a market capitalization of $32 billion. Still, almost nobody has ever heard of Diane Greene, a quiet, diminutive (5-foot-2), but fierce executive with a self-described "weird history."

Only someone who buys servers for a living could love VMware's technology. The VM stands for "virtual machine," because the software tricks servers and other computers into running multiple operating systems, even though most are designed to run only one. Running virtual machines allows companies to buy fewer computers - a cost savings that accounts for VMware's explosive growth.

Its revenues should hit $1.2 billion this year, according to Bernstein Research analyst Tony Sacconaghi, up from $218 million in 2004. The technology is so important, in fact, that Greene and her engineers - including her husband, VMware's co-founder and chief scientist Mendel Rosenblum, who is a computer science professor at Stanford - have essentially created a new subset of the computer industry.

"They have developed and marketed a revolutionary technology," says Sacconaghi. "And they've become the de facto standard."

Adding to the improbability of a fast-growing company in a mature field is Greene's unlikely ascent: She's an accidental CEO if ever there was one. After her windsurfing stint, she worked in the engineering department of Windsurfing International, then at the camping-equipment company Coleman, which was eyeing the windsurfing business.

In 1988 she picked up a second master's, in computer science, at the University of California at Berkeley, where she met Rosenblum. Before getting down to business, she found time for one last adventure: serving as the computer expert on a treasure hunt to a sunken Spanish galleon off Saipan. "Then I came back and went to work at Sybase" - once a major competitor of Oracle's - "and that's when my boring life started," she says.

Jobs at once-great hardware makers Tandem (now owned by Hewlett-Packard (Charts, Fortune 500)) and Silicon Graphics came next, as did two children. By 1997, Greene was working on her second startup, a software company later bought by CMGI, but was ready to resume a more adventurous life.

First, however, she agreed to help Rosenblum to, in her word, "productize" a concept. That is, to turn the research that he and two graduate students had been doing into a software product that would allow a computer to run more than one operating system simultaneously. The plan was to set up the company, negotiate some deals, and leave. "I never aspired to be a CEO, period," she says. Almost ten years later, though, she leads a 3,000-plus-employee company.

The first time Mendel Rosenblum realized that his research could morph into money was during a visit to Microsoft. He and his grad students had presented a paper on virtualization in 1997 at a technical conference and subsequently received word that Microsoft was interested in talking.

Nothing came of the meeting in Redmond, Wash., but Rosenblum, the very picture of the rumpled academic, was intrigued that Microsoft had bothered to ask. Plus, he'd caught the startup bug. "Obviously we had watched people like the Yahoo guys go off and get rich," says Rosenblum, 45. "So we said, 'Okay, we think we should try to do a commercial version of this.'"

The company started small. Greene quit her previous startup and signed on in 1998 as an unpaid employee. The following year Rosenblum took a two-year leave from Stanford to work full-time on VMware. It wasn't until he went back to teaching - Stanford allows its faculty to consult one day a week during the academic year - that Greene took a salary.

Although she's far more polished than her husband, there's a latent, nutty-professor element to the 52-year-old Greene as well. On stage at VMworld, a conference in San Francisco in September that attracted 10,800 users, Greene speaks as if reading from a script during what was meant to be a casual conversation with the far smoother Intel executive Pat Gelsinger.

Greene's presentation skills lagged her technical acumen, says Mike Kwatinetz, a venture capitalist who invested in VMware in 2001, "and because of that she was underrated."

Because VMware's technology was so good, though, the company quickly won over the skeptics. Twice VMware prepared to go public and didn't. In 2001 it was undone by a weak market, and in 2003 it took itself out of the action by accepting an unexpected cash offer of $625 million from EMC.

CEO Joe Tucci had heard about VMware from one of his own software developers. EMC was buying up software companies at the time; he decided VMware would fit in nicely. In a matter of weeks the deal was done. The acquisition will go down in industry history as one of the savviest ever.

The deal worked because after buying VMware, EMC has mostly left it alone. The reason: It had to. Greene says she realized only after the deal was announced that a close association with EMC carried enormous risks for VMware.

The penny dropped when she called Bill Zeitler, an IBM senior hardware executive, and told him of the sale. Zeitler politely hit the roof. Like HP, Dell (Charts, Fortune 500), and others, IBM (Charts, Fortune 500) had been enthusiastically selling VMware together with its products. IBM is a key VMware partner - and bitter competitor of EMC.

Greene and Tucci quickly crafted rules of engagement that keep the companies separate. Most important, they agreed to prohibit EMC's aggressive salesforce from selling VMware, which would have given EMC a weapon against its competition but hurt VMware.

The companies integrated next to nothing. Not their databases, not their compensation plans, not their hiring practices. "They wanted to draft off our campus relations because hot computer science people wanted to talk to VMware and not EMC," says Betsy Sutter, VMware's head of human resources for seven years and one of the few VMware executives in frequent contact with the higher-ups at EMC.

Greene's response: No. Greene even requested that EMC, which owns 87% of VMware, assign a single executive to serve as a gatekeeper for all communications with VMware employees.

Ensconced in its splendid isolation, VMware flourished. What's more, Greene warmed to the task of running a large organization. She never much cared for sales and finance. But she is hyperattentive to VMware's partners and she has unlimited time for the engineers, a group she is known to coddle.

Just as engineers at Google famously present project proposals to co-founders Larry Page and Sergey Brin, Greene presides over hours-long product-review sessions for significant initiatives. Unlike the Google guys, she doesn't don a lab coat. Quips Karthik Rau, a senior marketing executive: "We're not into costumes at VMware."

When it comes to the corporate vibe, VMware is the anti-Google. There are no heated toilet seats at VMware, no Pajama Days. (See "Google Is No. 1: Search and Enjoy.") Google famously attracts the young and the restless; VMware's employees are more likely to be married with children. VMware does serve a free lunch - once a week. The day I visit it's a perfectly adequate salad bar set up on card tables.

The company is oozing money - operating margins are 25% - but extravagance just isn't Greene's style. "We're very focused on creating a phenomenal work environment," says Greene. "But we try to do it very frugally because that's sustainable."

Frugal, yes; killjoy, no. It's a picture-perfect mid-September afternoon on the San Francisco Bay, and Diane Greene is in her element. Skippering her 31-foot trimaran, she grins as we tack past Alcatraz Island, aiming for the Golden Gate Bridge. Greene asks if I'm having fun.

"Oh, yes," I say. "Are you?"

"There's absolutely nothing I'd rather be doing," says Greene, as she perches high above the helm.

Back on land, we repair to the St. Francis Yacht club for cocktail hour. Greene orders a "very light vodka tonic," and the discussion shifts from sailing to software. VMware's two biggest threats are common in the software industry: commoditization and Microsoft.

Competitors who have caught on to VMware's allure are offering stripped-down virtualization software for free or next to nothing. VMware is aware of the trend, but not afraid of it. Eighty percent of VMware's revenues, Greene says, come from advanced features that the competition can't match. Microsoft is another story. It plans to incorporate virtualization - at no extra charge, natch - into its latest software for servers, due out next year.

The biggest headache just might be EMC. The two companies continue to have as little to do with each other as possible. Greene and her acolytes butt heads frequently with EMC's senior executives, who remain annoyed they cannot benefit more directly from owning VMware by selling its software. Tucci manages to keep a tenuous peace, but even his praise hints at the tension. "The No. 1 item that makes anyone successful is passion," he says. "Never bet against a person with passion. She [Greene] has an intense desire to win."

Greene herself doesn't talk much about EMC; she points out that she ceased to be an EMC officer when VMware went public. Still, EMC has the right to approve all major transactions and expenditures. The companies tussled, for example, over the cost of VMware's new Palo Alto headquarters, designed to be environmentally light-footed.

Tucci chairs VMware's board, which is stacked with EMC people; of the six members, three are current or former EMC executives and two are EMC directors. (Greene is the sixth.) Greene appears bemused she has stayed on; as her husband points out, "If you look at her résumé, this is far longer than any other job she has ever held." Her contract, signed in late July, is for only one year. "We have not discussed how long she intends to be there," Tucci says.

A little appreciation, of a tangible kind, might help. Though Greene and Rosenblum did well by selling to EMC, nearly all the upside since has accrued to EMC shareholders, a source of annoyance to Greene and her top employees. That irritation was compounded by the terms of the IPO. Of the 37.1 million stock options granted to VMware employees before it went public, Greene received just 2.7%. (The typical award by startup boards to CEOs they recruit is 7% to 10%.)

Asked why the award was so small, Greene doesn't hesitate. "Joe Tucci told me he thought he was being 'very generous,' " she says. "Those were his exact words." Tucci declined to comment directly but notes he has "tremendous respect and admiration" for Greene. An EMC spokesman points out that VMware enjoyed the benefits of being part of EMC, that Greene also has an equity stake in EMC that is convertible into VMware shares, and that she recently received a sizable salary increase.

It's not as if Greene does not appreciate her good fortune. She is running, on her own terms, a respected business that she helped to create - and she has more than enough cash to buy just about any boat she wants. "If I had $10 billion," she concludes, "I couldn't buy my way into this job."  Top of page