The $12 million team

For the first three months after he helped launch Laurel Networks with five other entrepreneurs, CEO Atul Bansal commuted weekly by car between his home in Washington, D.C., and Pittsburgh to get the company off the ground.

His 18-month-old son, Bansal says, missed him so much that he would not leave his father’s side for entire weekends. A month after he moved into the house the fledgling company rented to serve as its temporary headquarters, Bansal had to move out of his bedroom to free up space for new employees.

Any ambition-driven entrepreneur should be able to commiserate with Bansal. Even now, with only a two-mile commute between his Wexford office and his home, Bansal continues to put in long hours. The kinds of sacrifices and accommodations he has had to make, he acknowledges, are what it takes to build a business, in this case one with promise enough to land $12 million in venture funding mere months after its conception.

And while the founders are anything but inexperienced in business, the journey hasn’t come without surprises.

“It’s been a real eye-opener dealing with the venture capitalists, the lawyers, talking about stock options and that kind of thing,” says Jeffrey Prem, one of the partners.

Laurel Networks’ short saga serves up an example of how dramatically the paradigm of business development—in the high-technology field at any rate—is changing.

Laurel Networks is proposing to build switching systems, a new class of devices, for the optical Internet. But that’s not where the founders began their journey. They arrived at that decision only after deciding to leave their former employer and putting together an entrepreneurial team.

Only after they created the team, did they try to figure out what kind of high-tech business they would create. That is a stark departure from a more traditional business model, in which an entrepreneur comes up with a fairly well-formed concept, gets financing and puts together a team to execute a plan.

In the New Economy, by contrast, form follows function. A talented team assembles, then identifies a wide gap in the marketplace that offers bountiful opportunity, confident that its skills and knowledge will allow it to meet the need and commercialize a solution.

In a business environment so intensely influenced by the portability of intellectual capital, knowledge-rich entrepreneurs have little to lose in traditional terms and tremendous potential for gain—financially and personally—by throwing themselves into a high-tech venture.

The team

Bansal had a successful career at the former Fore Systems (now part of Marconi plc), eventually rising in rank to head a $100 million division. He had logged experience in the corporate big leagues in senior engineering positions with Digital Equipment Corp. before joining Fore. At Fore Systems, he got a close look at a rapid-growth business, from start-up to IPO.

With a solid management and technical background behind him and abundant opportunities in his field, Bansal began to consider his options.

“It was a question of, ‘What do I do next?’” Bansal says.

With his experience running a large organization within a technological giant and the chance to witness the entrepreneurial success at Fore Systems, Bansal concluded that an entrepreneurial venture would be the next stop in his career. He and Stephen Vogelsang, at the time Fore’s senior director of strategic and technical marketing, got together to get Laurel Networks off the ground. What they found were others at Fore Systems who likewise were getting the entrepreneurial itch.

In short order, Prem, a software architect and developer, Robert Rennison, a principal engineer at Fore Systems with expertise in switching, Rob Warden, a hardware engineer with experience in switching systems, and Dimitris Varotsis, a principal engineer who is an expert in data communications and networking systems, joined the team.

Four for three

The six partners in Laurel Networks were convinced that they had scored with at least one of the three venture capital firms they met with during a week in January — so confident, in fact, that they canceled a meeting scheduled for the following Monday with a fourth potential investor.

By the next week, they had four proposals in their hands, including one from the firm that hadn’t met with them, and a promise of $12 million in venture funds to move their company out of a home-based headquarters and onto the high-tech fast track.

All this came just months after the partners left their jobs at Fore Systems to start a company whose product is still under development and won’t be available until at least 2001.

You can’t help but contrast that with the sojourn of Fore Systems, the region’s early high-tech high flyer and the first of the region’s high-tech start-ups. Fore Systems survived its early years mostly on government contracts before it managed to patch together a $5 million package of venture capital, and that only after demonstrating that it had a product ready for manufacture and sale.

Fore’s feat was remarkable for its time, in an era in which most investors’ thinking was still mired in the ways of the old economy. Now, consider the path followed by CoManage Corp., a start-up launched by a another couple of former Fore Systems employees.

In 1998, partners David Nelsen and Andy Fraley attracted $4.2 million in venture funds at least a year before they expected to have a product on the market. Last fall, they landed $12 million in a second round of funding. Clearly, venture investors are looking at deals such as CoManage and Laurel Networks in the context of their business propositions, but perhaps even more so in light of the brain trust that the partners put together and in their ability to assemble a team to execute their plan.

In the New Economy in which Laurel Networks plans to do business, the highest values are placed on people and ideas. Strong teams with solid experience are expected to turn out products that will create huge markets, and venture capital firms are jumping in earlier in the life cycle of companies that promise fast and massive growth.

“Today, the tables have kind of turned,” says Vogelsang, vice president of marketing for Laurel Networks. “If you have a team with some business experience and which knows how to build a product, getting funding — I’m not going to say it’s easy, but the money’s out there.”

Getting the capital

While it took only three months to secure venture funding, the road wasn’t always smooth. The first few markets they investigated turned up crowded with competitors who had a head start on a technology they had targeted. And once they identified a viable market, they found that no one was knocking down their door to finance them. The first incarnation of their 30-page business plan went essentially unnoticed by potential venture investors.

“We thought everyone would read it,” says Vogelsang. “We found out nobody even opened it.”

As the end of the year approached, the partners weren’t in a panic, but they did share some concerns. The parcel of seed money, in the form of a loan from Ryan Capital and small investments by the partners, wasn’t going to last forever.

“People knew we had some seed money, and even though you don’t show the exact date when the money will run out, everybody can calculate approximately how long the money will last,” says Bansal.

By this time, they had hired more than a dozen employees. A holiday party organized by the partners’ and employees’ families lifted spirits, and Bansal says he remained optimistic about the prospect of getting funded.

An encounter with a local venture fund helped them to revise their plan and warmed up some introductions to other venture investors who might have had an interest in Laurel Networks’ plan. By New Year’s Eve, the deal had caught the attention of Rob Coneybeer, a partner at Baltimore-based New Enterprise Associates, a large venture investor that funds primarily early-stage technology companies.

NEA completed 121 venture investments last year, the most of any venture capital firm in the United States, according to PricewaterhouseCooper’s Money Tree Report. Coneybeer called Bansal, did some checking around, and liked what he heard.

“All four of their references came back with the highest regard of respect for the team,” says Coneybeer.

The next day, Coneybeer was on a flight from NEA’s San Francisco office to Pittsburgh to meet with the Laurel Network partners. Coneybeer was so sure the deal had promise that he persuaded Peter Barris, general partner with NEA, to join him in Pittsburgh for the meeting.

The Laurel Networks partners are convinced that their credentials provided the clout to grab the notice of NEA.

“Given where we’ve been and what we’ve done, I think that got their attention,” says Vogelsang.

Coneybeer confirms that the team’s experience with Fore Systems and other strong technology companies was a determining factor in NEA’s decision to invest in Laurel Networks.

NEA was so impressed that it offered a term sheet to the partners and led the investment, bringing along Rein Capital, a venture firm based in Lakewood, N.J. Within a week of hearing about Laurel Networks, the deal was virtually a wrap, fast even by current standards.

“It’s one of the fastest deals we’ve made,” says Coneybeer.

The Fore experience

All six partners in Laurel Networks say that the experience they gained while at Fore Systems was invaluable in leading them to the current opportunity and in priming them to become entrepreneurs.

“It actually was a good thing for all of us,” says Vogelsang. “I came into Fore in the very early days. I got to see what was happening, watch the company grow, learn about the whole process.”

All worked for the company through its fast-growth period and saw what is required to grow a business from a small, entrepreneurial venture into a public company, and, ultimately, to an acquisition by a major multinational corporation. The excitement of that process and being in the thick of things at a fast-moving company with a ground-breaking technology left a lasting impression on them.

“I liked building a company and creating something that wasn’t there,” says Warden, who started at Fore when there were about 10 employees. “I had a taste of what a start-up was like.”

The high level of control that individuals retain in a small, fast-growing start-up is, for some, irresistible. Rennison, for instance, left a lucrative but dull 9-to-5 job at a large high-tech firm for a position with Fore Systems.

“I like to be very busy,” says Rennison, who found what he was looking for at Fore Systems. “They were a small start-up, and I liked that fast-paced environ

ment.”

Ultimately, the rapid growth at Fore Systems sowed the seeds of the partners’ departure. Inevitably, growth meant a larger, more complicated organizational chart and less autonomy.

“The excitement, the ability to take your ideas and turn them into products at a very rapid pace, that’s just very difficult to do in a large company,” says Vogelsang.

But the partners weren’t running away from Fore Systems as much as they were charging toward something else. In a small, entrepreneurial venture, “you have a lot more control over what you do,” says Varotsis.

Adds Warden: ”I’m a lot more intrigued about building something, about delivering something useful.”

The risks

All of the partners took real, if limited, risks to start Laurel Networks. They could have stayed with Fore Systems and enjoyed the security of a large company that appreciates their talents. Or, if they found Fore Systems’ corporate comfort too bland for their appetites for excitement, they easily could have found jobs with a company living a little closer to the edge. All are seasoned professionals in their respective fields, coveted by a high-technology market that is scooping up talent with almost irresistible force. In that sense, there’s little on the line for the partners.

But leaping from a tried-and-true company into a speculative venture takes time, and spending even a couple of years in an unproductive venture can erode a career. In a rapidly moving technology field, a year can be a long time.

“I think the risk from the founders’ perspective … is the time risk, how much time did I spend in this venture,” says Vogelsang. “If it flops, there’s a window of time that you’ve wasted. This market is hot, but you don’t know how long it’s going to last. It’s not going to last forever, so time is precious.”

And Bansal says that the founders are asking their employees to take some risk as well. They’re balancing that risk by offering their employees equity in the company, but that equity will only be valuable if the company succeeds. Competition is murderous for employees with the skills needed to do the work that is needed to build successful technology companies. And Laurel Networks’ parking lot is rife with German and Japanese luxury sedans and SUVs, suggesting a work force that values its mobility as well as its marketability.

And there’s yet another wrinkle: Because of the necessity to protect their proprietary plans, Bansal says, he and his partners have had to be careful about what they reveal to prospective employees. That means the employees, to some degree, are joining the company on the strength of a promise.

“They all had a chance to go to other companies, and they chose Laurel Networks,” says Vogelsang. “If it doesn’t succeed, there’s a larger effect than just on any individual.”

What’s next?

Building a company can be a tragic experience for an entrepreneur. Creating a successful company means growth, and as organizations grow larger, they become, by necessity, more hierarchical and bureaucratic, often stifling for the entrepreneurial personality. There are shareholders and boards to answer to. The big decisions that once were made at a lunch meeting can take weeks to resolve in a bigger company.

Many an entrepreneur reaches a point where his ideas and drive are outpacing the capacity of the business to keep up with them, creating in him impatience and frustration. Ironically, the very qualities that propel entrepreneurs to go into new ventures are among the same ones that make the entrepreneurs uncomfortable staying in them as those ventures become more complex. The Laurel Networks partners fully acknowledge that they may end up creating a company that, at some point, no longer suits them.

“We might find ourselves in positions that may not match our skills,” says Vogelsang.

In anticipation of such a scenario, they realize that they might at some point have to hand over the company to a different set of managers.

But at this stage, no one seems to be worried much about things getting stale at Laurel Networks, at least not for awhile. To the contrary, all seem to be looking forward to building the company into a large enterprise and willing to accept whatever comes with it. Bansal, a veteran of larger organizations, says he is confident that the atmosphere can remain invigorating for even the most entrepreneurial in the company. He says it’s all about how the company develops its corporate culture.

“It’s fun to grow a company that size,” says Warden, referring to his experience at Fore. “It’s even fun to run a company that size.”

Adds Rennison: ”It took six years to get bored at Fore.”

How to Reach: Contact Laurel Networks at www.laurelnetworks.com. New Enterprise Associates at www.nea.com, Rein Capital at www.reincapital.com and the Money Tree Report at www.moneytree.com.