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Just one deal away Featured

10:04am EDT July 22, 2002
Call him the Willy Loman of pipe inspection. Success, for George McNulty, was always just over the horizon, just one big deal away. Around every corner was that key investor who could finally inject enough fresh capital to complete his vision. Or that breakthrough application where robotic inspection devices introduced into a new environment would at last put his fledgling PLS International on the map. But 13 years after he began the company in his basement, it has never quite happened for the proud Naval Academy graduate.

For most of his career, McNulty, now 62, bounced around as a salesman for large companies-but always with a longing to do something more exotic. Some assumed he'd had bad experiences in corporate environments that soured him on big companies. Others saw hints of a congenital dreamer. But no one discounted his consuming passion for PLS, nor the company's flashes of technical brilliance in its niche.

By all accounts, McNulty was a skillful salesman with a knack for translating marketplace needs into new products to inspect utility pipes, underground storage tanks, smokestacks and cooling towers. He mixed an Irishman's beer-hall blarney-an ability to instantly connect over a cool one-with an engineer's subtle understanding of the highly pressurized world in which utility engineers and other unsung heroes of the infrastructure toil in anonymity.

With $70,000 in funding from East Ohio Gas Co. and the services of a borrowed project engineer, PLS developed a robotic instrument containing a miniature video camera, which could be introduced into live gas lines for 300 feet to remotely check for leaks. Some of its instruments could be snaked through pipe just 2 inches in diameter, instantly beaming video images to the PLS truck nearby.

Through word of mouth in the tightly knit utility, chemical, mining and nuclear industries, PLS got calls from throughout North America to tackle tricky inspection projects in challenging environments. One day it might be a New Jersey utility interested in checking if its ancient utility pipes were in good enough shape to be repurposed for fiber optic lines. Another day it was for an inspection of a gas pipeline in Prudhoe Bay, Alaska, or a check of the condition of utility pipes in the underwater Astoria Tunnel linking Manhattan and Queens.

McNulty likened the service business to being a fireman, waiting by on call, but he clearly reveled in the variety of assignments that came over the transom. By the mid-'90s, the little company headquartered on Cleveland's far west side had become a $1.4 million business, and McNulty owned 51 percent.

But he was no manager. Even he admitted that. Too set in his ways. Too distracted by the intellectual challenges of clients and their technical puzzles. Too focused on all the cutting-edge new products PLS might develop to kick things into overdrive.

He described his own inattentive management style this way: "You do the things you like, and let the rest of it float." That was only compounded by the heart attack he suffered five years ago, which prompted him to spend more time enjoying the second family he had begun in his mid-50s and less time obsessing over the business. To get PLS to the next level, he needed a more focused manager to run the business side.

McNulty thought that man would be Paul Lincoln, whose princely bloodlines he must have hoped would rub off on his fledgling enterprise. In 1992, fresh off an MBA, Lincoln, the grandson of one of the chief founders of Lincoln Electric Co., came into the PLS picture. Not only would the then-32-year-old run the business side, but he also agreed to invest a quarter of a million dollars in the company.

Today, Lincoln says he was determined to avoid the MBA syndrome, the tendency to come into a new environment and act as if one has all the answers. All he wanted was to install some operating systems and standardize some of the chaos. "Everything was very verbal and very fluid. I just wanted to get everything written down and standard," he says.

McNulty saw things differently. "He got in the big-company mode," he complains. "He started with the memos and Monday-morning meetings. We don't fly a 747, we fly a crop-duster." He says he warned the younger man that his approach was doomed to failure. "When you want to talk about what's going on this month, you do it over beer and pizza. And if you have a problem with somebody, you talk to them in private." According to McNulty, they even clashed over the petty-cash account, which often contained $200. Lincoln wanted it limited to $20.

"He's very emotional," Lincoln says of McNulty. "I'm not. If I was, there would have been a lot of yelling."

So, just weeks after the experiment began, quiet was restored with the forced departure of Lincoln, half of whose stake was purchased by another investor. The scion went on to spend nine months in a sales-training program at the family company, though he didn't stay around afterward. Then, last year, he embarked on a 14-month around-the-world trip, solo.

McNulty uses all of that as evidence to suggest that his now-silent partner is really a dilettante. "He could be up in a Tibetan mountain, for all I know," McNulty said before Lincoln returned from his globe-trotting. "We send the financials and the board-meeting materials to him through his mother." But he concedes his clash with Lincoln probably also sprang from his inability to surrender control.

Lincoln, now 38, splits his time between homes in Mentor and Shaker Heights. Still wounded over the PLS experience-"Emotionally, I got very upset; I felt like I got beat up"-he says that with the stock market having performed so well, he intends to "graze" for a while. His latest idea? "I'd like to learn to make boats," he says.

Lincoln has an old-money aversion to speaking ill even of his antagonists. But he does offer one telling critique of his estranged partner. "George is a very smart man," he says, "but he goes in so many different directions at the same time." It's an assessment with a deep ring of truth to anyone who has spent much time with George McNulty.

Over the years, it's been one near-miss after another for PLS.

Just as the company was making a name for itself in the natural gas industry, getting referred from one utility to another, the industry was deregulated. The resulting financial problems for McNulty's customers led to deep cuts in maintenance budgets and forced PLS to focus on other industries.

Then, several years ago, a little girl in Midland, Texas, touched off a national spectacle by falling down a well. The entire country watched as she remained trapped for days, just beyond the reach of rescuers, who could hear her via the microphone dropped down the well. It was an opportunity for McNulty, who had a distributor in the area. Even today, it still haunts him. "If he had put a camera down there," McNulty says of the distributor, "PLS would be a big company today."

Sales of equipment might well have picked up the slack from these lost opportunities. After all, tiny PLS sold custom-designed systems to such gold-plated clients as TRW (to inspect the system used in making auto air bags), aerospace giant Boeing and defense contractor Lockheed Martin.

The problem was, it never made enough on equipment sales, largely due to McNulty's primitive costing system. As he describes it, he asks his chief engineer to estimate how long a project will take, and what parts are needed. Then he doubles the total and adds 30 percent.

Lincoln merely shakes his head. "I only know two ways to price," he says. "Cost-plus or what the market will bear," making it clear that PLS should be pursuing the latter rather than the former.

While McNulty says these projects are high-margin business, Paul Lincoln says it didn't take long before he learned that PLS generally doesn't earn anything on equipment sales.

Still, PLS' technology-and perhaps McNulty's persuasiveness-were sufficient to draw an investment four years ago from an industry-resea rch consortium. Intertech, a limited partnership composed of six regional natural gas companies and the Battelle Memorial Institute, bought a one-third interest in the company in 1994.

Their contacts helped McNulty set his sights higher. By 1996, PLS had landed a five-year contract to license its technology to an Oklahoma-based manufacturer of pipe fittings. "We thought it had happened," McNulty recalls. "God, a contract with a big company. Guaranteed capital." Finally, he'd have the time and money to develop a couple of related products to tap promising new niches: a system to remotely inspect smokestacks, now checked by humans dropped in by cranes after the stacks have cooled for days, and a robotic instrument to inspect flaws in railroad tank cars.

But once again, his hopes were bitterly dashed. The larger company brought in a new manager, who wasn't so keen on the venture with PLS and found a way to terminate it. Though McNulty had seen it coming and had some time to prepare, revenues were nevertheless cut in half almost instantly (though they've since recovered).

Several years ago, McNulty commissioned a consultant to write him a business plan that might also serve as a prospectus for investors. It was a window on organizational chaos. "He barely used a computer at the time," recalls the consultant, Carol Ensinger. Instead, he handed over "laboriously produced ledgers."

But in working with the company, she also saw the flip side of its lack of management sophistication-how McNulty's determination kept PLS afloat during chronic financial crises. "He has an internal teamwork and family kind of environment that you just wouldn't see in a company run by a professional manager. During their tough times, I know there were guys in the back flipping a coin on taking alternating paychecks. And yet, no one ever bolted. They just believed in George, and I think they saw that the products were innovative."

But as others have painfully learned, belief in a charismatic leader and his innovative products are rarely enough to get a company over the hump, absent managerial discipline. By early this year, McNulty's partners were growing restless. At the last board meeting, representatives of Intertech "said very emphatically: They're not going to bring any more money in with me running the company," McNulty said in March. Together, they decided to look for a buyer.

"We all recognize that I'm still the entrepreneur, I'm not a business manager. For some reason, we're still in the entrepreneurial stage after 13 years ... I think everybody recognizes that with me running it, it's not going to change unless we bring somebody in who's a better manager of the business side of things. To grow the company, I think I've got to get out and do the selling and the product development."

Lincoln, who now owns a 16 percent stake, thought the situation was more dire than that. He was fretting over the possibility that his investment could tank altogether. "It's highly leveraged, so it might be worth nothing. Another company might want to start over from scratch," he said. Which would leave McNulty with precisely nothing to show for his 13 years of toil.

Finally, in July, McNulty got the news for which he'd been hoping. A private company in Rochester, N.Y., which specializes in inspections for the devastated nuclear-power industry, tendered an offer, contingent on a 90-day due diligence process. McNulty was jubilant. "I've known the president for 15 or 16 years," he said. "They talk my language; I can't talk to my [current] partners." The suitor tentatively agreed to run PLS as a division and to keep the headquarters in Cleveland. After so many dashed hopes for a lifeline, would this rescue package finally come through? "If I were a betting man, I would say it's 85-90 percent," McNulty says.

Paul Lincoln remained skeptical. "You're going to find out that every six months this company has a big deal." They ultimately fail to materialize, he said, though he's not ruling this one out.

He's learned from his PLS experience to have an exit strategy in place next time before investing in a company, and to ask some harder questions during the courtship. For now, he's decided to treat it as a chapter in his education. "If I get my money out of it, I'll be happy with the learning experience," he says.

Sometimes, Lincoln imagines temporarily returning to academia to compile a case study on the tensions between entrepreneurs and investors, drawn from his experience with PLS.

He'd title it, "Venture Capital's Learning Curve."