Pittsburgh's Generation "S" Featured

10:02am EDT July 22, 2002

A pair of California boys, former employees of a fast-growth high tech business, leave to form their own start-up software company, land $4 million in venture capital in a few months and kick it off in a middle class suburban office park complex a stone's throw from their old employer.

Sounds like the Silicon Valley, right?

Could be, but in this case, it's playing out closer to the Ohio Valley, more specifically, in the North Hills of Pittsburgh.

David Nelsen, 38, and Andy Fraley, 34, two former employees of FORE Systems and now partners in CoManage Inc., are striking out on their own to develop software intended for a segment of the telecommunications industry that they expect will experience explosive growth over the next few years. They plan to be at the head of any pack of software companies that decide to jump into this emerging market, and they've lined up the money to do it - and they won't ship their first product, a piece of software that could sell for as much as $1 million a copy-until late next year.

Heightening the anticipation is Adams Capital Management, the venture capital fund providing $4.2 million in start-up money, a group of investors who do only a handful of the hundreds of deals that they look at each year.

"We are funded, now we are moving as fast as we can to find the right people," says Fraley.

Perhaps more importantly, though, the prediction that the region's economic development hopes would be fulfilled by the entrepreneurial seeds sown out of lush success stories like FORE Systems appears to be taking shape. That process appears to be gaining momentum, approaching the critical mass that economic development experts say is so crucial to sustaining such growth. Companies such as CoManage are at the forefront of the procession, attracting heaps of capital from eager investors and breaking into new markets that have explosive growth potential.

The market

Companies such as FORE Systems have developed high-speed communications networks called wide area networks for voice and data communications based on asynchronous-transfer-mode technology. Corporate owners of such networks have decided they don't want the headache of managing them and are welcoming the opportunity to hand them over to outside contractors.

Industry deregulation has opened the market, and as a result, thousands of telecommunications companies, including Internet service providers, cable companies and competitive local-exchange carriers, are getting into the management of such networks.

The opportunity that Nelsen and Fraley see is in developing software to for the service providers which allows them to manage emerging services offered on these huge, complex networks. That is, the software is designed to solve hardware and software problems, calculate billing for network use and determine what kind of actions are necessary to restore the "health" of a network in the case of a failure. In effect, as Nelson describes it, the software offers a "window" into the network.

"This is a relatively small market, and very few people have built management solutions for this yet," says Nelsen. "But this is a very rapidly growing market that will worth billions and billions of dollars over a short term, like five years."

Ironically, there seems to be scant chance the big players will pull the market out from under CoManage, Nelsen says. In their experience, some of it gained at FORE Systems while their former employer considered - but ultimately abandoned - the idea of developing a product similar to what CoManage is proposing, the big companies don't yet have designs on this niche.

"The threat to us is there's somebody out there that looks exactly like us, is well funded, and growing quickly, that will emerge to be a player in this market," says Nelsen.

Of moons and money

While some ventures take years to get off the ground, often for lack of funding, Nelsen and Fraley seem to have pulled off CoManage's launch in a wink. But in many ways, the partners were able to strike while the iron was hot, increasing their chances for success on every front.

"The moons were really aligned well for these guys," says Frank Demmler, vice president of venture development at the Enterprise Corp. of Pittsburgh, a nonprofit entrepreneurial assistance organization that gave Nelsen and Fraley advice early on, helped them with their business plan, and provided them with a conduit to potential funding sources.

Demmler's not suggesting that CoManage has gotten off to such a quick start because of some astrological phenomenon, but a confluence of conditions has made it easier for Nelsen and Fraley to put the wheels in motion.

For one, the venture capital market is flush with money looking for promising deals to fund. Venture capital funds in recent years have enjoyed huge inflows of capital from institutional investors looking for high-growth investments. In 1991, for instance, there was about $1.4 billion in the venture capital pool nationally. For the past two years, funds available have exceeded $12 billion.

Second, while they are first-time entrepreneurs, Fraley and Nelson logged critical experience during their tenures at FORE Systems.

"There's nothing that substitutes for successful experience in an entrepreneurial environment," Demmler suggests.

Nonetheless, the fact that Nelsen and Fraley have been able to land the amount of investment capital that they have is nothing short of remarkable.

"You would be hard-pressed to identify other first-time entrepreneurs who are successful in raising that kind of capital locally or even nationally," says Demmler. "Clearly, the FORE pedigree was instrumental in their raising that capital."

Beyond the impressive resumes Fraley and Nelsen have compiled, they are jumping into a market which they and their investors say has staggering growth potential.

"CoManage was attractive because the telecommunications market is growing rapidly and undergoing rapid change," says Bill Hulley, a partner in Adams Capital Management, which championed the deal with CoManage.

Getting the bug

Nelsen got the entrepreneurial itch almost as soon as he walked through the doors at FORE Systems. A headhunter had courted Nelsen, a Stanford University graduate who was working at AT&T as a product manager and network architect, on behalf of FORE Systems. Nelsen decided to investigate the company as a potential partner in some of the things he was involved with at AT&T. Once he got a taste of the then-small company, he was seduced by the entrepreneurial atmosphere and left the telecommunications giant.

"When you get inside a small company like FORE and you see the energy and opportunity and the excitement, it's different than what a large company can offer," Nelsen says.

That experience prepared Nelsen in a critical way for entrepreneurship, giving him a taste of handling multiple responsibilities in a business environment changing almost daily.

"When you're in a big company, you usually don't have a whole lot of insight into what's happening," says Nelsen. "You know a whole lot about one little area."

Fraley, a native of the Reading, Pa., area, had gotten a taste of entrepreneurship at a tender age. His father, a physicist at Bell Labs, exposed him and his brother to computers when young.

"Early on, we were writing things like games for the Commodore," Fraley recalls. The brothers amassed their skills quickly, and eventually had their own contracting company, doing projects for a company that developed medical applications. It should come as no surprise, then, that the entrepreneurial allure of FORE Systems was enough to draw Fraley away from a job in Sacramento with Hewlett-Packard, where he worked for eight years.

A picky investor

Fraley and Nelsen courted a number of potential investors before settling on Adams Capital Management, a group suggested and introduced to them by Mark Juliano, a FORE Systems alumnus who l aunched ISLIP Media. The Adams Capital offer, which put two of the venture fund's partners on the CoManage board, was the best.

"It was a simple, straightforward deal," says Nelsen.

But it went deeper than simply the investment Adams Capital was willing to make in CoManage. The business knowledge, contacts and experience which the investors offered was value-added for the new company. "It goes far beyond the money that they bring to the table," Nelson says.

Indeed, Adams Capital has experience with high-technology companies, mostly involved in telecommunications, medical and information technologies. Its portfolio has included Scalable Networks, a start-up that was acquired by FORE Systems, Dell Computer Corp. and NetSolve, a network management company.

Hulley says the fund sees 800 to 1,000 proposals a year but does only four to six deals. Adams Capital looks for early-stage companies that have the potential to reach No. 1 or No. 2 in their industry and can "present a compelling value proposition to the customer," Hulley says.

FORE times two?

High-technology proponents in Pittsburgh have long been preaching the mantra of the multiplier effect which successful high-tech start-ups can have for the region. With the kind of launching capital and human resources CoManage is mustering, there is good reason to believe that this venture has the potential to mushroom into the region's next smashing success-the kind of prospect that gets the juices of venture capitalists going.

The principals have worked for large, mature companies in the telecommunications field as well as for FORE Systems through its own high-growth phase. And they won't be stymied by a shortage of capital, or by any notion that other software management solutions may already exist in their niche.

"Dave and Andy are prototypic for us in that they have a fair amount of experience in their field, they're first-time entrepreneurs and the know what they can and can't do," says Hulley.

Power hitters

For entrepreneurs in the high-technology field, FORE Systems is an example of a grand slam. When Fraley and Nelsen joined FORE four years ago, the privately held company did a shade less than $25 million and employed about 100 people. Now, FORE is a public company with 1,500 employees approaching $500 million in annual revenue.

While FORE Systems is far from a run-of-the-mill start-up, it's not out of the question to think that CoManage could signal the beginning of an era of successful ventures spawned by FORE Systems and, perhaps later, by companies such as CoManage. In fact, Nelsen has every expectation that CoManage will spin off additional entrepreneurial efforts.

Demmler says companies such as FORE Systems, fast-growing businesses that attract highly skilled professionals to work in an entrepreneurial environment. will inevitably produce new ventures.

"Companies like FORE will ultimately create some number of spin-out companies," he says.

Fast out of the box

As baseball players avoid mentioning the possibility of a no-hitter after six or seven hitless innings for fear of jinxing the pitcher, no one involved is talking about CoManage as the region's next FORE Systems. But the thought can't be far from their minds as CoManage, in much the same manner as FORE Systems did in the late 1980s, leaps into a nascent industry in anticipation of making itself the market leader.

This start-up won't be without its challenges, however. While money isn't a problem, they know that hitting the company into the high-tech field's bleacher seats will depend on how successful they are at attracting the talent needed to develop the software product that promises to fill the company coffers.

Nelsen and Fraley have worked at a breakneck pace to get their company started, and so far, it has paid off. Barely four months after leaving FORE, the region's most spectacular high-technology success story, they dropped their business plans on the doorsteps of a number of venture capital funds and convinced Adams Capital Management to fund a product they have yet to develop for a market in its infancy.

"This is a huge market, and there are potentially many customers for the technology that CoManage is building," says Hulley.

But in the fast-moving high-tech marketplace, Nelsen and Fraley know that getting a product to market which will satisfy that customer is crucial. Says Nelsen: "Time to market is key for us. These opportunities that are created don't last forever."

Getting human capital

If there is a factor that could restrain CoManage's growth, it will be its ability to attract talent to complete the development of its product.

"Ultimately it comes down to being able to build a team of software engineers," says Nelsen.

High-technology companies these days fret loudly and continuously over the difficulty attracting qualified talent to their organizations. Nelsen is no Pollyanna when it comes to the situation his company faces, but he believes the Pittsburgh region offers some key advantages that will work in CoManage's favor.

"I think it's somewhat of a challenge for everyone in the industry today," Nelsen says, "but there are several nice things about doing this sort of thing in Pittsburgh. Generally, when people do join your company, they stay with a company longer than might be normal in the industry."

"The biggest problem we had at FORE was getting people," says Fraley. He should know. During his tenure at FORE Systems, his department zoomed from 15 to 125 people. He and Nelsen were responsible for hiring, and know what a challenge that might be.

"In recruiting candidates, the toughest thing is getting them to come to Pittsburgh," Nelsen says, but adds he believes the relatively low cost of living in Pittsburgh, the numbers of technical people coming out of local universities, and the overall quality of life will help them attract and retain the right talent.

But the founders' high-tech contacts, combined with a recruitment strategy that includes classified ads and pitches on its to-be-developed Internet site, should give the fledgling company a good shot at attracting the kind of talent it needs. The company, for instance, has attracted Fraley's brother, a Carnegie Mellon University graduate who worked on several high-profile projects at MicroSoft and who no doubt will serve as a prime source of industry contacts.

The ripple effect

Ultimately, the creation and growth of businesses like CoManage mean more jobs for the highly skilled and highly compensated technical employee.

"You create jobs in one of three ways," says Ray Christman, president of the Pittsburgh Technology Council. "You want to see new businesses start, you want to see existing companies grow and, finally, you would like to see technology companies invest in this region."

The growth of entrepreneurial ventures that spawn other businesses leads to job generation and the development of a critical mass that keeps the business-creation cycle going, says Don Smith, executive director of the center for Economic Development at Carnegie Mellon University.

A vibrant high-technology community, he says, will attract other companies to the region, generate new businesses and make the community attractive to highly skilled professionals who can fill the jobs that are created and, in some cases, start their own companies. If that paradigm is valid, then CoManage holds the promise of contributing significantly to the process.

Clearly, Nelsen and Fraley see the possibility that their own venture, even if it doesn't reach the peak their former employer has scaled, can be the springboard for other entrepreneurial ventures.

Says Nelson: "Hopefully, some day people will be leaving our company and starting their own companies."