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Shelter from the storm Featured

10:02am EDT January 26, 2005
Dave Nelsen is wearing his jacket in his office, feeling a chill after a couple of soft drinks at lunch and the cold he's been fighting.

But Nelsen's discomfort is nothing like the discomfort generated by the blizzard that hit the telecom industry not long after he and partner Andy Fraley founded CoManage in 1998 and sped into that industry's boom with $39 million in venture capital.

Nelsen and Fraley launched CoManage intending to create software to manage telecommunications networks. It was a problem that their former employer, FORE Systems, didn't have the inclination to tackle but that the two were confident they could solve.

It soon became apparent, however, that most of the customers that CoManage was positioning itself to serve either weren't going to be around long or would have scant resources to purchase its product.

So instead of squandering its capital, CoManage pared back its work force and looked around to see what new opportunities might exist. Nelsen and Fraley picked the brains of executives at big telecom companies and found that sloppy databases were a huge headache, a problem that was costing the industry millions but that no one had figured out how to solve.

The CoManage team saw the problem as one they could crack, given the company's experience, so they sold off its initial product and went to work on one that could solve the telecoms' data problem. Hedging its bets, they decided to target the large telecom companies that were most likely to survive the downturn.

CoManage switched operating systems, database platforms and programming language, yet the core of what it already had in place was robust enough that the company was able to come up with a new product in nine months. The new software, TrueSource, has landed customers including Sprint, Verizon and AT&T Wireless, and transformed CoManage.

"It is a different company," says Nelsen, describing CoManage today. "It's a different product, although we're still focused on telecom, just on the 125 megabillion-dollar players worldwide that are prospects for us."

Nelsen talked to Smart Business about how CoManage found a new market, transformed its product and saved itself.

How did CoManage survive a tough telecom market?

One of the aspects of our survival was really based on lucky timing. We had raised a large volume of venture capital, $39 million in September 2000. The NASDAQ had already peaked, the dot-coms were exploding at that point, but telecom, everyone thought, that's a real business, and in the fourth quarter 2000, only months after we closed that funding round, the telecom world just fell apart.

When I look back on it now, the fourth quarter, things went off a cliff. First quarter (2001), we started asking ourselves if it was us or the market.

Second quarter, we took the first big step and reduced the company by a little over a third, and less than five months later, we cut the company in half. Looking back on it, I feel like we accepted reality relatively quickly, which meant we had resources to move forward.

How did you decide to change the company's direction?

One evening, Andy and I flew to New York, we met with the senior vice president of operations for Verizon and we spent five hours talking to him about the challenges and problems he had in his business relative to things we knew about. It turned out that in doing two dozen of these kinds of conversations with people we knew would be survivors, we found that there was a fundamental problem that no one had solved that we felt we were particularly well-equipped, based on what we knew and what we'd done, to solve.

We discovered the next opportunity by talking to these customers.

Did you get the feeling that the rules had changed on you rather abruptly?

They really did. In fact, it changed the way that I will behave in business from here on out. When there's a lot of capital available, you're really encouraged to go as fast as you can, take risks in a way that maybe isn't smart. So you make major investments before you necessarily know what the return is, like hiring a team and building a product before you know that there's a customer out there.

This whole process made me much more conservative with respect to the idea of how much money you can raise and how you deploy it or spend it. We have an expression -- we call it 'bleeding from the ears.' What it means is that you get everyone up to 110 percent busy before you add the next person.

Instead of hiring in advance of known demand, you hire in a slight lag to known demand.

What lessons did you learn from your first experience as an entrepreneur?

I guarantee you I will start another company some day. It will not have this nice furniture; it will not have this kind of nice space. There are things you should invest in and there are things you shouldn't invest in.

An amazing number of companies have run successfully for some very long period of time. Then they build some beautiful headquarters building. If there's a better indication of the coming fall of a company's stock, I don't know what it is.

Spend money on stuff that makes sense to spend money on. There's a lot of stuff that you have to make major investments in, sometimes taking a risk. But I think there are other things you shouldn't spend your money on.

What are the key skills that an entrepreneur needs to have to survive?

Optimism is absolutely key, because you're always dealing with so many potential threats. You're so much smaller than other players out there. So I think you have to be optimistic by nature to be an entrepreneur.

If you sat down and looked at every possible threat, you'd probably be too scared to start a business. I think confidence is important because one of the real challenges and threats to the company at that time was people would leave. The only chance we had was if this incredibly talented tech team stayed together and quickly got to the next product, and it worked.

What are the most important factors involved in surviving a turbulent market?

Focus on creating real value for your customers. I think a lot of companies didn't do that in the late '90s. There were a lot of wacky ideas out there, get-rich-quick Ponzi schemes, more or less. I think if you're creating real value for your customers, you can get a share no matter what the economic environment.

Capital spending is about 30 percent of what it was four years ago in the telecom space. So that's two-thirds gone, almost $100 billion that's not being spent in telecom. Even in that tough economic environment, because what we do creates real economic value ... they're willing to invest in it.

How to reach: CoManage Corp., www.CoManage.net