Venture funding adventure Featured

9:47am EDT July 22, 2002
In the best of all possible worlds, the jaw-dropping performance by the initial public offering of FreeMarkets Inc. at the end of 1999 would be a harbinger of things to come in a future dominated by high-tech high fliers.

While it’s unlikely we’ll see a host of other young companies become billion-dollar successes anytime soon, more than a handful of local upstarts have, nonetheless, shown a serious potential to take off into the economic stratosphere. So what’s the lesson for the region’s aspiring entrepreneurs looking to bring the next blockbuster to market?

“It will show that you don’t have to leave Pittsburgh to become a billion-dollar company,” says Ajmal Noorani, vice president of Mastech Corp. and manager of the founders’ new $50 million eVentures fund for Internet-oriented start-ups.

It may indeed be possible to create a billion-dollar company on your first stroll down Wall Street — but only with the right kind of business idea, sharp management and adequate financing. FreeMarkets’ meteoric rise would have been much more difficult, if not impossible, without the help of early-stage venture capital to develop its service, provide critical management expertise and demonstrate its promise for big returns to the first buyers of its stock.

Providers of that kind of risky investment capital finally appear to be gaining some level of comfort in this region. The managers of several homegrown funds, as well as those from outside the region, are beginning to see an alluring shade of green in the hills and valleys of Southwestern Pennsylvania.

Another reason for the interest in local deals is that venture funds are once again flush with capital and looking outside the traditional geographical hotbeds to find places to invest.

“There’s so much competition and so much hype in the valley,” says Sean Sebastian, managing partner with Birchmere Investments, a $20 million early-stage venture fund started by wealthy steel industry entrepreneur Richard Simmons. Birchmere partners today can’t help but celebrate their success, thanks to their early investment in FreeMarkets. In fact, the fund still maintains holdings in a number of local start-ups, including CoManage, another company lining up for sizable entrepreneurial success.

Mastech created eVentures in 1999, and Lycos Ventures was launched in July in a partnership with Triangle Capital, headed by local entrepreneur and educator Don Jones. Redleaf Management, a $150 million Silicon Valley-based venture capital firm, opened an office in Pittsburgh last year, and the Western Pennsylvania Adventure Capital Fund, led by Pitt professor and investor Richard Patton, mounted a second round of fund-raising last September.

And a rejuvenated Innovation Works, a retooling of the former Ben Franklin Technology Center, got a $6.6 million grant from the state, earmarked for parceling out in $100,000 to $500,000 bits to promising upstarts.

Enlightened self-interest

For funds such as eVentures, the objective is a symbiotic relationship among entrepreneurs, investors and Mastech. Investments in new companies will provide not only a speculative opportunity for gain which stems directly from their success, but also creation of entities that could use the kinds of services that Mastech can offer, as well.

In effect, Mastech will find new customers for its products by spawning new ventures and foster the development of businesses that can feed off of its client base by offering services they can use.

“We’re the smart money because we can understand the technology,” says Noorani.

Along the way, eVentures plans to provide the practiced guidance and mentoring that fledgling firms often need nearly as much as they need capital.

At the most fundamental level, Mastech is offering a select group of Carnegie Mellon University students, through the school’s entrepreneur-in-residence program, the opportunity to get their ventures off the ground. University seniors get a monthly stipend, office space and administrative support. In exchange, Mastech gets a guaranteed stake in the new company and reserves the right to participate in up to 20 percent of any future funding.

Redleaf, too, sees the value of adding operations, marketing and legal support to the cash it pours into promising ventures. The fund is establishing offices in locations such as Pittsburgh, which offers a core of high-tech companies, local support for their development and a strong university community.

“In addition to capital, Redleaf will offer a range of services, including operational support and a digital incubator systems integration capability to help seed-stage Internet firms mature into category winners,” says C. Lloyd Mahaffey, director of Redleaf’s Pittsburgh operations.

“Venture capital firms are spread thin, especially the top few,” says Ashok Trivedi, Mastech’s president and a co-founder with partner Sunil Wadhwani. “What start-ups need is a committed investor who has a strategic interest in the success of the company, and who has the expertise and deployment capabilities to help them scale up quickly.” How to reach: eVentures, www.mastech.com/eventures; Western Pennsylvania Adventure Capital Fund, www.wpacf.com; Redleaf Management, www.redleaf.com; Birchmere Investments, www.birchmere.net; Innovation Works, www.innovationworks.org

Ray Marano (rmarano@sbnnet.com) is associate editor at SBN.