 
|
|||||||||||||||||
              
|
Pursuing the new American dream 659 days in the life of promising software start-up CoManage Sunday, November 28, 1999 By Ken Zapinski, Post-Gazette Associate Editor
Dave Nelsen and Andy Fraley are barreling towards a cliff at 90 mph, and they're taking a few dozen folks along for the ride.
Their company, CoManage, has a plan but no products ready to sell. By this time next year, they'll be spending $40,000 a day on salaries and expenses just to keep their Pine software company afloat. Unless they're able to start selling something, the roughly $15 million they have left from investors will run out in early 2001.
Dave and Andy and their 40 employees are hard at work developing the data-networking software that CoManage hopes to sell. But what they're really doing is scrambling to build a bridge across the yawning chasm that every small business faces.
"Is the bridge going to get done before you get to the cliff?" Dave wonders. "Or are you going to just sort of sail off and crash?"
Theirs is a story repeated time and again across the economy -- bright people with an idea who strike out on their own to make a name, a product, maybe a fortune. We've heard it so many times, it's easy to dismiss it as a cliché and lose sight that it is their courage and confidence, perseverance and craziness that drives the economy.
Seldom does one firm with 30,000 workers dominate a regional economy anymore. Instead, it's more like 1,000 firms each with 30 workers.
Dave and Andy are putting themselves on the line. But they are carrying so much more.
Forget the millions that investors have poured into the CoManage coffers. What about newborn Zachary Pawlowski? His dad quit his secure corporate job two months ago to come to work for Dave and Andy.
"After I gave my notice, I remember the first two nights. I just said, 'What am I doing?' " said Bob Pawlowski, a 32-year-old development engineer at the 15-month-old software company.
Then there are the hopes of an entire region, whose leaders see in CoManage the kind of promising spin-off that will drive Pittsburgh into the next century.
The region is just a few moves away from the "critical mass" needed for high-tech success, Buchanan Ingersoll attorney Carl Cohen recently told the Pittsburgh Technology Council, a local trade organization. "We believe that CoManage will be one of those success stories that puts us over the top."
Hyperbole? Maybe.
But even the greatest of empires started small. Michael Dell had his college dorm room. Steve Jobs had his parents' garage. And Dave and Andy had Andy's basement in Ingomar.
They started toward the cliff in the late afternoon hours of February 7, 1998, while atop a ski slope in Jackson Hole, Wyo., as part of a Fore Systems ski trip. Dave and Andy had moved to Pittsburgh a few years earlier to work at the Warrendale company, which makes computer networking gear based on asynchronous transfer mode technology.
They knew that Fore's customers needed some sophisticated software to help them manage the huge networks of computers that are playing an increasingly important role in Corporate America. They also knew that Fore, since its purchase by Marconi PLC, didn't want to develop it.
Let's build it ourselves, Andy said that day.
For a while it seemed a crazy idea. Then Dave took a few weeks off to craft a plan. After all, they knew their customers and they had the credentials. Dave had a master's degree from Stanford University and a dozen years at AT&T Corp. before coming to Pittsburgh. Andy came from the Massachusetts Institute of Technology via eight years at Hewlett-Packard.
On July 4, 1998, 37-year-old Dave and 33-year-old Andy, each with a wife and two young children, left Fore for Andy's basement. They had until Nov. 1 to find someone -- a potential customer, a venture capitalist, someone -- who believed in their vision. If not, then it was back to the work-a-day world.
"This Nov. 1 thing," Andy said, "well, that's my wife. Basically, the ultimatum -- your leash is this long."
They quickly found it was plenty long enough. Their original plan was to raise around $1 million, enough to pay seven engineers to sit around Andy's basement to solve their knotty software problems.
The money men Dave and Andy approached to invest quickly taught them that developing a tech product is a lot like computer equipment itself: Speed counts. A lot. And more money means more people, which means faster development. Which means you can beat the other guy -- and there is always a competitor -- to market.
They notched up their request to $3 million. A trio of venture capitalists, or VCs, -- Adams Capital Management, Birchmere Investments of Pittsburgh and the Western Pennsylvania Adventure Capital Fund -- kicked in $4.2 million instead.
"This is a fundamentally terrific company," said Bill Hulley, general partner of Adams Capital and now a member of the CoManage board. CoManage, in fact, is the only Pittsburgh-area company in the Sewickley VC firm's portfolio.
Dave, at the suggestion of former Fore executive Mark Juliano, had placed a cold call to partner Joel Adams to make his pitch. And the VCs jumped in. It's very rare, Hulley said, for Adams Capital to invest in a company that just comes in off the street as CoManage did.
Those first millions rolled into the CoManage account on Oct. 7. Eight days later, the company moved out of Andy's basement and into the second floor of a non-descript Pine office building.
But not before Dave spent a lonely day disassembling the used office furniture that the newly minted multi-million dollar company purchased for 10 cents on the dollar.
"There were only five people in the company," Dave said, "and I wanted the four engineers to keep working."
It's easy to understand the VCs' enthusiasm. Dave is a perpetually upbeat CEO, such a naturally energetic man, he sticks to decaf Starbucks. He seems to form an instant bond with everyone he meets.
"Dave in particular is a rare mix of marketing and technology that you don't often see," Hulley said.
And he had a compelling product to describe.
Computer data networks are complex webs of routers, servers, switches, cables and ports that need to work together to work at all. Network managers need to monitor the system to know when something goes down. But diagnosing and fixing problems can be a problem because the equipment generally comes from different manufacturers.
Dave and Andy, the company's vice president of engineering, want to build a Windows-based system that coordinates all those different monitoring functions in a single piece of software.
Network managers "have to go buy the transmission and the engine and the tires and assemble the car themselves," Dave said. "We're Ford Motor Co., if you will. We are going to deliver to the customer a completely assembled car."
They don't spend money like Ford, though, or Dave would not have rescued the storage cabinet in the company conference room from his neighbor's trash pile. Even with millions in the bank, every dollar spent on furniture or travel or office space is one more dollar that can't be spent hiring a new employee. And for a software company, people are the only true asset.
"We agonize over small purchases," said Phil Compton, the chief financial officer who came aboard in April. He should know. He and Dave drove to and from Washington, D.C., on a single day this summer for a meeting while the company was shopping for additional financing.
When a company is spending so much money adding new employees -- roughly one new worker every 11 days -- even a task as mundane as managing space becomes a challenge. Too little, and you have to move too often. Too much, you spend too much money and your employees end up working in a warehouse.
When CoManage's second-floor home became too crowded, it moved up to the larger third floor. But the company was growing so quickly thatDave and Andy held onto their old space, too.
They wanted to make sure their people developed the sort of bonds necessary to work well in teams in an intense atmosphere, so they remodeled the third-floor kitchen as a casual get-together space.
It houses the foosball table they assembled for the twice-monthly office tournaments; the refrigerator stuffed with free sodas and juice; cabinets filled with "virtually every variety of Little Debbies," according to Dave; and the bread machines, which crank out delicious warm loaves for the assembled masses every morning.
Dave said CoManage reached a crucial expansion milestone this summer when it had to buy a second machine because one just couldn't feed all the employees.
But the company faced a more imposing hurdle at about the same time -- the need for a second round of venture capital.
Dave and Andy soon confronted a multi-million dollar problem.
Too many people were pushing too many dollars at them.
Dave and Andy were hoping to raise $8 million to $10 million. Instead, they raised $12.6 million in August from a group led by the investment of arm of telecommunications manufacturer Lucent Technologies and Columbia Capital Equity Partners.
But that money came with a price.
CoManage is still Dave and Andy's baby. It's just not their company anymore.
Each dollar from outside investors dilutes Dave and Andy's stake a little bit more. Together, the two men own just under 30 percent of the company they founded last year. The employees own 15 percent. The outsiders own the rest and control a majority of the seats on the seven-member board of directors.
That has been one of the big lessons of this journey. The process of growing and racing toward an initial public stock offering, Dave said, is "a progressive loss of control for the founders."
VCs generally have no interest in keeping their money in a company forever. They see their role as funding risky start-ups until they are strong enough to survive on their own through an IPO or are purchased by a larger company. If a company is hot, VCs can rake in big bucks.
Securing funding from VCs instead of, say, maxing out your friends' and families' credit cards, means a founder will have to settle for a smaller piece of the pie. But ideally, Dave said, it will be a much larger pie.
Not every entrepreneur can come to grips with the realities of the process. But Maureen Lawrence, a partner at Lucent Venture Partners, said Dave and Andy are not starry-eyed inventors. "They knew what a schedule was. They knew the risks of bringing this type of product to market," she said. "We see a lot of good ideas for technology, but a lot of those good ideas for technology never become businesses."
Lucent doesn't have much at stake in CoManage. Even if the company were to fail completely, the few million dollars Lucent has invested would not even be a blip on the earnings report of a company that will do $40 billion in business this year.
The numbers work out a little differently for Bob Pawlowski. Six years ago, the Munhall native took his University of Pittsburgh master's degree in electrical engineering to Cutler-Hammer, a subsidiary of the Fortune 500 company Eaton Corp. He liked his job. But when a friend told him about CoManage, he was so impressed with the team Dave and Andy were assembling that he couldn't pass up the opportunity to join.
Still, it took some adjusting. His new base salary is comparable. "Cutler-Hammer had some guaranteed bonuses that would kick every year," he said. "Here I don't have those guarantees, but I have stock options." In other words, like the venture capitalists, he is willing to take on a little risk for the chance to hit it big.
"The company actually does not have the first dollar of revenue," Dave said. "So this is a lot of money betting that the product concept is right, betting that the team can deliver, betting that sales can sell this thing, betting that tech support can support it ... The VCs are betting that this is a team that has the ability to deliver."
The secret is to keep those risks to a minimum.
It's a given that computer networks are going to keep growing in importance. It's far less clear what specific technology will be used to carry the little bits of data around.
No matter. All of the competing technologies are potential customers for CoManage.
"We're actually selling the pickaxes and the shovels and the jeans to miners that are on the way to the gold rush," Andy said.
And that's a good place to be, said Mike Nelson of VentureBank@PNC, the bank's high-risk lending and investment arm. He likes CoManage so much he tried twice to get the company to take some of the bank's money, to no avail.
"They're kind of poised to be winners," Nelson said, "no matter who the winners are."
|
||||||||||||||||
Breaking away