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Getting things started

Round Table panel sees critical mass building for "new economy" in Pittsburgh

March 7, 1999

By Douglas Heuck and Dan Fitzpatrick, Post-Gazette Staff Writers

If the keys that made Pittsburgh the entrepreneurial center of the world 100 years ago were vision, will and raw materials, then at least in some quarters in this region, those same tools again are being assembled.

With today’s Round Table Discussion participants, their vision for Pittsburgh may be aided by the fact that most are newcomers who see the region with fresh eyes from a fresh perspective. In so doing, they say they see it not for what it was but for what it is and can become.

Their will to risk and sustain new ventures probably is a function of both youth and ability. And the raw materials are no longer what’s under the ground but what’s in their heads.

The participants are: Glen Meakem, co-founder and CEO of FreeMarkets OnLine; Barbara K. Mistick, director of Seton Hill College’s National Education Center for Women in Business; Mark D. Myslinski, president and CEO of DFD Information Services; David Nelsen, co-founder and CEO of CoManage Corp.; and Sean D. S. Sebastian, managing principal of Birchmere Investments.

Collectively, they see Pittsburgh as having terrific prospects as a great place to live and a great place to create new fortunes.

Q: Why do people say that we don’t have an entrepreneurial spirit in Pittsburgh and that we need to change the culture before entrepreneurs can flourish?

Nelsen: I have no idea why they say it other than history and momentum. We haven’t had a lot of startups in the past, so we’re not going to get a lot of startups in the future. That’s bunk. You’ve got 27 great colleges and universities, so you’ve got all the raw materials you need. You’ve got more software employees in this area than in almost any region in the country. There’s nothing that we lack. I think it’s just an attitude of people that you can’t do it. They haven’t tried.

Q: Where does that come from?

Meakem: Who cares where it comes from? Starting a business is hard. If starting a business that’s going to be worth millions and millions were easy, everyone would do it. The critical resource is not the lawyers, accountants and universities; without them you’re not going to get it done. The critical resource is entrepreneurial leadership. And I would say that the area has historically been leadership constrained.

Q: How do you get these people?

Nelsen: Well, I wouldn’t be doing this were it not for Fore Systems. Early in 1994, I came to this region to join what looked like a promising high-tech startup. When I saw what it was doing, I was impressed. I decided to stay on. From the time I interviewed until the time I left, it grew from 100 people to 1,700 people. And I got the direct experience inside this company, and ultimately that’s what gives you the knowledge and confidence to go out and do this yourself. I see now all sorts of small companies starting up in Pittsburgh. FreeMarkets has made a big impact. Islip Media. Stargate Industries. BeFree. There’s a list as long as your arm.

Mistick: If you have an industry cluster where people can get the training, skills and knowledge, then they can weave out of that and create all of this wealth and opportunity.

Myslinski: People talk about it’s hard to raise money. It’s hard to start a business. Hard to attract people. It should be hard. These are scarce resources, and we have to compete for them. But through hard work, preparation, good ideas, well communicated, well executed under the right leadership, things fall in place. But it does require a lot of nos. And entrepreneurs have to learn to deal with no.

Meakem: And no one owes you anything. When you start a business, even if you’re really, really good, you’ve got to expect a high percentage of nos. Right now, in the current capital environment, raising money — if you’ve put together a smart team and an intelligent business plan — is a relatively easy task compared to selling your first client. When you go out to do sales, people say "no." You need to learn to overcome obstacles.

I think Pittsburgh is actually an easier place. Costs are relatively low here. We’re finally moving from the building where we started the business four years ago, where we’ve been paying, on average, $12 a square foot rent. When I tell people we’ve got a Downtown location in a major city paying $12 a square foot, their jaws drop.

And because this hasn’t been Silicon Valley and hasn’t been Boston, there’s a tremendous base of smart people who are just dying to work for a really aggressive, good, growing company. Dying to. We have no trouble recruiting people within the city. Young people who are smart are looking for great opportunities here. And they don’t have 50 to 100 really cool startup companies to go join at the moment. Five years from now, the labor market might be really tight for smart folks, but right now, boy, you can go get ’em. So I would much rather be building my company here than in Boston or Silicon Valley because we have better labor.

Q: So the notion that there’s a labor shortage of highly trained, skilled workers in emerging tech industries is not true?

Sebastian: It’s not the technical people. It’s the managerial people. Show me the people who’ve taken a company public before, who’ve built a national sales organization. If I’m willing to pay, I can recruit all the top programmers I want either locally or outside the area. Comparatively speaking, those people are easy to get. But when you need the top five or dozen people in a company that has ambitions to be 500 or 1,000 employees, those people are hard to find.

Mistick: It’s a global marketplace. People are recruiting outside the region as well.

Meakem: Outside the region, there are multiple layers of Diaspora, I call it. There’s the direct Pittsburgh Diaspora, people who’ve left who want to come back. We hire some of those folks. There’s also Midwest Diaspora, who have gone to the coasts to work in the high-tech industry but who long for a safer, simpler, more family-oriented Midwest lifestyle.

Mistick: We’ve really beat up our self esteem here. All of you who’ve come here from outside the region are saying all these wonderful things, but if you had a room full of people who’ve grown up here, you’d hear a whole different story. We need to be able to convey what a great place it is and not go to the negative side. It’s the whole cheer leading part of leadership.

I was in Chicago recently, and I was just there for two nights for a meeting. And the cab driver said "You’re leaving already?" I said, "I’m just here for a couple days." And he said, "I can find you a hotel down the street that’s about $50 a night cheaper, as long as you have an American Express card. Don’t leave our city so soon. There’s great things to see. There’s this, there’s that." This guy was selling that town in his cab.

Q: Do you think the local economic development institutions put our best foot forward? Are these groups helpful to this region?

Nelsen: We have too many people doing too many different things. We could have half as many people working in one or two key directions and making a larger impact. There are many things I’d like to see done in the Pittsburgh region. One of the challenges I have in recruiting people to the area is the reputation that Pittsburgh has, which is really based on looking backward instead of looking forward. Marketing this region and helping to change its image would be a great thing, so young people would choose to stay here and people from outside the area would be attracted to here. I welcome that help.

Sebastian: I would not say we’re overstaffed in economic development, but we’re overagencied. There are too many small, fragmented groups with small missions.

Meakem: I feel strongly that we shouldn’t waste any energy at all in trying to manage our public and semi-public and private-sector economic development agencies. They should come and go like any other organization. If they have a need and are able to find funding, great. If they disappear because they’ve mismanaged themselves, then let’s let them fail and go away. Should Ben Franklin [Technology Center of Western Pennsylvania] just sort of go away? Maybe. I bring into this the free-market attitude of letting 1,000 flowers bloom. Some will fail, and some will succeed. Leaders will have a chance to emerge.

I am joining the Pittsburgh Technology Council’s board. The only message I’m going to bring to that organization, and I’m going to say it over and over, is to market this city. They and the Pittsburgh Regional Alliance should be pounding this marketing, media drum, about how this is a great place and a great region. Even if they don’t feel sincere about it all the time, they should be propagandistic in putting that message out.

The agencies spend a lot of time focusing on the servicing/education aspect but to the neglect of the national media that they should be pounding on. The fact that U.S. News and World Report publishes an article on new software cities and we’re not in there — it’s either nobody’s responsibility to worry about that or somebody completely dropped the ball. Boise, Idaho, is not as high-tech a city as Pittsburgh.

Q: Do you really need any of the service stuff these agencies offer? Do these entrepreneurs need to be nurtured by these collective groups?

Meakem: When you talk about a group of thirty-somethings with tremendous education, experiences, and access to capital, the answer is absolutely "no." But what I need them for is atmosphere. I can’t represent the city, nor do I have the time. As far as the training, back when I was in school and there were entrepreneur clubs and issues focused on that, I took a lot of courses, so I think it’s important to build people up and get them the skills.

Nelsen: You know what the very best training program is? Working inside one of these startup companies yourself. That gives you the skills to go out and do it. The good news is that Pittsburgh is approaching this critical mass. There are a lot of things starting to happen here. If you’re a student, look for a job in one of those companies. You will then be in a position to lead your own company in the future.

Q: What about the group NextSTEP, in which several local entrepreneurs gets together monthly to help each other solve problems? Did NextSTEP grow up on its own or through one of these entrepreneur help agencies?

Myslinski: That grew informally, from some fathers in Sewickley. That’s as far removed from an agency as you could possibly be.

Q: And yet it’s very valuable?

Myslinski: The value has been proven time and again.

Nelsen: I’m involved with that, and I credit the speed with which we were able to get on our feet with being able to join this group. I had never started a company before. I was able to get together with 10, 15 other leaders and ask them who the venture capitalists are, who to go to for legal services, how to put together a world-class benefits package and who to use for insurance. I didn’t know. That group helped me understand that. The group, with real world experience running companies like mine, was the single most valuable thing that happened as I was working to get the company off the ground.

Q: We’ve heard in past years that there isn’t enough venture capital around here. What is the money situation?

Sebastian: You have two kinds of opportunities. The exceptional opportunities like FreeMarkets or CoManage that burst out of the gates and raise millions of dollars in weeks or months. That’s a rarity even on the West Coast. Then you have a whole slew of younger, less-developed companies that have to go through a first round of "angel" investing with people putting in $10,000 to $50,000. They raise their first half million with blood, sweat and tears. That’s enough money to get them through the first year, and now they’ve got a story they can sell to the venture capitalists. That tier of investing is very difficult, and the angel network in this area is underdeveloped. Minneapolis, for example, has a very robust angel community. There are hundreds and hundreds of people you can go to for your first $50,000 investments.

Myslinski: There’s a down side to $25,000 to $50,000 angel investors. Their money is all very good, but everyone who has an interest in their investment calls you once a week. "How are things going? I’ve got a friend who’s doing this. Maybe he can help you." It ends up draining your time and slowing down the speed, which is essential to taking a company from concept to product to market.

Mistick: There is much more capital out there. Risk capital is what is really in short supply. For people to take a gamble on a company that has no posted earnings, we still hear that money is very hard to find.

Meakem: If you’re good and you have a good idea and you put your ideas together well and you can answer all the questions investors put to you, the money flies to you. And this is one of the hard realties of capitalism, but 85 to 90 percent of the people who try to put that business plan together aren’t good enough, their ideas aren’t good enough, their talent isn’t good enough, and they can’t answer the questions.

Sebastian: We’ve looked at 500 business plans easily. I’ve got file cabinets full of dead plans. We’ve invested in 12. I’ve got $13 million of risk capital. Most of that money is in companies that are pre-revenue. They don’t even have a product yet. That’s as risky as it gets. But every one of those 500 says "Gee, there’s no risk capital."

Meakem: Capital moves globally. We decided to locate our business in Pittsburgh, but we sent out business plans all over the country and in Europe. Capital flows. There’s no problem with that.

Q: If it helpful to have local capital, because personal relationships make it easier, how important is it to have successful local companies, so local people know they can make a lot of money doing this? Where are we on that continuum?

Nelsen: I see obvious progress. Take Fore Systems. It was successful. Not only does that convince other people that they can do it, but it creates a whole class of angel investors who have made their millions at Fore who are not only interested in striking out on their own but also supportive of other people. As we take people out of the universities and into the companies that are here, we’ll get positive momentum in the right direction, and that will create the next wave and the next wave. Ultimately, this thing becomes completely organic. It doesn’t require agencies. It doesn’t require anything. It just happens. It feeds on itself. And people make money.

Q: If you look at places which are successful, most of them also have a Hewlett-Packard or a Microsoft. Do you need to have that industrial staying power, as opposed to startups that hit it big and then get bought up and moved out of town?

Nelsen: Silicon Valley ultimately depends on and exists because of Stanford University. You can trace most of the technology industry in Boston to MIT and/or Harvard. We’ve got CMU. We’ve got that seed that is going to make this grow. And for every company that got bought and moved out of this area, I’ll point out that Fore Systems alone has purchased, I believe, eight companies now and pulled them into this area. This is the way technology works.

Sebastian: High tech is different. It is not like steel. There is almost no fixed asset invested. Any one of these companies could pack up and move over the weekend. That did not happen overnight in the steel industry. It did happen over time. It is a very different sort of transition. Second, most companies that have left this area are small companies that are very easily moveable. They did not set out to be an anchor of a newly emerging industry. Fore Systems did, frankly. It emerged at a time when telecommunications hardware was just beginning to be an important part of the economy. It is a measurable piece of the overall GDP, so it became an anchor of our local high-tech community, just as Hewlett-Packard has on the West Coast and Dell has in Texas. You do need that magnet.

Q: Can you make it happen, or does it just have to happen? Do you get these things just by chance?

Sebastian: I wouldn’t say you get it by chance. All the companies we have invested in, high-tech companies here in the area, are here because they want to be or because they have to be. And those are both good enough for me.

Meakem: The name of the game for companies is, where do smart people want to live? If they want to live here in Pittsburgh, Pittsburgh is going to have a successful economy. If people don’t want to live here, they’re not. What makes it a great place to live? If taxes are low, costs are low, and quality of life is high, then successful, smart, high human capital people are going to want to live here.

Myslinski: We’d be happy to build companies here. Obviously, we’ve made that choice. But if the economic opportunity is that someone wants to buy us, and we feel that is a reasonable proposition, then that will be accepted. I don’t know that we all have clear strategies. I think the idea is you build the company and build the structure.

Mistick: That mindset of 20 years ago that we have lost something when a company is sold, I beg to differ with that. We have not lost a thing. You have created value in a different manner. I would venture to say that any three of you (Meakem, Myslinski and Nelsen) do not know exactly where your end is going to be. You don’t know where that point is going to be. You start and you grow and you build. So the idea that you have sold out and you sold out on the city, that is not true at all.

Sebastian: The neat thing about airports and universities is that they really don’t go anywhere. They are these perpetually living organizations, over centuries. Even the biggest, most successful companies come and go.

Meakem: Another asset is having McKinsey & Co. in town. We probably wouldn’t have been here if they weren’t. It’s not purely what comes out of the universities. They bring a lot of smart people in, but it’s the smart people that make stuff happen.

Q: What needs to happen around here to increase its attractiveness to such smart people?

Nelsen: Part of it is focusing on what we’ve already got. You’ve got some of the best mountain biking in the world right here. There is a new extreme sport that is sweeping the country called adventure racing. It started in Moraine State Park. Now it is going worldwide.

Paint balling is a hell of a fun thing. We have got tremendous paint balling national tournaments here each year, but are we marketing this kind of stuff? We have got great sports. We have one of the world’s best roller coasters at Kennywood. How come we locally don’t focus on it? How come we are not excited about where we live? People complain about the traffic here. The traffic is nothing. Sometimes it takes having been somewhere else to know what we’ve got.

Meakem: One reason we are building a lot of conference rooms in our new offices is that our clients like to come meet here. Our senior clients like to get out of the office and come to Pittsburgh. They like our youthful, high-tech atmosphere.

But one said, "The biggest problem you’ve got is that tunnel, because it backs up the flow of people to and from that airport." But boy, the feeling going through the tunnel and seeing the cliffs and the mountains.

Mistick: I think we need to take a look at Maglev from the airport to Downtown to Greensburg. That would help us be more competitive.

Meakem: There is not going to be a hub airport like that built anytime in the next 50 years. It is a huge strategic asset to have this, with this great little Downtown, with the rivers and this natural setting we have. If you could connect that airport to this Downtown, have a reasonable corporate tax situation, and get rid of the gross receipts tax, you would suck large corporations in here like there was no tomorrow.

Nelsen: A little story that gives a concrete example of one problem is this: I was talking to somebody who was putting in AT&T cellular service in this area, and she said, "You know what, this was the single hardest region in the country to put in cell service." And I said, "It’s all those hills, isn’t it?" She said, "No, it’s all of those little governments and municipalities and having to negotiate with every single one of them."

Meakem: How much money do we waste, having to support all of this public sector infrastructure?

Nelsen: Let’s have a giant merger.

Meakem: Also, let’s face it, there is a tremendous entitlement feeling here. There are a lot of great people, but there is a tremendous legacy of unionism here with this union kind of entitlement.

Mistick: It’s interesting, though, the unions here are in the Maglev group. They really want to see that happen here. So there are points in which there exists collaboration among those groups.

Myslinski: This area needs to be marketed. And if this community can work together on a common goal of marketing the region, and everyone is thinking positively about it, the region can really benefit from the excitement.

I think an important aspect of that has to be patience, though. It takes time to develop what’s happening here. In terms of the new economy, people shouldn’t expect it to be a Silicon Valley in the next five years.

Q: What about Oakland? Is that what it could be in terms of attracting people?

Sebastian: You need a cool part of town

Nelsen: You definitely need a cool part of town.

Sebastian: A place you can get to with a cab ride after work with clubs and restaurants.

Nelsen: It would be very nice if there were a region that you enter and you are now in Digital Pittsburgh. From a marketing perspective, one of the problems this region has is that there is a lot of stuff happening, but it is very spread out. It would be nice if you had a high-tech area with much more of a concentration of the coffee houses and the night clubs all growing up. The Strip District would be a perfect place.

Meakem: Cambridge, Mass., (where Meakem went to school at Harvard University) is a very, very unique city. There is an energy about the place, because it is an urban setting, very much like Oakland. The same level of urban density, but it is a nice place to be. It’s not perfect by any stretch, but year by year, more money is thrown in there. And it is better and better and a nicer and nicer place to be.

I drive through Oakland, and I say "This place could be so much better."

I think this region could adopt competition in schools ahead of the rest of the country and be revolutionarily ahead both in terms of the PR value but also the performances that come from that. It’s just another possibility there.

Where are places where we could take leadership, given the private and public schools, the universities and colleges we have? We could really, really take leadership in education.

I really see no reason why a long-range strategic vision shouldn’t be that, 30 years from now, Pittsburgh should be known as the best medium-sized city in the world. I would much rather live in the best medium-sized city in the world than the best large city in the world. I think it’s a great vision and one we could fulfill.

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