Pittsburgh’s Entrepreneurial Evolution Attracts VCs –

PITTSBURGH – After long bemoaning a lack of funding for Western Pennsylvania’s technology community, the region can now tap into three new sources of venture capital.

Two Silicon Valley firms, Redleaf Venture Management and Draper Fisher Jurvetson, and Boston-based technology company Lycos Inc. are preparing to start venture investments in this newest technology hub, joining health-care focused Caduceus Health Ventures (VCJ, March, page 16), which opened a Pittsburgh office in late January.

“Pittsburgh is coming into its own,” said Carnegie Mellon University President Jared Cohon. “People are beginning to recognize it for the entrepreneurial hotbed it is.”

The university, along with the nearby University of Pittsburgh, stands to benefit from the region’s growth of available capital. Carnegie Mellon, with its long history of entrepreneurship, spawned the core technology behind Lycos in 1995 and has played a key role in attracting new sources of capital.

“The entrepreneur is a little closer to the dorm room than the board room,” said Redleaf Managing Partner Lloyd Mahaffey, who was joined by Pennsylvania Governor Tom Ridge at a recent in-state technology conference to announce the September opening of Redleaf’s Pittsburgh office. The firm will tap deal flow coming out of the area’s universities.

Meanwhile, Governor Ridge also introduced the creation of Pittsburgh Digital Greenhouse, a collaboration among Carnegie Mellon, the University of Pittsburgh, Penn State University, Cadence Design Systems, Sony Corp. and state and local governments to make Southwestern Pennsylvania the center for emerging systems-on-a-chip technology. Such innovation, used in the manufacturing of products that rely on digital video and networking, is expected to be an important component in the future of consumer electronics.

Governor Ridge had been vocal for some time about the need for catalyst-stage funding to help spur the state’s technology industry. Following his 1998 Technology 21 initiative, the Wayne, Pa.-based Pennsylvania Early Stage Partners last year launched a $50 million fund to focus on deals in Eastern Pennsylvania (VCJ, March, page 49).

Redleaf Venture II, which also will scout deals in Philadelphia, Northern Virginia and Research Triangle Park, N.C., held a $30 million first close in early June (story page 28), which includes commitments from Pennsylvania-based Safeguard Scientifics Inc. and PNC Bancorp. The Digital Greenhouse and the investments from Safeguard and PNC were crucial to Redleaf’s decision to expand eastward, Mr. Mahaffey said.

“There’s obviously some huge opportunities [in Western Pennsylvania],” he added, noting that Pittsburgh’s two world-class research universities, growing sources of capital, right investment culture and government support position the region as another hotbed for Internet deal flow.

Carnegie Mellon, which did not invest in Redleaf’s first close, recently committed $3 million to a yet-unnamed Western Pennsylvania vehicle (VCJ, May, page 5) that will be co-managed by Redwood City, Calif.-based Draper Fisher Jurvetson and Pittsburgh’s Triangle Capital Corp. Additionally, the Pennsylvania State Employes’ Retirement System (SERS) in May committed $20 million to Triangle.

Officials at Triangle and Draper Fisher declined to comment on the still unnamed fund, but past reports have estimated the vehicle will be in the neighborhood of $50 million.

Triangle also will team with Lycos for a Pittsburgh-based vehicle that will raise money from third-party investors, several sources confirmed. Lycos Ventures, headed by Dennis Ciccone, who joined the company as vice president of mergers and acquisitions in May 1998, is raising about $60 million to $70 million.

Lycos had no comment at press time.

Carnegie Mellon’s Dr. Cohon believes efforts by the state and local governments to promote Pittsburgh’s technology community have been instrumental to the area’s recent burst of venture activity.

“The governor has invested a great deal of his own time and effort in getting this up and running,” he said. “[VC interest in the area] is both substantially and symbolically very good for us. We’re delighted [these investors] are setting up shop here.”