Why the Time Is Now For Starting a VAR Business

For Rob Wolfe, Feb. 1, 2003, was shaping up to be the kind of day that has become all-too-familiar to IT professionals since the "new economy" tanked. Avcom Technologies, Wolfe's employer for two years, was officially closing its doors, bringing an end to a popular Silicon Valley solution provider after more than 20 years in business. Avcom's employees discovered that they'd join the wandering droves of unemployed engineers and consultants looking for work in a tough economy. No one was more disappointed than Wolfe, who ran the solution provider's highly successful East Coast business.

Wolfe didn't like the idea of the company ceasing operations, especially since Avcom was financially secure. Rather than join his colleagues on the unemployment line, however, Wolfe decided to take action. As Avcom moved toward dissolution, Wolfe put together a plan to purchase assets from Avcom using his personal savings so he could spin off Avcom's East Coast operations into a new solution-provider shop.

"At 7 a.m., we got the call that Avcom was shutting its doors and by 9 a.m., I had articles of incorporation written up for AvcomEast," Wolfe says. "The opportunity was too good to pass up."

Literally, when one door closed, another opened: Just two weeks after the lights went off at Avcom Technologies for the last time, AvcomEast was born in Silver Spring, Md. Amazingly, Wolfe's story isn't unique. From Miami to Montreal, new solution providers are moving in where failed companies have departed. Many are diving headfirst into emerging technologies, including storage and wireless, throwing caution to the wind and starting companies in the unlikeliest of times. Many have no choice. For example, some VARs are being born from the unemployed masses seeking new opportunities outside of the corporate grind. Other integrators and consultants are being started by industry veterans that,economy be damned,are bent on giving IT another shot. Whatever their motivations, the men and women starting companies today promise to reshape the solutions community for years to come. Here's how.

'I'm Never Going Back'

Rarely has the IT industry endured such a dramatic decline as it has since the dot-com bubble burst. Layoffs have swelled into the hundreds of thousands, while Chapter 11 filings have outpaced IPO filings. As red has replaced blue or green on most stock tickers, the joy and exuberance this industry once took for granted has nearly evaporated entirely. More than 500,000 pink slips were handed out over 2001 and 2002 in the IT sector alone.

Jim Stewart was one of those casualties. An IT veteran, Stewart was laid off by Genuity in 2001. In describing his employer's fall, he uses words such as "bloodbath" and "meltdown." Stewart found an unkind job market and turned to freelance consulting while he waited for a job offer. But when the calls didn't come, Stewart decided to make a drastic career change. He went into business for himself late last year.

"I realized I could work from home and run my own business," Stewart says. "I have an entrepreneurial background, and I intended to do this eventually, but the job market just sped it up. It was probably the best thing that ever happened to me, career-wise."

In January, Stewart formed Project Management Associates, an independent consultancy focused on project-management services in the greater Boston area. Stewart has won a few clients such as Northeastern University, but admits he's still living off his savings and says that Project Management Associates isn't a successful venture yet. But something changed for Stewart during the past few months; despite drastically altering his lifestyle, he fell in love with running his own business. He doesn't want the six-figure salary and 100-hour work weeks anymore. He's taking more time for himself, and he's even started writing a novel in his spare time. Furthermore, Stewart says he intends to be self-employed for the rest of his life.

"A lot of people go into business for themselves to pass the time while they wait for another job offer at a big corporation to open up," Stewart says. "I'm not. Come hell or high water, I'm going to make this work. I'm never going back to work for someone else." He pauses, then adds: "Well, maybe if someone asks me to manage the Olympics, I'd take that job. But that's about it."

A number of people have found themselves in Stewart's position: jobless and with limited prospects. But many IT professionals are pulling back their resumes, reluctant to be faced with another pink slip down the road, and instead are starting their own businesses rather than letting their skills collect dust on the sidelines. As odd as it sounds, they say getting laid off was a blessing.

Jon-Paul Kern of Miami was laid off by Ericsson recently, and was also forced into freelance consulting. "The more I searched for jobs, it seemed, the more people the telcos and networking guys laid off," says Kern, who became interested in storage technology two years ago but found little opportunity working for a big employer. "I told people storage was going to be huge, but no one really listened to me," he says.

So Kern scraped together some savings and in January launched LANSpeed Computer Service, which specializes in LAN/WAN/SAN implementations and storage solutions for small and midsize businesses. LANSpeed also offers 24/7 support service and on-site emergency visits, which is remarkable considering the company has just one full-time staff member: Kern. That's not a problem, he says. LANSpeed has won a few contracts, and Kern is making enough money to hire part-time engineers or freelance consultants on a job-by-job basis. Soon, Kern expects to bring on full-time staff.

"People say it's a bad time to start a business, but it's really a great time. There's so much opportunity out there," Kern says. "A lot of IT companies are ailing and desperate to sell. There are new areas like disaster recovery and SAN technology to take advantage of. And you'd be surprised how many IT professionals are out there looking for work and how cheap it is to hire them."

The Second Time Around

Frank Benitez founded Tri-Com Computer Services, a solution provider in the Washington, D.C., area in 1989 and grew the business from $280,000 in its first year to $18 million by 1999. His company was sold in 2001 to The Management Network Group, and Benitez himself had departed shortly before to begin working on creating another IT business, Phoenix Systems. The reason? "I knew that if I just sat on my couch on the sidelines, I'd lose touch with the VAR industry," Benitez says. "There was some trepidation, especially when I told the banks, 'Here's my house, here's everything I own,' but I couldn't say no."

Benitez is a classic example of a channel-lifer, an individual who eats, sleeps and breathes the IT industry and who can't resist giving it another shot. A number of veteran VARs have seen their fortunes dissipate during the past two years amid a flurry of mergers, acquisitions, bankruptcies and closures. But many of those veterans are getting up off the mat and back into the ring. "I still feel there's a lot of opportunity in the market today," Benitez says. "Plus, I know the holes and the traps I fell into last time. If you're just trying to push product, you're not going to get far."

Phoenix Systems, also based in the Washington, D.C., area, presented an enormous challenge for Benitez. The company, which focuses on IT consulting services around small and midsize business solutions, was incorporated in 1999 but stayed in incubation for two years as the economy went south. "It took a couple years to develop the business because hiring was tough, and then the industry downturn hit," says Rich Benitez, Frank's brother, who is vice president of sales and marketing.

Though they had no venture capital funding, the Benitez brothers stayed together and last year gained some momentum with application development projects. Soon thereafter, they began hiring more people. The solution provider is now turning its attention to the growing federal government market. Recently, for example, it won a deal with the U.S. Postal Inspection Service to deploy Compaq servers running Windows Server 2003.

Frank Benitez says the key lesson he's learned since forming Tri-Com Computer Services is the importance of providing unparalleled customer service. "You have to be there for the client when they're buying and when they're not buying," he says.

Wolfe learned similar lessons and decided AvcomEast would take a slightly different angle than its predecessor. While targeting the same technologies and vendors as Avcom Technologies, Wolfe says his company will focus more on complete infrastructure solutions for enterprise applications, storage, networking and security instead of simply selling product.

AvcomEast is also wisely building on the success of Avcom's highly successful East Coast business, which surged from $14 million in 2001 to $22 million last year. Wolfe kept strong ties with Sun Microsystems, Veritas, Oracle and MOCA, Arrow Electronics' Sun distribution business, and also retained a sizeable chunk of Avcom Technologies' former customers, which include Cingular Wireless, Motorola and XM Radio.

"Things are still tough out there. We used to have 12 months of customer purchases at Avcom [Technologies], but in the last two years, it's been down to eight months," Wolfe says. "But we're starting to see some customer budgets open up."

As a result, Wolfe says he intends to keep the business lean and tightly focused. He, like new VARs, believes that if he can grow his business steadily and weather the recession, he will be in a strong position when the economy recovers. "It sounds unbelievable, but there's no better time to do this," Wolfe says. "There's a lot of opportunity in the midtier solution-provider market. How could we do anything but start our own business?"

The Survival Instincts

New solution providers say they are confronted with a legion of threats and obstacles these days. Sadly, the IT spending crunch is just one of the problems. Newborn VARs often have difficulty getting the attention of large vendors, and the requirements to enroll in partner programs are frequently based on high-bar revenue and sales figures.

"It's impossible to get into the big vendor programs if you're my size," says LANSpeed Computer Service's Kern, who made D&H Distributing his primary product source and, indeed, advocate. Many newborn VARs are turning to the distributors to get them going. Lines of credit and vast inventories are must-haves for many VARs who don't have the capital to stock warehouses with product.

Milestone Networks, which began operations last summer outside of Denver in Parker, Colo., has relied heavily on its distributors, Tech Data and GE Access, to get its networking solutions business off the ground.

"Tech Data just gave us a $10,000 credit increase over the phone," says Joel Kappes, co-founder of Milestone Networks. "GE Access has also really bent over backwards for us."

As helpful as distributors are, however, most VAR newcomers would be nowhere without customers. That's why many, like AvcomEast's Wolfe, are leveraging their previous customers and hard-won contacts to get inside their doors. The same goes for vendor alliances, too. Andy Ernst, for example, left his position at a storage company to start his own solution-provider business, AdviStor of Fairport, N.Y., last summer. Ernst used his previous experience to land some crucial partnerships with leading storage vendors such as Hitachi and Veritas. "We had previous relationships with a lot of the vendors, so that helped us get started," Ernst says.

In addition to contacts, money seems to be the biggest hurdle facing young VAR companies today. While few solution providers ever see venture capital funding to help them get off the ground, many VARs say they'd rather be independent. Milestone Networks, for example, sought no outside funding. Co-founders Kappes and Kevin Wiley started the networking VAR with a meager $1,000, which bought a Web address and site, a T-1 line, two notebooks and legal advice, which Kappes says is as important as anything else they invested in. The twosome worked out of Kappes' basement for the first few months. Within 60 days of starting their business, Milestone had $100,000 in the bank.

"One of our advantages is that we are small and we don't have a lot of overhead," Kappes says. "We don't charge as much as larger competitors, so we can beat them on price."

Thus, many new solution providers are taking the plunge with their own cash and staying small. Scott Miller founded Server Centric Consulting, a Citrix-focused solution provider in St. Louis, Mo., last summer and investigated venture capital funding options but found that "either they wanted to own the entire business or they would slam the door in my face," he says. So Miller turned to a different source for money,his parents. "This company was started with my parent's retirement fund," Miller says, "so I look at it this way: I have extra incentive to succeed because if I fail and blow all their money, they're coming to live with me. I'll tell you right now, I am not going to fail!"

Once-budding solution providers have scraped together enough capital, many are finding bargain-basement prices not only for engineers and consultants, but for office space and supplies, too. One advantage new VARs say they have is that the cost-of-entry is much lower today than it was three or four years ago. Ernst says he bought most of AdviStor's office equipment, supplies and office space for a fraction of what it would have cost him just two years ago. "I'm paying 50 cents on the dollar for great office space in Rochester," he says. "From phone service to office equipment, there's great deals to be had if you do some digging."

The New Wave

A number of new solution providers are getting into the business because of the irresistible allure of new products and emerging technologies. Francois Lapierre is one such example. Unlike other proud parents of new solution providers, Lapierre had a perfectly good job at CGI in Montreal but decided that he wanted more. He and a friend, Michael Lambidonis, were moonlighting as wireless technology consultants since 1999, when the two were working at Ericsson. Lapierre went on to CGI, but when Lambidonis was laid off from another company last year, the two decided it was time to take the plunge.

"People thought I was crazy. I had a steady job, of course, but the desire outweighed the security blanket," Lapierre says. "It was always a dream of ours to have our own company."

Lapierre and Lambidonis co-founded InfocomIdeas in February and turned their side gig into their full-time job. To InfocomIdeas, wireless is more than just trendy cell phones with digital cameras. "There's great technology out there that just isn't being deployed," Lapierre says.

Server Centric Consulting saw a similar landscape of underserved markets. Miller felt the market for server-based computing was wide-open, and decided that Citrix had the right technology to build a solution provider around.

And Milestone initially set out to build a business around traditional network switches and routers, but instead found an even more lucrative technology in the emerging technology of IP telephony. Sometimes VARs will build around a single product, such as iFusion Solutions in Vancouver, Canada, which is bent on becoming the Microsoft CRM leader in its region.

"All of our founders had been laid off, and all of us knew MS-CRM was coming and thought it was the perfect product for businesses in our area," says Dean Guest, CEO of iFusion.

If there's one constant for new VARs, it must be optimism. Whether they've been laid off or simply were unable to resist the itch to start a business, IT professionals are overcoming the notion that it's the wrong time to start a solution-provider business, or that it simply can't be done in this economy. With infectious enthusiasm and an entrepreneurial spirit reminiscent of the late '90s, they say there is no better time than now.

"The market isn't as bad as it looks. It's kind of like the reverse of irrational exuberance. There's too much pessimism today," Kern says. "But there's amazing opportunity out there. If I didn't believe that, I wouldn't be doing this." n