Fresh Start

When Tim Joyce, CEO of Roundstone Systems of Alameda, Calif., first decided he wanted to start his own solution-provider company, he ran some numbers in his head. Joyce looked at the number of North American channel partners at Hewlett-Packard, his desired vendor partner of choice: a whopping 20,000 resellers. Then he looked at the amount of revenue those partners generated: roughly two-thirds of HP's $72.3 billion in total revenue for 2002. "How could I distinguish myself among that kind of competition?" he wondered.

But Joyce figured he had an edge; in addition to spending several years in the channel with Forsythe Technology (No. 86 on the 2004 VARBusiness 500), he had also spent some time at HP itself, most recently as a sales manager for HP's Network Storage Solutions unit. Joyce left HP on amicable terms and approached some of his former colleagues on the channel side at HP for some advice. His question was simple: What would the perfect HP partner look like?

"I talked to HP about some ideas, and I told them I wanted to build an HP solution provider unlike any other," Joyce says. "I saw an opportunity and a need going unfulfilled and decided to get back into the business."

In late 2002, Joyce pitched HP on creating a new company, solely dedicated to HP partners who would specialize in the SMB market and have a strong sales strategy that revolved around face-to-face engagements with customers and prospects. Rather than pushing for high-volume product sales, Joyce's company would lead with "Real Value" consulting services that would improve the business processes of its customers. Instead of simply taking orders for servers, the solution provider would sell storage, platform migration and server-consolidation solutions to customers below the enterprise level, who were unaccustomed to seeing such things. The idea got a favorable response inside HP, and Roundstone was soon launched. Better still, HP agreed to make the company a Gold Business Partner. It was a fitting launch date for the company: St. Patrick's Day, 2003.

In its first abbreviated year in business, Roundstone generated more than $3 million in sales. Last year, sales totaled close to $15 million. But it was hardly the luck of the Irish that created the good fortunes of Joyce's young solution-provider company. Like many nimble newcomers, Roundstone pursued a seemingly simple formula that is anything but easy: It examined the way business in the channel was being done, and it went in another direction.

Turns out start-up solution providers like Roundstone are leading the way with new approaches that shatter the old way of thinking. They are swift and often sharper integrators and resellers than their predecessors, and may well set the prevalent trends for the next decade. How these newborn VARs--the members of the channel's next generation--get off the ground in today's economy is nearly as fascinating to watch as how they thrive. At each step of the way, they must make key decisions regarding technologies, markets and vendors, not to mention sales strategies, marketing and even hiring. In this exclusive new series, we examine the secrets of successful start-ups and show how they can benefit new and old solution providers alike. Whether you, too, are contemplating going out on your own, or are merely wondering who these new competitors are, you'll benefit from spending time with the companies in the Integrator Incubator.

In the Womb

Finding that all-important, underserved, untapped niche market as Joyce did is the seed that sprouts many successful channel start-ups. According to VARBusiness' own survey of new solution providers in business less than five years, nearly 28 percent say they started their businesses because they recognized an unfulfilled market or niche. Such opportunities can manifest themselves as new technologies, target customers, emerging vendors or new business models. Whatever the case, finding that niche often means breaking from industry norms.

When Milestone Networks of Parker, Colo., was created in the summer of 2002, co-founders Joel Kappes and Kevin Wiley knew they couldn't be a viable solution provider by selling Cisco routers and switches like most of their competitors. They needed to be different than other networking VARs, so Milestone not only partnered with secondary vendors such as ShoreTel, Enterasys and Fortinet, he also embraced cutting-edge technology in the form of Voice over IP.

"ShoreTel's IP-telephony products alone account for a good 50 percent of our business today," Kappes says. "We've got a great market going with IP telephony in the small and medium business space."

Distributors are following suit, too, by embracing many of the new and emerging markets, which can give budding solution providers a leg up in honing in on new technologies and creating a business with such products. For example, ScanSource of Greenville, S.C., has traditionally focused on point-of-sales and data-capture products but has a growing IP-telephony business with its Catalyst Telecom division. This year, the distributor continued its Solution City Road Show program, with educational symposiums and training for IP telephony and RFID, and hopes to recruit 300 VARs for its convergence push.

Other distributors also are launching product-centric efforts with top vendors; Avnet Partner Solutions recently teamed up with Microsoft to create CRM Advantage, a program designed to help Avnet VARs build a practice around the software giant's CRM solution (more on Microsoft CRM later in the story).

But identifying an underserved need is one thing; finding fuel to go after it is another. Turns out, most budding channel start-ups don't get favorable responses from banks and other potential funding resources. Nearly 70 percent of start-ups we asked said their primary financial resource for starting their companies was personal equity. Only 20 percent cited private funding as their No. 1 resource, while venture capital and bank loans accounted for just 2 and 1 percent, respectively. Solution providers say it's hard to find venture capitalists or banks willing to invest in a reseller company because most don't understand the economics of the IT sales and integration business.

That has thwarted would-be entrepreneurs, but not upended the smart ones. Dave Condensa, for example, remortgaged his home to start Helio Solutions in 2001. The Sunnyvale, Calif., company was battered in its first year of business, and Condensa was forced to refinance Helio with money that he couldn't afford to lose. Luckily, Condensa had some allies in his quest. "I called the 20 best people I knew in the channel before I started Helio and made my pitch to them, and I got more than half of them to join me," Condensa says. "We got some key people to come aboard and invest some money into the company as employees."

Helio weathered the storm and today is one of the fastest- growing members of the VARBusiness 500 this year, posting nearly a 100 percent increase in sales last year. Helio also earned VARBusiness' 2004 VARBusiness 500 Newcomer of the Year award last June. Not bad for a company that was struggling to break even after its first 12 months.

One To Six Months

"The first six months are ugly."

So says Vinny DiSpigno, chief executive of Webistix, a solution provider based in Boynton Beach, Fla. DiSpigno and partner David Salav started the company nearly two years ago, and they describe the first two quarters in business as a grueling period. The reason is simple--you don't really know how fast expenses pile up week after week until you're actually in business. Webistix, for example, discovered its health-care plan cost half of what the company was paying in rent for its office building--and the plan covered only two employees, DiSpigno and Salav.

The best advice from solution providers like Webistix that have been through a similar experience in recent years? Don't panic.

"We lost money every month during that stretch," DiSpigno says. "But turning the corner was only a matter of time. You have to be patient and wait out those long sales cycles and get your name in the mix."

A key survival technique is, obviously, to keep expenses low, whether it be finding cheap office space or refraining from buying luxurious office furniture and dŽcor. Another important ingredient is the ability to be able to convert perceived weaknesses into strengths.

For Webistix, being a lean and mean VAR also included keeping its head count low. At first, it was just DiSpigno and Salav. To this day, they remain the only full-time staff members; they hire independent consultants and engineers on a one-time basis depending on the type of job. DiSpigno says the unusual arrangement gives Webistix lower overhead as well as a high degree of agility.

"It's hard to find people who have top-notch integration skills in Apple, Microsoft, Cisco, Xerox and all the other areas we cover," DiSpigno says, "so we subcontract work to independent service people, which gives us the flexibility we need."

In addition to settling on a market and shoring up financing, the next big hurdles most channel start-ups face is determining with whom to partner. According to VARBusiness' survey, nearly 54 percent said they aligned with between one and three vendors in their first year of operation. But they often work with many more in order to meet their clients' needs. Hence, choosing the right vendor partners can mean the difference between thriving or crashing.

New VARs such as Roundstone and Webistix give much credit for their success to their top vendor partners, such as HP and Apple, respectively. For SpyderWeb Technologies of Atlanta, its partnership with Microsoft was the difference-maker.

"Without their support, we probably would have closed our doors," says CEO Kimberly West. "Microsoft has an excellent SMB program for partners like us. The company really stepped up to the plate for us."

But alliances such as these come at a price. New solution providers say vendor training and certification is one of the top two capital expenditures for their companies within the first year of operation. Office space, of course, is the other. And with good reason: Achieving gold partner status or earning high-level technical certifications, for example, can carry young integrators and resellers a long way when it comes to catching the eye of prospective clients. So when the world's largest software company assisted Atlanta's newest Microsoft VAR with training, education and support for several of its products, most notably the Microsoft Small Business Server, it had an immediate impact on SpyderWeb's bottom line.

"That's become a big part of our business," West says. "We just did a Small Business Server deployment for a catfish farmer. It's amazing!"