Outmaneuvering the Competition
Any entrepreneur worth their salt is constantly thinking about how they can both defend and increase their market share. For us, the answer came courtesy an email from KPN, the incumbent Dutch telecom. They were interested in selling our products to hundreds of thousands of business customers they served in the Benelux region. They wanted to know if we could situate our web and application hosting platform in their data centers and integrate our software with their legacy billing, customer care, provisioning and operational management systems.
Naturally, we replied in the affirmative and ultimately won the contract. Next step was to figure out how to actually deliver a private labeled platform to them in the time-frame they had requested. As we were developing the solution, we immediately recognized the potential market for "wholesale" web hosting was significant - almost all telecoms struggled to deliver a web hosting product set competitive with that of scrappy pure-play web hosts. However, what they lacked in product they made up for in reach - as a group, global telecoms had tens of millions of small business customers who trusted their brands and wanted a web hosting solution that could be bundled with their other telephony and data services on one bill.
Pioneering the Wholesale Market
I decided we would be the ones to enable these giants to compete effectively against nimble companies like ourselves. We would partner with the telecoms instead of competing with them. We shifted our focus to wholesale web hosting solutions for large telecoms, broadband operators, ISVs, and financial institutions. As part of this strategic transformation into the world's largest provider of wholesale OEM hosting solutions, we renamed the company InQuent Technologies. We continued to operate WebHosting.com as our retail brand, but most of our energy was channeled towards building InQuent.
By early 2000, InQuent was providing managed email and hosting infrastructure for the world's largest service providers. Companies like Telecom New Zealand and Comcast were fueling a growth trajectory that saw our private label business eclipse the WebHosting.com retail channel for overall revenue contribution.
"Growing Pains" - An Understatement
I had just returned from Hong Kong after closing a deal with PCCW, the incumbent in the region, and I found our offices in a state of disarray. Workstations were lining the hallways. We no longer had a boardroom - it was sacrificed to make room for a dozen cubicles. My management team had swelled from just Mike and I two and half years earlier to ten execs managing a staff of 160 in Toronto, the US, Europe, and Asia. A significant amount of my time was now spent on recruiting to keep pace with our growth.
We now faced a new challenge - could we build a foundation to support our expansion quickly enough or would our house collapse under the weight of our growth. Frankly, we nearly succumbed to the pressures of growth on more than one occasion. I credit the resiliency and determination of our people, whose willingness to work in the most chaotic of circumstances and believe in the vision of what we were building, with getting us through our growing pains to this point.
And then the phone rang. It was early February and a call from a prospective customer would cause me to revisit if the spirit of our team alone would be sufficient to seize the opportunity now at hand. This prospect had the ability to push our geometric expansion to the next level and test our resolve as it had never been tested before.
The Baby Bell's Ring
I had the good fortune to participate on a board of Telecom executives that gathered in Toronto to discuss Canada's state of connectivity. It was through this venue that I met various members of the management team of BCE. As a result of these introductions, Bell Canada would ultimately become a prized customer for InQuent.
This client win, combined with our established position as the leader in the wholesale hosting market, attracted the attention of SBC Communications of Texas (now AT&T). They owned 20% of Bell Canada at the time and had numerous investments in other telecoms throughout the world. They were also the largest telecom in the United States. When they called to speak to me about a potential partnership arrangement, it was immediately clear that this opportunity would be another company transforming event.
To this point we had not taken a dime of outside investment - InQuent was bootstrapped from the beginning. In the backdrop of the NASDAQ crashing and many VC-backed Internet companies gasping for air on their way to a much deserved death, InQuent was flourishing.
However, if we were to take on AT&T as a client, our estimates showed we would need to double our staff in the next year and make significant investments in hardware, human resources, and office space to support AT&T. There was no way around it - we would require additional capital to fund our business.
Trading Control for a Strategic Partner
From their perspective, AT&T felt that the strategic importance of our product offering and the commitment they would undertake to monetize our platform with the millions of business customers in their portfolio warranted an ownership stake in InQuent. While taking an investment from AT&T would likely have precluded us from acquiring the business of their largest competitor (Verizon), there was no certainty we would ultimately win that business, but there was certainty that we would gain access to all the Baby Bells in AT&T's portfolio and their investee telcos around the world.
In the summer of 2000, after much deliberation, we ultimately reached an agreement resulting in the sale of 51% of InQuent to AT&T in a transaction that valued InQuent at $342 million dollars. It was essential to me that InQuent retain its headquarters in Toronto and have the freedom to continue to service and grow its wholesale customer base. As part of the transaction, we agreed to hire a new CEO, past Sprint Canada president Ken Wilson, and I retained my post as Chairman. Ken assumed responsibility for the direct management of the company, permitting me to spend time on a number of other initiatives, including working with VerticalScope, an online media company I co-founded with Rob Laidlaw in 1999.
InQuent continued to grow over the next 12 months, ultimately reaching a headcount of nearly 250 people with a singular focus on delivering best of class of hosting solutions to AT&T and our roster of private label partners.
[Televised Interviews on sale of InQuent stake - filmed August 2000]
It's Hard to Say Goodbye
A year had passed since I sold a control stake in InQuent. AT&T had originally wanted to buy 100% of InQuent but I refused. I was optimistic that we would be able to go public in the not-to-distant future. I envisioned an IPO that would be gainful to all our employees, rewarding those who had worked so tirelessly to build InQuent into one of Canada's most successful Internet companies. Unfortunately, it was quite clear in the summer of 2001 that regardless of the fundamentals of the company, there would be no market for new technology IPOs at any point in the foreseeable future.
As time passed, a number of other trends emerged that would ultimately influence my decision to sell my remaining 49% interest in InQuent to AT&T. Most of the challenges I had in my relationship with AT&T were a consequence of the enormous size of my "baby" bell partner - nearly 300,000 employees, 90 million customers and over $100 billion in revenue. Despite the well-intentioned efforts of several AT&T staffers who managed the InQuent relationship, many divisions of the multi-faceted company treated InQuent as though it were a wholly-owned subsidiary. Most were not aware there was another shareholder in InQuent, and many tried to use InQuent as a cost-center for expenses they did not want to carry in their own budgets.
After making a significant investment in infrastructure to support the AT&T channel and having the "green light" for going live repeatedly postponed for reasons outside of my control, I decided it was time for me to move on. My ability to exert influence over the direction of InQuent was diminished to the point where I felt I could no longer make a meaningful contribution to the growth of the company.
I had a good relationship with the AT&T executives who sat on my board. These people were key stakeholders in driving the successful growth of AT&T into the world's largest telecom. It was evident, however, that in the context of a conglomerate that did hundreds of billions in mergers and acquisitions, InQuent was but a tiny fish in the AT&T sea. We agreed to part ways at the end of 2001 in a transaction that resulted in the sale of the 49% of InQuent I still held to AT&T.
Inquent, Act II
It would be a short interlude between my exit from InQuent and regaining control of the company I had started some four years earlier. Within months of leaving InQuent I received word that AT&T was going to put InQuent up for sale. Not surprisingly, InQuent's private label clients favored independent ownership from AT&T, a potential competitor. This concern had been previously mitigated when I was a shareholder. At the same time, I don't believe AT&T wanted to be in the business of servicing other telecoms. AT&T decided they would sell InQuent, but retain the rights to utilize InQuent's IP and ownership of the WebHosting.com domain name.
Several parties bid for InQuent but my management team backed buy-out offer prevailed. The InQuent we acquired in March 2002 was a very different company than the one I had sold 20 months earlier. Much of the infrastructure and human resources put in place to support AT&T were no longer required. InQuent had to be streamlined to be lean and efficient, and that meant many cost-cutting measures had to be implemented in an effort to restore the company to profitability.
Targeted layoffs were a very difficult but necessary step to ensure the long-term financial viability of the company. We reduced the workforce by 40%. We renegotiated our office lease from over 40,000 sqft to 15,000 sqft. We restructured or bought out a number of equipment leasing and software licensing commitments. We significantly consolidated our data center space. Finally, we sold the portion of the retail business not retained by AT&T (predominantly non-US customers) in a structure that saw us keep the former retail customer base as private-labeled end-users of the acquiring company. As a result of these restructuring efforts, expenses were halved and we exited the retail hosting business. We now had a singular focus on providing web and applications hosting services to our private label customers.
Time to Move On
When presented with an offer that rewarded the management team for turning around InQuent, we made the decision to sell the company once more. While I was pleased to have completed another successful sale of the business, I derived most of my satisfaction from knowing InQuent would continue to be a viable business that would outlast the historic technology bust of 2000-2003. I credit much of our success to the tireless dedication of the many people who worked at WebHosting.com and InQuent. The job was often thankless, the work hours were often long, and the office conditions were at times far from ideal, but the hundreds of people who were part of the InQuent family over the years made our success possible.
As an entrepreneur, I took great pride in seeing my business weather a number of fierce storms only to come out ahead stronger for the experience. After numerous merger and acquisition transactions over the company's history, InQuent is today a wholly-owned subsidiary of Network Solutions. In addition to providing web and email hosting to the millions of domain registrants at Network Solutions, InQuent continues to service private label telecom customers around the world.Back to Archived Essays