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A Fork in the Road: It works, but do it over anyway
Thursday, January 18, 2001 By Bob Starzynski, Post-Gazette Staff Writer
Arc Technologies was a profitable small business with $6 million in revenue in 1999. But that didn't stop its founder and chief executive, Harvey Pollack, from completely changing the course of the company a year ago and abandoning the business plan that had provided healthy revenue and earnings.
A year after making the decision to change, Arc Technologies is now RedSiren Technologies and is on a new trajectory, with $5 million in venture capital, a new business model, new clients and plans for being one of the primary players in a new market.
Pollack, an accountant by trade, was a partner for 24 years at Pittsburgh-based Alpern Rosenthal & Co. In 1994, he created Arc as a business unit of the accounting firm to provide information technology support to business clients of the firm. At the end of 1998, Pollack decided against retiring from the firm and instead bought Arc from the other partners at Alpern.
The young company, based Downtown, grew to 30 employees who generated $6 million in 1999 by reselling computer systems to other businesses and integrating the systems for those clients.
Arc was not suffering from any problems and could have continued growing as a reseller and integrator, but Pollack saw a need to change anyway.
"Our sales cycle was long -- it would take a year or 18 months to close a deal," Pollack said. "Our clients had to evaluate everything on the market before making a large capital outlay for these solutions. Then, when the projects were done, they had trouble staffing the technology we had just integrated for them."
Pollack was convinced that he could shorten his sales cycle from a year to three months and alleviate the clients' needs for technology staffing if he went to a different business model. So, at the end of 1999, he decided to build his own technology operating center and go after clients who wanted to outsource their technology infrastructure as well as its security.
RedSiren was born.
"Being an accountant, I understand a recurring revenue model much better than one-time sales," Pollack said. Instead of selling a computer system, integrating it and closing the book with that client, the new model would allow RedSiren to charge a monthly or annual fee for continually managing the technology and the security of that technology for a client.
But there was, of course, a roadblock. Data centers are not cheap to build.
In changing business models, Pollack would have to abandon the stream of revenue that had been supporting his business and simultaneously shell out more than $1 million to build his data center.
Time for an investment.
Pollack quickly pulled together $1 million from angel investors and another $800,000 from his personal savings and the savings of his employees.
"We pulled our consultants out of the field to build our center," he said. "When I look back on the risk I was taking, it wasn't a fork in the road. It was a fork in my back."
The data center had to be built before RedSiren could go after its first customers, and the data center took longer to build than Pollack had expected.
By the time the center was nearing completion last summer, the company was running out of money. To keep the company going, Pollack put up the rest of his life's savings to get through the summer months.
"Two things I've learned," he said, "are that sales will always be less than your projections and expenses will always be more than you expect. Both of those things happened to us."
In order to approach potential clients properly and attract venture capital for continued growth, RedSiren needed to fill a couple of key management roles -- sales and marketing.
Pollack turned to e-biz consulting, a Pittsburgh firm that temporarily fills key management slots to kick-start companies. E-biz supplied RedSiren with an interim vice president of sales, Steve Lippock, and an interim vice president of marketing, Suzy Teele.
Lippock helped attract USX subsidiary U.S. Steel as the first client for RedSiren's new services by early September. Since then, the company has attracted 11 other clients who ante an average of $40,000 a year for RedSiren's services. Lippock was replaced in November by a permanent vice president of sales, Keith Franz, who previously was a director of strategic sales for Axent Technologies.
Teele's responsibility with RedSiren's marketing was to refine the business plan to make the company more attractive to venture capitalists.
"It was a particularly challenging time to market a company to the financial community, because it was right after the downfall of the market," Teele said. "We had to convince [venture capitalists] that although we were successful before, we wanted to change our business and we needed their money to do it."
When RedSiren began approaching venture capitalists last fall, the company had only one client and about 30 prospects. But the company had something attractive to investors -- the data center was already built, so profitability could be realized as soon as several more customers were signed. Pollack estimated that by the end of this year, the company will be generating the annualized equivalent of $10 million in revenue
The needed venture capital arrived in November from Redleaf Group. The $5 million from Redleaf will be used to boost sales and to build a second data center on the West Coast.
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