News Column

Dialtone’s Unlikely Arc

Alvaro Albarracin’s company is that rarest of creatures – a successful Internet startup.

By Jonathan J. Higuera
May 2002

Someday, Alvaro Albarracin may step back and smile when he thinks about how he guided his company through the dot-com implosion of the past two years. Of course, that would require looking back, and Mr. Albarracin prefers looking ahead. He is already focused on the next move for Dialtone Internet Inc., the privately held company he founded in 1998. “We want to be the number 1 managed hosting provider in the world,” says the 33-year-old entrepreneur. “We’d like to merge with or acquire other companies so we can scale faster.” That may sound like a tall order for a company that grossed $7.9 million in sales last year, but given Mr. Albarracin’s track record, it could well prove achievable. He started his company as a one-man virtual Web-hosting firm in the bedroom of his home in suburban Miami. He and his wife, Madelyn, and their two young children had just moved into a four-bedroom home, and he convinced her that the extra bedroom could be an office. So he placed an ad in the paper offering Web-hosting services for $19.95 a month. Those accounts were then resold to a Canadian company, which provided the service. “We signed 15 accounts the first week,” he recalls. “It quickly grew to 100 accounts. I gained some Linux expertise and decided to bring in T1 lines and my own server. When it grew to 800 clients, we decided to move to an office.” But his success didn’t stop there. Realizing that other companies likely needed the same services his company did with regard to dedicated server management, he took Dialtone to another level. “I thought there’s got to be people out there like me who want to host accounts and need more than a $19.95 line,” he says. “Why don’t we offer the whole machine – build the system, install the software, and support the software, hardware, and network?” But to do that required at least 50 computers and a $70,000 investment. With the company’s credit already overextended, Mr. Albarracin decided to sell the virtual Web-hosting part of the business and move into managed hosting services for businesses. In August 1998, Interliant acquired the company’s virtual hosting assets. “We needed to sell that part of the business to move into the one that would be our future,” Mr. Albarracin says. “The idea was to go into something that would generate more revenue per customer.” So far, the decision looks like a winner. The company recorded $3.6 million in sales in 2000 and $7.9 million last year, and expects to exceed its $10.8 million projection this year. It became profitable in its second year, after switching to managed hosting services. In three years, the company has attracted more than $6 million from investors – among them Crossbow Ventures, Silicon Valley Bank, and Sun Microsystems – to finance expansion plans. With the funding, Mr. Albarracin renovated the company’s Fort Lauderdale data center into a world-class facility and opened two others, one in Mexico City and another in London, which opened in December. The Mexico City office has two sales associates and the London office has one. Among Dialtone’s partners are IBM, Cisco Systems, Sun Microsystems, Intel, and Microsoft. Although it started as a Linux-dedicated company, it now also offers Windows and Free BSD managed dedicated hosting. Last May it began offering Windows 2000 to satisfy customer requests and now has more than 300 servers on that system. And the company has other services beyond hosting, including firewalls, security services, data backup, data recovery, and enhanced management. Clients pay between $195 and $1,500 a month, depending on the services they receive. About 60 percent of Dialtone’s clients are U.S.-based. “Our business model is very affordable,” says Mr. Albarracin. “Our clients save money because they don’t have to have staff, pay for connectivity, or invest in equipment. And whether you access it from the Web or through Tel-Net, the servers don’t have to be on the customer’s premises.” Asked how he has been able to avoid the path of many other Internet companies that have crashed and burned spectacularly, Mr. Albarracin cites his habit of closely watching expenses and keeping them from getting out of hand. “When you have a lot of money in the bank you can lose focus and not follow your business plan,” he says. “I saw companies spending $800 on chairs. Or they would spend $10,000 a month on technology when they could have been spending $1,500. If you don’t have a foundation on how to be very efficient with your money, you’re going to lose that fight.” Mr. Albarracin’s business savvy dates back to his upbringing in Cartagena, Colombia. His parents owned a beauty salon chain and two farms. When the young Alvaro told his father he wanted to make money, his dad suggested he open a hot dog cart. “It was very successful,” Mr. Albarracin recalls. “It was the second hot dog cart in the city, and I sold up to 80 hot dogs a day.” The family moved to Miami in 1986, and Mr. Albarracin finished his last year of high school there before going on to Miami Dade Community College, where he earned a business administration degree and a real estate brokerage license. After working in factories, shoe stores, and a car rental agency, he spent five years at a large furniture store chain, working his way up from sales associate to store manager. He saved enough to buy a long-distance communications franchise and sold it back to the franchisor after eight months. He used the money from that deal to start Dialtone. Now that he’s at the helm of his own multimillion-dollar company, Mr. Albarracin doesn’t fit the mold of the obsessed entrepreneur who lives by the motto “my way or the highway.” Says Craig Moseley, senior vice-president of Daniels & Associates, an investment banking firm that helped Dialtone raise private equity, “He puts people around him who can help him out. He’s not afraid to do that, and that’s to his credit. It’s helped him get where he is today.” Mr. Moseley notes that part of Dialtone’s success stems from its focus on a certain niche – catering to owners of small and medium-size businesses. “He’s positioned the company to be one of the larger independent players within the dedicated-server managed-hosting industry. At this point, he has more options than most companies because he has a proven business model that generates cash.” Mr. Albarracin suggests that future deals are in the works, although he won’t provide details. Asked if he would be concerned about relinquishing control of the company he started if it merged with a larger company, he is unequivocal: “I’d rather be a 1 percent owner of a billion-dollar company than 100 percent owner of a million-dollar company.” Jonathan J. Higuera is a business writer for the Arizona Daily Star in Tucson.

Source: HISPANIC BUSINESS magazine

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