Inflow Making Strides
Managed hosting provider sees benefits of 'flight to quality'

August 6, 2001 -- In today's market, web hosting companies covet two things above all - cash and customers.
Inflow, Inc. is having a strong year on both fronts. The Denver-based managed hosting provider has raised $110 million this year, and signed up 135 new hosting customers in the second quarter.
The two trends are related, according to chief executive officer Art Zeile, who said Inflow's financial stability has allowed it to attract enterprise companies, which are quickly becoming the Holy Grail of customer acquisition.
"There's a real serious flight to quality going on," said Zeile. "Enterprise customers want to know they're dealing with a company that's financially stable. Our balance sheet gives people a lot of confidence. We're well-suited to survive the financial storm."
As the shakeout in the colocation and web hosting industry grinds on, Inflow is shaping up as one of the survivors. The company's business plan, which targets managed hosting customers in second-tier markets, has steered clear of competitive pressures in markets like New York, Washington and Silicon Valley.
"We took the opposite approach," said Zeile. "We avoided those cities and looked for markets where quality if life is very relevant and you're not going to see (oversupply of data center space)."
Inflow has benefitted from fortuitous timing. A year ago it was on course to become a public company, filing a registration statement with the Securities and Exchange Commission. Last October, Inflow postponed its planned IPO.
In retrospect, that was "absolutely a good thing," according to Zeile.
"From a funding perspective, a lot of these companies that are public can't get (additional funding)," said Zeile. "A lot of sources of capital are locked up."
As an example, he pointed to Exodus Communications, whose problems have had a chilling effect on the entire sector.
"They're the bellwether in our industry," said Zeile. "There's this cloud around Exodus. Once that cloud subsides, people will realize the underlying health of this industry is still sound."
Inflow has raised more than $300 million overall, including $110 million this year. In March, the company secured $75 million in debt financing from the Bank of Montreal, GE Capital Telecom and First Union National Bank. Last month it picked up another $35 million in private equity financing from a group led by First Union Capital Partners.
As Inflow's CEO, Zeile oversees all financial matters, including accounting, vendor relationships, marketing and sales. He owns a degree in astronautical engineering from the Air Force Academy and a masters in public policy from Harvard.
Zeile founded Inflow in 1997 along with Joel Daly. The pair previously worked together in the Air Force's satellite program, and then at LINK-VTC, a provider of videoconferencing services.
Like many colocation and managed hosting providers, Inflow has had to adjust its business model and expectations in recent months.
"Even back last summer, we recognized our world was changing," said Zeile. "We have really focused on enterprise-type customers. What they are concerned with is financial stability and a full-fledged solution. We've been operating for four years, and in our industry that's a long time."
The shift has affected some of the company's financial projections. "The sales cycle is much longer (with enterprise customers), which is relevant and causing revenue numbers to slip," said Zeile.
Nonetheless, the second quarter was a good one for Inflow, with 135 new customers. By comparison, Exodus had 264 new customers in its 33 domestic data centers, Equinix had 36, and Data Return reported 24.
Inflow operates 18 data centers in 15 states, including three in Denver, and one each in Atlanta, Austin, Dallas, Irvine, Minneapolis, Nashville, Phoenix, Pittsburgh, Philadelphia, Portland, Raleigh/Durham, Sacramento, San Diego, St. Louis and Dublin, Ireland.
"We are only seeing pricing pressure in two of our markets (Irvine and Dallas, where Exodus also has data centers)," Zeile said. "We saw a lot of discounting going on, especially at the close of the second quarter. We want to be the premium service provider. We don't want to compete on price."
Inflow competes with Exodus in just four of its 15 markets, and with Relera in four cities as well. Zeile said the cash crunch in the data center industry may insulate Inflow from new competition in a number of their key markets.
"The overarching principle is this - data centers cost a hell of a lot of money." he said. "I personally don't think we'll see competition for a long, long time."