Company Learns That Rapid Growth Has Its Costs

Chris Lyman thinks of himself as both chief executive and janitor of Virtualis, a Web hosting and software startup he founded three years ago.

He’s had a lot of cleaning up to do.

Less than six months ago, fresh from a first round of venture capital funding, Studio City-based Virtualis was in the middle of a dizzying growth spurt. The company doubled its ranks and had planned to move into posh new offices with plenty of extra space to accommodate another anticipated doubling of the staff.

Then a funny thing happened. It turned out that with the first round of hiring, Virtualis had caught up with its growth and would not need the thousands of extra feet of square space it had contracted for.

Worse yet, the expansion that had taken Virtualis from about 30 employees to about 90 in just a few months was causing a number of problems.

“You get upside down,” said Lyman. “Which means, you have more new people than old people. Not only do you have more new people than old people, but the old people can’t do what they used to do because they’re training the new people. So you can’t get anything done.”

‘Too much, too fast’

Others facing such a predicament might have been tempted to forge ahead, figuring the growing pains would work themselves out. Lyman took a deep breath and put on the brakes. “It was too much, too fast,” he said. “We were enamored with our own growth, and we were making the moves of a public company.”

Founded with $2,000 from Lyman’s own pocket, Virtualis has carved a niche as an Internet service provider to small businesses, typically with fewer than 50 employees, that do not have in-house expertise to set up their own e-commerce operations.

Working through Web-site developers, the company provides e-retailers with the software they need to provide shipping information and other sales and inventory management functions. Retailers pay a monthly fee that varies with the size of the site and the services used, and the site developers earn commissions on those fees.

Until last summer, the company grew slowly and steadily, supporting itself with revenues the business generated. Then in August, a group of venture capitalists, including Knight Ridder Ventures, Adobe Systems and Hambrecht and Quist Venture Associates plowed $8.7 million into the company, paving the way for a major expansion.

“I thought they had a quite clever business model,” said Bob Ingle, president of Knight Ridder Ventures. “They had a suite of software tools to help small businesses get a Web site up easily and without undue expense. And I called about 35 customers and got very, very good reports on customer satisfaction levels with the service.”

With its newfound wealth, Virtualis built a data center in El Segundo and began hiring to accommodate what it projected would be staggering growth, an anticipated 200 employees within a year.

But Virtualis had miscalculated its needs. “We got up to 90 people and we had people wondering what to do,” Lyman said.

Not only were the company’s needs more modest than originally thought, but its new hires upset the cohesiveness of the original group of employees. “We had to become a team at 80 or 90 people like we were at 30 people,” Lyman said.

The earliest hires had experienced first-hand the company’s struggle to establish itself. They shared a sense of purpose lacking with the new employees. “It’s the little things,” Lyman said. “It’s picking up the phone on the third ring instead of the first. It’s coming to work 10 minutes late instead of 10 minutes early. It’s sitting back and hoping the problem will be fixed by the manager instead of going to the manager with the problem.”

Lacking cohesive team

The company needed structure, everything from a place for the new hires to sit, to a policy on holidays and benefits and training for the new staffers. “When you’re a company of 15 or 20 people, you don’t need a lot of infrastructure,” said Ingle. “Once you get past 30 or 40 people, you must have it or you’ll drown.”

Lacking a cohesive team, Virtualis’ ability to provide reliable and swift service began to slip. Before, when something went wrong, customers could depend upon receiving responses within an hour, said Mike Wattier, a San Diego-based Web developer who researched 65 providers before choosing Virtualis.

Although Wattier said that he himself did not experience any significant problems, a community bulletin board that Virtualis hosts for developers showed that others did. “I do stay on top of everything, and some people did have some major problems,” Wattier said.

Lyman regrouped. He brought a handful of the firm’s key Web developers to Los Angeles to hear their complaints, halted hiring and began putting on paper the kinds of policies and procedures the company hadn’t needed as a close-knit band of 30 employees.

“The shift from entrepreneur to professional manager has been excruciatingly painful,” Lyman said. “I’ve had to reinvent myself inside out in six months.”

Among his most difficult tasks, Lyman said, was the decision to give up the newly built-out, 43,000 square feet of office space the company had leased in Burbank’s Media Center North building. Virtualis would stay put in its old offices, with worn carpets and a measly 20 parking spots.

Company officials won’t disclose the cost of customizing that space, which had already been completed when Virtualis decided against moving, except to say that it was substantial. The company is hoping to recoup the costs when it signs a sublet agreement, Lyman said.

The problems created when Virtualis began trying to absorb its new employees slowed its sales, which had been growing at about 10 percent to 15 percent a month, Lyman said. But with the changes, the former pace has resumed, and the company expects revenues to double this year to $8 million or $9 million.

“We’re comfortable now,” Lyman said. “We again have the feeling of a real startup.”