Venture Capital Notebook: Phoenix rises from dot-com dustbin

Friday, November 16, 2001
By JOHN COOK
SEATTLE POST-INTELLIGENCER REPORTER
Glenn Meyer has heard the names before: scavenger, vulture, bottom feeder.
But Meyer prefers to think of his four-month-old Seattle company -- InterQuest Communications -- as something much grander: a phoenix rising out of the dot-com ashes.
InterQuest, which announced $3.1 million in venture funding this week, is trying to create a business out of the wreckage of the dot-com bust by buying up bankrupt high - speed Internet access providers.
"We definitely are bottom feeding, no doubt about it," said Meyer, a native Seattleite. "But there are a lot of people out there who understand the value of buying distressed assets and cleaning them up."
ComVentures' managing partner Cliff Higgerson, whose Palo Alto, Calif., firm led the first round of funding in InterQuest, is one of those believers. And he said it makes a lot of sense to buy defunct companies and reinstate Internet service to apartment and condominium dwellers in major cities.
"There is a real void in the market," Higgerson said. "The demand is there, the assets are in place and the growth potential is tremendous."
Meyer, whose 34-person company works out of a 2,000-square-foot office space near Southcenter Mall, has been busy trying to fill that void lately.
At bankruptcy auctions in August and September, Meyer paid less than $2 million for some of the assets of Darwin Networks, Reflex Communications and VelocityHSI Inc. -- an amazing deal considering those companies raised more than a quarter of a billion dollars when they were in business.
Those purchases gave InterQuest high - speed networking equipment in as many as 50,000 apartments in seven states. While only 13,000 of those apartments have been activated and just under 2,000 customers have signed up for high - speed Internet access through InterQuest, Meyer said he hopes to have all 50,000 units up and running by March.
He also has his eyes on a couple of other distressed Internet service providers that may help him in his goal to build a profitable company that delivers reliable Internet service to apartments and condos.
Next week, InterQuest will "relight" half a dozen properties in the Seattle area, including Signature Point Apartments in Kent, SummerWalk in Sammamish and On The Green at Northshore in Tacoma. Meyer said there is already a waiting list at some of those properties as word has spread that the service is coming back.
Jim Miller Jr., who founded Seattle-based Reflex in 1998 and remained on the board until its Chapter 7 bankruptcy filing in March, applauds the efforts of InterQuest, even though he says it is bittersweet watching his company reborn.
"I think there is always an opportunity for competition, especially against the two large incumbents: the cable company and the phone company," Miller said.
But he also said InterQuest faces some hurdles.
One of the biggest, he said, would be renegotiating deals with apartment building owners.
"The contracts that we had with the owners of properties expired because of non-performance," said Miller, whose company attracted 10,000 customers before burning through $69 million. "So (InterQuest) would potentially have to renegotiate the access agreements with the landlords, and that is just another delay in rolling out the service."
On top of that, he said, many landlords are gun-shy about working with another start-up after the failures of Darwin, Reflex and CAIS Internet .
InterQuest also could have trouble winning back customers who have already chosen new high - speed Internet access providers.
An example is Brian Duhon, a former Reflex customer who lives in Kirkland. After the demise of Reflex, Duhon signed up for DSL service through Seattle's Speakeasy.net. Now, he said, it would be hard for him to go back.
"The only way I'd switch to (InterQuest) would be if the service was faster ... and cheaper," he said.
Will DeWitt, who lives in the Central Park East apartments in Bellevue, said he was happy with his Reflex Internet connection. But DeWitt thought it was unlikely that his landlord would switch to InterQuest given that the building last month installed high - speed Internet access from Verizon.
Meyer, a former division president at Darwin Networks, is aware of the challenges facing his company. But he says they are surmountable.
Meyer said he has had "tremendous success" renegotiating with landlords over the past two months.
"My biggest fear was that there would be a lot skepticism," he said. "But candidly, we have only had one owner, out of the entire batch of probably 50, who said, 'I don't want to do this again.'"
As far as competing against Verizon, Qwest and other high - speed Internet providers, Meyer said that because of the quality of the InterQuest service and the marketing efforts, "we will generate the lion's share of the customers in the building."
And he said his team -- 95 percent of whom worked at Darwin, Reflex or VelocityHSI -- have learned from past mistakes.
"It isn't often in business that you get a chance to do something a second time around after it failed," Meyer said. "If it doesn't work this time, the only place to look to place the blame is the guy in the mirror."