Nouveau Web Host Virtualis Aims to Roast the Competition’s Goose

When you walk like a duck and talk like a duck and are seen in the company of ducks, it’s awfully hard to convince people that you’re really an eagle. This is the marketing dilemma faced by Virtualis which describes itself as “a Web hosting service that has morphed into an application service provider.”

While the Virtualis Web site looks pretty much like the other ducks in the hosting business (various server account options, shopping cart, Front Page extensions, domain registration, promises of marvelous customer service yawn, yawn) there is some very credible evidence that it belongs in the raptor category as opposed to just another a pond-dwelling meal that goes well with a raspberry confit.

But buried beneath the usual hype and glittering generalities that makes it look and quack like Verio or Concentric is a custom interface that elevates it above most of the competition says Craig Moseley, vice president of the Internet technology group at Denver-based financial advisory firm B. Daniels & Co. who agrees that on the surface they look like just another hosting firm.

“I would say they are among the top 12 companies in the country,” Moseley said, “because they have solid management, a more customer- friendly proprietary interface and they’re more scalable,” than ISPs or the usual hosting operation.

Virtualis President Josh Marks said that currently about 60 percent of the hosting market is held by large players such as Verio and Mindspring, another 20% by more than 4,600 “Mom and Pop” operations and the remaining 20% by middle-tier companies like his.

In general, smaller companies are having trouble providing everything their customers need, while the large players, especially Verio (VRIO), have trouble servicing and supporting their growing user bases.

It’s a substantial opportunity: Forrester Research estimated in December 1998 that the net hosting market is about $3 billion today and will hit $10 billion by 2001.

The financing behind Virtualis points not only to the opportunity but a recognition that they may not be the average duckie in this pond. Garage.Com took a 4 percent stake for $10,000 back in March and then helped shape up a second, $8.65 million round in June led by Knight Ridder Ventures which invested $4 million. Others in the round were: Hambrecht & Quist Ventures, Adobe Ventures, Ambex Ventures, Ignitio Ventures, Group one and Silicon valley legal powerhouse Wilson, Sonsini, Goodrich & Rosati.

The Virtualis funding syndicate illustrates the principle of “smart money” — getting more for your equity than just the money. Marks said that Knight Ridder’s network of media outlets in the United States came with a huge database of small businesses — all potential customers — while Pacific Rim VC, Ambex Ventures brings a wealth of Asian connections — a region that currently accounts for about 20% of Virtualis’ business.

After looking at what appeared at first glance to be just another hosting duck, VC Watch nearly passed on doing this column. But the quality of the financing syndicate told us that the investors were seeing something that was not readily apparent to a potential customer visiting the site so we took another look.

But most potential customers won’t be looking at the financing syndicate when they make a decision on a hosting company. This means that the most critical job Virtualis faces is to figure out how to avoid looking like just another duck and instead have the market see them as the category killer they believe will cook their competition’s goose.

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