Sandwiched on gray metal shelves in a quiet corner of the e2grow Inc. offices are stacks of big brown cardboard boxes.
In those boxes are relics. Folded neatly in clear plastic are hundreds of T-shirts in every size from small to XXL. These T-shirts are leftovers from an eerily recent, but now disregarded time.
They sport the logo of one of e2grow’s latest acquisitions, Locality.com, a small business directory Web site formerly located in posh Mountain View, Calif.
e2grow’s president and CEO Dennis Barba Jr. rifles through the boxes looking for a large to present to an office guest.
“I think we’ve got that size,” says Barba, dressed about as far as he could be from a T-shirt in a blue pinstriped suit sans jacket, striped French collar broadcloth shirt and red tie. “We’ve got every size. They had so many of these printed up.”
The ignoble legacy of the dot-coms is plastered on these T-shirts. In hindsight, many of these companies were all marketing gimmicks and promotions. No sales, no revenue, no profits, but “Hey, look at our great logo!”
But standing in the e2grow offices 3,000 miles away from Silicon Valley, it’s clear that the model that killed so many online companies is just what e2grow isn’t. e2grow is a traditional company with old-fashioned, proven principles, a company that could have the motto “profits or nothing.”
Here’s how Barba puts it.
“It’s just a matter of mathematics,” he says. “Once you get X number of paying customers, you have a profit and you just have to watch your overhead.”
Barba’s back-to-basics philosophy is working. He is not only surviving, but thriving in economic conditions that have destroyed the lame dot-coms and have established, traditional companies cutting and restructuring.
There’s no magic in Barba’s success. He keeps expenses low. His modest offices are on the top floor of the Park View Federal Building in Bedford Heights. He invests in smart technology, not Aeron chairs and Herman Miller workstations.
Correspondence is digital to save paper. He uses his cell phone to keep phone bills down. He staffs lean.
“You heard about these companies hiring 100 people in 90 days, it was just unbelievable,” Barba says. “Especially in a start-up company, it’s like you’re building a family. The early employees are key, and if you hire 100 people in 90 days, you’re not going to be making just a couple mistakes, you’re going to be making many mistakes.
“You can’t afford to make mistakes when you’re bringing people on early.”
Set firm roots
e2grow’s roots date back to Barba’s time at the Columbia University Graduate School of Business, where he earned his MBA. This was 1998 and 1999, during the fever pitch of the dot-com craze.
Stories of 30-year-old tech billionaires echoed in the halls, so it’s understandable that Barba and his classmates were drawn to new technology-focused careers.
“I was told I should start a company or come up with some kind of a vision and try to get people to follow it,” Barba says the Columbia faculty told him. “They thought I would be a good leader.”
Barba’s potential was not lost on his classmates, either.
“Out of a class of 45 senior executives from some major companies, Dennis really stood out,” says James Blackwell, a Columbia classmate and international vice president at ChevronTexaco. “His drive, focus and aggressiveness is key. Everybody in the class could see Dennis is one of those people who was going to make things happen. That was a pretty high-power group to stand out amongst.”
Back home in Cleveland, Barba spent the summer planning what kind of company to start.
“I wanted it to be A, Internet-based, and B, built on solid business fundamentals that could actually make a profit and be a viable business and be a valuable service to the people that use it,” Barba says.
Then, after Thanksgiving dinner in 1999, Barba was playing pool at a friend’s house when the idea for e2grow hit him. He put down his cue, told his friends he had an idea and left. By 5 o’clock the next morning, he had a 12-page PowerPoint presentation describing the basic structure of e2grow.
Capture the market
Barba knew many small business owners lack Web presence. He saw the Web as a way not only to even the playing field with their large corporate competition drawing customers to the malls, but to generate sales from outside their local areas.
For consumers, e2grow (now branded as Locality.com) puts them in touch with local merchants and service providers with a community-based directory. For the business owners, they sign up to have e2grow’s Web designers build them an e-commerce site, set them up with e-mail and place the business in not only the local directory but in top Web search engines such as Google and AOL.com.
Barba watched other Internet companies tap the small business market with varied success. But he was an investment banker for 14 years with companies including Bears, Stearns and Co., and Cowen & Co. before he founded e2grow, and his financial savvy was going to be his edge in the game.
“A lot of the companies would raise $30 million, $100 million, $200 million and really generate no significant revenue,” Barba says. “It was increasingly shocking to see how little emphasis was focused on cash flow and how it was all about raising money and trying to exit as soon as possible.”
The other fatal flaw Barba saw with some companies was that they apparently expected the software to sell itself through heavy media advertising, e-mail marketing, direct mail and cold calls. But that kind of faceless marketing doesn’t work in the small business market.
“These people don’t want to converse with you via e-mail,” Barba says. “They don’t want to be on hold for 15 minutes. They don’t want to leave a message and hopefully have somebody call them back in three days. They needed attention by people, it needs to be fairly immediate, and that’s expensive.
“So we’ve spent a lot of time and effort to try and make that a cost-effective way to scale.”
With the basic business model in hand, Barba assembled a board of advisers to help him manage costs and grow the company. He culled executives from top companies including Parker Hannifin, AT&T Solutions, Kinetico and Steris, and advisers with academic backgrounds at schools including Columbia Graduate School of Business and Case Western Reserve University.
His management team included his father, Dennis Barba Sr., as president; John Anderson from Lincoln Electric as vice president of business development; and John Strathern, a former securities broker, as managing director.
“What first struck me was Dennis’ personality and the team he had put together,” says Warren Goldenberg, e2grow’s legal counsel and a partner at Hahn, Loeser & Parks LLP. “These are people with significant business backgrounds, really people of substance.”
Barba hired Deloitte Consulting to manage the project’s financial modeling and Beacon International Marketing in Akron to help with market research. To design the e2grow software, Barba hired Cleveland-based software developer IdeaStar.
Jim Fisher, IdeaStar’s president, is on e2grow’s board of advisers.
“We’ve really had no problems with IdeaStar since we’ve done this, which I think is rare,” Barba says. “We continue to have a good relationship with them and part of that was their willingness to work with Deloitte as a team. It was fairly bug-free after it was put out.”
Barba and his advisers voted to risk $70,000 in seed money. If they couldn’t get the company growing before the money was gone, they would fold it.
But thanks to keeping his costs low and making strategic acquisitions for pennies on the dollar, Barba and his advisers didn’t need to chip in any more cash.
Acquisitions
Barba started small by building community portal sites in eastside communities such as Chesterland, Solon and Bainbridge to draw consumers to news and information and to local merchants. For his first few business customers, he built their sites for free.
But he had seen too many customer freebies kill many dot-coms, so he still charged the monthly subscription fee for e-mail, e-commerce and search engine optimization services.
“I kept very close tabs on what it cost us to acquire a customer, and we included the cost of labor to build these Web sites in that cost of customer acquisition,” Barba says. “Our goal is to have a customer that’s profitable to us from the first day. So the check they give us to build their Web site, it’s our goal to have that check to be more than what it costs to acquire that customer and build that Web site.”
Unfortunately, sales alone weren’t enough to sustain e2grow in the early days, and fund-raising was a necessary evil for the start-up. It wasn’t easy. From January to June 2001, Barba says it was “damn near impossible.” But that all changed once he snapped up a bleeding online business directory called Locality.com.
Locality.com had a strong presence in the San Francisco Bay area, Portland, Seattle, Nashville and Cleveland. In its heyday, it raised $8 million in venture capital and generated revenue. But in its final months, sales dried up and the cost of doing business in Silicon Valley was too great.
Locality.com was losing $600,000 a month, and its investors needed to sell.
“We were able to demonstrate to the venture capital firm that was controlling the company that we had good management, we had good financial management, and that we were determined, hardworking and tenacious,” Barba says.
He won’t reveal the numbers, but in one month, Locality.com was earning a profit for e2grow. The key was cost savings. Barba kept none of Locality.com’s employees, and rent in Cleveland was 5 percent of what the company had been paying in Silicon Valley.
Internet service cost only 10 percent of what the start-up was paying for the same features out West.
“They were running the business model that was en vogue for a while,” Goldenberg says. “Dennis has never operated on that model. He’s running it and always had run it more like a traditional business where you build it one step at a time.”
The acquisition of Locality.com’s assets piqued investors’ interest. The transaction showed the VC firms on the West Coast and elsewhere that this Cleveland-based Internet start-up was a survivor. Investors who ignored Barba months ago wanted to schedule meetings.
By the end of summer, he was turning away potential investors after landing investors in 14 states.
“We never thought six months ago that we’d ever tell somebody ‘No’ that wanted to give us money,” Barba says. “But right now, we have an operating plan and enough money to make it profitable by the first quarter of next year (2002).”
Get to the point
The boost in funding allowed Barba to acquire ConnectSpace.com, an Internet marketplace that allows owners of small- and mid-sized businesses to network and to buy and sell goods and services with each other.
The site was formerly owned by the Cleveland-based Ohio Innovation Fund, an early stage seed capital fund.
“It was good timing,” says Jeff Hanson, partner of the Ohio Innovation Fund. “They have cash and they have a good plan for going forward and they’re getting very good valuations on acquisitions. Their strategy of turning acquisitions into cash-flow positives the month after the transaction is a good one.”
Connectspace.com was e2grow’s fifth acquisition in the last 12 months, which seems unusual for man as tightfisted as Barba. But he avoids what could be costly situations by using his skills as a fast and tough negotiator.
“Dennis is very focused and extremely intense,” Goldenberg says. “He’s no-nonsense. Once he sees what he wants, he goes after it.”
Hanson, who’s faced Barba on the other side of the negotiating table, calls his style “tenacious.”
“Dennis moves fast, makes decisions quickly and is very aggressive,” Hanson says. “He doesn’t take ‘No’ for answer. It’s actually very refreshing to work with him.”
Barba says he picked up his negotiating style from experience and business school, but mostly from his father, who worked for General Motors for 34 years as regional director of surplus properties for the eastern United States and Europe.
“It’s just a matter of finding out as quickly as possible where everybody stands,” Barba says. “Then you try to find the simplest and most creative way to get to that solution.”
Despite the steely exterior and what some might characterize as ruthless negotiating tactics, Barba is said to send flowers and gifts to business colleagues after working on a project or negotiation.
Profitability awaits
With its wider nationwide brand recognition, Barba decided to roll up all of e2grow’s features under the Locality.com name and imaging. To spread the word, he plans to unveil a fiscally conservative radio and television marketing campaign in Cleveland with a major cable television provider and with the dominant radio in Portland, the company’s second largest market.
Profitability will just be a matter of expanding Locality.com’s customer base, which should be easier with 130 independent sales reps in new markets including Chicago, Dallas, Albuquerque, Kansas City and Denham Springs, La. The addition of Gary Adkins, a regional sales director based in Nashville, brings e2grow/Locality.com’s total full-time staff to 22 people.
“There’s really nothing magical about it,” says Goldenberg. “It’s a management play. He just manages and executes very well. Just by doing it day in and day out.” How to reach: e2grow Inc./Locality.com, (440) 735-9060
