Well Connected

SoVerNet, the Internet service provider business J. Barton Elliott and Erik Leo founded in 1995, has grown larger than either of them ever imagined. They have resisted buy-out offers and plan to remain a Vermont business with offices in Winooski and Bellows Falls.

by Jason Koornick

J. Barton Elliott (left) and Erik Leo founded SoVerNet in 1995. In 2000, they responded to the changing marketplace by adding telephone service through a merger with Tom Lyons' company, National Mobile Communications. Lyons (seated) is now company president.

In this era of consolidation and acquisition, operating a local Internet and telephone company can be daunting. Just ask SoVerNet founder and CEO Tony Elliott, who has experienced many ups and downs during his eight years of connecting Vermonters to the World Wide Web. From the early days of the Internet through the dot-com boom and the following economic downturn, Elliott and his partners at SoVerNet have remained a locally owned company even as their former competitors were gobbled up by corporate conglomerates.

Elliott has certainly entertained plenty of offers of merger or acquisition from small and large companies. "In the mid to late '90s, we would get a call a week from companies looking to acquire us," Elliott says, "but what we like about operating our own company is actually doing it. We didn't start SoVerNet to make a lot of money but to do something in Vermont and run a business."

The principle continues to guide the company today. After experiencing some growing pains in 2001, the company has settled into a management strategy that Elliott deems "organic and sustainable."

SoVerNet provides dial-up Internet access to more than 20,000 customers around the state, high-speed DSL (digital subscriber line) and T1 access to numerous businesses, and local and long distance phone service to more than 1,000 customers. The organization employes 90 workers in two locations Winooski and Bellow Falls and has experienced growth of at least 23 percent per year in the sale of its core products.

The company's size still amazes Elliott, who started the ISP with partner Erik Leo in 1995. "SoVerNet is huge by my standards," he says.

Elliott, a New York City native, moved to Vermont in 1962 when he was 12 years old. He attended Vermont Academy, then enrolled in the University of Vermont to study electrical engineering, but never graduated. An eager entrepreneur, Elliott was anxious to start his own business.

In 1978, Elliott and a partner, Jay Eshelman, founded the Woodstone Co. in Westminster. The firm, which still exists, manufactures custom doors and windows. Elliott became acquainted with the power of computers through working with a consultant to design software that automated some of the company's processes. The consultant, Erik Leo, would become his partner in SoVerNet.

As the duo concluded the Woodstone project in 1994, they discussed "the dire state of Internet access in southern Vermont," Elliott says. With clients around the country, Leo was trying to work on-line, but found he was paying outrageous long distance fees just to connect to the budding Internet.

"Erik came up with the idea of signing on businesses to bring an Internet line into southern Vermont," Elliott recalls. It became clear to the partners that area businesses had no clue about the Internet when they received a single response to a mass mailing sent to 150 local companies. "That response was 'no'," Elliott says.

"So we changed our approach. We came up with the concept of creating access to the Internet with a local call," he says. Elliott and Leo looked into the technology and investment necessary to provide dial-up service in the Brattleboro/Bellows Falls area. Upon writing a business plan, they deduced that if 500 customers signed on in the first year, the venture could work.

In the months surrounding the launch of the first SoVerNet dial-up connection in March 1995, the partners sold the benefits of the Internet to local businesses. "I went around to a lot of association meetings like Lions and Rotary clubs with a laptop and did demos of the World Wide Web," Elliott says.

He educated potential customers on the value of using e-mail as a means of communication and the power of Internet search engines. "They were blown away," Elliott remembers. "There were some departments in bigger companies that used on-line sites but they were paying dollars a minute and it was mostly Telnet connections."

Even though some business owners embraced the power of the new tool, "the impetus to access the Internet came from the individual who would use the Internet at work," Elliott says. "The boss would look over the employee's shoulder and ask about it. It was enlightening to see this power transferred to the individual."

The founders secured a business loan from a community redevelopment organization in Bellows Falls where unemployment was high. "They asked if we could hire seven people, then lent us $50,000 at very reasonable rates with the understanding that we would stay in Bellows Falls and help the community," Elliott remembers. The money financed the equipment that would allow SoVerNet to grow into the region's largest Internet provider. Elliott reports that 50 employees are working in the Bellows Falls location.

To get their fledgling company off the ground in 1995, Elliott and Leo made countless presentations to associations using a laptop to demonstrate the then-new World Wide Web. Now, the company is the region's largest Internet provider. Jason Butterfield (left) and Joe Clark are network administrators.

At about the same time, Tom Lyons, another entrepreneur, was running a cellular phone and pager company in Boston. Lyons would eventually become the president of SoVerNet when his National Mobile Communications merged with the ISP in 2000.

A UVM graduate, Lyons started National Mobile Communications in 1993 as an agency to resell wireless services from companies such as Cellular One and Nynex Mobile. Soon after he started the company, Lyons landed a contract with Grossman's Lumber that allowed National Mobile to sell phones in all Grossman's stores throughout New England. Lyons calls the deal "a huge contract that helped the company take off."

When Grossman's Lumber went out of business in 1994, Lyons thought about expanding his operation, but found that competition was too great in the Boston area where he had already opened a few stores. Vermont was a natural choice for Lyons, who grew up in Montpelier.

"Boston was a very competitive marketplace," Lyons recalls. "Nobody was doing it on the same level in Vermont." He says that Vermont was also attractive because it was easier to find employees when the South Burlington office of National Mobile Communications opened in 1995.

Lyons hired 20 employees and opened several stores in Vermont. "We had six at the peak," he says. Five stores exist today as purveyors of SoVerNet products in addition to wireless communications.

After a couple of years of retail, Lyons was looking to take National Mobile Communications in a new direction. "We were essentially a large sales organization that focused on selling other people's products. With a sales force you start with a zero balance each month," he says. "The next logical step was to own the customers. We wanted to add a brick each day to create something we could claim ownership of."

The answer to Lyons' dilemma came with the federal Telecommunications Act of 1996, which introduced local competition into the broadband and telephony network owned by the major providers. The anti-trust law forces companies that own the telecommunications infrastructure to lease bandwidth to independent sales companies. By renting unbundled network elements, local companies like SoVerNet can resell the pipeline for local and long distance phone service and Internet access.

"Local competition had arrived," Lyons says. "We could do everything Verizon was doing and compete with them." He researched and eventually expanded the company into a CLEC (competitive local exchange carrier) in 1999. He raised $1.7 million in financing from Siemens, a manufacturer of telephone circuit switches. In May 2000, Lyons' company moved into a 6,600 square-foot building in Hillside Park in Winooski that now serves as the SoVerNet call center for northwest Vermont.

In the spring of 2000, Lyons connected with Elliott and the SoVerNet team.

"SoVerNet was looking to become a CLEC, so people were referring me to them," Lyons says. "We were a good fit for each other because I already had everything done."

"It wasn't until the late 1990s that we started to recognize a changing scene," Elliott recalls. "The Internet was growing all over the place, and the telephone companies were trying to create access but that eventually failed. We still had the problem of needing to operate the Internet on our own infrastructure. We had to dig a little deeper and run our own network, which is when we became a telephone company."

SoVerNet employs 90 workers in two locations Winooski and Bellows Falls and has experienced growth of at least 23 percent per year in the sale of its core products.

"Tom Lyons had a project that was well under way so we took all of the work done by both companies and merged them together in October 2000," Elliott says. The deal brought 17 employees into the SoVerNet fold.

Lyons says the merger made sense for both parties financially and collaboratively. "We shared the same views about how we could build this company in Vermont. We were a good fit for each other."

When the merger with National Mobile Communications was complete, SoVerNet controlled the infrastructure over which they could run their network. At the same time, the company expanded its product line by offering phone and wireless services at retail stores.

It wasn't the first serious merger that SoVerNet had considered. Within months after the Telecommunications Act was signed into law, SoVerNet was almost acquired by Frontline Communications. "We had an agreement, but the financial markets started becoming precarious," Elliott says. "Ultimately we weren't acquired, although some people still think we were."

Upon merging, the founders and their new partner hired a management team to grow the company. Lyons calls them "top dogs" who had been executives at Verizon and other telecommunications corporations. Due to the depressed state of the market and other factors, the founders accepted the reality that venture capitalists weren't investing in new telecommunications companies at that time. The executives were let go in the summer of 2001.

Lyons says that his team experienced growing pains in the months following the merger. "As entrepreneurs, we liked the idea of bringing on managers to run the business, but we weren't mature enough to let go of the business. We didn't have the business pulled together where we could hand it off to a seasoned manager."

About the management change Elliott says, "Being an ISP provider with 20,000 customers around the state and a pretty good cash flow, we decided to back off and grow at a more organic pace."

Elliott calls 2001 "our building year." They had to lay off the management team, then design a strategy that would facilitate realistic growth. Elliott says that in the last 12 months, the team has focused efforts on building and improving the technological backbone that supports the SoVerNet network. Phone service was launched in the summer of 2001.

"We're done with the major part of the job and can provide all of the services," Elliott says. SoVerNet offers local and long distance phone service with all the ancillary functions, dial-up Internet access, cellular and pager service and broadband Internet connections to half of the Vermonters on the Verizon network.

At least one SoVerNet client is happy with the network improvements. Jim Boutin, the director of technology for the Southwestern Vermont Supervisory Union in Bennington, has been a client for five years. The ISP provides Internet access to 11 schools and 4,300 students. "As the technology improves, they have come forward with better ways to do things and to bring more bandwidth to our network," Boutin says.

SoVerNet provides dial-up Internet access to more than 20,000 customers around the state, high-speed DSL and T1 access to numerous businesses, and local and long distance phone services to more than 1,000 customers. Dale Hege is director of network operations.

SoVerNet is a partner with the SVSU in E-Rate, a federal reimbursement program for telecommunications and Internet usage in schools. Working collaboratively with SoVerNet, Boutin says his district saves "a significant cost of $70,000 per year."

Elliott says the company is "cash-flow positive" with about 65 percent of revenue coming from residential use. The new telephone service is sustaining a comfortable level of growth that Lyons expects will remain steady. "Once people understand that we have invested in tried and true technology, they really trust us," Lyons says.

Now that the infrastructure is in place, the company will concentrate on selling the services. "We need to sell, provision, bill and keep people happy," Lyons says. "It's time to focus on execution and bring in revenue."

Elliott tries to keep recent threats to the legality of the Telecommunications Act in perspective. Regional Bell operating companies are challenging the law on many levels, he says. "We saw a foray of attempts to completely undo the Telecommunications Act, but there won't be the whole undoing, just tweaks and changes. What is evolving today is a healthy form of competition that is largely built on infrastructure financed by public subsidies.

"SoVerNet is always worried, but we will find ways to work with the changes. We will be around because we're tough. We can scale back if we need to, but we don't want to," Elliott says. •

Originally published in July 2002 Business People-Vermont