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Q&A – With Tim Mercer, CEO, Vapour Cloud

If this year had all gone to plan – and it still might – Vapour Cloud would have been celebrating its seventh year in business and an MBO to kick-start the next stage of its development. The venture capital-backed, Elland-based network and cloud services provider broke even earlier this year and, with a record billing month in March (nearly £500,000), was well placed to reward its original investors and push on to even greater things.

Vapour Cloud was founded by CEO Tim Mercer, who, following a career in the Army, including service in Northern Ireland and the Gulf War, started working in telecoms with Telewest (then NTL Telewest) and Virgin Media for Business. He started one company, partnering with a mobile business owned by friends, before, in 2013, setting up Vapour Cloud with venture capital and money raised from the sale of his family home and his wife’s car.

“We set it up with venture capital because we wanted to run our own network in the UK. Owning the infrastructure is important for supporting your clients – you can give a better level of support,” he said.

From that point, with no customers – not even a desk – Vapour Cloud has gone on to become the sixth fastest growing tech firm in Leeds. It is growing at an average of about 50% per year and is currently turning over in the region of £4 million per annum, of which about 95% is recurring revenue.

Today, Vapour Cloud employs around 21 people, and it is to them that Mercer attributes much of the company’s success.

“Any business owner will tell you the most difficult thing is getting the right people in the right roles, doing the right jobs. We’ve got a really tight-knit family now: lots of technical people and operational people who have been here a long time. The customers know them and trust them, and they know the customers inside out and back to front,” he said.

Technology Reseller called Mercer in the second week of April, not long after lockdown had begun, when he was still processing what the pandemic might mean for Vapour Cloud and its customers. We started by asking him about the role of private equity in Vapour’s success.

Technology Reseller (TR):
You have already told us of the importance of private equity to the success of Vapour Cloud. Is the company still backed by private equity?

Tim Mercer (TM):
We are. The people who backed us from day one are still in and we’ve got a slightly bigger shareholder now called Seneca, which came in in the Series B round. The plan was to look at doing an MBO this year and to take those original private equity boys out and go with a bigger firm to grow the business quite significantly in 2021. How that is going to work now I don’t know. The beauty of our business is that we have high recurring revenues and not a lot of one-off sales. In general, our revenue is billed every month, and that’s the kind of business the private equity boys like.

TR: Has your business evolved since you set it up or have you stuck to your original vision?

TM: We’ve stayed true to our core vision. Seven years ago we knew the development of cloud was coming and we knew that if we owned the network, if we built the infrastructure and if the application we wanted to deliver to a customer sat on our network, we could control it. We knew that if we owned the wire that goes into a business premises, over the years people would put more services down it.

Voice was a big play for us. We knew that voice would go into that space and we knew that people had a bad recollection of VoIP services because they were delivered over an internet service with no quality. We built a network that allowed us to put in quality and to manage that effectively. Then we put in some back-up and some storage, so people could store their data. We built the wire, we built the internet pipe, we built the voice platform, we built the back-up and storage platform. We do video now, but in the early days those were the three core basics.

We went to the investors and said ‘Look, if we build this network, we own the customer. If we get two or three services down that wire it is really difficult for that customer to move’.

You then have to overlay a fantastic layer of customer service on top. Our industry is renowned for having really poor service levels. We wanted to change that by offering great customer service at a good price – not necessarily the cheapest price – but a good price. That has stood us in good stead over the years.

So, the three core services that were there from day one are the core services we deliver today. We don’t step outside that function: we don’t build hardware; we don’t do software licensing; we don’t do Microsoft services. We work with partners that can do that. People come to us for those three things and video, making it four; they don’t come to us for Microsoft partnerships; they don’t come to us for hardware services or for software services.

TR: Are you going to stick with those four areas or are you going to bolt on others?

TM: There will be changes – technology like SD-WANs – but they are still part of the network, and video is becoming more of a play with people working from home. So, never say never; if we feel an application or service has some merits, we will have a look at it. But we will only take on something we can actually support. That’s important to us.

People come to us because we see an application from end to end. If you pick up your handset, we can see the voice platform, we can see the traffic, we can see the infrastructure, we can see the network, we can see where the faults are and we can fix those internally. Unless we can do that, we won’t take on a piece of technology.

TR: As I understand it, you provide your services to the channel community rather than end users. Has your customer base always consisted of channel partners and resellers?

TM: Originally, we considered any business from anywhere. One of our early customers was a big Cisco partner that built everything inside a LAN environment – security, firewalls, switches, routing, that kind of stuff. They kept asking us to build networks for them; we built the network and then overlaid their services on the LAN. We had done quite a bit of work with them when I realised that if we flipped our model, instead of trying to get 500 separate customers we could get one partner who had 500 customers of their own. So that is what we did. We made less money, but we had a recurring revenue stream from partners’ customers.

It was a challenge at the beginning because revenues were smaller and the private equity guys were saying ‘Are you sure this is the way to go?’. But because we were specialists in networks and voice and didn’t do what partners were doing – i.e. supply hardware – we added real value to their structure. Partners knew we weren’t going to approach their customers to sell hardware, which meant they could keep their margins quite high. It was a good fit.

That was probably in our third year. I redid the documentation and wrote all the SLAs, which we would give to partners in a white-label document. They would rebadge that and sell it on and make some margin. We’ve never really looked back from that point.

TR: Do you have any end user customers now?

TM: We do. It’s probably about 5% of our base and is not something we actively go out to win. Sometimes direct relationships come through word of mouth or because we know the owners of a company and sometimes they come to us because a partner has gone into administration and we’ve taken over a customer relationship. We also find that some bigger companies like to deal directly with us. For example, we look after Betfred’s voice platform across its whole network – 2,500 people and 1,700 shops. That business was won by a partner, but Betfred wanted to contract direct with us. We contract direct and pay the partner a commission.

TR: The transition from selling to end users to focusing on the channel was one light bulb moment in Vapour Cloud’s journey. Have there been any other moments that have transformed the business over the last 7 years?

TM: Not particularly. We have the reputation of doing what we do and doing it really well – of being very, very good at what we do in back-up storage, voice and technical networks and services.

It is very, very difficult, I believe, to be a jack of all trades, which is what a lot of people used to be – ‘We do networks, we do voice, we do software, we do Microsoft, we do IT support’. Nowadays, people are looking for specialists; they want to work with people like us that have that experience and specific expertise.

We decided really early on that we would be a specialist. It wasn’t a lightbulb moment, but we saw earlier than some that in the future people would want to work with someone that had that specialist engine around them, that weren’t trying to be all things to all men.

TR: It couldn’t have been cheap building your network.

TM: No it wasn’t. Over the years, we’ve had about £4 million of funding and we’ve spent more than £2 million of that on the network. It is the most expensive part of our business; you have to sustain it, support it, maintain it, you have to have people that can look after it.

TR: As you said earlier, having a network gives you control. This must be a great advantage in addressing the array of challenges businesses face today.

TM: Building a network allows us to deliver encrypted and secure comms and network services, especially voice. Normally, what would happen is somebody would deliver the voice network and someone else would deliver the network, because voice people don’t know networks and network people don’t know voice. You have anomalies, of course, but that’s predominantly how the channel has been for the last 20 to 30 years.

The network is the foundation of our business. For us, voice is just an application that sits on the network. As long as you have built the network correctly and understand the customer’s needs, the application should work fine. A lot of people, when they are building secure voice platforms and services don’t understand – or underestimate – the complexities of building networks and services that have to integrate into a LAN environment, into a security infrastructure. We are very good at that.

That capability is becoming more and more important, especially in this world where you have people working from home – how do we get data to them? how do we extend that voice platform to them? how do we support them? We have Betfred’s contact centre working from home on iPads – the whole voice platform for 2,500 users is on our network and, because of Covid-19, its people are now at home.

TR: You must have had lots of customers asking you to set up home working packages since March.

TM: Yes, we have. Most people would have had some homeworking capability from the start, primarily for the management team. If you were building a network and voice platform for 100 users, you would typically have 20 home workers. What happened with Covid was that very quickly all 100 of those people needed to work from home.

Because we built Vapour Cloud as a cloud business – a software business for voice – we can flex up and down to meet customers’ voice needs very, very quickly.

We also had to make sure businesses’ networks would support people working from home and that we could support them. That was more of a challenge. We had a week and a half when our engineers were working through the night to make sure people at home were set up properly because, as you can imagine, everyone wanted it today. We must have had 50 calls like that a day. It was ridiculous.

What you often find is that management say everyone’s going to work from home, but forget all about where their servers are based and whether they have enough bandwidth to support more people working from home, logging in and trying to get access to systems and services. Do you need to upgrade it? Those are the challenges we have had to overcome.

TR: You talk about being a specialist but at the same time a lot of businesses like to go to one supplier for convenience. Does that supplier then need to build relationships with the specialists so that they can offer a good service?

TM: Generally, businesses, especially smaller firms, will want an IT support company to look after them across all IT platforms and services. The IT support company might also supply them with hardware and Microsoft services, but they probably won’t know how to build a network and they won’t know how to build a voice platform. So, in general, they look for a partner to do that.

That’s where we come in. The customer will say ‘I am moving office; I am upgrading my phone system’ and the support company will say ‘Vapour Cloud can come in and do that for you; we trust them; we know we can work with them. We will do your IT support and your hardware, Tim will do the network and the voice platform, and together we will support you 24/7. If there is a problem we will talk to Tim’s guys and together we will sort it out’. The customer really likes that level of trust. They feel much more comfortable using a business recommended by their IT support company than an outside company they have never heard of.

TR: Do you provide that sort of support on a white label basis or is it always clear that the network and voice platform are being provided by Vapour Cloud?

TM: We have always been really upfront that the end user has to know we are involved in the chain. Even if we white label the documentation for the client, it is important that the client speaks to us. Instead of us asking the partner a lot of technical questions about the network and the partner then asking the customer, we insist that we speak to the customer. ‘It’s a 24/7 support contract and when there is a fault, they are going to be ringing us and we are not answering the phone as you, we are answering the phone as Vapour’. We are very, very transparent with the end user. It’s important for credibility and for support.

What we don’t want to see is a partner buying a service from us and pretending it is theirs: a) you always get found out; and b) you will cause us problems because you will be talking to the customer about SLAs, platforms and technical services that you know nothing about. You will probably be making judgments and decisions that you shouldn’t, to the detriment of everybody’s business. It’s important we speak to end users and that end users understand where we fit in.

TR: What are your priorities for 2020?

TM: We had a fairly robust plan of what we were going to do and how we were going to achieve it, which included a management buy-out. We broke even at the beginning of this year and the plan was to grow our revenue and make sure we put good enough numbers on the table so that the private equity guys got a return on their money and I could take back some control. We gave a lot of control away at the beginning because we were a seed fund business. People took a punt on us and it’s time they got some money back, and it’s time I got some control back. That plan is up in the air now, as you can imagine.

If we can get through this year on a sound footing with most of our customers intact, we should have a good 2021 because I think people will be looking for businesses that were sustainable in 2020 – it shows they have a good business plan. We’ve got enough cash in the bank for the whole of the year and we don’t need to furlough anyone. That should give our customers and our partners a solid base to work on in 2020 and on into 2021.

TR: We haven’t mentioned Avaya yet. They are obviously a very important partner of yours (see box).

TM: We run two voice platforms. Originally, we were a Storm cloud contact centre platform partner. We chose Storm because we wanted to be different and we wanted higher end customers – we didn’t want to be competing in the 15 to 20 user market. That market is incredibly cut-throat; there’s not a lot of profit, there’s a high customer churn rate and there’s a lot of bad debt. So, we built the Storm platform into our business.

We are a big BT player as well. And BT became a wholesale provider for Avaya. We sometimes missed work because we were too expensive with Storm and too complicated, so we were looking for an alternative provider and the Avaya platform met our needs. We were already integrated into the BT network and the platform could be run as a private voice platform. It sits in our datacentre, in our network and we can deliver it privately across our core and support it properly.

We have won plenty of business off the back of that, including JCT600, a big car dealership in the North with 48 garages and over £1 billion in turnover. We took around 50 separate Avaya phone systems and turned them into one big cloud platform for them. I spoke to them the other day and they said it was a good job they had done that because they wouldn’t be able to furlough staff and operate as a business today if they had had 50 separate phone systems.

We became one of Avaya’s fastest growing mid-market voice partners in the UK last year. All we do is cloud – we don’t do any tin, everything is licences. That is obviously the model Avaya wants to move to and we’ve got a good relationship with them, so much so that we have just built our own Avaya platform in our datacentre, so we don’t have to use BT any more.

We buy directly from distribution and have a really good relationship with Westcon. Where a partner is looking for network support and a cloud platform, Westcon will work with us on speaking to resellers/partners. That has allowed us to deal not just with IT partners and support companies, but with Avaya partners too. Partners that were once predominantly selling IP Office systems to end users are now coming to us to buy the network from us and the voice platform. That is a cultural change.

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