Web Host Success Story Virtualis Sold to Allegiance.

The latest L.A. tech entrepreneur to cash out for sudden riches is 26-year-old Chris Lyman, who earlier this month sold his North Hollywood-based business-to-business Internet services company, Virtualis Systems Inc., to Allegiance Telecom Inc., a Dallas-based telecommunications company, in a multimillion-dollar deal.

Both Lyman and Allegiance executives described the deal as "a private purchase," and declined to offer any particulars -- including the sale price.

The sale caps a virtual roller-coaster ride for Lyman and his employees, going back several months. Like many Internet startups, the company found itself more than once teetering on the edge of financial disaster.

"It's been a wild, wild ride," said a happy Lyman, who founded Virtualis in his basement four years ago.

In a letter to friends shortly after the sale, Lyman, who dropped out of college to grow Virtualis, expressed shock at his sudden good fortune.

"I was going through my business e-mail this morning and then realized that something huge has just happened in my life. I mean something positively enormous," Lyman wrote.

The transaction brings together two aggressive, entrepreneurial Internet players that are eagerly seeking bigger market share in the fast-growing Web-hosting marketplace. The targets of both firms are small to medium-sized businesses that have neither the budgets nor infrastructures to set up and manage their own commercial Web sites.

"Web hosting has become one of the busiest sectors on the Internet, as companies of various sizes attempt to gain something of a presence online," said Helen Chan, a Web analyst with The Yankee Group, a research consulting firm in Boston.

The industry is expected to grow to nearly $30 billion by 2003, according to Dain Rauscher, a New York-based Web research firm.

For a monthly fee, Web-hosting firms provide a range of one-stop online services such as Web site management and e-commerce support, so clients can run online storefronts and process retail transactions.

Solid fit

Dan Yost, Allegiance's president and chief operating officer, said Vitrualis provided the technical skills and entrepreneurial expertise his company needs in voice and data services.

"Up to now, Allegiance has been neither here nor there with its data delivery system, so both companies should be winners in the deal," said Dmitri Eroshenko, editor of Web Hosting, a monthly trade publication based in Washington, D.C.

Publicly held Allegiance has struggled and failed to achieve profitability since its 1997 IPO. In its most recent quarter, which ended Sept 30, the company reported a net loss of $73 million (67 cents per share) compared to a $56 million loss (58 cents per share) in the like period in 1999.

That performance, rather typical for Web-related companies, is in stark contrast to the performance of Virtualis, at least according to Lyman.

While declining to release specific figures, Lyman said his privately held company enjoyed steady earnings growth for nearly three years before its first money-losing quarter in mid-1999. In that year, the company had to seek out venture capital funding to remain afloat and "to invest in our growth," Lyman said.

That growth obviously has suddenly rocketed forward with the buyout.

In its acquisition, Allegiance gets some 40,000 Web-based customers currently served by Virtualis and a state-of-the-art computer-driven operations center housed in an 8,000-square-foot North Hollywood facility staffed by 80 employees.

Lyman said his firm will handle all Web-hosting services for Allegiance and its affiliates, meaning Allegiance will likely fold its existing Web-hosting infrastructure into Virtualis.

In exchange, the transaction will broaden Virtualis' own reach into the Web-hosting market through an expanded network of users and some 500,000 customer telephone lines currently operated by Allegiance nationwide.

In addition, Allegience plans to make an unspecified multimillion-dollar capital investment to beef up its newly acquired Virtualis operations, an investment which Lyman says will be used to improve services and invest in new online activities.