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Building a data center business from the ground up:
An Interview with Infomart CEO John Sheputis

Infomart Data Centers (formerly Fortune Data Centers) has been working with KBD since its inception in 2006. Data centers are a unique member of the technology community, with ties in both IT/enterprise tech and the far more traditional real estate market. As executing a wholesale data center lease is a very large investment decision for most companies, Infomart must market not just to the IT buyer, but across multiple departments within an organization. Compared to most IT purchases, the transaction cycle is incredibly long and arduous, but the payoff is significant. We talked with John Sheputis, president and founder of Infomart Data Centers, about his challenges and victories through the years.

Let’s start with a little bit of your history. Where were you before you started Fortune Data Centers?

Well, I’m an engineer by background, and I’ve spent most of my career working in technology services. I founded and managed several technology ventures, most of which specialized in large-scale infrastructure management and hosting of global applications. My Silicon Valley roots go back to the dot-com era with Totality (now a managed services unit of Verizon Business), which helped launch and manage over 100 e-commerce applications for some of the nation’s most trusted and well respected firms. Most people recall the tech slump that followed the dot-com boom. But by 2006, I noticed the surplus of data center capacity had become a shortage. Because of my background in technology and application deployment, I had been a tenant in many data centers. I understood their value and more importantly their limitations, which gave me a pretty good view of how the data center market was evolving. Unlike prior eras where vendors bundled IT services with the physical space, I thought this market phase would see separate providers of logical services and physical space. We wanted our new venture to purely focus on the physical facility services (space, power, and cooling), and not the IT automation (which some now call ‘cloud’ services). So, by taking that position, my partners and I became an early entrant to the wholesale data center segment.

That vision from 2006 has now become a company with over 2.3 million square feet in 4 major markets, hosting some of America’s most trusted names as our clients, and generating a substantial amount of income for our investors.

Building a wholesale data center is a very capital-intensive proposition. How does one find financing for that?

You are correct. Wholesale data centers are larger and more expensive than those of prior cycles. And because of that, the sources of data center financing have changed. We’ll address the scale part first. Building a merchant data center was enormously challenging when we started a decade ago, and the scale required to remain cost competitive has only increased since. We are talking about nine figures per property. Maybe that can be parsed into 2 or 3 development phases, but even these checks are still big. Most IT managers simply don’t have that amount of capital, and this is part of the reason they lease capacity vs. build in-house. Also, unlike venture-backed developments, money and risk can’t be absorbed in stages via investment rounds. In developing real estate, almost all of the money is required up front. Venture capital is expensive…it’s not practical for projects with massive up-front capital needs. This meant approaching different sources of capital, which meant there was an enormous amount of learning I had to do.

Real Estate funds understand development and how to fully capitalize large projects. While data centers differ from traditional real estate, we had to give it a try. While most real estate funds were attracted to the returns, many simply couldn’t get comfortable with the costs and risks to develop, lease, and operate a data center. Let’s start with the development costs—which are ten times the cost per square foot compared to an office building. What if we developed the wrong product and couldn’t lease it? Were the excess costs a write-off if we converted the building back to a warehouse? What about performance risk? Data centers host mission critical IT gear, which means they have to run without fail—not unlike a hospital. How would a fund know if we had sufficient engineering skill? Learning to present the investment opportunity and financial structure in terms that would satisfy real estate funds was a marketing experience in itself.

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What do you think is the single most important decision you’ve made over the last few years that have contributed to where you are now?

You mean after we got the project funded and built? The biggest realization I had early on was we were marketing more than a building. Real estate investors tend to focus location, and for good reason. Any property at a major intersection in Manhattan is valuable, regardless of what’s on the lot. With a data center, sure, location matters…you have to be in certain markets. IT types clearly have a preference for Silicon Valley. But with every pitch we made, I was realizing this is a branded business. In our early days we lost an opportunity to a competitor, even though they were proposing a less reliable product, and a later promise date, and a higher price. Go figure…we won on good, fast, and cheap… but lost the deal. Ultimately the prospect CIO said to me, “John, the other firm has a track record, you don’t.” I realized we had to distinguish ourselves by the quality of the operation, not just the building and the address.

We would be known as the highest quality, most transparent, most sustainable, most innovative operator. These were very conscious choices about the brand that have made us the company that contractors and customers want to work with.

We would be known as the highest quality, most transparent, most sustainable, most innovative operator. These were very conscious choices about the brand that have made us the company that contractors and customers wanted to work with.

KBD services a lot of enterprise clients, some of whom might actually be thinking about acquiring wholesale data center space. How does a company know when it’s time to make a move, and what kinds of questions should they be asking?

Customers coming to us have already come to the conclusion they need to outsource. Lots of things are influencing their decision…cost, hassles, compliance, and frankly, growth. Early on, many will initially outsource via AWS or Rackspace. Once they reach a certain scale, some realize the day rate is economically untenable—or that their needs change. I can rent a car for occasional use, but if I drive every day, leasing a car longer term might make sense. Most of our customers come to us when they are graduating from some sort of outsourced cloud service or a collection of small footprints in retail data centers. Regardless of where they start, the economic motives and destinations are similar. Most growing IT operations want to consolidate into their own larger space under a more predictable, longer-term lease rate.

Today we are seeing an indisputable wave of IT investment in cloud based computing, and those applications must be accessible to consumers and other applications. Each of these new applications will have physical needs for power, cooling, and security, as well as network connectivity. These needs define the questions that IT managers ask. The need to be cost competitive will drive scale, and while the number of data centers built tomorrow may be fewer than the number built today, those facilities will be much bigger and better connected. And our belief is that the premier facilities will be owned and managed by specialist providers, and we want to be one of the best.

You have to be close to your market. It will help you find the right people to hire, help you choose the right segments to go after, and which opportunities to no-bid. You need to have a sixth sense on where you can compete and win.

You have to be close to your market. It will help you find the right people to hire, help you choose the right segments to go after, and which opportunities to no-bid. You need to have a sixth sense on where you can compete and win.

Any final thoughts for a young, new CEO that’s just getting started?

Know your market. A CEO that doesn’t know his market has a lot of blind spots. You make mistakes all the time trying to read the market. That’s not only OK, it’s expected—because we all make them. Good CEOs spot their mistakes and adjust faster than others. You have to be close to your market. It will help you find the right people to hire, help you choose the right segments to go after, which opportunities to no-bid. You need to have a sixth sense on where you can compete and win. I am not a fan of business plans that say, “All I have to do is win 1% of the market…” It seems like a lazy way to compete. You need to passionately believe, “I see a segment of the market where I can clean up, and I know exactly why.” And of course, ideally it’s a big segment. You have to believe you are doing something that no one else does as well, and that’s why you are going to win.

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