January 22, 2007
Crain's Detroit Business
By Tom Henderson

John Bonaccorso thought he'd escaped northern winters for good when he fled Syracuse in 1987.

Up until just a few months ago, the 44-year-old figured he'd be a happy Floridian for life. He was living in Melbourne, and his high-tech company was housed in a business incubator at the University of Central Florida in Orlando.Today, he has chosen to move his company, 9thXchange Inc., which allows people to sell a wide range of digital content at www.9thx.com, to Michigan.

It was, to his surprise, a move he made willingly, in part to get close to recent investors. Seventeen of his 25 employees are here working out of their homes and apartments while he looks for office space in Oakland County and Ann Arbor.

He's getting used to wearing a down coat, but he hasn't yet gotten used to the fact he's taken this plunge, a plunge that comes with doubts and second-guessing.

"They wined me and dined me, but will they still love me once I'm here?" he said of Michigan Economic Development Corp. business recruiters who successfully brought him to Ann Arbor in November on a recruitment trip.

Bonaccorso said a proposed incentive package was discussed with MEDC officials, but he said he has put it on hold while negotiating offers with venture capitalists and choosing a location for his company.MEDC President James Epolito was out of the country Friday and unavailable for comment.

Other questions, Bonaccorso said, are:

- As he needs to hire tech staff, will he be able to recruit people to Michigan, with its rust-belt image? And will Silicon Valley types be willing to endure its winters?

- What will be the impact of Michigan's higher labor costs compared with those in Florida?

- Will he encounter the us-versus-them culture he has heard so much about in Michigan? Already, he said, early hires seem to have the mentality that they are on one side and management on another. "It's shocking. ... I have to try to train them that it's our company. You own it, too."

- A troubled local housing market. "Sure, you can say housing is cheap, but people still want to feel they can make money when they sell. People would rather be in a rising housing market."

9thXchange stores data for customers who set up online stores to sell anything digitized, including, say, public-domain compilations of Thomas Edison films, clips of old TV shows, how-to or follow-along DVDs made by fitness experts or chefs, quirky or interesting home and amateur videos, cartoon shorts, ring tones and independent films. Download prices typically ranging from 69 cents to $1.69, with 9thXchange getting a small piece of each transaction.

The creators of the content get royalties on sales.

David Spencer, executive director of Oakland University's business incubator, heard a presentation by Bonaccorso at the Great Lakes Angels' monthly meeting in December. Two weeks later, they met to discuss 9thXchange becoming a tenant.

"9thXchange appears to have a very unique digital-content distribution business model," said Spencer. "It's a new model that appears to have significant business potential ... but we haven't yet conducted our own proof of concept and proof of product. We are in the process of determining the company's interest in becoming an incubator client, and I'll be delighted to hear back from him."

Bonaccorso said Ann Arbor seemed a shoo-in for his headquarters but that he is considering Rochester Hills following his meeting with Spencer.

Terry Cross, an early investor in Google who is now entrepreneur-in-residence at Wayne State University, also listened to Bonaccorso's pitch for capital at the December meeting of the Great Lakes Angels, an investor group that meets monthly.

"I love the company. I absolutely love it," he said that night. "I was the second person here, and I told John, 'I want to see your complete business plan.' It's going to be the ultimate sticky site. Stickiness like you can't believe. It's a great opportunity."

A month after the meeting, Cross has yet to invest. He said he is meeting with another prospective investor this week to discuss the company. "I need to learn a little more about it before I put up any money," he said.

Bonaccorso, who showed a slide projecting revenue to grow from $1.5 million this year to $27.1 million in 2008 and more than $400 million in 2011, told the gathering that he had already raised $500,000 and was looking for $250,000 to carry him over to a larger upcoming round of venture capital.

He says two deals grew out of that meeting, with other deals possible. "We're not quite to $750,000 now," he said.

He said he has had offers from three venture-capital companies, two in Michigan. One VC firm in Ann Arbor wants the company there. The out-of-state company will let it stay here if it invests. He plans to retain a majority stake.

He said he expects the first round of VC funding will be about $3.5 million with a second round of about $10 million late this year.

"Right now the digital media space is so hot. I've been getting unsolicited calls from hedge funds, but I tell them, 'The company's not for sale. I'm looking for investors.' "

Bonaccorso said that without any advertising and mostly by word of mouth, traffic has grown to more than 300,000 page views a day.

This is Bonaccorso's third Internet company. In 1999, the first company, ePort Inc., backed by $1 million in money from angel investors and $1 million in hardware and support services from Apple, began offering Internet access. It installed its first pay-to-use terminal in the lobby at the Walt Disney World Dolphin Hotel in Orlando. Bonaccorso sat there watching for his first customer. At 9 p.m., a man walked up, read the instructions and got online.

"He didn't know we were watching. I think we made like $12 off him, and then we came up and grilled him for an hour about it," recalled Bonaccorso. He said the company was quickly in the black, but his backers in Miami differed with him on how to expand the business.

He says they agreed to part ways and he quit early in 2000. "I sat on the couch depressed for two weeks. I cried as much as when anyone in my family died," he said.

Bonaccorso then started Scorecard USA as an online community of amateur sports enthusiasts. In the heady, go-go days of the Internet, he was quickly able to get $4 million in venture capital, with a promise of another big investment round in September 2000.

He said he hired 40 employees and launched the site with 200,000 members, thanks, in part, to tie-ins with the U.S Olympic Committee and various large marathons around the country. It was just in time for the market crash in April and the collapse of the tech-heavy Nasdaq stock exchange.

It soon became clear there would be no September infusion of cash, and in June, Scorecard USA had what Bonaccorso calls its Black Friday, laying off 25 employees. His investors decided the company should refocus as a seller of data-collection software.

"I sold one license, hated it and quit," said Bonaccorso, who went on a Carnival cruise to cheer himself up.

On the cruise, he got the inspiration for 9thXchange, rented a ship computer for $18 an hour and wrote up a business plan. "It all just came to me."

But with markets in collapse and the Internet a dirty word for investors, he put his business plan on hold and did freelance marketing and consulting.

Last July, with the encouragement and offer of financial support from a relative in Plymouth, he incorporated 9thXchange in Florida. He then found an office in the tech incubator in Orlando and launched a beta-version Web site in September.

On Oct. 11, he was visiting a friend in Michigan who was having a birthday. She'd been invited to a friend's house in Novi to celebrate, and she took Bonaccorso with her.

The house belonged to Bernie Shinkel, who, serendipitously enough, is manager of Huntington Bank's New Economy Fund, a mutual fund focusing on new technologies and content. Bonaccorso talked about his business, Shinkel asked some questions and soon was on board as an angel investor, the first angel investment he's ever made.

"I found the 9thXchange fascinating," said Shinkel. "He's got a company at the right place at the right time. The digital content market is just starting to see an explosion of demand. They've put together a technology that's not easily replicated and could be a prime mover in the marketplace."

Soon after, Bonaccorso got an invitation to attend a weekend in Ann Arbor on Nov. 4-5 sponsored by the MEDC and Ann Arbor Spark, a business-support group. Highlights were the Royal Shakespeare Company and a University of Michigan football game.

"I said, 'I'm interested. I'll come, but I'll never move my company to Michigan,' " recalled Bonaccorso.

To his shock, he began thinking of life back north. It wasn't the Shakespeare, it wasn't UM's exciting win over Ball State University, it wasn't the wining and the dining. It was, said Bonaccorso, "all the people here coming up to me saying, 'We really want you to come here.' People here just really love their state. You hear all the bad stuff, but then you come here and people are so open about how much they love it here. And how much they really want you here. I couldn't believe it. I was blown away."

But there was a more pragmatic reason than feeling the love: He discovered "that there is a lot of capital here that doesn't know where to go." There are, he said, a lot of aging baby boomers who had done very well in their careers, have a taste for some risk in their investment portfolio and don't have as many start-up investment options as high-net worth individuals in other regions.

"It really was the capital available," he said.