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THE BALTIMORE SUN

In the lounge of a posh New York hotel last fall, two men munched on bagels and chewed over the future of Blue Sky Factory Inc.

One of them was Greg Cangialosi, 28, who had spent the past eight months pouring his personal savings and virtually every minute of his time into the Baltimore startup, hoping the e-mail marketing company would make it big.

The other was Burt Manning, 70, who may have the power to make it happen.

"It comes down to what it takes to run a business, any business, at that level, the level that we do not have the experience in - the post-startup level, the national company level," said Richard Cruit, 40, Cangialosi's partner.

Manning was once chairman and chief executive officer of J. Walter Thompson Co., the New York advertising giant, and still serves as chairman emeritus. He also invests in and advises several other businesses, and over the past year had seen promise in e-mail marketing.

Cangialosi and Cruit are in that business. Their technology - animated e-mail messages with moving images and video - is used as an advertising tool to steer people to Web sites or sell products.

But e-mail marketing wasn't always the focus of Blue Sky Factory. Since it was founded in April, the company's staff, business model, even its core product have been overhauled in an effort to succeed. Now, the new company is almost beginning again.

The Sun has followed Blue Sky Factory in a periodic series of articles since the startup began. Its founders, Cruit and Cangialosi, formed the business at a time when dying companies seemed far more common than those just getting started. Today is the final article in the series.

In its short lifetime, Blue Sky Factory has already endured a merciless summer when money was tight. It survived the economic uncertainty that followed Sept. 11. And, in an unusual twist, it may have actually been given a boost by recent anthrax scares, as advertisers shied away from traditional mail and looked to e-mail marketing.

As the economy continued to soften, the startup began to transform. Now, Manning has agreed to come on board as Blue Sky Factory's adviser, adding to the list of drastic changes the company has endured since inception.

"I looked at a number of companies that were doing it," Manning said of e-mail marketing. "The one that was most interesting to me, the one that I thought had some real potential to take advantages of the opportunities, was what Greg and Rich are doing."

Cruit and Cangialosi got their introduction to Manning through a colleague in New York. Several phone calls and meetings followed, including one at the stylish W Hotel in Manhattan, which to the Baltimore men solidified the relationship with Manning.

Manning will coach the two founders, assist with presentations for potential clients, partners and investors, and help Cruit and Cangialosi shape their company. He will also spearhead assembling the company's advisory committee.

If Blue Sky Factory is successful, Manning will also reap some of the financial benefits, though he declined to reveal terms.

But his involvement comes at a critical turning point for Blue Sky Factory, as the company tries to grow from small startup to big player in its field.

"This is where most startups struggle, most startups stumble, most startups fall," Cruit said.

Experts said that bringing in an experienced adviser at this juncture is common.

Several new businesses in fast-moving sectors, such as technology, don't have the luxury of time: Management can't afford to earn while they learn, and they need someone with experience in growing a company quickly, said Erik Gordon, director of M.B.A. programs at the University of Florida's Warrington College of Business Administration.

"For many of these companies there's a very, very slim window of opportunity," he said. "You jump in and get big now, in the next 12 months, or somebody else does."

In one of the best case scenarios, the entrepreneur is flexible and follows the adviser's lead, Gordon said.

But the marriage between company founder and adviser often fails, Gordon said. The most common reason? The adviser and the founder want to take the company in different directions, he said.

"The typical thing is to bring somebody in, it works for 12 to 24 months," Gordon said, "and then there's a parting of the ways."

To avoid such pitfalls, companies should look at both the personality and vision of potential advisers as well as their track record for running companies, said Lisa Melsted, an Internet analyst with the Yankee Group in Boston.

Still, Gordon said entrepreneurs often have to choose between a rock and a hard place: Either they risk losing some control over their business or having it stray from their vision, or they gamble on going it alone and possibly being boxed out of the market.

Back in April, Cruit and Cangialosi and their six employees gathered around tables and black leather couches in the upstairs room of a Federal Hill bar, just days before they moved into temporary office space and started their new company.

An ebullient Cruit gave employees a quick pep talk. "We're all in it together," he told them. "This is a great experiment."

Many new businesses are experiments, a game of trial and error.

"Companies are morphing like crazy right now, trying to hit on the right business model that makes sense," said Tim Miller, president of Webmergers.com, a San Francisco company that researches Internet businesses.

Cruit and Cangialosi began Blue Sky Factory as a Web design company that also developed databases and offered other Internet and consulting services. Though it still designs Web sites, the company today is focused on e-mail marketing.

Like dozens of tech companies large and small, Blue Sky Factory also pared down its staff. The startup, which began with six full-time employees, now has one full-time salesman and a part-time office manager on the payroll. Two saleswomen work on commission.

To save money, the company has sublet space in a lawyer's office upstairs, rather than moving into its own office as originally planned.

Blue Sky Factory has also shifted from a strategy where all work was done in-house to one where small parts of the company's Web design work are handled through a partnership with a Northern Virginia tech firm.

In hindsight, the founders said that hiring a handful of workers and trying to do every job in-house was likely their greatest blunder. "That was probably our biggest mistake," Cangialosi said.

But Cruit and Cangialosi said their new e-mail technology has shown promise. And experts said the company is in a growing field.

As marketing budgets are being slashed, e-mail marketing has exploded because it's cheaper and advertisers can see a direct response, said Shar VanBoskirk, an analyst in the digital marketing group for Forrester Research.

Anthrax scares may have added to the boom. The Direct Marketing Association in New York issued safety guidelines last fall that recommended marketers use e-mail campaigns in conjunction with their mailings.

VanBoskirk added that "this scare alone doesn't mean e-mail marketing wins, direct mail loses."

Blue Sky Factory's founders said the company has in the past few months landed new clients, such as the public relations firm Weber Shandwick Worldwide.

As they try to wrestle already established competitors, experts said the founders of Blue Sky Factory - like executives of many new and growing businesses - now must learn how to think big, but stay small. They must gain new contracts, without adding employees too quickly. And they must improve their core product while still paying close attention to their customers' needs.

For this, Cruit and Cangialosi said they now have the hand of a business veteran: Manning.

Manning said he chose Blue Sky Factory because he believes Cruit and Cangialosi are hard workers. He also believes in their technology, and likes that the two founders have learned to operate on a shoestring budget.

When Cangialosi comes to New York for meetings, for instance, he takes the train and crashes at a friend's house. "He doesn't charter a plane, take his girlfriend and stay at a suite at the Plaza, which, believe me, some of these guys were doing 2 1/2 , three years ago," Manning said.

Though they are still watching their pennies closely, Cruit and Cangialosi said they now earn enough money to cover their living expenses and afford a meal out a few times a week.

But the days are long. Cruit is at his computer developing the e-mail technology and working on campaigns from about 5:30 a.m. until 8 p.m., and Cangialosi spends his days writing proposals and trying to land clients from about 8 a.m. until about 11 p.m.

And with Manning now in the picture, there are even more pressures and more is at stake. "We want Burt to always feel like he made the right decision," Cruit said.

They are also hoping Manning will help with some of their weaknesses, such as building new departments and handling the administrative side of growing a business.

Whether Manning will eventually pump money as well as advice into the company has not been decided.

Cruit and Cangialosi said they have not handed any of the company's control over to Manning so far, though they have been influenced by most of the advice he has passed on.

The pair said they want Blue Sky Factory to become a dominant player in the industry, even if it means eventually giving up some control to get there.

If the company takes off, it could lead to an acquisition or professional management coming in to run it, Manning said. But he and the founders of Blue Sky Factory said either of those possibilities are a long way off.

For now, as this young company starts anew, Cruit and Cangialosi said they are confident that, after months of struggling, they have molded their business into one that can succeed.

"The light is at the end of the tunnel," Cruit said, "and we can safely say it's not an oncoming train."

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