Selling Out: why some acquisitions are good and others are bad for Philadelphia business

Remember: I am an individual who is a technology reporter. These are my opinions and should not reflect those of my company Technically Media, nor its technology news site Technically Philly.

Online auction giant eBay bought for $2.4 billion King of Prussia-based e-commerce powerhouse GSI Commerce in March, and I spoke briefly about the deal on WHYY.

As NewsWorks reported, there was immediate concern about the loss of local jobs through contraction and restructuring. In my conversation, I pushed on the notion that there is important value for the region’s perception as a technology hub to have significant exits to point to.

This acquisition, I suggested, can be seen as a good thing.

In doing so, I raised the ire of Old City coworking space Independents Hall co-founder Alex Hillman, who told me he felt strongly that growing companies in Philadelphia was a lot more important than selling out to bigger players elsewhere.

This post is going to argue that we’re both right.

WHAT ARE WE TALKING ABOUT?

Philadelphia hasn’t been much known as a business powerhouse for, oh, I don’t know, maybe a century.

In the second half of the 20th century particularly, with consolidation across a variety of professional and service industries, Center City Philadelphia has become known as mostly the place of middle managers and regional vice presidents, with some prominent exceptions like Comcast, Sunoco, Aramark, Urban Outfitters, (Cigna, for now) among others. Regionally, Wawa is gearing up for something big, and SAP and Bentley Systems are players of important note, but we have a lot more stories about regional executives, like those we’ve seen in the competitive wireless market here.

That means a smaller pyramid of high-paying, white collar jobs, which often comes with other jobs and, yes, the draw of still others who want or need to be in the orbit of major decision makers.

While business woes are nothing new for Philadelphia — a cultural Goliath turned whimpering regional outpost — this city’s high yield, professional IT community has postured itself as a real way to grow jobs, improve perception and bring cache back to the Cradle of Liberty. Something other cities have seen, too.

But, as some like Hillman might rightly suggest, it’s tough to do that when anyone big enough to really impact the region keeps signing the biggest offer sheet, keeping the only Philadelphia beds with CEOs in them inside the Four Seasons.

First, a few examples of companies whose top decision makers aren’t here anymore due to recent sale.

OK, by now, you probably get the point. But here’s a different one.

WHY ACQUISITIONS CAN BE GOOD FOR THE REGION

When that WHYY reporter asked me to assess whether GSI Commerce being bought by eBay would be bad for the region, I answered the only way I could.

I am a technology reporter, focusing mostly on city policy and early stage, consumer-facing startups.  My answer didn’t come from deep knowledge of GSI or eBay’s intentions regarding staff here. My answer was driven by the need for the business community, particularly technology-driven leaders the world over, to have on their lips the news that a Philadelphia area company exited for a few billion dollars.

It was an exciting, cloud-based deal in Philadelphia, a place that, as Inquirer business columnist Mike Armstrong put it in one of the most important columns in Philadelphia news over the past few years, “is home to many big, old companies, but few big, bold companies.”

That is why, yes, entrepreneurs growing their businesses and selling for great profit and whatever other reasons we might offer can be a good thing. Every city — every country — needs a varied ecosystem in any business community, and that certainly includes technology companies selling prominently to other technology companies, even rivals from other cities.

TAKE THE HILL: WHY ACQUISITIONS LIMIT PHILADELPHIA

But here’s why Hillman is also right.

Because for every point the region might get for a high profile acquisition, Philadelphia must get something like a million of them for snubbing convention and pushing to greater heights. As that Armstrong column referenced earlier suggests, though, Comcast is just about the only example of that happening here — as its acquisition of NBC Universal is making it one of the largest media companies in the world.

While I want 10,000 business sharks to bloom here — who chase money to create jobs in Philadelphia — Hillman also sees the need for the community-driven entrepreneur. Companies that identify their sense of place as a contributing factor to their success. These stories in tech are as essential to a region’s attraction and retention of talent as acquisitions and, yes, even likely more so.

We’ve seen this model of hip, young startups who are distinctly not from the Bay Area and are doing so proudly and successfully. Paired with a tech scene and a big, talent-hungry Fortune 500 company spewing out talent, perception can fuel wonder. Some startups in this case that quickly come to mind for me:

  • Groupon in Chicago — the father of a million daily deal startups is the giant of the Second City’s startup community
  • Gowalla in Austin — the location-based social network ended up losing out to FourSquare but in the height of the battle between the two, the tiny Texas town with the interactive design conference to top them all was rocking with one of the hottest companies in the country.
  • SCVNGR in Boston — Sure, the mobile-based scavenger hunt platform was incubated in Philadelphia, but it’s home is in New England.
  • Cheezburger in Seattle – the well-trafficked online comedy site has in audience what it lacks in seriousness and is that national voice (whatever that voice is) from a city with considerably less publishing notoriety than Philadelphia, once a leader in such things.
  • GoDaddy in Scottsdale — the domain registrar and hosting company is almost 15 years old but remains Arizona’s IT face and fit with the Sun Belt scene, makes a case for being something.

In most of these cases, the tech scene has the freelancers, entrepreneurs and startups, along with the buzzy growth machine and a stable giant or two (think Dell near Austin and Microsoft in Seattle). That’s a nice package, but it seems Philadelphia is missing a piece of the puzzle, and that’s what Hillman seems to want most and feel acquisitions hurt that.

CONCLUSION

Will some of those examples be bought out? Almost certainly. But perhaps this is my final unfinished thought.

If Philadelphia proper and its environs succeed at anything in a big way in technology, it’s in the boring and stable world of life sciences. (I want to add education to fit the ‘eds and meds’ tripe, but after watching Wharton-bred Coursekit flee northward at the first opportunity, it’s clear that no one is listening)

And in the boring world of life sciences, buzz rarely extends beyond those narrow industries.

That’s fine, as an economic driver and jobs creator. But I’m also interested in Philadelphia raising its profile nationally and beyond to help attract and retain more entrepreneurs who might duplicate that work and, dare I suggest, build consumer facing products that could push the cycle forward of changing how Philadelphia as a place of business is seen.

Strictly building businesses won’t do that because Philadelphia IT is best at what most people care least about: slowly, carefully constructing a company.

So, yes, build powerful businesses, grow and make corporate headquarters inside the 135-square miles of Philadelphia. Care about community and place, do cool, innovative and even important things with technology and innovation. That is what we’re most lacking in Philadelphia’s technology community to date: those better known, consumer-facing products of buzz and growth and scale.

But understand that those take very different types of entrepreneurs and they are rarer than the ones who are going to execute the best deal possible for investors and themselves. And don’t ignore that we also need a bit of the marketing that acquisitions help provide.

I do wish GSI Commerce would have done the acquiring, rather than being acquired, but I won’t consider it a failure. Because this region needs as much activity in as many different ways as we can get.

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  • http://dangerouslyawesome.com Alex Hillman

    Pretty great post Chris, nice to see how you’ve been ruminating on this since our conversation months ago. A few things that I’ve found myself repeating on the topic since our first talk:

    * Marketing alone isn’t going to help a lousy product. I’m not speaking about the startups themselves in Philadelphia, necessarily. But the region as a “startup hub” is a crappy product. We’re missing guidance. We’re missing leadership. We’re missing experience. We’re missing vision. All of the “good marketing” in the world isn’t going to help us if we can’t fix those problems.

    * I’ve heard another argument on the “for side of regional acquisitions pumping up the ecosystem: the purported “fallout” of an acquisition is two things- money and talent.

    Funny, aren’t those the two biggest things that our region claims it’s missing (rather than acknowledging the real problems at hand)? And yet, we’ve had the half a dozen recent acquisitions you mention, as well as some other historical whoppers. Where’s our golden goose? ;)

    I think this comes from a deeper problem I’m noticing in the genealogy of acquired startups: there’s no involvement or leadership from these companies in the region once they are acquired. I mention genealogical because, at least in SOME cases, there’s recurring founder/investor/advisor DNA in the companies.

    That is to say, when a new (young) company is acquired, its founders don’t have good role models in Philadelphia to show them that, “Hey, congrats on your cashout, you worked really hard for that! Now…before you go running off to the Valley to play pit-boss with your newfound bankroll, there’s some really great, passionate people in Philadelphia who’d really love to learn something from you. Trust me. They need a decent lesson from somebody who’s actually done it. Think you could carve out a little bit of your time and get involved with them. Mentor them. Save them, Obi-Startup Kenobi. You’re they’re only hope.”

    This message can’t come from the existing startups, it sounds too needy. It can’t come from the press, it sounds too pundit-y. It can’t come from the government, they’re too busy getting out of their OWN way.

    Who does it come from? An enlightened leader with a successful exit and a desire to improve the region. Not make it more like Silicon Valley, where there’s dozens of faceless transactions every day. But more like Philadelphia, a place where people get to know the people they do business with. A city that knows the gritty charm of reaching down and pulling up your bootstraps.

    If we’re looking at the value of acquisitions for our region, I think we need to look for ways to make our region a better version of itself before we’re mimicking the patterns of other cities, especially the ones with unproven growth patterns.

  • http://jarv.us John Fazio

    The problem I have with the “national attention” and local inspiration that Philly gets from these exits is that it breeds this “exit mentality” in Philadelphia. When you ask someone about the Philly tech scene they rattle off a list of exits in the past 10-15 years, and rarely mention existing and sustainable local Philly tech companies.

    The exit mentality that we’ve created in Philly, specifically in the higher education venues like UPenn and Drexel, promotes these entrepreneurs to create companies with the sole goal of an exit. Its a cyclical problem that we’re feeding into. By promoting these exits as a way to get us national attention and inspire our local entrepreneurs we are actually creating a negative impact on the personality of our startup community by over-valuing the exit scenario.

    We need entrepreneurs thinking about creating sustainable companies that will stay in Philly and continue to hire in Philly. But as long as we praise and celebritize these exits as the holy-grail of starting a company in Philadelphia, we’re going to be promoting our entrepreneurs to aim for high profile cash outs.

    The mentality in Philly’s startup scene (particularly the B-Schools) is success = exit. That mentality is fed into by our press’ obsession with exits and lack of attention for our smaller sustainable tech startups. It scares the shit out of me that Philly B-School professors actually REQUIRE exit-scenario’s in their business plans. VCs and investors should be worrying about exit strategies– entrepreneurs should we worried about solving problems, and creating companies.

    Until we shift the mentality and praise of our community, we can hardly expect our entrepreneurs to want to stay and build long-term-strategy companies here.

  • http://www.boomi.com Bob Moul

    As the CEO (now GM) of Boomi, just wanted to share that after “selling out” to Dell, I still live here (and def not sleeping in a bed in the Four Seasons :-)), still run the company (adding lots of great jobs), still love Philadelphia and will contribute in any way I can to help others succeed and to help this awesome tech community reach its full potential. I would also be willing to take this discussion offline into some f2f forum to help explain why exits are a vital part of any thriving tech ecosystem if there’s interest.

    Alex – would also love to come visit Indy Hall if you’re willing.

    Bob

  • http://dangerouslyawesome.com Alex Hillman

    Bob, the door’s always open!

  • http://cera.us Chris Cera

    Chris,

    First of all, I subscribed to your blog in July and it’s awesome. Thanks again for another well researched article.

    I think the conversation should be “good vs great” rather than “good vs bad” because overall this type of activity IS good for the city and region. Companies are typically net importers of value from other places (i.e. people, assets, etc), and I think it’s hard to say that is a bad thing. It could be better.

    I’m personally interested in the “national attention” part, but somebody I trust usually convinces me not to waste my time for one reason or another. B2C would clearly have the most impact. Groupon has definitely recast Chicago in a much more visible way than a mostly B2B Chicago company like Navteq which sold to Nokia for $8.1B in 2007 (Navteq had tons of protection around their business and times were much less bubbly back then). I think Groupon is bad for investors seeking long-term shareholder value, so they aren’t the best example, but I wanted to make the point about national attention and B2C. It might also be an example of why national attention could be a bad thing, but that is totally speculative.

    I often think that the best thing any of us startup junkies can do for Philadelphia is to build the next Google, Facebook, Amazon, Apple, or Salesforce that creates a ton of jobs for awesome people, whom in turn love their jobs, the city that they live in, and give back to their communities. I couldn’t agree more with Alex on the need for an “enlightened leader with a successful exit and a desire to improve the region” to help us get there. Some of us in Philly Startup Leaders are working on identifying exactly those people. They are here and willing to help, but need guidance on how they can efficiently contribute to the community.

    I’m sure you’ve heard the old adage that goes something like “every company is for sale at the right price”, and I agree it does take a different type of entrepreneur to say “no” or “never”. When you have shareholders you basically have two businesses, “the market in your business” (demand for your product) and “the market in your stock” (demand for your stock). Investors ultimately care more about the price of your stock. Investors are never bad, but entrepreneurs often take money from people that hold different values. If you didn’t sell them your vision to build the next Google in Philadelphia, then it’s likely they will not support this later.

    I think the person that does create the next Google in Philadelphia will be a founder with that type of vision, and would only have investors that align with that vision. It will happen.

  • http://phillytechnews.blogspot.com Tom Paine

    One thing to remember about GSI is that in addition to the potential for
    greater growth under eBay (don’t know if that will happen though), there are still several pieces left in Michael Rubin’s new holding company, including locally based ShopRunner which has a lot of promise.
    As for GSI, though it built value, it was still a flawed company with a difficult business model that never really got over the hump in terms of profitability. They needed a buyer.