CEO Insights is a new series on the RBTC blog that features technology and business perspectives from the RBTC President and CEO, Jonathan Whitt.
When we think of saying goodbye, we usually don’t want to say that to the locally-owned companies that leave our community. A recent Roanoke Times editorial mentions Heyo and Interactive Achievement as two such examples. However, the recent “exits” of these high-tech start-ups demonstrates the workings of a healthy, growth-oriented entrepreneurial ecosystem in our community. They are not our first either, in fact there have been several others over the past few years. Let me explain why that’s a good sign for our community.
A prime example of this is the story of ITT, which was a pioneer in fiber optics and spawned the creation of Optical Cable Corporation. Then there’s also Innotech, which led to Pixel Optics (and a few other companies), not to mention New River Pharmaceuticals, which was followed by Intrexon. When these companies “went public” (via IPOs) their exits seeded the next generation of entrepreneurs and the entrance of new prosperous locally-owned technology companies, which in turn strengthened our community.
All companies have lifecycles and if successful, it may include selling to a larger company. These company exits cultivate an innovative environment in the region that attracts smart entrepreneurs. It also cultivates an ecosystem that continually refreshes an infrastructure to support creativity and risk taking. Ultimately, this leads to more successful companies. This environment creates profitable, diverse businesses, quality jobs, and the building of local wealth for both entrepreneurs and investors. An entrepreneurial economy strengthens the community with tax revenues, philanthropy, new business leaders, and investments into other businesses.
Consider these facts when thinking about the recent press about job losses. Most jobs in our region (84%) are from “homegrown” or “resident” businesses and the number of these jobs have dramatically increased over time. Since 2009, “non-resident” companies (out-of-state headquartered), have lost 9,000 jobs compared to a growth of 37,000 from our resident businesses.
Privco’s 2014 Private Tech Company M&A Research Report states that the number of tech companies worth acquiring is the ultimate barometer that a city is a top-notch tech hub. Another example of a local high-growth technology company that started as a homegrown business is Webmail.us. Webmail.us grew dramatically and was acquired by Rackspace in 2007, which shifted it into the non-resident category, but it was able to grow its customer and revenue base significantly, opening a new building in 2014. Rackspace has expanded from 73 to more than125 employees since 2009 and continues to do well, and it certainly bucks the trend of non-resident businesses losing jobs.
In the March 2015 Kauffman Report (private educational foundation), one of the four indicators used to measure the vibrancy of an entrepreneurial ecosystem is connectivity. Entrepreneurs thrive in a community where they’re able to obtain knowledge and assistance from a variety of sources. But it’s the connectivity between these organizations that help build a strong entrepreneurial network. These “dealmaker” organizations serve as mediators in the formation of new firms. Locally, the connectivity between the RBTC, economic and workforce development organizations, higher education institutions, and other business organizations supports this type of activity. More importantly, observing connectivity over time, the Kauffman Report states that one way connectivity manifests itself is through spinoffs. “The entrepreneurial ‘genealogy’ of a given region, as measured by links between entrepreneurs and existing companies, is an important indicator of sustained vibrancy.” In Silicon Valley, generations of spinoffs have helped periods of business renewal. Closer to home, as well as in secondary technology markets like Austin, Boulder, and Seattle, exits of companies provide the fertile ground for new companies and job creation.
In a Progressive Policy Institute memo: “Innovation by Acquisition-New Dynamics of High-Tech Competition,” the dynamic described is similar to what we’ve seen in our region. “An increase in start-up activity potentially leads to an increase in the number of successful startups – companies whose innovative products and services find a large enough market to warrant going public or being acquired. That gives us a feedback loop – a higher rate of acquisition accelerates the rate of startups and innovation, while an increase in the rate of startups and innovation forces large companies to speed up their rate of acquisition.” Historical trends show that innovations derived from acquisitions are positively correlated with employment growth. “Successful acquisitions are both a cause of and a consequence of rapid innovation, and innovation spurs economic growth and job creation.”
It can be said with confidence that technology acquisitions, like those seen in our community, encourage innovation and are usually associated with gains in economic growth and job creation. This cycle of constant innovation, acquisitions, reinvestment, and new company start-ups leads to a sustainable economic growth pattern for our region and one that we need to continue to champion and celebrate.