strategies in the new economy:
roll-up or not, is it right for you?
become a popular acquisition strategy in a business environment as fractured and formative
as today's Internet space. While they often make sense, they can also simply magnify an
already weak business plan. When they work, when they don't and whether netpreneurs should
consider becoming part of a roll-up was explored at this Netpreneur Program Coffee &
DoughNets meeting, April 22, 1999, produced by the Morino Institute (http://morino.org).
made at Netpreneur events and recorded here reflect solely the views
of the speakers and have not been reviewed or researched for
accuracy or truthfulness. These statements in no way reflect the
opinions or beliefs of the Morino Institute, Netpreneur.org or any
of their affiliates, agents, officers or directors. The transcript
is provided "as is" and your use is at your own risk.
1999, Morino Institute. All rights reserved. Edited for length and
Good morning. We certainly have a lively crowd this morning. We're delighted to have two
business leaders with us today who can share their experiences in
netpreneurship and their business strategies with regard to a very
prominent phenomenon in the Net world—business roll-ups.
Drew Clark is president of Verio East (http://www.verio.com), a company that
has grown through acquisition, including the acquisition of ClarkNet,
the Internet service provider (ISP) that Drew founded with his cousin
Jamie Clark. He'll be
joined on the panel by Nelson Carbonell, president and CEO of Alta
Software (http://www.altasoft.com). Alta is one of the region's
Fast 50 companies, and Nelson has some interesting perspectives on the
topic of roll-ups.
Our panel will be moderated by a journalist who has been
examining high-tech companies in the region for the last six years,
Bob Starzynski, the editor of TechCapital magzine (http://techcapital.com). We'll begin with opening
remarks from Bob, followed by comments from Drew and Nelson, then
we'll open the floor to your questions.
bob starzynski: background
Before we get started,
let me take a minute to insult your intelligence and explain what a
roll-up is. A roll-up is
not just the acquisition of businesses; it is taking a series of small
businesses in the same or similar markets and combining them to create
a large business. It's
been a popular model recently, and the people who have put these
companies together have touted their benefits. Among other things, they say
that roll-ups afford a company the opportunity to attract bigger
clients, to buy materials and services in quantity more cheaply, and
to keep administrative and overhead costs down by eliminating the
overlap of services.
At the same time, other people say that roll-ups aren't all
they're cracked up to be. One
of the things that spurred this morning's topic is a letter that I
wrote in TechCapital, the basic message of which was "beware of
the roll-up" (http://188.8.131.52/vol2_no6/department/92-1.html). I
don't think that roll-ups are inherently bad or evil, but I do think
that roll-up strategies, if done for the wrong reasons, can be
troublesome. For example,
if you roll up stagnant businesses, all you're creating is a larger
stagnant business. Once
you stop acquiring, your top line growth is going to stop because
you're acquiring companies that weren't growing in the first place. That aside, if you're putting
together businesses that are growing in a rapidly growing industry,
you stand a good chance of continuing growth once companies are joined
By the way, one of our speakers, Nelson Carbonell, responded to
my column with a letter of his own (http://184.108.40.206/vol3_no1/department/105-2.html), expressing some of his
concerns with roll-up strategies, primarily with the integration of
Let's hear from Drew Clark to begin with, however, for
his first hand experience with Verio's roll-up acquisition of ClarkNet.
drew clark: "poof,"
you're a company
Thanks, Bob. Good morning, everybody.
The roll-up strategy dilemma is one that needs some fine
tuning. The early stage
"poof" transactions we have seen implemented a number of
times are different from building a business through the acquisition
of strong players in a particular industry and gaining economies of
scale, expertise or strategic advantages from those organizations. There are some companies that
go out and say, "We're going to sign up everybody to this great
agreement and, in a certain period of time, we'll become one company,
but it's all contingent on equity markets and raising a lot of
cash." That kind of
"poof" transaction is different from building a company
through a grass roots effort where you go out and identify the
companies, do a lot of due diligence and decide that it fits into the
vision you've created. You
may or may not ultimately go into the public equity or debt markets to
My old company, ClarkNet, was founded by my cousin, Jamie, who
got the idea to create a local ISP through some of his graduate school
programs at Johns Hopkins University.
He had some very difficult times getting connected to the Net
back in that period, 1992 and 1993.
When he first set up shop, he had a 56K line with Sprint, and
thought he was the king of the world.
Clarknet was the first deaf-owned ISP in the country and only
the second ISP in the Greater Washington region.
Jamie had a vision which he wanted to build up over time. As most of you know, the technology in this space is changing
so rapidly—hardware, operating systems, compression technologies at
the local loop level and throughout the Net. As time passed and
technologies changed, we had to keep asking ourselves, "Can we
continue to invest in the company to provide the level of service and
the level of products that the marketplace is demanding?" At some point, the answer became, "No, we probably
We could give it another three to five years, maybe, if we were
lucky, but what would we have had at the end?
Could we attract the kind of people we had brought on in the
early stages of ClarkNet and continue to have the level of expertise
from an engineering perspective and from our sales folks? Could we be competitive in the
human resources component? The answer was, "Probably not in the
There were a host of other issues. Could we be attractive to
local, regional or national banking institutions to provide us with
working capital? In the
past we had been fortunate, through Jamie's skills and his recognition
as Small Businessperson of the Year in Maryland, to have attracted
some Small Business Administration financing which helped us build
from the milking barn to a real facility, operating as a true
We looked at those types of issues. They are the kind of
challenges most entrepreneurs face every month. Can I do payroll next month? Will our people walk down the
street to work for competitor XYZ which has more resources, a more
attractive benefits program or more stability than we have today? Entrepreneurs are constantly
struggling with those decisions each and every day—keeping the
company afloat, maintaining the organization, driving the company to
the next level. You
overcome those hurdles and you feel good about it. At the end of the week, you
know you'll catch up this weekend and start over on Monday.
The Verio deal had risk associated with it. It was a venture
capital-financed private company.
Fortunately, one of the things we also evaluated was the
culture and the management team that had been put in place at Verio to
take the company to the next level.
We felt very comfortable.
We felt there were a lot of opportunities to grow with Verio.
That's another fork in the road where people must stop to
consider. If you're going
to participate in a roll-up strategy or become part of an acquisitive
company, what's the role for you in the future? Will you have a place in the
company? Can you commit
to that organization? Does
it have the same values and beliefs that you do? That's important. At some point, you may make
the decision that you're interested in selling your company, but not
staying with it. Hopefully,
you make enough money that you can go off and do another
entrepreneurial activity, or just go off and play golf. There are a lot of decisions
you have to make in arriving at the right exit strategy for you. If you're in the technology
marketplace today, and you have any type of success whatsoever,
chances are pretty good that somebody is contacting you, interested in
having you participate as part of their team. They want to acquire you and
let you go on about your way, or they want to acquire you and have you
become an important contributor.
We were fortunate with Verio.
They've been very successful in growing organically as well as
growing through the acquisition process. It's been an interesting and
very rewarding experience, much different from being an entrepreneur
in the barn at ClarkNet and worrying about rebooting modems at 2 a.m. It's been a good experience
for our folks and it's provided a lot of different opportunities for
our people to grow both intellectually and financially. We have a benefits package and
a set of solutions that we can feel good about each and every day, and
not have to worry about some of the hurdles we all face as
I'm a proponent of an acquisition strategy that makes sense. As Bob said, if you acquire
stagnant companies or businesses that don't have future potential,
what's the point? Perhaps
there are some economies of scale you gain, but if you're not going to
build a company for the long term, then I'm not sure the roll-up
strategy is one that makes sense for an entrepreneur. If, at the end of the process,
you have paper value that isn't rock solid, it's not necessarily
liquidity for you. You
have to consider the situations of cash versus equity or some other
compensations when you sell your company.
Mr. Starzynski: Can you tell us how many
companies were rolled together with Verio and how big the company is
Mr. Clark: Verio was formed in March of
1996 with venture capital from Centennial Funds and a few other folks
who participated in the initial seed financing. The idea was that the ISP
space was very fragmented, and there were opportunities to pool these
local companies together. If
you look at some of the leverage points, economies of scale and
opportunities to create value in that market, it lends itself well to
that strategy. You're
talking about backbone and infrastructure, things you have to buy from
somebody. The larger your
capacity requirements are, the more economies you can get with the
long-haul providers. At
the time of Verio's public offering, I think we had acquired and
incorporated about 36 companies that were predominantly regional ISPs. We've also done a number of
acquisitions subsequently in the Web hosting environment. Today's count, I think, is
close to 50 companies that have been incorporated into the Verio
family. That public
offering was in June of 1997, for about $150 million, and we did
another high yield debt offering last May. It's been a fairly aggressive
acquisition strategy, and, I will tell you, it's not been without a
lot of bumps in the road. You
start talking about trying to get people unified on administrative
platforms, on billing platforms, on customer care platforms. There are times when you're
trying to establish software functions across 40+ companies. The challenges of culture and
the challenges of integration are absolutely there. We've been pretty successful
in handling most of them, but we certainly had our bumps in the road. We continue to look to improve
our economies of service and our networks. It's been a plus for us and a
plus for Verio.
(strategy), stage left
Thank you. At Alta Software, we basically build custom applications for
the Web. We're a Web
engineering company, which is different from building Web sites
because we rarely work on front-end content. We usually work on putting
together the back-end applications to make something like an
E-commerce system work. Our
claim to fame is that we built and deployed sites last year for major
Fortune 500 companies, such as First Union and Equifax. Alta was started about six
years ago. Over those six
years we've had dark days, bright days, ups and downs. I'm sure those of you who are
entrepreneurs can relate to that.
During one of the dark days, I started thinking about exit
strategies. I can tell
you that my perspective on exit strategies ebbs and flows with the
numbers. Whenever things
are bad, I'm always thinking about exit strategies. Maybe I can get out of it what
I put into it. When
things are going well, I never think about exit strategies. Right now we're in heady
times, so I haven't thought about exit strategies for about 18 months.
All of the Internet professional services roll-ups have
approached us over a period of time, some of the famous public ones and some of the
ones yet to be public. Research
is an unbelievable thing. Every
single one of them found us. I
I sat in a room with one of them who said, "Why don't you
tell me a little bit about your company?" Two minutes into my talk about
how great we were, he said, "I want to buy you." I just sat there for a second. The only words that could come
into my head were, "Can't you kiss me first?"
See, when I look at our business, there are two constituencies
we have to serve. One is
our customers who come to us based on trust. How does someone trust you
that's never met you? They
trust you based on reputation and how you interact with them. Our customer gets delivery of
the product we built for them after they pay us. Maybe they have a little bit
left at the end, but, for the most part, there's a leap of faith that
they have to make. For many of our customers, we are the second,
third, and in one case, I think the fifth try at actually deploying
something significant on the Web.
We're dealing with people who have a lot of experience, who
have hit all the bumps, including some they never thought they would
hit. That's one
The other constituency is our employees. We are only as good as each
person that we hire and their ability to execute a job with a
When I think about a roll-up strategy, I imagine that I'm one
of my customers who picks up the newspaper and reads that Alta
Software has joined roll-up XYZ.
I wonder how that makes him feel. Does it make him feel good? He's thinking, "Most of
the people are going to be independently wealthy, so that means
they're going to give me better service, right? Not likely."
From an employee standpoint, we spend a lot of time talking
about how to build a culture. Our
turnover rate has been below 3%.
How do we retain those people?
We have a value proposition with them that they don't have just
a job; they're working and building a company that's going to last a
long time. Our strategy
has been to look at the big players in the professional services
industry, the Andersen Consultings of the world and so forth. Those weren't roll-ups. Those were organically built
cultures. You've heard
about the Andersen culture. The
reason for that notoriety is that they provide a consistent quality of
service for their customers—whether you think it's good, bad or
indifferent. We believe
that's a successful strategy and we employ it. If we can make sure that every
one of our customers succeeds, that every one of our customers gets
the best quality of service we can possibly provide for them, then we
believe that's going to lead to more customers and growing our
Some data points. Our
run rate is over $20 million now, and we've been growing about 25%
quarter-to-quarter, so, by the end of the year, it should be up to
about $45 million. We've
done that without acquisitions and without outside capital. I think, fundamentally, that
the people in our company believe we can build a business one person
at a time, one customer at a time.
Right now, it's kind of hard to read the paper and find out
about people going public and raising $500 million, but, three years
from now, maybe it won't be so hard when we have a business that's
built to last.