Housing Complex

LivingSocial: Too Big to Fail, But Can it Scale?

Fortify.vc's Jonathon Perrelli says losing LivingSocial would be "catastrophic."

Last week, the D.C. Council considered Mayor Vince Gray's proposal to grant the daily deals behemoth LivingSocial a tax incentive package worth $32.5 million, in the interest of keeping it around. LivingSocial's people came in suits, ready to don the mantle of good corporate citizenship, as is expected of those who receive favors from the District. Their testimony carried the earnest seriousness of a young suitor asking a father—ably played by Councilmember Jack Evans—for his daughter's hand in marriage.

"LivingSocial was born in D.C., we love D.C., and we want to stay in D.C.," professed Lisa Mayr, the company's chief financial officer. "There’s a strong feeling in the company that D.C.’s in our DNA," added senior vice president Andrew Weinstein, after describing all the volunteering LivingSocial employees do in the District.

Councilmember Michael Brown blessed the holy union, trusting that they would go forth and produce jobs for many D.C. residents. But the point of tying the knot with LivingSocial isn't just all the locals they'll hire—or not, as the case may be—which is the District's typical way of looking at economic development. More importantly, it's a demonstration that D.C.'s most high-profile tech success story doesn't need to leave in order to keep growing.

That's what the emissaries of D.C.'s tech community emphasized, at least. Reading from his iPhone, Fortify.vc co-founder Jonathon Perrelli—whom the city had also persuaded to locate here with a little financial help—said it would be "catastrophic" to the tech community if LivingSocial were to be lured away, because the partners who get rich when the company goes public or gets acquired will then reinvest their millions elsewhere. DJ Saul, chief marketing officer with the omnipresent media hybrid iStrategylabs, said that when he talks about why D.C. has a strong tech scene, “Livingsocial is always the first and most powerful oratorical muscle to flex.”

Here's the question, though: Will other companies also come and thrive here if they don't receive the LivingSocial treatment? And can D.C. get to the point where the tech sector is a really significant part of the economy?

Consider Arlington, which has been thinking about its tech sector pretty hard for a while now, and which didn't collapse as completely as the rest of the country when the dot com bubble burst. They have a really robust set of tech companies that serve their biggest employers: The Lockheed Martins, Accentures, and Northrop Grummans of the world, as well as research institutes and government agencies like DARPA and the National Science Foundation. And they've kept taxes low for everybody, for a long time.

"It’s the consistency. We’re very strategic about not being up and down up and down up and down," says Jennifer Ives, director of Arlington County's business investment group. "When you have localities that charge high taxes, and they’re writing checks for one, two, or five companies, somebody has to pay that. And other companies, when their agreement runs out, get stuck paying the bill." [UPDATE, 10:00 a.m., June 13 - It's worth pointing out that Arlington isn't totally above wooing companies with tax breaks.]

To be fair, D.C. has had some pretty significant tech incentives for over a decade now, and Gray wants to strengthen them by expanding their eligibility requirements and making it cheaper to invest in tech companies. But companies that have been here for a long time are often just now learning about them, and new companies find the paperwork daunting. Most of them are one-time or temporary: After a while, the companies that benefit from them will have to pay full freight. Startup D.C. is also working on connecting industry "verticals" like hospitals and hotels to techie problem-solvers, as well as convincing the city's lobbyists and lawyers to try angel investing. Arlington-style infrastructure, though, will take time to develop.

Another fundamental element here is simple ease of doing business, which Evans and the Chamber of Commerce hammer away at every chance they get (the argument has merit, even if they keep using a bullshit study to support it). I checked in with Chris Hertz, who started an IT company in D.C. nearly ten years ago, and now has 60 employees downtown. He also thinks losing LivingSocial would be a big blow, because it brought the mass market appeal that put D.C.'s heretofore unsexy tech scene on the map, attracting other entrepreneurs and investors. But it wouldn't change what companies have to go through when the Office of Tax and Revenue screws something up.

"It's sort of frustrating to see them giving tax incentives to big companies, rather than create improvements that would give D.C. a sustainable competitive advantage," Hertz says. "As long as it's a bad place to do business, your'e going to make these short term concessions. If D.C. was in a good position, they would say 'LivingSocial, why would you ever leave?'"

The electeds know this; they've launched a tax revision commission and an initiative to overhaul business regulations, so we'll see if those go anywhere. Right now though, LivingSocial would leave if the city didn't put something extra on the table, because plenty of other jurisdictions are happy to do so if D.C. doesn't. And besides taxes and regulation—and other tech-specific factors like the availability of software developers and venture capital funding—startups deal with rent.

This is where Matt Yglesias is right. Tech companies want to be close to each other, with very easy access to out-of-town investors, and they often have the resources to afford $50 per square foot (second only to midtown Manhattan). But this city has a lot of big institutional users, and more capacity would lower the barrier for everybody. If the city really wants the tech sector to become a serious force, busting the height limit becomes less of a nice idea, and more of an imperative for growth.

So yes, right now, LivingSocial is too big to fail. Losing it would be a black eye, and especially damaging to the part of D.C.'s tech scene that isn't married to some part of the federal government: If they can't stay and grow in D.C., the logic goes, then who could?

Hopefully, though, the next LivingSocial won't need a tax package. The Chief Financial Officer figures that a company with $100 million in taxable income per year renting 200,000 square feet of Class A office space would lose $10.8 million a year in rent and taxes just by being in the District rather than Chevy Chase and Bethesda. D.C. would really like lots of LivingSocials, but it can't afford to subsidize them all.

In the mean time, here are lots of other ideas, many of which don't cost much at all.

  • D

    One of the District's top priorities should be to diversify it's economy and this deal is a step in that direction. Those that can't see that are being myopic.

  • Anon

    To the extent that repealing the Height Act would incentivize teardowns and redevelopment of older, shorter buildings, it will increase rather than decrease rents.

  • http://istrategylabs.com Peter Corbett

    If you find this topic interesting, come to DC Tech Meetup on July 11th - we'll be having a panel discussion with representatives from Greater Greater Washington, the DC Government and LivingSocial.

    Details: http://www.meetup.com/DC-Tech-Meetup/events/39214222/

    Peter Corbett, CEO, http://istrategylabs.com

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  • Marcus

    LivingSocial isn't really doing too much innovation in terms of technology, are they? It seems like a glorified coupon flyer and largely reaching to think "real" tech companies care that much about this company being here, especially when it the cost is our government going out of it's way to pander to them and lose tax revenue.

  • nextenron

    LivingSocial is too big to fail? Right.

    DC's hope for a new tech economy is resting on a company that is hemorrhaging money and is premised on an easily replicable business model that seems to leave most of its clients with a very sour taste in their mouths. The business owners I know unanimously deride the sort of customer that is brought in by these deals: cheap, hypercritical, and unlikely to repeat their visit. I've unsubscribed from every deal email service as the deals became noticeably more obscure or just cleverly disguised mark-ups on retail. With Amazon, Google, and even the City Paper in on this game, what makes LivingSocial any more likely to survive?

    Forget scalable - I don't see how the model is even sustainable at this level. And furthermore, I don't see why there is any incentive for them to remain in DC. All we've done as a city is thrown a huge favor toward a company that probably won't even exist in 5 years.

  • http://urbanplacesandspaces.blogspot.com Richard Layman

    Living Social is digital direct marketing. So it may seem unique to people who don't know anything about direct marketing or because it is digital. There is a support of the sector issue, but it's true that as a company, it doesn't contribute much to significant technological development, and for their target audience, it's hard to make participating worthwhile economically. + Groupon has its problems as well, which says something about long term investments in the company.

    I agree that general improvements in the regulatory environment matter more.

    I'd be curious about Blackboard, the tech. company that is DC based, that probably has the most scale, that actually produces stuff. (E.g., is an ad sales rep selling online ads a "tech sector employee"?)

    Plus, you can put all the accelerators (another entry by you) downtown, but they don't have the space there to expand economically. U R not right that these companies can afford $50/s.f. (Hell, the warehouse buildings by RI Ave. Metro about the best DC can do on that note.)

    So yes, the height limit is an issue. But no, in the intermediate run (up to 20 years), it won't significantly decrease rents, except marginally, in that it adds to space inventory. It will mostly decrease further escalation.

    Only over long periods of time in a strong market will these kinds of commercial inventory changes have a long term impact on rent in terms of reductions.

    (This is because of DC's strong real estate market orientation and the fact that as a non-industrial city, it lacks an inventory of the kinds of huge industrial and warehouse buildings that seed innovation elsewhere.)

  • Rik O.

    Why is the tax paying public always paying bribes to the private sector?

  • kob

    I don't see how DC can compete without tax breaks. This area is almost as expensive as San Francisco/Silicon Valley and that's without the massive labor pool and instant connection to VC funding.

    DC is also competing more directly against NYC, which has a dynamic tech sector and is getting government support in a serious way, including plans to build a technology-focused campus on one of NYC's islands.

    Boston's university system churns out more tech-focus grads than DC's universities, which are really focused on law and PR and foreign stuff.

    If you can afford the rent and the salaries, NYC and San Francisco are far better choices than DC. A lot of tech firms are also heading to Austin, Colorado and even Detroit, which offers low rent, an interesting urban environment and genuine buzz. Seattle remains very popular.

    DC is a nice place to start a tech business but it's rarely the first choice.

    But DC does have its attractions. It has one of the nation's strongest technical labor pools, although many of these workers are focused on government related industries and not start-ups. That doesn't mean they can't be recruited. There is a VC community here and a growing start-up culture, so things are moving in the right direction.

    The problem, really, is that people in DC think too much.

    Instead of just giving the tax break to create jobs and foster industries, this community engages in a never ending debate about the wisdom of such a move.

    This over analysis of the obvious is DC's greatest obstacle to developing its tech sector.

  • Sue

    As said below, LivingSocial is not a tech company, so how can it truly benefit development of the tech sector?

    Meanwhile, they are poised to crash and burn.

    Sure, give them tax breaks just so long as they have to offset real profits over time. That'll end up costing us taxpayers little.

    On the other hand, tax breaks aimed at subsidizing employment in a fad, investment-destroying business -- not so smart...

  • DC Home

    This is a very thoughtful, complete and well written article. I hope council reads it. Excellent piece of reporting!

  • kob

    >As said below, LivingSocial is not a tech company, so how can it truly benefit development of the tech sector?<

    They are a tech company. It is a product of social media. It has, no doubt, a large development and IT staff. It is absolutely a tech firm. And it is hiring technical positions.

    Companies like LivingSocial help the tech sector in much the same Facebook has helped the tech sector.

    If LivingSocial can make the transition to public company, it will bring in more investment and create more tech development jobs. The people who work at LivingSocial who cash out will likely form their own firms or invest in new tech firms.

    This is how tech sectors are built. Absolutely.

    If you think otherwise, why don't tell Chicago that it would be better off without Groupon, since it's just a glorified coupon operation as well.

  • Anon

    Sometimes I just shake my head. This town is ridiculous.

    So DC will hang a ~30 million dollar carrot out there to convince an unproven fledgling (non-technology) business to keep a few hundred low paying marketing jobs in DC (LS has 1000 DC employees but less than half actually live in the District), but won't bother spending ~9 or 15 million respectively when someone like VW or Northrup Grumman is moving their headquarters to town, bringing decades of proven billions in earnings and high income white collar professionals to boot?

    LivingSocial lost 500 million last year. Their "growth" is entirely funded by the venture capitalists who are just keeping the money flowing enough so that LS goes IPO and they can rake in the billions from their investment and run for the doors (like Facebook).

    Someone above already mentioned, Groupon is many times living socials size, and with deep pocketed profit makers like Amazon now in the breech, it will be a matter of a few years before LS goes the way of so many "techs".

    This money is just going to be wasted. Might as well spend it on more cutsey cupcake shops...because DC obviously doesn't have enough of those.

  • http://urbanplacesandspaces.blogspot.com Richard Layman

    DC offered $ to Northrop Grumman, DC offered $ to Hilton. I don't know about VW.

    Given the amount of NG installations in VA, it's not a surprise that they chose to locate in VA. WRT Hilton, their CEO lives in NOVA. "We" tried to get them to locate in NOMA (there is a low end Hilton there), they weren't interested. The high end Hiltons that are present in DC don't have cheap or vacant office buildings proximate.

  • Anon


    They made ridiculous childlike offers. The winning bids were for 9 and 15 million for those two companies, and while there were some minor issues along the edges both companies made a public showing of "the most money wins".

    So no, DC didn't compete for those two companies, VW either. But the city can somehow justify spending ~30 million on some unproven fledgling (non-technology) business to keep a few hundred low paying marketing jobs in DC.

    DC needs to get serious about economic development, because the FFX and Mont Co's make DC look like a childs operation

  • AC

    Mayor Gray - quite simply you are not creating a sustainable system when you give these large incentives, allow competitive advantage to work. How many millions are you going to give my business? DC does have an inherent problem though, the rents are too high and we get stale national chains because of this (in all sectors) and can't get cool small businesses, or tech startups. This hurts our city culture. Do not yet Living Social be the pouting child that gets their way. They are a great company and if they are smart they will reduce their overhead (cut some of their ridiculously expensive real estate in Chinatown) and reduce overhead, and remain in a city that is burgeoning with creativity and potential.

  • http://widness.blogspot.com/ Widness

    Late to this post, but as a former AOLer, I think one of the more overlooked bad moves AOL made was consolidating almost all of their employees in Ashburn.

    They once had offices in Reston, Tysons and even DC proper.

    The consolidation made attracting new people harder and it made mediocre people stay longer, even if they should have moved on.

    It's bad for traffic, and it's bad for innovation.

    Good for LivingSocial for getting the best deal possible, but the risk of them skipping town may be overstated.

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