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