(McLean, VA — April 22, 1999) It was a debate in which both sides agreed on the fundamental principle—roll-ups can be a good business strategy...sometimes for some companies. They can also be a mistake, however, so when and why become the big questions. The two entrepreneurs who spoke at this morning's Netpreneur Program Coffee & DoughNets meeting have arrived at different answers to those questions for their businesses.

Drew Clark, President of Verio East (http://www.verio.com), is the self-described "accountant with an attitude," who presented some of the why-fors of roll-ups, including why he helped sell his former company, ClarkNet, to Verio in that company's roll-up of local ISPs. Nelson Carbonell is President and CEO of Alta Software (http://www.altasoft.com), a custom application developer for the Web. This software engineer-cum-entrepreneur has turned down more than a few roll-up minded suitors. Between them was moderator Bob Starzynski, editor of TechCapital magazine, whose recent commentary inspired the topic, "Business Strategies in the New Economy: Roll-Up Or Not...Is It Right For You?"

Just what is a roll-up? It's a strategy for buying and combining a series of small businesses in the same or very closely related markets into a large business. Carbonell called them, "acquisitions on steroids," but for entrepreneurs like Drew Clark and his cousin Jamie, who founded ClarkNet in 1992 as just the second ISP in the Greater Washington region, it was the only strategy that made sense in such a rapidly changing and competitive marketplace.

Before going with Verio, the Clarks asked themselves a series of questions: Could they continue to invest in the company to provide service levels which the market was demanding? Could they continue to attract the caliber of employees they had in the early days? Could they continue to be attractive to banking institutions? These are questions every entrepreneur answers every day, but after six years in business, the answers were starting to come up, "No."

"Fortunately," remembered Clark, "one of the things we also evaluated was the culture and the management team that had been put in place to take Verio to the next level." They felt comfortable with that mix and confident that there were opportunities for them to grow with Verio. "If you're going to participate in a roll-up strategy or become part of an acquisitive company," he asked, "what's the role for you in the future? Can you commit to that organization? Does it have the same values and same beliefs that you do?"

Why do companies pursue a roll-up strategy? Among other reasons, it offers the opportunity to attract bigger clients, purchase materials and services more cheaply, reduce administrative costs, acquire a competitor's customer base or become more attractive to the skilled technologists who are in such short supply. Basically, to grow big, fast.

"I don't think they [roll-ups] are inherently good or evil," said Starzynski to open the session, "but if done for the wrong reasons, they can be troublesome." Some of those wrong reasons include rolling up stagnant companies to give the illusion of growth, when strategy and tactics are too tightly contingent upon equity markets or "poof transactions," and when the acquired entrepreneurs are not really ready to let go.

It's all a matter of your goals as an entrepreneur, because every position has two sides. Take the question of employees. For Clark, one of the advantages of being part of the Verio roll-up is that the company can attract better technologists because they can now offer different and more challenging projects. For Carbonell, it's exactly the opposite. In a service business like his, he's more concerned with keeping the proven employees who have relationships with customers. That becomes harder after the culture shock and personal fortunes which can result from being acquired.

In fact, most of the arguments for the roll-up seem to revolve around wealth and exit strategies. "Whenever they tell you it's not about money," laughs Clark, quoting Mark Twain, "it's about money."

Perhaps audience member Charles Owens of AbleMedia (http://ablemedia.com) put his finger on it. A former investment banker involved in numerous roll-ups in other industries, Owens suggested, "Those roll-ups were investor strategies. They weren't entrepreneurial strategies and we rolled up entities which, as far as management was concerned, were passive management entities. . . . The idea of rolling up 50 companies is strictly an investor play. I can't imagine it being in the interest, primarily, of the entrepreneur."

Carbonell's take on it is, "if you think you're done, then sell. If you think you're not done, then don't. And if you think that you can sell without being done, well, most people end up disappointed in that. I always imagine it's a challenge to manage a company where 40 guys used to be president of their companies."

One audience member, Arnold Kling from homefair.com (http://www.homefair.com) likened that kind of situation to "trying to roll up several rock-and-roll bands into an orchestra."

"If the value proposition from the roll-up-er is 'We can get you away from all of that stuff you don't want to do,' then why did you become an entrepreneur to begin with?" asks Carbonell.

So what's the answer? Roll up or stand pat? Each decision will be different because of the players and contracts involved. Just take the time to do your homework and know what you want from the deal. You can't even generalize about the nuts-and-bolts, because something as basic as transition periods can range from 30 days to three years. Clark's advice? "You have to figure out the true value of what you're receiving for what you're giving up. At the end of the day, are you comfortable with that exchange?"

Copyright 1999, Morino Institute. All rights reserved.