A study by Wharton’s
The region’s IT strengths typically lie in selling products and services in the business-to-business market. As a result, nearly all IT companies in the region are not household names and unknown to many potential investors.
Indeed, Philadelphia-based Comcast is the only $1 billion area company that provides self-branded consumer products or services. "So, it is not surprising that people (even many IT executives interviewed for this study) are not aware of the significant volume of IT activity taking place in this region," the study says.
In fact, the report notes that many of the business people interviewed found it hard to name three or four regional companies with annual sales of $1 billion or more.
The study warns, however, that many Philadelphia-area firms are in dire need of capital to help them grow.
The attempt by the researchers at the Sol C. Snider Entrepreneurial Research Center to assess the health and prospects of what may be Philadelphia’s best-kept business secret comes against a backdrop of phenomenal nationwide growth in the IT industry. Information technology is now America’s largest industry, both in terms of manufacturing employment and total revenues.
According to PricewaterhouseCoopers‘ Money Tree Survey, an ongoing compilation of venture capital expenditures, venture capital investments in the United States hit an all-time high of $14.27 billion in 1998. Investment in IT firms in 1998 represented 66% of this total, up from 60% in 1997.
For their study, the Wharton researchers used the same definition of IT as that of PricewaterhouseCoopers. That definition includes companies doing business in five categories: communications, computers and peripherals, electronics and instrumentation, semiconductors and equipment, and software and information. In addition, the Wharton report defines the Philadelphia region as the area bounded by Princeton, N.J., to the north and east, Wilmington, Del., to the south, and West Chester, Pa., to the west.
In one indication of the Philadelphia area’s contribution to the national IT economy, the database developed for the Wharton study contains 165 regional IT firms. Of those 165 companies, 11 have more than $1 billion in annual revenue and 27 have more than $100 million. Since the database focuses on established and rapidly growing companies, it is likely that many start-up and early-stage firms in the area went uncounted, the study notes.
Venture capitalists have begun to pay attention to IT investment opportunities in the Philadelphia area: there were 46 regional IT deals funded by venture capitalists in 1998, a 44% increase from 1995. "Although it is agreed by most that there is still a gap in capital availability for seed-stage IT ventures in the region, the growth in the total number of IT deals is consistent with anecdotal evidence from this study’s interviews," writes Paul Morin, the study’s author. Morin is a principal of Vector Strategic Management Group.
However, the market for initial public offerings of venture-backed IT companies fell sharply in 1998. IPOs for all U.S. venture-backed IT companies totaled 77 in 1998, a 43% decline from the 134 firms that went public in 1997. This led the Wharton report to declare that the appetite for all but Internet and "brand-name" IPOs has largely dried up.
"This myopia and limited appetite for non-Internet or non-brand name IPOs on the part of public market investors has led to a liquidity challenge for many early-stage non-Internet companies," Morin writes. "Many healthy companies, including a great many serving IT segments with large markets and strong growth prospects, have been virtually locked out of the public equity capital markets."
Among the study’s other findings:
- From 1995 to 1998, more venture capital dollars flowed into the Philadelphia area’s health-care sector than into the region’s IT industry, but not by much – 42% compared with 37%. The overshadowing of IT by health care in the public’s consciousness may be another reason why the growing amount of venture capital being invested in regional IT firms has gone largely unnoticed.
- The Route 128 corridor in Massachusetts has a reputation as a hotbed of IT activity. But over the last 10 years, Pennsylvania and New Jersey each have had more total startups every year than the Route 128 corridor.
- The Philadelphia region is home to a large number of wealthy people, many of whom are part of "angel" investor groups that invest in fledgling companies during the initial seed stage. But many angels do not understand IT deals, and hence do not invest in them. The "lack of an organized angel network that focuses on IT in this region is an impediment to the initiation and incubation" of IT firms, the study says. One entrepreneur told the Wharton researchers that he personally had to visit more than 100 angel investors in an attempt to raise just $500,000.
- As a whole, Philadelphia-area IT firms have performed pretty well for investors. As part of the study, the Wharton researchers created a Greater Philadelphia IT Index. Comprised of 40 stocks, the index serves as a barometer of how regional IT stocks perform relative to other equities. From March 1998 through May 1999, the Greater Philadelphia IT Index underperformed the NASDAQ Composite Index and the Dow Jones Industrial Average, but outperformed the Standard & Poor’s 500 as well the Computer Technology Index, an established index of IT stocks.
The study concludes by noting that some factors -– taxes, the lack of "tech-savvy" angel capital and a dearth of high-tech workers -– are potential roadblocks to regional IT growth. Nonetheless, "these are common in many successful IT regions, and few interviewees felt that these issues were of a significant magnitude to stop the momentum being created in Greater Philadelphia."
