An entrepreneurial spirit grows in Phila.

Posted: August 24, 2012

The reasons for Philadelphia's distant also-ran finish in the first 30 years of America's tech boom are numerous and complicated, but two stand out: 1) the city's anemic entrepreneurial culture; 2) a tax structure that's been outright hostile to start-ups and the investors who fund them.

But with the news last week that the hotshot investment firm First Round Capital was moving to Philadelphia, there's reason to hope the city need not be shut out of the economy-goosing tech sector forever.

That's due in part to the fact that the tax climate - at least as it applies to entrepreneurs and the investors who fund them - has improved considerably and is scheduled to become more favorable still in the years to come.

Second, there are signs that Philadelphia is reaching something of an entrepreneurial critical mass, with enough new companies, and enough of a support network for those start-ups, for it to make good business sense for a firm as accomplished as First Round to set up shop here.

"I'm done sitting on the sidelines, and so is First Round Capital," the company's founder, Josh Kopelman, wrote in an exuberant blog post announcing the move last week. "I'm trading my sterile suburban office park environment . . . for proximity to Philadelphia's entrepreneurs."

In recent years, Kopelman - who made his fortune selling Half.com to eBay for $350 million - has become a Philadelphia booster of the first order. But you don't move a firm like First Round - one of the most highly regarded venture capital companies in the nation - just because you're a cheerleader.

"He's doing it out of civic pride, but also enlightened self-interest," said Alan Greenberger, the city's deputy mayor for economic development.

Venture capital firms like to set up shop close to the companies they do business with, the better to keep an eye on their sizable investments. So it makes sense that First Round chose a decommissioned bowling alley at 40th and Locust Streets in University City, just 21/2 blocks from the Wharton School, a place that churns out talented young entrepreneurs like Hershey's produces chocolates.

Tragically for Philadelphia's economy, the overwhelming majority of those Wharton entrepreneurs quickly pack up for the West Coast or New York. The hope now - and I don't think it's a crazy one - is that having someone like Kopelman in town could persuade a few of those graduates that Philadelphia is a pretty good place to start a business.

First Round Capital's new headquarters (which, felicitously, was also the first storefront of the homegrown retail giant Urban Outfitters) is way too big for the 10 employees who will work out of the space. And so the company is sharing its digs with five start-ups, including a social-media analytics outfit called Curulate, and Technically Media, which publishes Technically Philly. There will also be desks for a couple of dozen "drop-in" entrepreneurs.

The package for a young entrepreneur is pretty attractive. Seed money. Office space. And easy access to guys like Kopelman who know what it takes to build a successful company.

So this is obviously a big win for Philadelphia. The city hasn't just lured one company. It has snagged a proven start-up incubator with the potential to create many more Philadelphia-based businesses. And, in time, that means jobs and tax revenue.

Ah, yes, taxes. Odds are First Round would not have made this move were it not for the low-profile passage in April of an ordinance introduced by at-large City Councilman Bill Green. The legislation - a version of which the Nutter administration was independently considering at the same time - exempts partners in investment funds from paying business taxes on the profits earned off those funds.

In other words, had they moved in March, Kopelman and his partners would have had to pay the city 6.5 percent of their investment profits. Now, they won't have to pay a dime in business taxes on their fund's profits, no matter how much cash it generates.

On one level, that is absolutely infuriating.

And yet, I don't know that Philadelphia had a choice: The fact is, investment funds were already exempted from these sorts of business taxes in cities around the country. Before the local exemption, investment partnerships like First Round Capital either avoided Philadelphia - the taxable business activity in this sector was close to zero - or set up shop in the special Keystone Opportunity Zones (like the Cira Centre), where the tax breaks are even more generous.

But that, argues activist Stan Shapiro, is a poor excuse for Philadelphia to join the "race to the bottom."

"I recognize that it's difficult for one jurisdiction by itself to say no to if everybody else is saying yes," he said. "But someone has got to be a leader."

Greenberger dismisses the notion that the city can go against a nationwide trend and win.

"We don't get that luxury. We have to be competitive, and this is a baseline requirement for being competitive," he said, noting that First Round's employees will pay city wage taxes.

Green would like to see the city extend the favorable tax treatment to all businesses.

"In the long run, this Band-Aid approach to fixing the tax structure isn't ideal. We need major systemic change," Green said. "But you've got to do it for a few industries and prove that it works."

First Round Capital's relocation is a strong argument that it does.


Patrick Kerkstra is a freelance journalist and former Inquirer staff writer. He can be reached at Patrick@PatrickKerkstra.com, or followed on Twitter @pkerkstra.

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