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When Midwest Startups Sell, Their Hometown Schools Often Lose

When Midwest Startups Sell, Their Hometown Schools Often Lose

(Bloomberg Businessweek) -- City officials in Columbus, Ohio, could hardly believe their luck. In less than a decade, $850,000 worth of state dollars for local startup CoverMyMeds appeared to have paid off many times over. Drug distribution giant McKesson Corp. acquired the company for $1.3 billion, a state record. At each stage of its development, CoverMyMeds, which makes software that automates insurance approvals for prescription drugs and sells it to doctors and pharmacists, had been nurtured by public money. The deal seemed to vindicate the local boosters who’d steered millions of dollars’ worth of public funds into tax incentives and other support for Ohio’s fledgling startup scene.

That was two years ago. Today roughly 1,000 of Columbus’s 4,300 public schoolteachers are spending part of their summer vacation near CoverMyMeds’ downtown headquarters, protesting the property tax abatements that followed. Since McKesson acquired CoverMyMeds, in 2017, it’s received an additional $55 million worth of tax breaks from the city, even as Columbus was slashing its education budget and programs to reckon with mounting deficits. The teachers say that their politicians shouldn’t have taken the company’s threats to move CoverMyMeds and its 1,000 employees to the suburbs so seriously, and that McKesson, which reports about $2 billion in profits most years, can afford to pay its own way.

“They want to feel like they are good neighbors,” says John Coneglio, president of the teachers union. “Well, what’s best for your community is to pay your taxes.” CoverMyMeds said in a statement that the undeveloped land where its new offices will be built had generated only $32,821 for the school district and will now bring in $649,000 a year. But under the deal, the school district, Ohio’s largest, must wait 15 years before the company pays its full $3.6 million annual tax bill.

Development officials in Columbus say tax incentives are critical to keeping companies such as CoverMyMeds, which are “inherently portable,” according to the city’s development director, Steve Schoeny. Yet this spring, McKesson moved its own headquarters from San Francisco to Irving, Texas, without getting a dime to do so. (It was offered incentives earlier in its development in Texas but didn’t meet the requirements needed to collect them.) Pittsburgh hasn’t given MModal, its homegrown maker of transcription software, any more tax breaks since 3M Co. bought the company for $1 billion in December. “Anyone that has that kind of money will always say, ‘We’ll just go somewhere else,’ ” Coneglio says. “Well, you don’t know if you don’t say no. What about saying no?”

Saying no has proven a tough proposition for cities throughout America’s Midwest. While tech startups are far from the only businesses seeking tax incentives wherever they can, their success almost always means an exit that siphons money away from the region to venture investors elsewhere, even as the new parent company demands more subsidies from the startup’s hometown. “It’s a horrible irony,” says John Austin, director of the Michigan Economic Center, who says only early-stage startups should benefit from public funds. “We don’t end up the home of the money and control. You are subsidizing an entity that’s going to do what it wants anyway, and giving away dollars that could educate your local population to a higher level or build your transportation system to make the region more vibrant.”

The protests in Columbus against CoverMyMeds may represent a new front amid a wave of teachers strikes, which until now haven’t called out a homegrown startup by name. Educators in particular are pressing the issue, faced with crumbling schools and stagnant pay. In Indiana, where teacher salaries have fallen and schools are struggling to close funding gaps, the capital city of Indianapolis has given ExactTarget, a software company that automates email marketing, some $60 million in tax abatements to stick around: $43 million prior to its $2.5 billion acquisition by Salesforce.com Inc. six years ago, and $18 million since.

“The abatements in Indiana are a killer,” says Jennifer McCormick, Indiana’s schools superintendent, adding that Salesforce’s $1.7 million in grants to the Indianapolis Public Schools doesn’t make up for the millions more the district might have seen had the company just paid its taxes. Salesforce, which is based in San Francisco and has a market value greater than $120 billion, declined to comment on whether the incentives were determinative.

City officials aren’t crazy to think valuable startups might move elsewhere. St. Louis still rues letting Square, the digital credit-processing company, move to San Francisco in 2009 without a fight. “They couldn’t find enough local talent here,” says Cliff Holekamp, co-founder of Cultivation Capital, a local venture firm. “There’s this huge sense that we totally missed the boat.” (It might also have had something to do with co-founder Jack Dorsey, who was raised in St. Louis, living in San Francisco.) Since Square’s $3 billion initial public offering in 2015, St. Louis has given it about $5 million, and Square has hired about 500 people in the area. Square declined to comment on whether the incentives were determinative.

Instead of throwing incentives at established startups, public dollars are better used investing in companies’ earliest stages, says Paul Krutko, president of Ann Arbor Spark, the region’s economic development entity. His team gave homegrown startup Duo Security Inc. a $3 million grant for an office space expansion before, not after, Cisco Systems Inc. acquired the company for $2.4 billion last year. “It’s about gardening vs. big-game hunting,” Krutko says. “We believe in gardening.”

In Columbus, the school district hired a private contractor over the summer to replace striking teachers, who demanded better pay as well as influence over tax abatements like the one CoverMyMeds got after it sold. This would be unprecedented power for a teachers union. “We are always being told there is no money for what we need as teachers,” says Coneglio. “We want a say in the process so next time there is a big deal worked out behind closed doors, what the schools and teachers need comes first, not the needs of another wealthy corporation.”

To contact the editor responsible for this story: Jeff Muskus at jmuskus@bloomberg.net

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