CitySoft in the News 


Venture Magazine - Human Capital
by Jonathan Reiman
  THE BUSINESS MODEL
CitySoft’s corporate structure is an integral part of its commitment to urban economic opportunities. Many of the company’s website builders hold no college degree, but were instead educated at public training centers that teach computer and technology skills to the urban poor. In theory, CitySoft does not hire workers who need extra training; Gleason said that CitySoft officially offers no training beyond what the normal training of a professional services center would be. CitySoft, however, sometimes finds it difficult to hold to this principle. He explained, the training centers haven’t been good about understanding our market and providing all the skills that [the workers] need, so there has been more on the job learning. Because CitySoft does not run its own training programs, this learning takes place informally, often with a more experienced website designer assisting a newcomer.

CitySoft varies its wages with the skills and educational background of its workers. While CitySoft wouldn’t release specific figures, Gleason noted that salaries and skills should balance out. He believes that once those educated in urban training centers fill in the gaps in their knowledge, they can add just as much value to his company as website builders from more traditional backgrounds can. Gleason explained, If you have people slotted correctly, where they’re growing and being challenged, it works for them, they stick around longer, and it works for the client because the client’s paying for the appropriate amount of skill. While CitySoft risks that its employees will leave after filling in the gaps in their knowledge and improving their resumes, the company has so far been on the winning side of this gamble. Gleason decided that contracts requiring minimum stays at CitySoft were unnecessary. Even at the height of the internet boom, CitySoft boasted a turnover significantly lower than the industry average.

MAKING CITYSOFT A REALITY
CitySoft’s business model, with its pioneer dependency on a new labor market, turned the search for venture financing into an uphill battle. Gleason attributed this to return issues, tradi-tions, networks of the way capital works, or just stereotypes. He searched long and hard for the right investors, however, and eventually found them. Gleason received initial financial backing for CitySoft from a separate sector of venture capital firms, Community Development Venture Capital Funds, which backs socially responsible companies. Sustainable Jobs Fund and Coastal Enterprises Inc. were CitySoft’s largest backers. When the Internet shakeout began, CitySoft’s investors remained loyal. Gleason said, "By the time we got the end of the deal closed, the bubble was already collapsing, but we were still able to get a close, and I think the reason is that we found the right investors."

CAPITAL INVESTMENTS
CitySoft is not a publicly traded company. Venture capital investment in CitySoft grew rapidly in its first years, but since the end of 2000 its growth has leveled off. In 1998 CitySoft raised $50,000 in the form of debt; in 1999 it received $200,000 in equity; and in the last half of 2000 and first half of 2001 it raised an additional $1.8 million in convertible debts. As investment increased, CitySoft’s workforce expanded to 30. Investment has been flat since 2001, and its workforce has remained constant. CitySoft still expects to pay off investors roughly five to seven years after it incurred its debts, a timeframe consistent with the current standard for an equity investment. CitySoft saw large profit margins in its first years, but profits have been leveling off since the Internet bubble burst. "We were easily profitable in the first years," Gleason says, "and now we struggle to break even and be profitable." While many of its competitors went out of business during the Internet fallout, however, CitySoft survived without downsizing.

BEATING THE BUBBLE
When recession hits any market, general providers suffer the most. The Internet shakeout was no exception. In the face of reces-sion, CitySoft and many of its peer companies sought niches. CitySoft’s business model enabled it to do so with greater ease and success than many peer companies that were based on more tradi-tional business models. Gleason recognized that even when the bub-ble collapsed, CitySoft was still doing a lot of deals with educational institutions, nonprofits, foundations, government institutions. He recognized that CitySoft should focus on these markets. [These organizations] look at us and they get our model better and they’re more comfortable with it. And I think there’s a sense of trust, I think there’s an understanding that we’re coming from an activist, change-the-world point of view, much like their organization," he said. Further-more, since the nonprofit sector is relatively countercyclical, it not only provided CitySoft with a niche, but a stable niche.

SALES STRATEGY
CitySoft never tried to market the activist component of its business. "We were smart enough to know that wouldn’t work," commented Gleason. Anticipating that clients would not trust CitySoft’s employees, Gleason wanted CitySoft’s services to be its selling point. Gleason’s business model received a wave of early publicity, including a feature in The Wall Street Journal in February 1998. While this piqued interest in CitySoft, it posed problems for the company at the same time. Gleason explained, "We’d go in to talk about websites and we’d end up explaining this model.... I think people’s unease with the business model--which is perceptual and not in fact--would get distracting and wouldn’t really help us close anything."

Major companies, including Reebok, Polaroid, Siemens, and BankBoston, gave CitySoft small projects because they were interested in helping the community. However, these companies were hesitant to give CitySoft larger projects because they did not fully trust the same business model they revered. "Even with those sorts of perceptions," Gleason said, "we were still doing fine, growing at 350%, but the problem was the markets collapsed."

THE FUTURE OF THE MODEL
Gleason does not plan to take CitySoft public. While he is optimistic about growth in both size and profits, he contends that CitySoft lacks both the size and experience to do an IPO. He cited a merger or an acquisition as a more likely possibility. If all goes well for CitySoft, the company will continue to be living proof that its business model can work, but even with considerable growth, the company will remain unfamiliar to many. To further disseminate his business model, Gleason founded CitySkills, a non-profit focused on creating internet technology job opportunities for urban adults. Funding for CitySkills has come from a number of foundations, including the Rockefeller and Ford Foundations. Currently, CitySkills matches local employers with urban training centers. Within the next 5-10 years, it aims to build a large, nationwide network of employers willing to higher from urban training centers. It also plans to encourage the development of more mentorship and internship programs for the underprivileged. As Gleason said, "What we’re doing [with CitySoft] is impor-tant because we proved it could be done, not because of the numbers. I think what’s more important from a perspective of numbers is to get a whole bunch of employers over the years to buy into it. I think 10 years from now that we will have wielded something that really makes a difference in America."

About CitySoft
CitySoft, Inc. is the leading provider of Internet services to Common Interest Enterprises - sustainable businesses, foundations, non-profits, associations, educational institutions, and government agencies. By fusing strategy, user-experience, and application-development competencies, CitySoft helps clients leverage the power of the Internet to achieve organizational goals. CitySoft has offices in Boston and New York. More information on CitySoft can be found at
http://www.citysoft.com.

For more information, please contact:

Lyn Francoeur
617.864.4222
On behalf of CitySoft
lfrancoeur@avonhillgroup.com