Scott Ball / Rivard Report
Rackspace is turning 20 this year.
What started as a side gig for two Trinity University graduates who geeked out over e-commerce and building web servers in the early days of the internet became the incubator for San Antonio’s tech industry and today remains one of the city’s largest employers.
As it gears up for what some former Rackers and others expect will be a second offering on the public market, what does the future hold for one of the city’s greatest startup success stories?
In the next five years, “we see ourselves as one of the leading IT service companies in the world,” Chief Marketing Officer Mark Bunting said in an interview with the Rivard Report.
Since its acquisition by the privately held Apollo Global Management in 2016, Rackspace has seen a near-complete overhaul of its leadership team. CEO Taylor Rhodes resigned six months after the sale, and his departure was quickly followed by an exodus of department heads and considerable internal realignment. New CEO Joe Eazor installed 11 new executives, concluding with the hire of Bunting in May.
The new team’s ambitiously-stated plan for dominating the IT sector is predicated on its ability to service multiple cloud platforms. Rackspace says it can provide more objective support than its behemoth competitors at Amazon, Google, and Microsoft, which are apt to push their own cloud products: Amazon Web Services, Google Cloud, and Azure, respectively.
“It is the cornerstone on which Joe’s vision for the company has really been built,” Bunting said. “That is this IT gap. No one else has this broad base [of] collective services and expertise.”
Rackspace executives would not comment on reports the realigned company was weighing an IPO, but some local tech industry observers believe such a move is inevitable.
When asked about Rackspace’s chances on the public market, financial markets expert Barrett Daniels, CEO of Nextstep, said the answer is nuanced.
“This has been a really good year to do an IPO,” Daniels said, but the past several weeks have been “screwy.” For example, he noted, file storage giant Dropbox, which went public in February, had been trading well up until July 15 when its shares dropped nearly 57 percent during the next month and a half.
“The numbers felt like they should have afforded an increase in the stock price and for whatever reason that did not happen,” Daniels said.
While the window might be closing for some companies considering a move to go public, Rackspace is a “different beast,” he said. Mature companies such as Rackspace are more resilient.
“For companies like Rackspace, windows aren’t as important to them unless you’re just in catastrophic times,” he said. “Generally, a company like that should be able to get out.”
When Rackspace shares hit the New York Stock Exchange on Aug. 11, 2008, trading opened at $10.70 per share. Four years later, company stock hit its peak at $77, but that’s as high as it went. The price began sliding that year, and by the middle of 2014, shares had taken a tumble. When trading closed on Nov. 3, 2016, the last day RAX shares were on the public market, the stock price was $31.99.
But a Bloomberg article in March cited unnamed sources who claimed Rackspace’s valuation this time around could be as much as $10 billion – more than double the $4.3 billion Apollo Global Management paid in 2016 to acquire Rackspace and take the company private. The company’s enterprise value at the time of its IPO was $1.4 billion.
Some of Rackspace’s earliest leaders, and its founders, who are now unaffiliated with the company, weighed in on the company’s direction and what going public again could mean for its future.
Co-founder Dirk Elmendorf, who left Rackspace in 2009 and continues to live in San Antonio and invest in and develop other tech startups, said the company’s future rides on the optics from its eventual exit from Apollo.
“I don’t know when Rackspace will go public, but I hope they do because that is the best exit for Apollo,” Elmendorf said. “That means that Rackspace as a company will continue to succeed and thrive, and if it doesn’t, things can get really bad.”
He said if Rackspace can’t exit on a big profit, Apollo might decide to significantly downsize the Windcrest-based company locally known in no small part for its contemporary headquarters in the former Windsor Park Mall on Interstate 35 North.
“That’s the last thing I would want to see at a company I founded,” Elmendorf said. “If they were to go independent again, you take that stuff off the table, which is in the long term better for the city and their employees.”
Richard Yoo and Elmendorf, fresh off of earning bachelor’s degrees at Trinity University in 1996, started building servers and programming them during some of the earliest days of the internet. They decided to become business partners and began helping set up internet infrastructure for companies as a way to pay the bills, Yoo said.
What they were really passionate about was e-commerce and becoming among the first successful companies to service financial transactions online. Using your credit card to buy things on the web might seem rather simple today, but it was in its earliest and murkiest stages in the late 1990s.
Pat Condon, an accountant whom Yoo studied with at Trinity, began advising the team on their finances: They were hemorrhaging money. If Yoo and Elmendorf didn’t pivot fast, they were going to run out of money by the end of the year, Yoo recalled.
That’s when they realized most of their money was coming from building web servers. Yoo snapped up the domain name for Rackspace.com in August 1998.
Along the way, they met business partners Morris Miller and Graham Weston. Weston, a local entrepreneur, had just purchased the Weston Centre, downtown San Antonio’s newest Class A office tower, from his uncle and wanted to outfit the entire building with secure, high-speed internet. Yoo and his associates offered the lowest bid to do the job, some $200,000 cheaper than the highest bids. They were hired.
Miller and Weston were impressed with Yoo and Elmendorf and offered to invest in their business. Demand for their services was so intense that the company was racking up debt purchasing equipment. Weston saw a huge opportunity where Yoo and his fellow founders saw a huge pain point, Yoo said.
“We’ve become a victim of our own success,” Yoo said, recalling the group’s thoughts at the time. “As the Rackspace business is growing over the course of the next few months, we are freaking out. We’re like, ‘How are we going to make this work?’ Then we’re like, ‘Maybe we should stop selling servers. This is crazy.'”
After some prodding and convincing Yoo to present the concept behind Rackspace – a dedicated web server for every business – without having to sign a nondisclosure agreement, Weston and Miller decided they were in and agreed to inject about $1.25 million into the business, Yoo said.
Rackspace was incorporated Dec. 28, 1998.
After gaining a foothold as one of the world’s foremost data storage service companies and swallowing up considerable market share in the late 1990s and 2000s, Rackspace grew from a spunky startup to a venerable corporation. The company opened for trading on the New York Stock Exchange in August 2008.
Around the same time, companies began migrating en masse from physical datacenters to the cloud. Remote servers that stored data and could be accessed, processed, and administered from anywhere became the trend.
This was a tectonic shift for a company that had a considerable stake and bought a lot of real estate for assembling data centers all over the world. In addition to the company’s Dallas area; Washington, D.C.; and Chicago data centers, Rackspace has large server networks in Frankfurt, Germany; London; Hong Kong; and Sydney, Australia.
What was once a staple of its business was at risk of fading into eventual obsolescence.
The company’s shift from servicing physical servers to the cloud was a strategy conceived by former Rackspace President Lew Moorman, who joined the company in its infancy and is credited by other executives with first seeing the tectonic shift to the cloud as it took shape on the industry’s horizon.
In a 2009 presentation, Moorman asserted cloud computing is a “movement” and asked, rhetorically, “Are you in or out?” Indeed, the trend toward leaner tech startups founded on the flexibility and the low overhead of operating in the cloud was already in motion.
Rackspace’s bread has always been buttered on its operating philosophy and identity of “fanatical support,” a term coined first as a mantra for its enthusiastic and responsive model of customer service, and has now become synonymous with the brand.
In the current cloud computing era, Rackspace is staking its claim on being a managed cloud, or outsourced web server support, provider for multiple platforms. And so the company’s value proposition is more about its expertise than its hardware, and its aim is to provide unbiased service – whether a company uses Amazon’s, Google’s, or Microsoft’s cloud.
“We are presented with a significant opportunity today as mainstream companies move their computing out of corporate data centers and into multi-cloud models,” then-President and CEO Taylor Rhodes said as Apollo announced its 2016 acquisition.
What Rackspace means to San Antonio
Rackspace has become the most widely cited example for advocates who believe in San Antonio as an attractive home for startups and investors incubating young tech companies. That is due in no small part to the role the company’s founders, investors, and many employees have played in creating a startup ecosystem.
Heard, whose nonprofit organization advocates for the advancement of the local tech sector and for progressive public policies aimed at making San Antonio a more attractive city for talented young tech workers, said concerns about the company’s periodic layoffs during the past two years have been blown out of proportion. Rackspace’s employee count currently stands at about 6,700. According to the San Antonio Economic Development Foundation, the company has about 3,300 staffers at its Windcrest headquarters.
“The reality is they’re larger in terms of employees,” Heard said. “While they have repositioned certain roles … and segments of their workforce, they are hiring in other areas. They are really pivoting in focus.”
Although Forbes ranked the company No. 38 among midsize employers as a top place to work, a common theme in Glassdoor reviews and off-the-record conversations with current and former employees is the increasingly stifled workplace culture – less play, more work, and a culture focused on business results. As one former Racker put it, “Less happy-go-lucky. Less autonomy. Less creativity. Constant eye on what you’re doing to bring measurable value.”
But the former employee, who asked for anonymity to maintain professional associations at the company, said Rackspace is comparatively “light-years ahead” of other mid-to-large companies in San Antonio as a “great place to work.”
Heard said it’s nearly impossible for a company that grows to the size of a Rackspace to maintain its fast-twitch startup culture.
“There’s been a lot of turnover,” he said. “I don’t think it’s necessarily a bad thing. There’s a certain culture and type of employee that thrives – and the company equally thrives – on their work in a startup-like culture. I think there’s been a maturation of the Rackspace culture where it’s more of a large-company atmosphere.”
Heard said with the contributions of its alumni to San Antonio’s entrepreneurial space and the boon it’s been to its technical workforce, Rackspace has cemented its place as the “Dell of San Antonio” – whose former employees have gone on to start successful companies throughout the Austin area.
“Rackspace serves as this important thing in our technical community as an anchor of the big scale that you can get to,” Elmendorf said. “It serves as a flag to prove that you can build something big in San Antonio. As a founder, I hope that it continues to thrive in an unbelievably competitive environment.”
Now, as the company turns 20, renewed interest in its future and its important place in San Antonio’s growing smart-jobs economy once again has people watching closely.