As Rackspace Battled, Then Befriended Amazon, San Antonio Tech Matured

San Antonio—The Alamo city has never received much credit for its work in technology. One local executive likes to say that San Antonio works on the plumbing of the Internet.

Compared to Austin, a renowned tech capital about 90 miles to the north of San Antonio, that description seems pretty accurate. Austin holds hip tech conferences, such as South by Southwest, which combine business and art. Flashy brand-name tech companies, from Facebook to Dell, have offices in the state capital, too.

Meanwhile, San Antonio’s work in tech has always been a bit less sexy. Cybersecurity has been a major employer in the Alamo city, but that work doesn’t get much national recognition because many companies work quietly as military or other government contractors. Rackspace has been a bright star in the San Antonio tech economy, but as a business that helps other businesses manage and store data, it has still never gotten a huge amount of attention.

Even so, Rackspace is one of the primary reasons why things are beginning to change in San Antonio. Over the last six years, more money is being invested in growing a startup scene in the city. Rackspace, and people who once worked there, have been primary drivers in that shift. Former Rackspace executives founded a co-working space, Geekdom, in 2011, which has helped spark an entrepreneurial spirit in the city.

Investment firms have started opening their doors, including Geekdom Fund in 2013, and Scaleworks in 2015. Scaleworks was co-founded by a former president of Rackspace, Lew Moorman.

Notably, challenges to Rackspace’s core business—specifically, fierce competition from behemoth Amazon—actually contributed to the growth of the startup culture in San Antonio. Rackspace’s effort to survive a shifting tide in its primary business helped at least one executive find his current path at a startup (more on that below).

As early as 2008, Rackspace knew that competition was coming from Internet companies like Microsoft and Amazon, which were investing in data centers and cloud computing.

Still, things were going well at Rackspace. It was growing, having doubled its revenue during each of the previous three years. The company completed an IPO in 2008, too, and though the public offering performed poorly, it helped bring more national attention. Growth at Rackspace continued in the following years despite a recession, according to public regulatory filings. The company was able to keep its business strong because of a customer service offering Rackspace calls “fanatical support”—expert engineers, programmers, and customer service reps that help Rackspace’s cloud computing clients with anything they need. By 2011, Rackspace reported its first year of more than $1 billion in revenue.

And yet Amazon and Microsoft lurked in the background, building their cloud computing businesses. “We will continue to compete more directly with Amazon, Microsoft, IBM and Google as cloud computing services become increasingly more virtualized,” Rackspace wrote in a 2012 filing with the U.S. Securities and Exchange Commission.

The market did indeed shift to virtualized cloud computing, and quickly. Amazon Web Services reported $3.1 billion in sales in 2013, and that number jumped to $7.2 billion by 2015. (For what it’s worth, that trend has continued: AWS reported $17.5 billion in 2017.) Meanwhile, Rackspace’s seemingly ever-present revenue growth was slowing down. Revenue increased by 31.3 percent to more than $1 billion in 2011 from the previous year; by 2015, that annual increase was only 11.5 percent.

The indication was that the customers who once bought Rackspace’s dedicated hosting and cloud computing services were indeed switching over to become customers of Amazon, Microsoft, and others who were offering scale, ease, and in some cases cheaper services. Rackspace realized that it may not be able to directly compete with AWS and Microsoft’s Azure, so it made a dramatic move—it decided it would try to work with its longtime competitors.

“How do you go build a relationship with someone you are competing against in a competitive market?” says Chris Cochran, who was an executive vice president and general manager at Rackspace. He worked with the company from 2008 to 2016, including in corporate strategy during this transition. “How do you build services and technology in a market that elevate what Rackspace does, but also expose all the magic that people are picking AWS for?”

The answer, Cochran says, was customer service. Rackspace began offering “Fanatical Support for AWS” in October 2015, which helped businesses with difficult tasks in AWS, such as authenticating across large technology teams, helping customers choose which is the best AWS service to buy—Amazon offers dozens of options, based on usage needs and other factors—and other technical and administration expertise, according to Cochran. Rackspace also added the same services for Microsoft’s Azure, Google products, and others.

“It was just looking at reality and assessing it correctly. It was a necessary action,” says Cochran, who led the Fanatical Support for AWS as general manager from April 2015 to August 2016, after strategizing on how to create it.

It’s no longer easy to track the impact the offering had on Rackspace’s lagging revenue growth—the company was taken private by funds associated with Apollo Global Management for $4.3 billion in 2016. Rackspace reached $2 billion in revenue for the first time in 2015, and estimated in a regulatory filing it would add about $100 million in revenue in each of the next two subsequent years.

Cochran says he doesn’t know exactly what interested Apollo in Rackspace, though he speculated that the private equity firm may have seen an opportunity in the stock price—perhaps that it was undervalued. He left Rackspace in August 2016, after the acquisition was announced.

Given his experience leading the Rackspace AWS team through the Apollo acquisition, Cochran likely had many job opportunities—possibly even ones that were more convenient, such as in Austin, where Cochran lives.

Instead, Cochran decided to continue working in San Antonio. Keeping tech talent in San Antonio, and drawing new businesses, is something city leaders have been hoping will happen more. The San Antonio Chamber of Commerce invested in promoting the region’s cybersecurity work by starting Build Sec Foundry, an incubator for startups in the sector. Other groups like VelocityTX are trying to draw startups and executives from other countries to town.

Cochran is now the CEO of Chargify, a small software-as-a-service company that helps businesses with billing—in particular, complicated billing issues, like customers who want to pay for services a la carte or based on usage.

Chargify was founded in Needham, MA, in 2009 to handle recurring billing for businesses that charge customers a monthly fee. A company such as Netflix, for example, could have used Chargify to handle its billing needs and would pay Chargify a flat fee to do it, according to Cochran.

Things changed at Chargify when Scaleworks, the investment firm founded by former Rackspace president Moorman, bought the company in 2016. Moorman and co-founder Ed Byrne created Scaleworks to acquire software-as-a-service businesses that they thought weren’t performing to their capability, and then invest in them to boost revenue. Scaleworks has grown, too, in recent months. It moved its portfolio companies into a new office in downtown San Antonio in September, acquired its eighth company, Keen IO, which helps software developers with custom application programming interfaces, and started a new $10 million fund that makes loans to startups with recurring revenue.

Cochran was an early hire who has stuck around. Scaleworks picked him up freshly out of Rackspace to be Chargify’s CEO in 2016.

Chris Cochran

Cochran has worked to add greater complexity to Chargify’s capabilities. A few examples: The company can help a business charge a customer one price for a million transactions and a lower price for the second million. Chargify can let customers test out price points on products, offering a product for $70 one month and $100 the next to see which performs better. Chargify’s customers use a software interface to work with the system, which Cochran says was designed to be easy enough for anyone without technical skills to use, despite the added complexity in the product pricing.

“What Chargify is trying to tap into is this trend that the very simple subscription model is changing to a much more complex model,” Cochran says. More companies will move to complex pricing methods, allowing customers to pay based on use or other intricate options, which makes billing that much more difficult, Cochran says.

What’s Cochran’s best example of that trend? Amazon, of course. The company has dozens of pricing options for the EC2 segment of its cloud computing service, and has a massive billing system to track it, Cochran says.

“What Chargify is doing is trying to help businesses who … don’t have a team of 10, 15, 20 people to treat their billing like a product,” Cochran says. “We’re trying to build software that allows any business to go out there and give the same level of personalized offers to their customers.”

If Amazon is doing similar work to what Chargify does, the obvious question is whether Cochran is worried that the company might try to sell a competitive product. After all, that’s happened to a company Cochran has worked at before—just like it’s happened (or is happening) to other industries, from books to groceries to healthcare.

“We’ve not seen them having an interest in doing that at this point,” Cochran says. He admits that Amazon’s involvement in any industry should probably give a business in that sector pause. “I think you have to look at Amazon now in any context and wonder, ‘Well what is their angle now?’”

Regardless of the competition a business faces, or its location, Cochran says the same things draw him to San Antonio and Chargify in 2018 that attracted him to Rackspace in the 2000s. It’s a chance to build a business with a centered mission, around similarly minded people, he says.

“In my opinion, Scaleworks and Chargify share a similar philosophy, so it made sense to keep working in San Antonio even though I live in Austin,” Cochran wrote in an e-mail. “I believe certain personalities will seek out those types of opportunities, wherever they exist.”

David Holley is Xconomy's national correspondent based in Austin, TX. You can reach him at Follow @xconholley

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