ArsDigita

What did it do?

ArsDigita was a software and consultancy company that developed the open-source ArsDigita Community System, a toolkit for building database-backed community sites, and used it to build web applications for organisations. Its clients included companies such as AOL, HP, Levi Strauss and Oracle.

Why did it shut down?

The company was profitable in 1999, and its monthly service contracts had reached an annual revenue run rate of $20 million. After it took $38 million from Greylock Partners and General Atlantic in March 2000, a professional CEO was brought in from outside and headcount grew rapidly. According to Greenspun, $20 million was spent between April 2000 and March 2001 just to get back to the same revenue; meanwhile the dot-com crash swept away clients, and offices began closing from September 2000. When the founders tried to retake control in April 2001, the company and its investors sued Greenspun; the dispute was settled with a payment of $7.6 million to Greenspun. The shrunken company's main assets were sold to Red Hat in 2002, and ArsDigita ceased to operate independently.

The story

ArsDigita was a web software company founded in Cambridge, Massachusetts, in 1997 by a group of programmers led by Philip Greenspun. The team had an open-source toolkit that made it easier to build database-backed community sites: the ArsDigita Community System. With it, the company built web applications for clients such as AOL, HP, Levi Strauss and Oracle.

According to Greenspun's account, ArsDigita was profitable in 1999, had paid about $1 million in tax on its profits, and its regular service contracts had reached an annual revenue run rate of $20 million. To attract talented programmers the company offered unusual rewards such as a Ferrari, while also supporting ArsDigita University, a free and intensive computer science programme.

In March 2000 the company took $38 million from Greylock Partners and General Atlantic. The investors gained two seats on the seven-member board, and a professional CEO was brought in from outside. Headcount passed 180, and new, highly paid executive positions were created. According to Greenspun, $20 million was spent between April 2000 and March 2001 just to get back to the same level of revenue. Over the same period the bursting of the dot-com bubble wiped out clients, and office closures began in September 2000.

In April 2001 the founders moved to change the management and reinstate Greenspun as CEO. The company and its investors sued, arguing that this breached the shareholders' agreement signed in March 2000. The dispute ended with a payment of $7.6 million to Greenspun. The shrunken company's main assets passed to Red Hat in 2002; Red Hat took on a group of employees and continued the Java version of the software under its own name. The community, meanwhile, lived on through OpenACS, the toolkit's open-source branch.

Lessons for founders

• Before taking large venture capital into a profitable, self-funding company, be clear about which concrete growth problem the money will solve and how control rights will be shared.
• Read every approval and veto clause in the shareholders' agreement before signing; a majority of the shares stays on paper if the agreement hands decision-making power to someone else.
• Rapidly inflating headcount and executive salaries with new capital leaves the company more fragile than before if revenue does not grow.

Sources

1. ArsDigita (Wikipedia)
2. ArsDigita: From Start-Up to Bust-Up (Philip Greenspun (waxy.org archive))
3. ArsDigita CEO & VCs Sue Philip Greenspun (Slashdot, 2001-04-19)
4. Red Hat Explains ArsDigita Purchase (Slashdot, 2002-03-13)

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