Economic Development Myth 5 - Entrepreneurial Length Matters

No, we’re not talking about that. What we’re talking about is the tendency of old-school economic development to ignore companies (or even industries) that have been in existence for only a few years. Seriously.

To those unaccustomed to the ways of group serial Entrepreneur culture, it may seem implausible. Many old-school economic developers, then, buy wholeheartedly into this myth:

Startups (and, hence, Entrepreneurs) Haven’t Been in Business Long Enough to Prove Their Worth

The corollary, with economic development spin, is this:

New Companies in New Industries Create Good Buzz But No Economic Value

Here I’m going to share a personal example, having heard first-hand the excuses of old-school economic development as to why Entrepreneurs weren’t worth pursuing (well, beyond lip service since no one really ever says “we’re not going to pursue entrepreneurs” - got close in one instance, but that’s another story). Going back to comments alluded to in the previous myth - such as Entrepreneurs not providing “quick wins” or a “short timetable”, I’ve been saddened to see opportunities to attract rapid growth companies (and clusters of companies) to regions such as the one I live in, solely on the basis of not being able to generate a significant number of jobs in a 2-year window.

I thought I wasn’t hearing the criteria right at the time, especially since companies like Google didn’t exist five years ago but now have proven to be key recruits for other areas in our super-region, so I decided to test the resolve of not chasing Entrepreneurs by setting up meetings with key serial entrepreneurs and market makers in Silicon Valley, to showcase what we could look forward to if we set our minds to attracting some of these people to move to our area (yes, the key point here is proactive recruitment of key, proven individuals). 

While the test yielded the same non-interest in pursuing a better understanding (and possible next-company recruitment), I was happy to note that all the companies chosen have turned out to be winners, with one of the companies recently being sold for $380 million, after only 32 months of operations. Try to fit that into a 2-year timetable! It’s like picking red or black on a roulette wheel in the dark and then arguing over who’s won. The game’s over long before the lights come (back) on.

So what’s a way to turn the myth into truth? Try this instead:

Entrepreneurs have an higher chance of creating a diversified job base (both in size and in new industries) than 99% of most large businesses.

Sometimes it takes doing real research - and even a bit of faith once the research is done - to see the trends that will grow a diversified region.

Economic Development Myth 4 - Entrepreneurs Cannot Handle Opportunity

One of the best lines I’ve heard from old-school economic developers is that they aren’t interested in pursuing Entrepreneurs because it doesn’t allow for “quick wins” on a “short timetable.” Temporarily suspending disbelief that 2-year goals are a beneficial horizon for economic development, let’s take a step back and look at why old-school economic developers might disdain working with Entrepreneurs.  It seems to boil down to this myth:

Entrepreneurs Cannot Compete With Large Corporations

Translated: helping an Entrepreneur bring in 3 or 4 jobs won’t get a mention in the newspapers and/or won’t gain the respect of other old-school economic developers. As a way to mask that to the general public, some economic developers spin it as a classic Catch 22 problem that damns the Entrepreneur to economic development oblivion:

Entrepreneurs Cannot Handle Large Opportunities

Admittedly, any Entrepreneur worth her salt will go through the various stages of euphoria, shock and fear upon winning a large order; I remember several Entrepreneurs signing up for assistance once they had received word that Wal-Mart was interested in purchasing a product from them - the abject terror of filling such a big order wasn’t helped by the fact that Wal-Mart itself admitted, during a World Trade Center meeting in Geneva that I attended, that it wasn’t the best-behaved client for many small businesses.

But the fear and trepidation also has a beneficial side effect, pulling the Entrepreneur into a deep reality check that allows her to most often accurately gauge whether she and her company are up to the challenge of opportunity.

Entrepreneurs are often frustrated when they approach government agencies, especially after attempting to run the gantlet or weave through the labyrinth (or whatever form of slow and methodical torture most suits the analogy). The frustration lies in being asked to do, and doing, what turns out to be the busy work of getting registered and ready for opportunity. I’ve described it this way to small business counseling clients and incubator tenants I’ve worked with: the amount of work you’ll do just getting ready to knock on the proper government agency’s door is at least equal to twice the length of time required for your typical private enterprise sales cycle. And then, perhaps, you actually get the contract, but have to wait for Congress to enact or lift continuing resolutions, wait for the budget to be balanced, wait for any number of reasons.

So the myth, busted, better reads:

Entrepreneurs are capable of providing quality service to large corporations and government entities, provided the corporation or entity knows how to work within Entrepreneur’s constraints, and provided the Entrepreneur can survive the morass of getting to the table.

For those of you who are Entrepreneurs, ever heard this one: We agree that you can provide the (product, service) but we’re concerned about your financial and business longevity. How can you guarantee us that you won’t go out of business just after we award you this contract?

More on that in the next posting.

Economic Development Myth 3 - Entrepreneurs Crave Government Subsidies

As a corollary to Economic Development Myth 2, that says Entrepreneurs must be created, there’s an even more insidious assumption amongst economic developers about what an Entrepreneur wants. It’s based on the assumption that old-school economic developers make that every business is looking for tax abatements and other government subsidies. In fact, the word subsidies is part of the myth:

Entrepreneurs Crave Government Subsidies

Some economic developers even go so far as to say:

Government subsidies can help create entrepreneurs

No. Not just “No” but “NO! NO! NO!”

Most Entrepreneurs would be content, or even glad, if government offered to leave them alone. A case in point: when I launched an office of small business (KOSBE) we were approached by a group that promised “rapid” SBA loans. These express loans, besides being a bit of a gouge to the business person looking for a micro-loan of $5,000 or $10,000 or $15,000, also had the “rapid” side effect of taking well over four months to be adequately proposed and countered. While I’d turned down the opportunity to provide an on-going audience after seeing the fee gouge, my successor and several others in the region have pitched this “rapid” loan, so I watched carefully to see if I’d missed something.

I thought at first it was a fluke that it took the first applicant about four months to hear back (rejected) but then a second, third and fourth recipient also met the same fate as the first - rejected, rejected, rejected, after having been told within the first two weeks that they were on track to receive the loan. The added benefit: all four waited so long for the “rapid” loan to come through that they went out of business. No lie!

Don’t confuse the Entrepreneur’s natural aversion to government “help” with an interest in working on government contracts; while those do take six months or so to become eligible for while obtaining various certifications (woman- or minority-owned, disabled-veteran owned, HUBzone, etc.) they are contracts that result in actual work, which any Entrepreneur is willing to take on.

Bottom line: Entrepreneurs want challenges, not hand outs. As mentioned before, if economic developers must be involved, the proper approach to entrepreneurship is to build the infrastructure and reduce government help and then get out of the way.

Again, as before, change a few words and it brings out a whole new meaning:

Entrepreneurs seek less government intervention and no bail-outs, but know government can be an exemplary customer, if the government entity knows how to work within Entrepreneur’s constraints.

More on that in the next posting.

Economic Development Myth 2 - Entrepreneurs Must Be Created

Are there other economic development attempts that miss the entrepreneurial raison d´etre and wind up stifling entrepreneurship? Yes, including Myth 2, which frustrates many attempts by economic developers to grow the entrepreneurial creative class in their localities. This myth says:

No entrepreneurs exist and, therefore, we must create incentives to attract them

The myth also has a corollary, replaces economic developers with small communities or governments:

Government must create entrepreneurs

Again, these myths are pulled straight from an economic development presentation – one that fillets both the myth and its corollary. The presentation was part of a study by  Peter J. Boettke, a 2004 Hayek Fellow, LSE, at Oxford University.

The presentation, given about six months after I joined the ranks of economic development and wrote a feasibility study/business plan for Kingsport Office of Small Business Development & Entrepreneurship (the acronym KOSBE was later settled upon), has two primary conclusions.

First, entrepreneurship – far from being dead or non-existent – is omnipresent. Boettke notes that “cultural explanations for a lack of entrepreneurship overlook what people have in common – namely alertness for profit and to improve their general situations.” He goes on to say even “underdeveloped nations do not lack entrepreneurship. Rather, entrepreneurial activities exist, but are not directed toward productive ends conducive to economic progress.” 

His emphasis on the requirement that entrepreneurs be productively directed toward economic progress is best left for Adams-Keynesian tug-of-wars that economists rage against each other, but the point needs to be re-emphasized. Entrepreneurs are everywhere. Just because old-school economic development discounts their value doesn’t mean they don’t exist. Similar to the logical conclusion from the previous blog post, entrepreneurs exist, they just don’t want your help.

Second, since entrepreneurs are everywhere, government cannot create entrepreneurship. Try as we might, we can’t argue with logic, so Boettke points out that “emphasis should be placed on creating a general institutional framework, making payoffs to productive entrepreneurship relatively high compared to unproductive and evasive activities”.

Immediately most old-school economic developers will seize this comment and say Ah ha! Incentives are needed! And we know incentives! Boettke begs to differ, noting that “resources should not be allocated to “‘encouraging’ or ‘training’ [or ‘enticing’] entrepreneurs but to developing the necessary institutional context to allow productive activities to come to the forefront”.

In other words, going back to our picture in the introductory blog, if economic developers must be involved, the proper approach to entrepreneurship is to build the infrastructure and reduce government help and then get out of the way.

Again, as before, change a few words and it brings out a whole new meaning:

Entrepreneurs exist, but we must eliminate those things that push them underground while, at the same time, laying the infrastructure that allows them to flourish.

A good analogy to this is a yogurt culture (not, not the yogurt culture but the culture in which it is nourished). Without a support infrastructure the yogurt will go into hibernation, but it won’t die. Conversely, with the proper support infrastructure, the yogurt will flourish and yield additional batches to work with.

Another example, which I found during a visit to the Jose Cuervo homestead, was the support infrastructure the family had created over 100 years ago to assist in the aging of their choice family reserves. The infrastructure screams utilitarian, consisting of a subterranean cellar with glass bottles, hemp coverings, a few finely-crafted oaken buckets – protected from one another by rough shelving and from outsiders by a set of bars almost indicative of a prison or dungeon – and a stray small window or two. But the final result, designed to age tequila for more than 100 years, proves the infrastructure is doing its job.