Economic Development Myth 12 - We've Tried That Before

I’m just finishing off two events that remind me of the phrase:

We’ve Tried That Before

The corollary, in reality, is this belief:

It Didn’t Work, So Why Try It Again?

The first event was a dinner meeting with a group of VCs and an executive from an early stage startup; the VCs are - for the most part - people I worked with or for during the heyday of the late 1990s, doing go to market strategies and market / competitive landscape strategies. They’re now back in the business of moving video from one place to another, but doing it with handsets instead of desktop computers (the song’s the same, only the devices have changed).

The second event is a recap article I’m writing for one of the magazines I have the honor of writing for in my spare time between consulting projects - www.streamingmedia.com - as the magazine / website turn 10 years old this year. This has brought me back into contact with another group of peers that I’ve interviewed to find out “where are they now?”

Guess what? Some of them have moved to different industries but are shaking those industries up as well (one went into real estate technology, another into early influencer marketing, and a third into fashion). Still others have taken a break from the work, after selling a company, and are back in the game in the venture, angel or executive role. 

Some of them are even trying again what they tried in the late 1990s but couldn’t complete because the technology, environment and user base weren’t honed to the level that they now are.

So the next time you hear a government official say “we tried that before,” give this one back to them

If the situation is exactly the same - including the same customers, constituency and backers - maybe the failure wasn’t the idea. If the situation is different, are we trying it again or a different way?

My favorite use of the phrase “We’ve already tried that” comes when talking about entrepreneurs and incubators. Those government agencies which have tried an incubator and failed did so not because they didn’t have potential success stories, but because they refused to prune the system of the dead wood of “wannabe” entrepreneurs to let the true success stories grow. And then they made matters worse by stunting the success stories by asking them to remain as “anchor tenants”. Entrepreneurs that use incubation the right way get the heck out of Dodge when it’s time to grow, and then return to the incubator again when it’s time to seed the next idea.

Pushing the incubated business out the door often means you’ll get two or three more within six-seven years from that same entrepreneur. My former colleagues - the new VCs - will attest to that as many of them are looking to start private incubators to remedy the ill-attempted public incubators.

Economic Development Myth 11 - Seed Capital Must Be Private

I’ve often heard this phrase:

Seed Capital Is a Private Affair

At the core of this myth is this belief:

Government funds can’t be used to benefit a particular entrepreneur

I’ll be the first to say that government money (with government strings attached) isn’t in the best interest of entrepreneur: for one thing, the government’s not really qualified to make direct investments, and cronyism or nepotism could more than likely result.

There IS a way that works for government investment in the best and brightest, one that is being used in countries that have a limited amount of seed capital and one that fits within the boundaries of Myth 3.

In a fairly timely conversation, I just spent an hour with an investment manager that walked me through the way that Denmark is approaching seed capital. Denmark has Lego, Skype and a few other key industries but had never really figured out how to do seed capital.  Then, in 2005, it decided to put place a seed capital fund in the hands of a private investment firm called, appropriately Seed Capital. The first fund, at DKK 500 million (just over $100 million), was established in 2005 and required that at least $60 million of that be directly invested in new businesses and the remaining was invested as shares in existing businesses.

The fund’s investments are to be made by a team of professional investors with experience within financing of businesses in the very early stages as well as experience in the combination of public and private sector financing.

The investment partner told me an interesting thing happened: at first the government wanted to completely protect their money, which makes an investment manager’s job impossible; then it moved to asking for just half the money back, at least getting the point that some companies are going to fail (most, without incubation or mentoring) and need to be put down, regardless of whether they’re funded by private or public funds; then finally on to requiring a particular ROI from Seed Capital.

Based on the current capital base, the fund is expected to be able to invest in between 20 and 25 new businesses. The goal for the fund is to raise additional capital during the next year.

Guess what? Here’s the great part: the investment managers can also pick a few of the growing companies that they’ve invested the public funds in, and then put VC money into them for the second round. In essence, the 10-12 companies per year that government capital is invested in may yield a few companies that are ready to move to the next level, and the private VC money that is used matches or far exceeds the government funds put into the initial seed capital fund.

I know, some will cry “foul” because a few people profited off of it. But look at it this way: these people (the VCs and investment managers) will make this money anyway on other deals. The lack of serious capital within the country (or in a state, for instance, in a US example) only means that the VCs may have to invest in another country (or state).

What are the implications of that? No tax revenue, no jobs and eventually no entrepreneurs - a vicious cycle that’s not beneficial to anyone. On the flip side, government seed capital, in the hands of a wise investment manager means wealth creation for entrepreneurs and company owners, returns for the government, and jobs for the workforce.

In other words,

The government’s way of “investing” via tax abatements has no benefit to the startup entrepreneur; try investing the way an angel or VC fund would invest for measurable results.

How ‘bout them apples?

Ec Dev Myth 7: Proximity is the key

Old school economic developers will often pitch a locale based on its proximity to other places: 4 hours to this city, 2 hours to another one. What they don't list are the things that important to entrepreneurs, who often like to work hard and play harder: mountains, beach, hiking, other outdoor activities. It's part of what makes Silicon Valley what it is today.

It's obvious why old-school economic development listed proximity: they chased big manufacturing that needed big power, big logistics and big draws for big company executives, who want high-end shopping and arts that aren't available in the locale being pitched. But it's almost as if those pitching the locale as being n hours from somewhere else would rather be there than here.

Economic Development Myth 6 - EcDev and The Single Entrepreneur

Some old-school economic development types tend to shy away from selectively helping Entrepreneurs and startup companies for fear of the perception of favoritism. In economic development spin:

Singling out one Entrepreneur (or Startup) means others don’t get assistance

The corollary, in reality, is this belief:

All Entrepreneurs (and Startups) Are Created Equal

Not much to say here that hasn’t already been said. I don’t know why economic developers would ever ascribe to the limited pie theory; if you’re in the business of creating opportunity don’t shy away from it!

Use this instead:

Targeted growth of sectors and business clusters starts with - and is complemented by - tests with a few key Entrepreneurs.

Think of these key entrepreneurs - many of them serial entrepreneurs - as the control group to gauge future cluster participants against.

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.