I have a tot who is a chef. Seriously. The kid can cook and bake like nobody’s business, and enjoys it. The word from the mouth of the babe is that perhaps we should start saving for tuition at the Le Cordon Bleu, or the Culinary Institute, in New York. I worked in the kitchen of a ritzy country club while in college. Let me share with you industrial kitchen virgins out there that cooking in a high-class joint for a living can be a kick-ass job. Where else will you get paid to watch a 55 year-old pantry worker wrap herself in plastic wrap and sing “Hey Big Spender” in her Catalan accent, and dance around the Sous Chef provocatively? “Da menute jew walked in the yoint….”
I still miss that country club job. If you can take the heat, the industrial kitchen in a ritzy eatery is a great place to work.
My advice to my budding chef is that you go to the local community college for a two-year degree in culinary arts and at the same time knock off the prereqs for a degree in business administration. Then, you transfer to Michigan and finish up a BBA at the B-School. After that, you’re off to make your mark on the culinary world. In addition to being a kick-ass chef, you’ll have the ability to speak intelligently to a banker when you want more money than I’ll probably have to give when you want to open your own “yoint,” where the big spenders will surely come to eat.
Food service is a risky business. The profit margin in that industry is way too small for my tastes. Show me a business with a 40-60 percent profit margin, and now we’re talking organic, free-range turkey. On AnnArbor.com today business reporter Nathan Bomey has a piece that argues Michigan entrepreneurs need to “embrace risk.” I like Bomey’s writing, as a rule, and appreciate the fact that he tackles the usual topics from unusual angles. As luck would have it, Malcom Gladwell has a piece in the Janaury 18, 2010 issue of the New Yorker that, in fact, argues that successful entrepreneurs do not take risks. This comes from Gladwell’s article:
“In a recent study ‘From Predators to Icons,’ the French scholars Michel Villette and Chatherine Vuillermot set out to uncover what successful entrepreneurs have in common. They present case histories of businessmen who built their own empires—ranging from Sam Walton of Wal-Mart, to Bernard Arnault, of the luxury-goods conglomerate L.V.M.H.—and chart what they consider the typical course of a successful entrepreneur’s career. The truly successful businessman, in Villette and Vuillermot’s telling, is anything but a risk-taker. He is a predator, and predators seek to incur the least risk possible while hunting.”
I read Gladwell’s article recently and found myself realizing that I am simply not a predatory entrepreneur. However, the argument of the successful entrepreneur as the limited risk-taker made perfect sense to me. Of course the most successful hunters take the fewest risks! It was a sobering read for me as a business owner, and I am still trying to decide whether it’s too late for me to become a predator in my industry. This gets into the who nature/nuture discussion, however, and that’s a blog entry for another time.
Then, I chanced upon Bomey’s AnnArbor.com piece in which he argues that for the sake of the economy, “…taking risks is essential for Michigan.” Bomey also writes, “A key element of reconstructing Michigan, however, is culture change. Michigan residents are largely averse to risk taking.”
Hell yes we are! We’re midwesterners. Risky business is not the culture of assembly-line workers at any of the Big Three. Our state’s politicians didn’t take risks, but blindly supported a single-industry to the detriment of the state and its residents. Our U.S. senators and representatives have pork-barreled money for the auto industry for decades. They have ignored environmental issues and global warming. In Time magazine, Representative John Dingell was accused of “pandering” to the interests of Michigan’s auto companies. These folks failed to realize that putting all your eggs in one sedan would eventually cause the state’s economy to implode.
Bomey writes, “This generated a culture defined by an incredible work ethic and a suspicion towards entrepreneurialism.”
Let me give you some free advice: those so inclined should be very suspicious of becoming entrepreneurs. According to data from the U.S. Small Business Administration Office of Advocacy, ”Two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years, according to a new study. These results were similar for different industries.”
Think carefully Padawan Jedi Entrepreneur: Would you take a job where there was a 56 percent chance you wouldn’t earn enough money to feed your kids or pay your mortgage? Yeah, me neither. Well, actually, it turns out I am kind of a risk-taker, but I didn’t choose food service, and my profit margins are pretty close to that free-range, organic turkey I mentioned earlier.
Now let’s talk economic development. The current economic development mantra in Ann Arbor is to fund start-ups. Ann Arbor SPARK and its LDFA master throw taxpayer money at what amounts to some very risky business investments. Neither Ann Arbor SPARK nor Board members on the LDFA have shown that the success rates for taxpayer financed start-ups are any higher than those of non-taxpayer financed start-ups. In other words, 56 percent of start-ups funded with our tax dollars will fail within four years.
Business investment is always a calculated risk—ask any banker or venture capitalist. The losses, one hopes, are offset by the wildly successful businesses that survive. If the Small Business Administration survival numbers for small business are accurate (and we have no reason to believe the SBA is out to exaggerate the numbers—like some local economic development outfits I know), this means that when economic development is focused on start-ups, there will be a return on the investment only 44 percent of the time. Those are not odds I like for taxpayer dollars.
That’s why bankers don’t generally get involved in funding start-ups without secured assets, either someone’s house or a loan guarantee from the U.S. Small Business Administration. Bankers give lines of credit to, and fund the expansion plans of, firmly established businesses. Heck, it’s tough for a start-up to rent office space. Landlords don’t want to sign three-year leases with companies that might fold in less than two years. It’s a brutal world out there for business start-ups because the folks with the money know the odds of start-up successes are under 50 percent.
This is also why Ann Arbor City Council needs to dissolve the LDFA, revoke the entity’s TIF, and return that money to our schools, library and transportation. Council needs to spin off Ann Arbor SPARK. SPARK should go and gamble its own money on start-ups.
Me? I’m all for an economic development plan for Ann Arbor that focuses on attracting and recruiting established small and medium-sized businesses to our city by expanding services, minding our infrastructure, paying real attention to non-motorized/alternative transportation, and offering economic development services through a city-controlled Office of Economic Development.
I don’t agree with Bomey that risk is going to rescue Michigan’s economy. Start-up entrepreneurism isn’t, statistics show us, the silver bullet solution to the economic woes our city and state face. We need to make Michigan and especially Ann Arbor magnets, and do it through offering the caliber of schools, city services, recreational opportunities and infrastructure that will attract established small and medium-sized businesses.
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It seems the only growth industry in this State is the business of “economic development.” Private industry is on life-support so laid-off middle-aged businessmen, bureaucrats, and all their pals who failed to make a living in the private sector have found greener pastures in tax-payer subsidized agencies that do nothing but fund each other’s “incubators.” Never mind that little, if anything ever hatches. It’s all about padding the nest.
What these folks really need is a taxpayer financed conference center where they can come together and discuss new ways of ripping off the public. Imagine topics such as, “Grants, Subsidies and GO Bonds–Opportunity Knocks!” or, “Job Creation Statistics and Other Art Forms” or, “Creative Financing for Marginal Capital Projects” or “Scratch and TIF–What’s That Smell?”
Comment by Teaman — January 22, 2010 @ 7:39 pm
A2P, while we agree on many points in your post, we disagree on some, as well.
We agree that government funding private businesses – even startups – is bad, bad, bad. Using General Obligation bonds (which are backed by the full faith and credit of the issuing government unit: your property taxes) to finance private interests is a scandal. If no banks, private investment funds, venture capitalists, or investment partners think a particular company business idea makes sense, it’s not likely that any group of elected officials is likely to out-guess them. if elected officials – or senior public employees – believe that they spot an opportunity that everyone else has missed, let them put up their own money, or raise their own money from the markets.
We agree that our best course is to provide a blend of taxes and services that makes people WANT to be here. I think that our true target market is people who live in Scio or Pittsfield, but that’s another thread.
We disagree on “attracting and recruiting established small and medium-sized businesses to our city” as a strategy for jobs and rising living standards. This once was called “factory -chasing”, and it is Michigan’s one-note siren song to encourage economic development. A political jurisdiction/entity offers a firm the chance to receive the high level of public services if offers (educated workforce, recreation facilities, maintained roads, freeway access, etc), without requiring the target firm to pay its fair share of the cost of those services. A few years later, when someone else offers even lower taxes, or corporate business plans change, the target firm leaves.
Factory-chasing is an unsustainable model – if the only reason a company locates in your state is that taxes are low while someone else pays for their services, they will leave on a whim, and act as a drain on public finances in the meantime (if the lowered taxes offered are not a drain, then why not offer them to all existing firms, as well?). Michigan has bought some Hollywood film production with tax refunds, but as soon as the refunds end, so do the jobs.
The New Yorker article (which I also read -the cartoons weren’t so good in that issue…) missed the point completely, because the author seemed to want to “prove” that 1) entrepreneurship is phony; and 2) Ted Turner is unfairly successful.
Entrepreneurship is simply the ability to see opportunity that no one else sees, combined with the personal chops and financial resources to take advantage of the opportunity. The “risk” in entrepreneurship is multi-facitied: 1) is the opportunity real, or illusory; 2) does the would-be entrepreneur have the skills and knowledge needed to create and run an enterprise that can take advantage of the opportunity; 3) does the would-be entrepreneur have the financial resources (personal, borrowed, or subscribed) to fund the building of the new enterprise; 4) can all this come together before the opportunity fades, or someone else gets there faster and better?
Ted Turner was able to clear all four hurdles; the author thought that this indicated he took no risk. My suggestion is that, instead, his ability to clear all four hurdles shows that he is the real deal: someone able to correctly identify an opportunity, figure out how to make it happen, finance the idea, and pull it all off before someone else did.
The point the author of the New Yorker piece made unknowingly was that many more people BELIEVE they can clear all four hurdles than actually are ABLE to clear them; that’s the real reason so many new businesses fail.
Locally-invented firms are a bit like plants in an ecosystem: they sprout because the local environment has the resources they need to grow. Unless the local environment changes unfavorably, or another environment emerges to offer superior resources, they tend to “bloom where they are planted”.
Borders, Domino’s, Creative Solutions, and Zingerman’s are all successful, growing firms that started in Ann Arbor (& envirions). There is no reason that they cannot locate somewhere else; they remain here more-or-less due to human inertia: things generally have to be pretty bad to make us pick up and relocate. Firms with no local roots have no such inertia – they leave when it suites their business needs.
Locally-invented firms are a bit like plants in an ecosystem: they sprout because the local environment has the resources they need to grow. Unless the local environment changes unfavorably, or another environment emerges to offer superior resources, they tend to “bloom where they are planted”.
Factory-chased firms are a bit more like a herd of grazing animals: when they have denuded the resources from an area, they are more likely to move on to more greener pastures.
Understanding that MANY more people THINK or hope they have the stuff/luck to start a successful company than actually HAVE the stuff or the luck, I suggest that locally-created firm are better for our economic health than chased factories, even than chased knowledge factories (remember Google’s “1000 jobs”, & Pfizer’s big investment right before it shut down?).
I’m OK with some publicly-funded incubator space (office w/desk, someone to help answer multiple phones, T-1 wiring, etc) for the first 6 – 12 months of an enterprise’s existence. Beyond that, however, I think we are interfering with the winnowing of the market. GO bond financing of private enterprise, in particular, is against nature. Odd, but I can recall a time when business people thought of government as more of a problem, than a solution. While I believe that that position was absurdly over-stated, I would subscribe to it before I subscribed to taxing homeowners to fund someone else’s hotel, or to build and operate a money-losing convention center to generate business for the private hotel.
Government should not be in the business of selecting “Winners and Losers”, nor of buying knowledge factories with tax holidays or abatements. Select the mix of taxes and services that works for the community and makes it attractive to outsiders, and stick to it. If taxes are too high, then lower them (and services) for everyone.
It’s one thing for an entrepreneur to ask government to reduce some perceived barrier to success; its another thing for a business person to ask taxpayers to insulate them from risk of failure, or to ask taxpayers to provide services for which the firm pays less than its share.
While we agree on many things, I believe that growing new firms is a more solid economic foundation than trying to attract existing firms by factory-chasing. Better the next Borders, Zingerman’s, or Argus Camera, than the next Bechtel or Pfizer.
Comment by John Floyd — January 23, 2010 @ 12:23 am
John,
I’m not talking about sex for money; I’m talking about love. No tax incentives for small- and medium-sized businesses. Larger, larger and largest businesses, there has to be an ROI scheduled attached to the deal and taxpayers have to always come out recouping their initial investment. We have been using the money we spend on the very things that, historically, attract business to communities, infrastructure, schools and parks, to RECRUIT business to our state. So, our schools are stuffing 35 kids into a classroom, our parks are unkept and the infrastructure is falling apart.
You’re right that it doesn’t work. Small and medium-sized businesses generally come with an owner or two who have families. We then must focus on making our city and state the kind of PLACE where people want to move and live, instead of throwing away money to lure business here.
Furthermore, as I write in an earlier post, Michigan is a sticky state, something like 65 percent of people born here stay here once they reach the age of 18 (in other words, if their parents down move them to another state). That means spending money on education is crucial so that if these people choose to start-up businesses, more of them will be among the 44 percent that survive up to four years.
What is clear from the Google jobs for incentives/parking spaces in our public garage is that is was a failed model. Google has not created 1,000 jobs; there are 200 or so employees there. We should be talking frankly with Google officials and studying why the incentives failed to get the jobs created. Google has created jobs elsewhere in the time during which those promised jobs were supposed to have been created.
Comment by A2 Politico — January 23, 2010 @ 7:25 am
“We should be talking frankly with Google officials and studying why the incentives failed to get the jobs created.”
How about we talk frankly amongst ourselves (i.e., the community) about how local entrepreneurs can create businesses that provide products and services that we want and that could be exported to others that want them? The jobs will follow and the wealth created will stay in the community rather than some of it going to Google’s (or whoever’s) shareholders. The key is local (independent) ownership, not jobs.
“Jobs” is too broad a term to be useful. Are we creating them or are we importing them? If the latter, they’re one more type of leak in our local economy, like many other imports such as energy/fuels, credit, insurance, and a multitude of products that we use every day–even housing could be considered an import if the landlord lives outside of the community. Of course we won’t replace all such imports with local alternatives, but I think it can be a more constructive way of looking at things than the jobs-focused approach that doesn’t seem to be working.
For more on locally owned, import-substituting businesses, I recommend The Small-Mart Revolution, by Michael Shuman.
Comment by Steve Bean — January 23, 2010 @ 2:14 pm
Job creation is a sticky term. What it boils down to for me is that it’s time to stop waiting for the Googles of the world to ask Ann Arbor to dance, and then have our financial toes stepped on over and again under the auspices of bringing “jobs” to Ann Arbor. There are other cities in this great county of ours that go out and pursue small and medium-sized businesses by pitching nothing more than the quality of life of the town. And when I say pitch, I mean pitch the whole nine innings. It works, too. Look at Inc., and you will find articles about the best places to move your business to and RAISE A FAMILY.
As for local entrepreneurs providing goods and services we buy elsewhere, then we get into some ugly discussions about price point, and whether it’s reasonable to expect people who have innumerable options now to pay more for goods or services if they have other options.
I LOVE the SMALL-MART, but let’s not delude ourselves into thinking there not some very good reasons that the Walton children are, at the moment, sitting in the top ten of the Forbes list of the world’s wealthiest individuals. Sam Walton was one of those predators referred to in the New Yorker article. So was John D. Rockefeller and so is Bill Gates. I would argue that what we want is to encourage entrepreneurism by stressing that successful entrepreneurs take calculated risks.
Local, independent ownership is going to go the way of the T-Rex unless politicos come up with some way more creative ways to nurture local business that doesn’t involve crony capitalism.
Great comment, Steve! Thanks.
Comment by A2 Politico — January 23, 2010 @ 3:06 pm
Those discussions about price point needn’t be ugly, A2P. If we have them we might find that other economic benefits outweigh price point. In particular, the multiplier effect of keeping money in the local economy may be difficult to quantify accurately but it seems to exist. Environmental externalities exist as well, as do social impacts. If we consider all aspects of sustainability — social equity, economic vitality, and environmental quality — we’ll start to get clarity on what actions and policies best benefit our community and which are distractions from true quality of life improvements. As a starting point we might consider the distinction between price and cost — in the broadest sense.
Comment by Steve Bean — January 24, 2010 @ 10:42 am
@6 Of course those discussions get ugly, particularly when we think that the buy local movement depends on median income being above the national average. It’s ugly to think that buy local could be construed to be a completely bougie idea that local business owners, as opposed to products produced in our state, deserve, nay desperately need us to support their business. I wasn’t the one who opened the local bookshop that now has to compete against Amazon.com and (ironically) Borders. We are in the midst of an economic revolution brought on by the internet, in terms of what local business owners may expect from local clientele.
Now, food is another matter. I think we can educate people to stop thinking cheese from France is better than cheese from Wisconsin. The cheese from Wisconsin is less expensive, and hasn’t come 6,000 miles to my local store shelf.
As for what is better for our community, for the majority of America, price point is the issue. We have been trained to comparison shop. It’s really that simple. Those who don’t need to comparison shop are, commonly referred to, as the rich. Buy Local is a movement that needs to be further refined in our community (as it has been in Berkeley). Then, we can really make some progress in the support of locally produced (and not just locally sold) products.
A2P, this is a great thread. Thanks very much for writing these last couple of entries about business, buying local, etc…t’s good to get off the bandwagon and look more closely at the issues.
Comment by Yale89 — January 24, 2010 @ 10:55 am
It’s often hard to beat the economies of scale of a large- nationwide – firm. That’s why when you walk down Main St. in Ann Arbor, there is almost nothing to buy that people truly need – only things they might want, but can do without. Yale89 is on the money about above-median vs. below-median incomes in the “buy local” discussion. There is a reason Aldi exists.
Many services – house painting, massage, dentistry, tonsillectomy – that don’t necessarily lend themselves to nation-wide economies of scale. In these areas, local firms an compete effectively with out-of-town or out-of -state firms. Other services – retail goods distribution, transportation, natural gas transmission, telecommunications – do have national economies of scale, and local small-time firms cannot compete.
The existence of internet shopping makes the game even more complex. It’s not obvious that lots of retail will survive, let alone local retail.
I’m willing to pay a modest premium to “buy local”, but that’s not a basis for the long-term survival of un-competitive business. “Buy local” has to be competitive with the other available options.
Comment by John Floyd — January 25, 2010 @ 12:54 am
In Ypsilanti, a medical marijuana facility has created 30 new jobs. The only incubator needed (I suspect) is for incubating seedlings. In the articles I have read, there’s no mention of tax incentives or other support from public tax dollars, unlike any articles you read about businesses coming to Ann Arbor.
Our city officials should be asking themselves, ‘Why did this business choose Ypsilanti over Ann Arbor?…What do we need to do differently?…How can we get more businesses to invest in Ann Arbor without using public funds to subsidize them?’
The crux of this article is that government shouldn’t be in the business of picking winners and losers. I couldn’t agree more.
Comment by Janelle Baranowski — January 25, 2010 @ 10:26 am
“‘Buy local’ has to be competitive with the other available options.”
One thing that makes local businesses competitive is buying from them and even from OTHER local businesses. It’s a positive feedback loop that results from the multiplier effect. “Buy Local” isn’t a call for buying things you don’t need or want or for supporting failing businesses (though some may confuse it as such.) It’s proactive, not reactive. It’s not about competition but about information — the knowledge of how money works and where it goes. It’s an investment, the alternative to which is continued, short-sighted spending that drains wealth from our community — our schools, our infrastructure, our parks, our transportation system, etc. It’s not about the businesses, it’s about the community, which the businesses (the people who own them and work for them) are a part of and benefit from. Within a supportive community businesses will still fail, but it will be more due to not providing a desired or needed product or service to the community rather than from losing out (being undercut?) by a national chain.
It’s not clear to me whether you all (A2P, Yale89, John) are critiquing the “Buy Local” movement or its misrepresentation by people who don’t understand it. If it’s the former, what do you suggest as an alternative? If it’s the latter, as a board member of Think Local First, I would appreciate any suggestions for how we could better educate the public about our mission (something I’ve discussed with our executive director and board members at and following our recent strategic planning session.)
Comment by Steve Bean — January 25, 2010 @ 10:28 am
Mr. Bean,
I like and support the idea of “Buy Local”. I get stuff at Downtown Home & Garden instead of Lowe’s, when I can. I think the point several of us have made is that cash-strapped people may find the benefits of not-shopping at the low-price retailer at bit abstract for their budgets.
Concreteness makes any message more effective. Offer specifics of buying local. I offered the choice between Downtown H&G and Lowe’s. Give us more specifics. Things like “The direct effect on you of shopping at DTHG is…” would help.
I like supporting local stores, but the notion of even a voluntary restriction of trade goes against 245 years of both economic theory, and free-trade practice, of what raises incomes the most, the fastest. For those who slept through that lecture in Econ 101, trade theory is an extension of the idea that 1) specialization of labor, by individuals or groups, increases productivity and output, and lowers costs at retail; 2) everyone has something at which they have “comparative advantage”, which is fancy way of saying that everyone has some unique, best, economic contribution to make, for which others will exchange their goods or services to mutual advantage; 3) free flow of goods and services allows people to specialize in that area in which they have comparative advantage.
For example, we don’t all make our own cars locally, and the people who make cars don’t make refrigerators, develop anti-cancer therapies, sell housewares, or sell groceries. We buy most of these things from outfits who reap economies of scale by having regional, national, or international markets, of which AA is a (small) part. To pay for these things, we as individuals have to find something to make or do for “export” to those who make or do things we want.
Perhaps I do mis-understand your organization’s ideas. Can you send me info, or direct me to it? And again, concrete examples would be helpful.
Thanks,
John
Comment by John Floyd — January 28, 2010 @ 11:14 am
John, the AADL has two of Michael Shuman’s books, one of which I referenced in #4: http://www.aadl.org/catalog/search/author/%22Shuman%252C%2BMichael.%22.
Think Local First is at http://www.thinklocalfirst.net. The site is overdue for some reorganizing but we’re stuck with it until some technical issues are worked out.
BALLE is at http://www.livingeconomies.org.
I’m interested in sustainable community. For that reason I don’t think that looking at economics alone is sufficient. Blend your Econ 101 with Ecol 101 and Ethics 101 and you might start to see things more from my perspective. Shuman’s books are great reads that get at some of that balance. I think you would enjoy them.
Comment by Steve Bean — January 28, 2010 @ 3:51 pm
Thanks, I’ll take a look.
The idea of costs and benefits not recognized by the market (e.g. “Externalities”, or “Public Goods) was in Econ 201. It’s not that these things aren’t real; its that one has to be living above subsistence (i.e., above paycheck-to-paycheck) to be able to worry about them.
Comment by John Floyd — January 29, 2010 @ 2:16 am
I live paycheck to paycheck and I do something about them. In fact, doing something about them helps me live as well as I do.
Comment by Steve Bean — January 29, 2010 @ 8:01 am
Well, OK.
Comment by John Floyd — January 29, 2010 @ 7:16 pm
John, people worry about money even when they’re rich (unless, of course, they don’t.) We worry about things we don’t understand or don’t think clearly about. I’m talking about providing information so that we can better understand how our local economy works (or could work), so that worrying is less of a factor regardless of our income.
I can’t give you a concrete example. If it was that easy to see we wouldn’t be having this conversation. We either need to think it through or read about a study (see Shuman), or just keep exploring it. The thinking it through involves mainly just seeing that money spent on a local purchase doesn’t immediately leave the local economy. By the way, didn’t your Econ classes cover the multiplier effect?
Economics seems to think that talking about “externalities” or “public goods” is sufficient to capture the role of nature, or the environment. Ecology sees things very differently. If anything, ecology comes closer to including economics than the other way around because it acknowledges that everything is connected. Moving up to Econ 201 doesn’t get us to that level of understanding. I’m shifting topics a bit here, but it’s that different way of looking at relationships that might help us see economics differently.
Also, it might help to keep in mind that we’re not alone when we “Buy Local”. If that were the case it wouldn’t be a movement. The movement makes its success possible (and I don’t think that’s just a tautology.) That’s why BALLE and TLF are needed — to help us to see that we’re not alone. If people don’t see themselves as part of a community, they’re confused, and their economic decisions will be confused.
Comment by Steve Bean — January 30, 2010 @ 10:21 am