Developing the Entrepreneurial System – Here and There

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A professor from the University of Michigan’s Ross School of Business is writing from his home state’s perspective, but sharing insights regarding Midwest entrepreneurial ecosystems and how they might differ from international efforts. He notes four key elements, including the always popular capital and worker skill aspects:

  1. The most important step is connecting with your customer

While understanding the basic fundamentals of cash flow and knowing how to manage a staff is important, businesses everywhere must put finding the customer first if they want to be successful. For Midwestern businesses, that might be a challenge for marketing. For startups in some developing economies, the search can be less abstract: Infrastructure challenges can make connecting with customers more difficult. For example, in Vietnam, the single biggest platform for ecommerce is Facebook — but in rural Morocco, a lack of infrastructure makes ecommerce virtually impossible. Interpersonal connections and marketplaces remain indispensable.

  1. Success begets success

In the United States, the story of every successful startup cluster begins with capital — and one of the best sources of capital is another company’s exit. We’ve also seen that for every $1 a Michigan startup receives from a Michigan VC firm, it attracts $4.61 of investment from outside of Michigan. Cash is the fertilizer, and the more of it in the environment, then the more likely the economy will grow.

This logic doesn’t always hold in developing economies, one of the hallmarks of which is no middle class and a huge income disparity. When wealth is created in these environments, there are many places that the money can be reinvested in besides another startup: to fund education, for example, or to buy more land. That being said, more wealth generated by new venture activity has the potential to lift the income threshold and lead to a more stable, flourishing economy. 

  1. Give your talent the fulfillment they need

A major challenge for small communities is talent, no matter where they are located. But talent isn’t just about having smart people — it’s about having people with the skills needed to build a business, and a community that can support them. In the Midwest, that talent gap often takes the form of local workers who are educated, well-trained, and experienced in running a business, but who might not choose to stay and work in their communities if there aren’t opportunities that appeal to them.

Robust entrepreneurial ecosystems with more activity have the potential to attract top talent away from more metropolitan areas. It can become a self-sustaining cycle once it gets going, but may take a significant event or local unicorn to get it kicked into action. In developing countries, that more often looks like workers who have limited skills, who need the determination and resources to invest in themselves — and who need an ecosystem that can provide them with that base.

  1. Take local differences into account

What works in Silicon Valley doesn’t always work in Chicago — and what works in Kosovo might not work in Vietnam. When it comes to translating what has worked in one place to another, the details become local, and critical. Some business climates trust banks and credit lines; others operate solely in cash. In some places, the local language is widely spoken; in others, that local language could be six different dialects. Just as the National Venture Capital Association has local chapters to better understand and focus on the small ecosystems being built all over the United States, context is everything for entrepreneurs looking to get off the ground no matter where they are.

While languages, customs, and currency differ from country to country, one thing doesn’t: When entrepreneurs and innovation win, it can lift the outlook of an entire economy. With the right resources and support, the Midwest has stepped up to create the jobs and standing it needs to survive in the modern economy — and developing ecosystems around the world are doing the same.

Give Me Liberty! Give Me a 51st State

A television station in Washington state recently reported that representatives there would like to divide their state — with the eastern half becoming the state of Liberty. Legislation includes the following: “Since statehood, the lifestyles, culture and economies of eastern and western Washington have been very distinct and dramatically different.”

The TV outlet reports a tech, service-oriented economy in Seattle and Olympia (the capital), while Spokane anchors the east with roots in mining, forestry and agribusiness.

Not surprisingly, forming a new state is not a simple process. But shockingly, at least 12 new states have been proposed at one time or another (according to State Legislatures magazine). Among the offerings: South Alaska, South Florida, North Maine and Superior (Michigan’s Upper Peninsula).

All About the Water

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The governors of the Great Lakes states recently approved a request by a Wisconsin city to draw water from Lake Michigan after its existing water supply dried up. But because the city isn’t in the watershed of the Great Lakes, the two Canadian provinces that share Great Lakes water rights say the request should be denied.

Waukesha, Wisconsin will be allowed to tap Lake Michigan for up to 8.2 million gallons per day once it completes a $207 million pipeline project that would draw in lake water and return fully-treated wastewater.

Delegates for the governors of Michigan, Minnesota, Wisconsin, Illinois, Indiana, Ohio, Pennsylvania and New York gave their unanimous consent to the first formal request to divert water outside the Great Lakes basin during a meeting of the compact council.

The 2008 compact prohibits water from being sent outside the basin watershed. Communities like Waukesha, located over the line but within a straddling county, can apply under a limited exception.

The eight governors approved the request over the objection of widespread opposition. Mayors, legislators, policy-makers and citizens around the Great Lakes have worried about the precedent Waukesha’s application represented.

Waukesha is under a court-ordered deadline to provide safe drinking water by mid-2018. The city draws most of its water from a deep aquifer that is contaminated with unsafe levels of radium, a naturally occurring carcinogen. The city has a population of about 70,000 people.

Kiplinger warns that more water conflicts will flare up, citing California, India, South Africa and the Middle East among the likely areas of dispute.

Making the Most of the Middle

Business direction background with two people

The Indiana Chamber Foundation conducted research on Indiana middle-market firms nearly a decade ago and initiated programming efforts (that continue today) to help grow those companies.

Now, American Express and Dun & Bradstreet offer the Middle Market Power Index.

The latest report rates Indiana fourth for growth in the number of middle market firms – defined as between $10 million and $1 billion in annual revenues) from 2011 to 2016. The current 3,916 firms in this category constitute an increase of more than 101% from five years earlier.

While small businesses (less than $10 million in revenues in this case) comprise more than 98% of all businesses, Indiana is one of 10 states – in a somewhat Midwest-dominated category – in which middle market firms comprise a greater than average share of companies. The numbers: Illinois and Wisconsin, 1.5% share; Michigan and New Jersey, 1.3%; Indiana, Kansas, Massachusetts, North Dakota, New York and Ohio, 1.2% each.

Maybe part of the explanation for the above is that middle market firms are much more likely to be found in manufacturing (18%) and wholesale trade (17%).

Just as the Chamber found previously, these firms makes an outstanding economic contribution. While comprising just less than 1% of all businesses, they employ more than one in four workers (27%) in the private sector and contribute 26% of revenues.

Time for Work Share to Happen in Indiana

Work share is a positive option for both companies and their employees in times of economic need. It is a voluntary program that allows employers to maintain a skilled and stable workforce during temporary economic downturns.

Here’s an example of how it works. Instead of laying off 10 workers due to decreased demand, a company could keep the full workforce in place but reduce the hours of 40 workers by 25%. The impacted employees would receive three-quarters of their normal salary, as well as be eligible for partial unemployment insurance benefits to supplement their reduced paycheck.

Just like regular unemployment insurance, work sharing benefits would not fully cover lost income. They would, however, help mitigate the loss.

There is no negative impact on the state’s unemployment insurance fund.

Work share programs are in place in more than 25 states. They are intended as temporary solutions, usually lasting no more than six months. The biggest users are manufacturers, where work flow often varies based on current contracts.

Neighboring Michigan and Ohio passed legislation that authorized work share programs. Indiana failed to do so the last two years, despite support in both political parties. Let’s finally make it happen in 2015.

On the Right Jobs Track

Indiana’s employment picture has brightened considerably in recent months. Some numbers behind the numbers, according to the Department of Workforce Development:

  • There are over 30,000 more Hoosiers in the labor force than in March of 2000, the employment peak in the state
  • Indiana’s labor force has grown at six times the national rate over the past year
  • The number of unemployed Hoosiers (196,272) is less than 200,000 for the first since August 2008
  • Since July 2009, the low point in recent employment numbers, Indiana has added 214,600 private sector jobs (10th in the nation) at a rate of 9.2% (seventh in the nation)
  • In the manufacturing world, the state ranks third in jobs added over the past year (behind Michigan and Ohio), second (behind Michigan) in jobs added since July 2009 and ninth in growth rate over the past year

Analyst: RTW Opponents Use Flawed Math

Citing research by James M. Hohman of the Mackinac Center, Michigan Capitol Confidential takes issue with the claim that right-to-work states feature lower wages. Hohman's conclusion is that, after all the facts are in, right-to-work states actually have the higher per-capita incomes.

Scores of right-to-work critics ranging from politicians to economists have cited lower per-capita incomes in right-to-work states as why the new law is not good for Michigan.

However, not factoring in cost-of-living exposes a flaw in that analysis, said Mackinac Center for Public Policy Fiscal Analyst James Hohman. Once that is considered, Hohman said the per-capita income is higher in right-to-work states than non-right-to-work states.

For example, Texas per-capita income was $37,098 but would have a purchasing power of $49,700 in the state of New York in 2007, according to Hohman’s analysis. New York’s per-capita income was $47,852.

Hohman found that in terms of Michigan dollars in 2000, right-to-work states had 4.1 percent higher per-capita personal incomes than non-right-to-work states when factoring in cost of living. Michigan was considered a non-right-to-work state because the law was passed in late December 2012. Hohman said the right-work-states didn’t surpass non-right-to-work states until 2003.

“One of the most basic arguments repeated time and time again by right-to-work opposition is that Michigan is going to lose income by passing this law,” Hohman said. “That just isn’t the case. When you adjust for what a dollar can get you, the difference reverses itself."

Hohman used the cost of living index done by political scientists William Berry, Richard Fording and Russell Hanson. They adjusted for cost-of-living in every state from 1960 to 2007.

Pennsylvania Legislators Introduce Right-to-Work

The Washington Free Beacon reports that legislators in the Pennsylvania legislature want to bring right-to-work to their state, citing its passage in Indiana and Michigan and the need for job growth and desire to attract businesses.

Six GOP lawmakers on (Jan. 22) introduced a proposal to make Pennsylvania, the “Keystone State,” the nation’s 25th right-to-work state.

The legislation, which would end the longstanding practice of forcing employees to join unions as a condition of work, has stalled several times over the past decade. The bill’s sponsors say new laws in Michigan and Indiana forced the state’s hand.

“The needs of our economy dictate that it must be adopted at some point in time,” said state Rep. Daryl Metcalfe. “The victory of right-to-work in Michigan and Indiana certainly thrust the spotlight on it and made the General Assembly look it more seriously than the past.”

Pennsylvania is one of the most heavily unionized states in the country with more than 700,000 workers belonging to organized labor groups. That is nearly 100,000 more union members than in Michigan.

The advent of right-to-work in the traditionally labor-friendly Midwest and Rust Belt has left policymakers scrambling to catch up, said Nate Benefield, director of policy analysis at the free-market Commonwealth Foundation.

“Indiana and Michigan are states that we directly compete with,” he said. “We’re going to have to evolve to remain competitive and it’s also a great opportunity for us to outcompete the northeast.”

If Pennsylvania passes right-to-work, it will be the first state to do so in the northeast. That could give it an economic advantage over neighboring New York and New Jersey, which lead the nation in union membership as a percentage of the workforce, advocates of right to work legislation said.

“We’re playing catch-up to Indiana and Michigan, but our immediate neighbors, New York, New Jersey, and Maryland are even less competitive than Pennsylvania is,” Benefield said. “I think right-to-work is a big part to improving our business climate.”

Restricting the use of compulsory union dues also could deal a blow to union influence.

‘First, Do No Harm’ Should Apply in Schools

Far, far too many times criticism of K-12 education is seen as an attack on teachers. In the vast majority of cases, it’s not the educators in the classroom (or anywhere in the school building for that matter) who are standing in the way of what is in the best interests of students.

Consider these recent cases from around the country (courtesy of the Education Action Group):

  • For one Michigan educator, the annual costs of “non-membership” in the local, state and national teacher unions total $544.28. Andrew Buikema has been trying to leave the union since last spring, when he realized that union leaders were uninterested in helping the district control costs, even in the face of a multi-million dollar deficit.

 
“They keep asking for more and more, even though the school district can’t afford it,” he told EAG. “They’re concerned about taking care of the adults and have no consideration for the kids. I don’t want to be part of an organization that says one thing and does another,” he said.   

The union responded to his resignation request last month by sending approximately 150 pages of documents. The upshot of all those documents is this: Buikema can technically quit both unions, but he must still pay them $544.28 in “service fees,” which equals 67.7 percent of a normal union membership.
 

  • These days a lot of school budgets are being held together by the accounting equivalents of bailing wire and duct tape. But one Pennsylvania school district is so broke that it needs the state to provide the wire and the tape.

The Chester Upland School District began this week with only $100,000 in its savings account, and had no way of meeting its $1 million payroll – that is, until a judge ordered the state to give the district a  $3.2 million advance in its allowance.

The money will allow the teachers to be paid and the lights to remain on, at least for a few more weeks. The district is on track to be $20 million in debt by the end of the school year.

Since 2006, Chester Upland’s enrollment has dropped by almost 1,000 students. During that same time, the district has increased its workforce by 145 employees and its budget by $28 million.

  • Florida’s Marion County school district drew national headlines last summer when it announced that it was switching to a four-day school week as a way to save money. 

Other school officials took a more conventional route by laying off teachers and cutting student programs, all the while blaming Gov. Rick Scott for underfunding Florida’s public schools.

Now comes a report that finds 946 school employees in the Sunshine State earned at least $100,000 in 2010. That’s up 818 percent from 2005, according to the Foundation for Government Accountability.

The foundation also finds the percentage of non-school employees who earn at least six-figures has increased by only 7 percent during that same period.

 “During these five years, you have flat student enrollment, the biggest recession since the Great Depression and skyrocketing six-figure salaries – that adds up to a raw deal for Florida parents and taxpayers,” says Foundation CEO Tarren Bragdon.

Clearing Up the Nuclear Footprint

In the last two issues of BizVoice magazine, we’ve touched on the fact that there are no nuclear power facilities operating in the state of Indiana. And that fact is true.

While we’ve stated that a nuclear plant in Michigan (the Donald C. Cook Nuclear Plant just north of Bridgman, Michigan or 25 miles north of the Hoosier border) supplies Northwest Indiana with a small portion of nuclear power, we didn’t tell the whole story. The Indiana Michigan Power facility actually sends 80% of its 2,200 megawatts to Indiana.

That 80% of the 2,200 MW (about a third of the company’s total generation in Indiana) "assists with our coal, hydro and wind facilities in providing power to our roughly 500,000 customers in Northeast Indiana, East Central Indiana and the South Bend/Mishawaka areas in addition to selling to wholesale customers throughout the state."

Thus, the nuclear facts are now in order. And, who knows, nuclear may one day become a bigger part of the energy mix in Indiana and beyond.