Required Reading

When I was in college, guys usually pretended they were in a band. Now they pretend they are in a start-up.

In the March 14th edition of The Economist, a special report on entrepreneurship offers a comprehensive analysis of our favorite subject.  Authored by Washington bureau chief Adrian Wooldridge, the report is a collection of nine articles examining virtually every facet of innovation-driven new enterprise.  Wooldridge cites our friends at the Kauffman Foundation in defining entrepreneurial companies as specifically innovative, as contrasted to replicative, businesses.

The leading article, Global Heroes, explodes the "five myths" about entrepreneurialism.  These include:

• Entrepreneurs are "orphans and outcasts"; solitary, antisocial nerds making widgets in isolation
  

Entrepreneurs may be more independent than the usual suits who merely follow the rules, but they almost always need business partners and social networks to succeed.

• Entrepreneurs are young.
  

The Kauffman Foundation examined 652 American-born bosses of technology companies set up in 1995-2005 and found that the average boss was 39 when he or she started. The number of founders over 50 was twice as large as that under 25.

• Entrepreneurship is driven by venture capital

Monitor, a management consultancy that has recently conducted an extensive survey of entrepreneurs, emphasises the importance of “angel” investors, who operate somewhere in the middle ground between venture capitalists and family and friends. They usually have some personal connection with their chosen entrepreneur and are more likely than venture capitalists to invest in a business when it is little more than a budding idea.

• Entrepreneurs must create world-changing new technology

Sir Ronald Cohen, the founder of Apax Partners, one of Europe’s most successful venture-capital companies, points out that some of the most successful entrepreneurs concentrate on processes rather than products. Richard Branson made flying less tedious by providing his customers with entertainment. Fred Smith built a billion-dollar business by improving the delivery of packages. Oprah Winfrey has become America’s richest self-made woman through successful brand management.

• Entrepreneurship cannot occur in large companies

Many big companies work hard to keep their people on their entrepreneurial toes. Johnson & Johnson operates like a holding company that provides financial muscle and marketing skills to internal entrepreneurs. Jack Welch tried to transform General Electric from a Goliath into a collection of entrepreneurial Davids. Jorma Ollila transformed Nokia, a long-established Finnish firm, from a maker of rubber boots and cables into a mobile-phone giant; his successor as boss of the company, Olli-Pekka Kallasvuo, is now talking about turning it into an internet company.

Just as importantly, big firms often provide start-ups with their bread and butter. In many industries, especially pharmaceuticals and telecoms, the giants contract out innovation to smaller companies. Procter & Gamble tries to get half of its innovations from outside its own labs. Microsoft works closely with a network of 750,000 small companies around the world. Some 3,500 companies have grown up in Nokia’s shadow.

As we've pointed out before, an economic downturn is a good time to start businesses.  Wooldridge notes that it is also an opportune time for growing entrepreneurial businesses.  Citing a study from Endeavor, entrepreneurs surveyed forecast that "their businesses would grow by 31% and their workforces by 12% this year. Half of them thought they would be able to hire better people and 39% said there would be less competition."

In addition to this overview, additional articles in the report include:

• Managing entrepreneurship
  
• Time for entrepreneurship
  
• The United States of Entrepreneurs
  
• Entrepreneurs in India and China
  
• Lands of opportunity
  
• The formula for entrepreneurship
  
• Entrepreneurs doing good
  
• The entrepreneurial society

Anyone professing an interest in innovation and entrepreneurship will be significantly better informed after reading this authoritative analysis.

Tom Hayes Stimulus Package

Our old friend Tom Hayes is at it again.  In an op-ed piece in yesterday's Wall Street Journal, he and Michael S. Malone critique the new administration's stimulus strategy, and offer suggestions for an innovation-based approach that certainly sounds more promising than propping up failed industries.

Readers of this page know that we have long argued that the best and most valuable jobs are created by entrepreneurs and the private investors who fund them.  And we've certainly celebrated the occasions when the public sector has recognized and supported entrepreneurial efforts, even while noting our disappointment in how little of that is evident.

Hayes and Malone rehearse the same catechism of entrepreneurship, innovation, private investment, and economic vitality, and go one to make some specific recommendations for policy makers to give serious attention.  Some highlights:

- First, kill Sarbanes-Oxley or make it voluntary. Right now.

- Allow entrepreneurs to more easily tap tax-free retirement accounts -- or better yet, let them create tax-free accounts specifically to fund themselves.

- Eliminate payroll taxes, which unnecessarily burden young companies. 

- Make the tax system more forgiving for Angel investors -- or allow the creation of tax-free investment vehicles similar to what we now see with nonprofit foundations or 529 college savings funds.

- Lower capital gains taxes on investments in early stage companies and higher taxes on later stage deals. 

- Help big business think small. 

- Convene a presidential summit on entrepreneurship and small business. The last president to do so was Ronald Reagan in 1982.

Hayes and Malone elaborate on these points, and we highly recommend their article as "required reading".  

In the "Q"

As long-time subscribers to McKinsey Quarterly's email newsletter, we enjoy the in-depth analyses featured on their website.  We'll continue to alert readers to useful and relevant content we encounter through this channel (links back to the Quarterly site require free registration for access to the entire article.)  We cited a report from the "Q" earlier this month, and now we are delighted that today's inbox brings credible third-party validation of one of our central theses: invention is science, innovation is economics.  

Excerpted from his recent book, Amar Bhidé makes a compelling case that despite falling behind rapidly emerging BRIC economies in secondary and higher education in STEM competencies and pure research generally, the United States enjoys a competitive advantage in applying discoveries from the laboratory to real-world uses.

Technological innovations, especially high-level ones, usually have limited economic or commercial importance unless complemented by lower-level innovations. Breakthroughs in solid-state physics, for example, have value for the semiconductor industry only if accompanied by new microprocessor designs, which themselves may be largely useless without plant-level tweaks that make it possible to produce these components in large quantities. A new microprocessor’s value may be impossible to realize without new motherboards and computers, as well.

New know-how and products also require interconnected, nontechnological innovations on a number of levels. A new diskless (thin-client) computer, for instance, generates revenue for its producer and value for its users only if it is marketed effectively and deployed properly. Marketing and organizational innovations are usually needed; for example, such a computer may force its manufacturer to develop a new sales pitch and materials and its users to reorganize their IT departments.

Bhidé makes these observations in the context of anxieties in the policy and media communities about America losing it's "edge", and his concerns about resorting to protectionism or diverting scarce resources to pure research activities, or "what the economists Sylvia Ostry and Richard Nelson call techno-nationalism and techno-fetishism".

Techno-nationalists and techno-fetishists oversimplify innovation by equating it with discoveries announced in scientific journals and with patents for cutting-edge technologies developed in university or commercial research labs. Since they rarely distinguish between the different levels and kinds of know-how, they ignore the contributions of the other players—contributions that don’t generate publications or patents.

They oversimplify globalization as well—for example, by assuming that high-level ideas and know-how rarely if ever cross national borders and that only the final products made with it are traded. Actually, ideas and technologies move from country to country quite easily, but much final output, especially in the service sector, does not. The findings of science are available—for the price of learned books and journals—to any country that can use them. Advanced technology, by contrast, does have commercial value because it can be patented, but patent owners generally don’t charge higher fees to foreigners. In the early 1950s, what was then a tiny Japanese company called Sony was among the first licensors of Bell Labs’ transistor patent, for $50,000.

In the current economic climate, it is critical that resources and regulations be more closely aligned with the successful commercialization of new science, rather than deep, long-range investments in adding to the store of human knowledge.  As we have seen, the economies that benefit most from commercial application of new technology are not necessarily the ones in which it was patented.  License revenue and royalties create few new jobs.

Since innovation is not a zero-sum game among nations, and high-level science and engineering are no more important than the ability to use them in mid- and ground-level innovations, the United States should reverse policies that favor the one over the other, and it should cease to worry that the forward march of the rest of the human race will reduce it to ruin.

Immigration policies that favor high-level research by preferring highly trained engineers and scientists to people who hold only bachelor’s degrees are misguided too. By working in, say, the IT departments of retailers and banks, immigrants who don’t have advanced degrees probably make as great a contribution to the US economy as those who do. Likewise, the US patent system is excessively attuned to the needs of R&D labs and not enough to those of innovators developing mid- and ground-level products, which often don’t generate patentable intellectual property under current rules and are often threatened by easily obtained high-level patents.

Even factoring in outsourced manufacturing and back-office services, the most (and best) net new jobs are created by innovators who find a crying need and fill it with creative solutions fashioned from new discoveries and existing technologies alike.  As we've pointed out elsewhere, an innovative company isn't necessarily introducing widgets, but is also applying novel thinking and imagination to improving established business processes for greater effectiveness or efficiency.  Cloud computing, for example, offers familiar software capabilities, but in a new form factor and delivery model.  That's not the sort of thing you invent in a lab.

Industry Cluster Engineering

Interesting take today by Sacramento Bee opinion writer Daniel Weintraub about industry clusters leading the charge to bring California back from the brink of total economic meltdown.

As California's economy struggles to rebound from the collapse of the housing bubble, it is difficult to imagine what will lead us out of this hole.  We had the dot-com boom and bust, and then a housing-led recovery that turned out to be a mirage. Is there some industry, some idea that can reignite sustainable growth in this once-golden state?

Maybe not. And maybe that's the wrong way to think about the problem.

It could be that there are six or eight or 10 major industries that together will form the foundation for the new California economy.

He is speaking about regional industry clusters, and he uses the example of Akron, OH, which led an economic revival by rallying around innovation within its faltering rubber industry, and the Central Valley, CA, which is positioning itself to be a leader in clean technologies like solar, wind and water.

Peter Weber, a retired corporate executive and civic activist from Fresno, has studied what makes economies tick and is promoting a regional approach as a long-term strategy for California.  He thinks local governments and the state should make the development of regional economic clusters their top priority.

We completely agree that cluster development within regional economies is at the core of regional economic development. We would add the cautionary note, however, that industry clusters are formed by innovative, entrepreneurial people identifying a competitive advantage and capitalizing on it.

You cannot wish one into place, nor invent one by merely by declaring it as such. Networks of people are the backbone of any industry cluster. If you don’t have the right people with the right knowledge and right access to a strategic business network, you won’t have a cluster form anytime soon. Innovation will sit on the shelf until someone with the knowledge and access identifies the opportunity and brings it forth. Take any notable example, including Silicon Valley, San Diego, Austin, TX, Research Triangle, NC, and you will find that human networks were at the core of the phenomenon.

This precisely why we say that any region wishing to develop any type of industry cluster should focus as much effort on cultivating general networks of innovation and entrepreneurship as deciding which cluster they want to be. Yesterday was biotech. Before that was nanotech. Today it’s clean tech, but yesterday was hydrogen and today is water, wind and solar.

This is an exaggeration, of course. All of these industries are still vibrant and active and provide expansive opportunity for companies and regions to capitalize on. The point is, private industry responds primarily to private market demands and technology flux, and it moves too fast and changes too quickly for government to easily influence it.

Policymakers should be aware of clusters, but understand to build one requires that economic policies help your entrepreneurial people with an affinity for the region find what works best there. Be aggressive to provide them access to things they need most: capital, talent, market intel and strategic relationships. Then let them be entrepreneurial. Let them find the industry that works best for what is available in the region in terms of people, technology, markets, innovation and opportunity.

On Feb. 26 leading technology cluster expert Doug Henton, from Collaborative Economics in Silicon Valley, will present a report on Solano County’s Life Science Cluster, anchored by biomedical giant Genentech. Another story about some smart people with an idea, the right knowledge and the right connections who decided this was a good place to build a company. Is that a cluster? It is now.

New Rules for Policymakers

Rule #1: Don’t Get Bogged Down in the Minutiae - Take Action Now!
By Golden Capital Network CEO Jon Gregory

In President Obama’s inauguration speech, he made a statement that will resonate with many local policymakers and civic leaders in cities and counties across the country seeking to make proactive change in their own communities: “The time for standing pat has passed.”

When it comes to economic development, which is a highly compelling current issue, it is clear the time for standing pat has also passed. Numerous studies and reports issued by credible organizations in the U.S. and abroad point to business innovation as the leading contributor to jobs and wealth creation, community prosperity, and economic competitiveness. Based on these reports, policymakers and civic leaders across the country, in metropolitan areas and small towns alike, are anxious to implement innovation-driven economic development initiatives to accelerate local economic recovery and growth.

The innovation-driven model represents a new approach for many communities and economic development practitioners that have historically focused on industrial attraction campaigns as the stimulus for economic development. While the industrial attraction approach -- and others like tourism development, downtown revitalization and micro-enterprise development -- are important components of an overall strategy, they should not represent the “end all” solution in today’s dynamic global economy where new industries rapidly emerge and grow (and other industries conversely decline). Because of this modern-day reality community efforts to support and add value to promising entrepreneurial companies similarly need to be high on the action agenda for economic development.

You’ve by now read all the compelling reports about innovation. And are enthusiastic and ready to move forward with your strategy to improve the local economy, today!!! Whoa bubba. Wait a minute. Sit down, relax and take a deep breath. I know I don’t have to tell you this, but bureaucracies can be resistant to change and slow to act. Fortunately, I’m here to tell you that you don’t have to play by the old rules. Local policymakers and civic leaders have within the realm of possibility a means to start fostering an innovation-focused economic agenda that doesn’t require a lot of financial resources or council approvals.

Three statements you may hear at the beginning of your efforts to make change should serve as red flags. The first statement is: “Let’s schedule a meeting with all of the nonprofit partner organizations in the community who deal with economic development.” The goal of such a meeting – to the start the process of creating collaboration – is, of course, good. But are the “usual suspects” the right partners to have involved in the collaboration? What resources do they bring to the table? What is their current agenda and is it in alignment with the objective of this effort, or will it really serve as an impediment or roadblock? And, perhaps most importantly, how long will it take them to obtain the necessary approvals from their board to participate? After all, your goal is to move quickly!

The second red flag is: “This sounds like a good idea, let’s hire a consultant and do a feasibility study.” As I’ve already stated, numerous reports, studies and articles have concluded innovation is an integral part of the process for any community or region seeking to enhance its economic condition and competitiveness. If you go down the traditional feasibility study route, the process is likely to take a minimum of 6 months, at best, to cycle through. Can you afford to wait that long?

Venture capitalist and angel investor Roger Akers of Akers Capital suggests a different approach: “To begin this process, I would first call on successful entrepreneurs and CEOs, and all of the regional lawyers, investment professionals, senior University leadership, venture capital companies, angel group leaders, appropriate non-profits and economic development leaders to attend a two-day workshop to be educated in the current and needed capabilities of the region relative to new business formation and development and why it is so important.” A single focus group with 8-12 private sector leaders in the innovation sector can get you the information you need to move forward in 2 weeks (at most). There are many projects requiring extensive feasibility studies. This isn’t one of them. You don’t have the luxury of time on your side.

The third red flag is: “Let’s include your project during the next cycle of potential funding applications the city (or county) could consider submitting for a grant later this year or next year.” Leverage state, federal and foundation grant resources to fund high-impact projects in your community. But putting important community projects put on hold while waiting for the big-ticket funding source is wrong.

An excellent example of a proactive civic leader is Charlie Brown, executive director of NoRTEC, a consortium of workforce investment organizations in rural Northern California. Charlie has been very successful accessing state and federal resources over the past couple of decades. He didn’t wait for significant grant funding to get started; he has been building a coalition of leaders around the notion of innovation as a regional economic differentiator, and supporting incremental, smaller activities along the way. When his organization was able to access State and Federal dollars through the federal WIRED initiative a couple of years ago, he was in a much stronger position to maximize the impact of that effort.

Getting started on an innovation-based economic development initiative doesn’t require a lot of money. Don’t underestimate the ability of local sponsorships, contributions and volunteer services to get great things done! Move forward with the grant proposals that your staff or community organization partners want to prepare. But view that as your lever, rather than as deciding factor of whether to proceed or not.

Below are ten activities you can act on tomorrow that can start fostering innovation-based economic development in your community:

1. Recruit a blue-ribbon committee of innovation leaders to immediately give your effort credibility, generate fresh ideas and identify a private sector champion
2. Secure sponsorships from private sector leaders
3. Engage local media in your efforts to generate visibility
4. Re-direct staff time and energy from lower value activities to your new high priority strategy
5. Use your influence to recruit community-based organizations to go to work in support of your initiative
6. Educate your elected colleagues and other civic leaders about the idea of innovation as an economic driver
7. Launch a series of informal network events that occur onsite at your successful innovation-based businesses or other venues in the community
8. Begin a speaker circuit, making presentations about innovation economic development at service club and civic group meetings and local schools
9. Initiate a brown bag lunch outreach campaign: visit with the CEOs of as many innovation-based businesses in your community as possible and find out how you can help these companies
10. Create a Mentor’s Roundtable from your most successful CEOs

Peter Gardner, a partner in the Venture Capital fund Wavepoint Ventures, offers a few suggestions: (1) identify a low-cost office space in the City to provide incubation and shared services for local early-stage companies; (2) organize a local angel investment group that can provide capital and mentoring to local entrepreneurs; (3) initiate a monthly breakfast meeting with local entrepreneurs, business leaders, select City employees and professional service providers to discuss challenges to growth, and potential solutions, and then incorporate this market feedback directly into City policymaking.

Bill Reichert, Managing Director of Garage Technology Ventures says: “I would initiate the ‘Ourtown Innovation Challenge’ calling on all businesses, organizations, and citizens to contribute their ideas and recommendations regarding ways to stimulate innovation and entrepreneurship, ranging from ways to streamline government to ways to attract more resources to the community.”

He continued, “I would start the planning for an Innovation and Entrepreneurship event to be held in one year to celebrate the individuals and the organizations that have done the most to help innovation and entrepreneurship in the area, and to provide a showcase for entrepreneurs seeking to launch their own innovative companies or non-profit organizations.” Reichert concluded with a statement about the impact these efforts can have. “In combination, these initial efforts will create a string of PR opportunities for the ongoing initiative. By enhancing the visibility of the initiative locally (and getting visibility statewide), I would hope to bring a combination of public and private resources into the community to participate in some way – at a minimum, sponsoring the annual event.”

There’s no time like the present to get things moving. Worst case, you will have dramatically elevated awareness of innovation as the true economic driver in your community that sets the stage for many good things to emerge. Best case you will have a fully functioning, sustainable innovation program in place that fosters business formation and growth from your entrepreneurs that doesn’t require a lot of public money. In either case, don’t let yourself get bogged down in the minutiae!

California Business Ascent Slideshow

A brief (15-slide) deck is available for viewing by anyone who's wondering how California is going to recover from the current economic crisis.

California Business Ascent

(tags: innovation entrepreneurship)

Comments welcomed.

The Cure

What's the big message for the tech industry coming out of Davos, Robert? (ANSWER: Innovation is only way out of economic hole)

Robert Scoble, via Twitter from the World Economic Forum

National advisors continue to tout GLOBIEs as the key component for sustainable economic recovery.

Reported by Jason Gertzen in the Kansas City Star in a story headlined Innovation “will be the path to revive our economy”, national political advisor David Wilhelm says that nurturing innovative companies with the potential for substantial and rapid growth very well could be one of the most effective strategies for rebuilding tattered regional economies.

“Those of us who are business builders are about to be brought front and center in a national debate over what constitutes honest capitalism, how to best promote genuine entrepreneurship, how to reconnect hard work, achievement and accountability in this great country of ours.”

Wilhelm has advised political campaigns for President Bill Clinton, Vice President Joe Biden and Chicago Mayor Richard Daley. More recently, Wilhelm advised President Barack Obama on innovation and entrepreneurship for economic development.

The New Entrepreneurship

Everybody's talking about entrepreneurship and innovation these days as the path to prosperity. From the President and the Governor down to your local elected officials, the new mantra of economic recovery is "entrepreneurship and innovation". And that's great, because, as we've been saying for a decade, they really are the best hope any community or region has for developing and expanding its economy.

However, over that same decade, those of us at GCN who have tirelessly preached this gospel have lamented over the manifold defects of the word "entrepreneurship" itself. It's hard to spell, for one thing. And it's looooong. And it's too French.

More critically, it's been misunderstood and abused, to the point that for most people it means merely "small business". As we've pointed out repeatedly, it properly refers to companies that innovate, serve national or global markets, and have the potential to grow into very large businesses, indeed. But getting that point across still requires us to type "entrepreneurship" again and again.

We've searched high and low for a new term that more clearly (and concisely) articulates that unique growth enterprise, to no avail. We've even coined a new acronym, GLOBIE, but that still has "entrepreneur" in it.

Now we think we've found an existing word, that describes vividly why entrepreneurship is so critically important to a healthy economy. It's short, easy to spell, and by happy coincidence is the name of a famously exemplary entrepreneur.

Jobs.

In the final analysis, that's the who, what, and why of entrepreneurship. Yes, it also engages founders, introduces exciting new solutions to vexing challenges, creates sustainable value, and enriches private equity investors. But the thing it does best is create jobs - for the entrepreneur as well as her employees. Importantly, particularly for local economies, it creates good, sustainable, career-grade employment opportunities for knowledge workers, whose demand for goods and services creates even more jobs in the community. This multiplier effect is why smart civic leaders are committing resources to support their entrepreneurial companies.

There simply is no better way to stimulate employment across the industrial continuum spanning from services to production to symbolic analysis. And that growth in employment leads to another important benefit: revenue. The purchasing power of workers employed by entrepreneurial companies drives growth in the retail, commercial, and durable goods markets as they buy homes, cars, decor, apparel, and food and beverage. Those purchases in turn generate tax revenues, especially sales and property taxes that fund critical services, including education, public safety, infrastructure and cultural resources. Innovation is about solving problems and monetizing the solution. When you think of it that way, "Innovation" is another word for "Revenue".

So save your typing fingers from getting tangled up with the conventional nomenclature. Just remember: Jobs is the new Entrepreneurship, and Revenue is the new Innovation.

Beyond Doom and Gloom: New Economic Development Rules for Local Policymakers

By Golden Capital Network CEO Jon Gregory

Introducing GLOBIES

With Tuesday’s impending inauguration ceremonies there has been a lot of media, economic and political speculation about President-elect Barack Obama’s stimulus package. While debate continues in the beltway about how to rejuvenate the American economy from a macroeconomic perspective, little attention has been given to the equally difficult challenge local elected officials face in cities and counties across America. They are tasked with creating jobs, tax revenues and prosperity in their communities in a period compared to the Great Depression. It is at the local grass roots level where the effects of lay-off notices are exceedingly personal and the impacts on public services most noticeable.

The recent announcement of the closure of the remaining 567 Circuit City stores in the U.S. at a cost of 34,000 jobs, along with major reduction in employment levels at well-known companies like Hertz Global Holdings Inc., WellPoint, ConocoPhillips, Advanced Micro Devices, Saks and Motorola Inc. make the road to economic recovery for local policymakers pretty rough.

Recent studies by economists and academics, along with noted authors and distinguished reporters, suggest that innovation remains the one true economic advantage America possesses over other nations. Excellent publications such as Regional Innovation, National Prosperity by the Council on Competitiveness, and The Innovation Driven Economic Development Model by Collaborative Economics serve as excellent resources on this topic. Yet, despite the increased attention on innovation, discussion among thought leaders about innovation as an economic development strategy has mostly been relegated to the 50,000-foot-level rather than given merit as a practical solution that can be implemented at the grass-roots level.

Even more important is the distinction between long-established national and global businesses with divisions or stores located in hundreds of communities across the country but whose headquarters are located elsewhere, versus innovation-based businesses serving national and global markets with their home base of operations located in the community itself.

I’ve coined a new term for the economic development vernacular to better distinguish these types of businesses from others: GLOBIE (Growth-focused Locally-Owned Businesses run by Innovative Entrepreneurs). Even while major global corporations such as those I mentioned earlier in this article falter or stumble, at Golden Capital Network we are able to regularly observe the under-recognized progress made by hundreds of GLOBIEs. Just last week, for example, alumni presenting company GLOBIEs like Red Condor, Utopy, Alter-G, Inc., and Sentilla reported important business-related achievements, such as new customers, new management team hires, new rounds of capital raised and new technology milestones reached.

The most recent 10-year period of my economic development career has been spent in the trenches on a day-by-day basis with the founders and CEOs of GLOBIEs. It is this subset of the innovation sector that drives ongoing economic growth. Importantly, GLOBIEs exist everywhere in this country. They represent the bright spots in an otherwise struggling economy.

GLOBIEs deserve special recognition and support by local policymakers because they not only serve as the market-leading difference-makers in a community, but also usually have a true affinity for that community and a desire to stay and grow there.

With 25 years directly or indirectly involved in local economic development under my belt, I am concerned that our local elected officials -- and other civic leaders charged with economic development responsibilities -- are not fully equipped with the right knowledge or the most effective tools and strategies to stimulate their economies by focusing on GLOBIEs. Instead, many of the strategies being championed to elected officials in communities across the country today are the same ones touted when I started my career in economic development in 1985. The problem is that the economy of today is nothing like it was in 1985.

It is important to emphasize that GLOBIEs are the businesses that are most vital to the economic recovery and growth of a local economy, and that grass-roots efforts can actually have a positive impact on their success! With companies whose headquarters are located elsewhere, the ability for a local entity to impact their decision-making process is minimal, at best. In fact, the economic development strategies being advocated in many communities and states across the U.S. today offer little value to GLOBIEs. This is disheartening in that it is possible for local policymakers and other leaders of local economic development organizations to have a profound impact on the success of these businesses by helping to address their needs. The organization of a community’s human capital assets is a good example. I am referring not only to the employees who become the workforce for GLOBIE businesses, but all of the human-related input essential to starting, growing and exiting a GLOBIE company; known as the innovation eco-system.

Local policymakers can play a pivotal role in this process. Yet in most community’s economic development efforts exert no energy into proactively cultivating this innovation eco-system. It is this disconnect that has inspired me to write “Beyond Doom and Gloom: New Rules for Local Policymakers” as a guidebook for policymakers and other economic development leaders to implement a cost-effective, sustainable and compelling economic development initiative at the local level that is focused on GLOBIEs.

Over the course of the next two weeks, I’ll periodically release these New Rules seeking perspectives from throughout the extended GCN network. If you have inputs, feel free to respond here. Next we’ll start the journey with New Rule #1 for local policymakers: “Take Action Now! Don’t Get Bogged Down in the Minutiae.”

Jon Gregory
President/CEO
Golden Capital Network
California Business Ascent

Skeptic's Surprise

In an article written by Bruce Ross in The Record Searchlight, dated September 5th, he initially states his skepticism regarding Venture Island. However, after attending the event he said that the event was “entertaining, educational, and an introduction to 20 creative businesspeople.”

“When you think venture capital, you probably think technology, but the entrepreneurs were a mix — insurance and accounting consultants with new ideas, farm products, creative new tools cobbled together by tradesmen, a craft brewery and, yes, some high-tech materials and Web idea.”

Ross is putting his money on Shasta Crystals new idea regarding the manufacturing of the crystals used in mini projectors. According to him, all the businesses represented, “win or lose this event, are worth keeping an eye on.”

Orking Cows

There is a hot and happening trend in knowledge work these days. It seems to have emerged a couple years ago, largely spontaneously, as disaffected technology freelancers got fed up with the isolation of working in their home offices and the turbulent chaos of working in cafes.

My first inkling of this came when reading a special report in the Economist magazine last April, which discussed the "new nomads" who work wherever they can find signal, whether on their laptop, PDA, smart phones, or blackberries. You see them at Starbucks, the library, and other areas where WiFi is promiscuously available.

On a recent road trip, my GCN colleagues and I sketched out a business plan to create a mental health club for nomadic innovators, a "venture community center" where entrepreneurs could work on their businesses among others of the similar inclinations, with access to GCN's network of domain experts, coaches, investors, etc. When I began to look into it, I discovered we'd reinvented the wheel, albeit a fairly shiny new wheel with a lot of permutations.

The term of art in the movement (it's so embryonic as to hardly constitute an industry -- yet) is "coworking". It manifests in a number of models, but the common features are a community workplace occupied by people working on their own projects, but actively collaborating, brainstorming, and socializing.

One of the godmothers of this movement is Tara Hunt, co-founder of CitizenSpace in San Francisco. I had an opportunity to visit her operation last week, and it was fascinating. For one thing, it was within sight of the location of the first startup I worked for back in the 1980s, Friend Technologies (introducing a service called "voice mail"; you may have heard of it). But the other thing that I found intriguing was that it was largely unoccupied, even though they are sold out. Startling at first, upon reflection I realized it made sense; when you're a one-man-band, you're not spending a lot of time at a desk. You're out there, meeting with folks, adding value at client premises, and prospecting for new business. CitizenSpace is an agreeably funky loft space with a dozen desks and an airy conference room. There was indeed a meeting taking place in the conference room, but aside from Tara, there was only one other solitary worker at a desk.

CitizenSpace is organized around a co-op model. It's not intended to produce a profit, but rather be a crucible for creative collaboration. The members are all "desk residents"; that is, they have a desk that is theirs alone, and pay a monthly rent for the use of it. While some coworking spaces are similarly aligned, others are more explicitly business models that can produce surplus cashflow, while preserving the core principles of the coworking movement. These include;

• Openness – Willingness to share ideas freely, without license. Open-source brainstorming.
  
• Collaboration – Creative interaction that promotes innovation and new science.
• Community – Sharing risks and rewards, obligations and opportunities.
• Sustainability – Combining resources so that less is used by more.
• Accessibility – Minimizing barriers.

I also visited Sandbox Suites in San Francisco, a commercial coworking scene, and that was also sparsely occupied at midday and midweek. Two conference rooms were busy (and their posted schedules looked pretty full, as well), but the rest of the space was pretty empty. They have resident desks like CitizenSpace, but also ad hoc access to tables, chairs, desks and a wifi network (called "hot desking") for a monthly membership fee, depending on part-time or full-time use.

It is a very attractive, casual, vaguely hip space, not at all like an "office". There is a conversation pit of black leather sofas and easy chairs. A row of cubicles separated by translucent plastic panels were lined up against one wall, but otherwise it was all very "open plan" cafe style furnishings.

I also visited a launch party in Fresno for OfficeBay, a spinoff of another casual workspace operation called CargoBay, which started up 18 months ago, offering 50 10'x10' hardwall offices with a desk and IP telephone for $399 a month. The play here is that there are also rollup-door storage units, a shipping and receiving dock, and a photo studio (a lot of Ebay auctioneers operating there). The new place has larger offices for up to 6 workers, a cluster of individual cubicle resident desks, and a hot desk area off the main lobby. This is a more overtly commercial work space operation, and not very aligned with the coworking movement, but it is clear that the potential for collaboration and community is there, as well.

From reading the Google coworking group and wiki page, it's clear that coworking is in its infancy, and seems to have the most traction in major urban centers in established technology corridors. In midmarket communities, coworking is primarily following a "jelly" model, which is sort of a flash mob of people who coordinate via twitter or text message to descend on a library community room or cafe to spend the day working together.

I think the coworking model has great potential for incubating emerging growth companies. Existing incubator programs have been problematic, and have largely failed to stimulate interdisciplinary collaboration. I think this is due to the limited number of dedicated office spaces that can be supported in that model.

In a coworking space, significantly higher numbers of companies can be supported, since the resources are randomly deployed as available and as needed. It also provides a venue and audience for guest speakers, panel discussions, workshops, and networking events explicitly focused on entrepreneurship and business development themes. There can be a social dimension as well, such a karaoke or Guitar Hero night.

The connections that can be made in this sort of intentional community can be very immediately valuable, indeed. These are the types of professional relationships colleagues form in large corporate workplaces, and are what freelancers miss the most when they begin working exclusively from home. As in corporate office relationships, these connections can become long-term allegiances, forming a network of like minds. I think successful coworking venues will be the ones that put resources into stimulating and sustaining collegial connections. For the innovator wanting to start and grow a great company, coworking is like a petri dish for ideas.

coworking

Like Talking To Bill Walsh About Football

I got to spend some time with a hero of mine recently. GCN presented the New California 100 conference in Davis last month, which culminated in a banquet to honor the central valley's top 100 privately-held companies, and to induct the inaugural class of the New California Hall of Fame. As part of that awards ceremony, I gave the "Legacy Market Leadership" award to Fred Franzia, the founder of Bronco Wine Company, the fourth largest winery in the US, shipping more than 20 million cases per year.

The best part, though, was getting to enjoy his company during the dinner, and listen to some of his observations about the winery industry in general.

For those who don't know, Bronco made a pretty big splash a few years back with the introduction of the Charles Shaw Winery brand, the first so-called "super value" wine. You may know it by its more popular sobriquet "Two-Buck Chuck". This is the wine distributed exclusively by Trader Joe's for $1.99 per bottle in the western states.

Someone asked Fred one day "how can you sell a great wine for only $2 a bottle?" He replied "I only make a dollar a case, but I sell a million cases a year. You do the math." He's also on record as saying "No bottle of wine is worth more than ten dollars." This may be hyperbolic, but he may have a point.

I love wine, and I love bargains. The truth is that making good wine is not significantly differentiated from making good paint or making good motor fuel. It's process manufacturing, and assuming you use good ingredients, pay attention to the process, and strive for quality, you should be able to make a good product. Franzia understands this.

The wine industry is actually three separate lines of business; agriculture, process manufacturing, and marketing. Bronco has innovated aggressively in all three areas. For one thing, Bronco has nearly 40,000 acres under viticultivation (and adding a section a year), making it the largest winegrape grower in the world. Secondly, Bronco has streamlined the production process, squeezing cost out of every step. Bronco is building the first new wine bottle plant in decades, further consolidating their vertical integration and controlling both cost and quality for maximum value to the customer.

Finally, Bronco has broken the monopoly of the three-tiered distribution model, which is critical not only for Bronco, but for the industry as a whole. Consider this; a ton of grapes costing $2000 per ton will produce a bottle of wine that retails for around $20. The retailer takes 40-45% on sell, the distributor take 20-25%, and after the cost of goods sold, the winemaker pockets about $3. If he sells that bottle to a customer in his tasting room for "10% off list", he pockets $15.

By negotiating directly with Trader Joe's to carry the Charles Shaw product, Bronco eliminated a critical factor contributing to the high cost of wine.

So getting the chance to sit with Fred Franzia and listen to him talk about his experiences, the history of his family (producing wines in California for more than a century), and his insights into delivering excellent quality at a substantial discount to the prevailing pricing in the industry was a memorable experience.

There are some things no man should know about making wine; Fred Franzia knows all of them.

Innovation and Entrepreneurship Seen as Key to Economic Prescription

I presented the Golden Capital Venture Communities model of cross-regional collaboration to catalyze innovation, entrepreneurship and private investing on a panel at a federal economic development forum this week in Alexandria, VA. (hosted by International Economic Development Council).

Never before in all my years of covering politics and economics as a journalist or working with companies, investors and communities to foster entrepreneurial networks, have I witnessed such optimism in the face of such potential calamity. It was a windy day inside the beltway, which I think lent a spirit of hope to the proceedings. It felt unusually fresh and invigorating, not hot and frustrating like Washington wind often does. In any case, it packed a punch.

Congressman Paul Kanjorski, the PA Democrat who chairs the house Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises, keynoted the luncheon and sent the strongest message. "This seems to be a very upbeat meeting, which is good. All the indicators, data and forecasts we have indicate, however, that not only are we in a recession, but we might well be headed for much, much worse. It's the kind of data that might make you want to put your head in a cannon and pull the trigger."

The 300 or so attendees -- mainly economic developers, tech transfer pros, and innovation policy wonks from across the U.S. -- nearly choked on their cheesecakes. Kanjorski lightened up some by the end of his speech, and everyone went on with their business of networking and finding out about what's cutting edge in fostering innovation and entrepreneurship for economic development, but I couldn't get his harbinger of "slow spiralling meltdown" out of my head as I flew home to Chico the next day amidst new records announced for a barrel of crude, a gallon of gas, and mortgage default rate.

Bringing innovation to market was a key theme of Kanjorski's prescription for avoiding utter economic catastrophe, and a key theme for the event. I felt pretty good hearing that, since at Golden Capital, we've been of a mindset for nearly 10 years that economic development must focus squarely on innovation, entrepreneurship and investing if it wants to really make a difference in a community. I made the point in my presentation that technologic innovation from universities or national labs --as revolutionary as it may be -- doesn't mean very much unless it can get to market. It takes an entrepreneur to do that. The best researchers and academics are usually not the best entrepreneurs.

What this means for us at GCN is a continued focus on building regional collaborations that involve the research institutions, and that we must also continue to encourage our regional members to reach out to the "most likely to succeed" entrepreneurs and high into the ranks of the private sector within a community to connect entrepreneurs with the capital and advice they need to grow.

Venture Communities is designed to do exactly that and we'll keep beating that drum until see it -- or something comparable -- instituted throughout the nation, or we break under the weight of those who can't see the writing on the wall. Either way the wind blows, we'll keep fighting. Because if you aren't part of the solution...