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Tuesday, April 13, 2010

Madison Misses Message: Homegrown Entrepreneurs More Reliable Than Toyota Lottery

Jack Schultz of the Boomtown Institute would be a great expert to bring to Madison to discuss rural economic development. His book Boomtown USA: The 7½ Keys to Big Success in Small Towns explains that the surest way to expand your local economy is to focus not on landing big outside employers but on building your own homegrown entrepreneurs, local movers and shakers who have great ideas and a stronger commitment to the community than any itinerant credit card company or retailer will offer.

To support this argument, consider a number Schultz tossed out at a presentation at USD last week. As Mike Knutson heard it, Schultz said there were maybe "only 200 significant 'smokestack chasing' projects in the entire country" last year. Schultz means the kind of big industrial developments cities and towns try to recruit in what some call the "Toyota lottery." So what are the odds of winning that lottery?
  1. Suppose there are 10,000 towns competing to recruit those 200 wandering employers.
  2. In a given year, your town's chances of landing that big employer are 200/10,000 = 2%.
  3. Over four years (the amount of time our current economic development exec, Dwaine Chapel, has been at Madison's economic development corporation), the chances failing to win that lottery even once: 92%.
  4. You could play the Toyota lottery for 34 years and still have a 50% chance of not scoring one big smokestack project.
Of course, Madison is unlikely to follow Schultz's advice (advice often offered in these very pages). Our local economic development corporation, the LAIC, focuses on the big score, trying to land the mega-employer who will bring dozens or hundreds of jobs to Madison all at once. (That plan's not working so well.) And the LAIC can't even play that game very well, losing a 75-job call center to Arlington, despite our very best marketing. Small employers and budding entrepreneurs get little sustained attention from the LAIC. Like Harrisburg, the LAIC keeps looking outward for solutions that could be right under our noses, in our on people.

Building more small local businesses gives more local people a chance to be their own bosses. That creates more community leaders who, in their experience helming their own small businesses, get used to exercising their initiative and leadership and thus have more time, money, and inclination to get involved with leading other local projects. That means more social capital moving around a small community and making good things happen.

Strangely, the LAIC just doesn't seem interested in expanding that class of local entrepreneurs. I wonder: maybe too many individual owners with successful independent businesses would create too much independent wealth, too many independent movers and shakers who would upset established power structure of the community.

We'll know that's not the case when we see the LAIC inviting Jack Schultz to speak in Madison.


  1. I think that you may be ignoring the extremely high failure rate of new businesses. I haven't checked the statistics in a while, but it's somewhere between 1/10 and 1/20 survive for 5+ years. The advantage of a recruited business is that it has an existing track record and the risk is very low.

    Let us hypothesize that we want to get one relatively small business started in Madison and not fail. We would need to start 10-20 for this to happen. Let's assume that each business only burns through 100k in start-up capital (EXTREMELY conservative here). That means for every successful, 5-10 employee business developed through local start up, we need to invest 1-2 million dollars (100k x 10 to 20).

    Now, compare that with simply providing incentives for attracting "toyota lottery" style businesses. For that same 1-2 million you've snagged a business that employs 50+ people.

    It makes economic sense to go after the big fish.

  2. If you look at the history of funds being spent for local development projects in the past few years, LAIC has certainly been supporting local businesses. James River Equipment built a fantastic facility on LAIC property, Heartland built a new headquarters on LAIC ground, The City and LAIC purchased several Rosebud Buildings, sold one to Rick Barger Electric and have a sale pending to ICAP for a new headquarters, plus a potential local buyer of the former Rosebud-Kostboth Motors building on Egan Avenue. Randy Schaefer has also received City and LAIC funding for his developments. The only problem with these local purchases and sales is, "Where are the new jobs for Madison?"

    I agree that a community can grow itself with the proper resources, but we've lost so many large employers recently who previously fed our jobs pipeline. That pipeline affects spendable income within our community. How do we replace those jobs and get back to the business of growing our town? Playing musical businesses among ourselves won't cut it.

  3. Rod, I agree that musical chairs is a waste of time. For all their moving the chess pieces around to where they think things should be, the LAIC has yet to demonstrate any job gains. Opening the door for new local businesses rather than just giving handouts to the established players would have a better chance of expanding not just jobs but entrepreneurship. More workers are great; more owners are better.

    Tony, I'll grant small businesses can fail. But big businesses that are footloose enough to move to Madison for a measly tax incentive are footloose enough to move away again on a whim... or on a slightly better offer a few years later from a more desperate community.

    And suppose a local start-up does fail. If it's run by a local guy, he's more likely to have roots that keep him here anyway. The proper response from the community is to help that failure soft-land, capture the lessons of that failure (What was missing from the business model? What part of the market did it miss? Did the location hurt the business?) to help future start-ups (maybe even by the same entrepreneur!) do better.

    The Toyota lottery doesn't work. You spend a lot of money on a gamble that gets you nothing a huge percentage of the time. Invest in a local start-up, even if it lasts for only two or three years, it operates. It provides a job or three, it provides goods and services, it keeps a storefront filled, a light on... immediate return on each smaller investment.

    Check out what Congressman Tom Osborne says:

    "Unfortunately, economic improvement is not enough to sustain communities. Economic growth is a vital element, but it is not sufficient by itself. Communities that survive and prosper invest not only in business, but also in building social and human capital. Simply having a workforce is not enough for a community to prosper. In order to add true value to a community, highly skilled managers and entrepreneurs need to thrive. Otherwise, the community will simply become a processing facility for the innovations of others. (p. 14)"

    Can anyone show me that the LAIC is doing anything to increase the number of jobs, managers, or entrepreneurs? Any increase in human and social capital? That's what the LAIC is supposed to be doing with our tax dollars. Instead, I see musical chairs in a black hole.

  4. I remember hearing that "failure rates" of new businesses are much exaggerated because people stop having their own business for reasons other than failure: they sell a profitable business, they retire, they decide to do something else.

    From Business Week:
    Their data showed that annual failure rates were greater than 9% when failure was defined simply as "discontinuance of ownership." When failure was defined as bankruptcy, however, the number dropped to less than 1% annually. About 4% of the businesses that closed their doors each year "failed to make a go of it." And owners disposed of about 2% of businesses annually to prevent further loss. The authors concluded that cumulatively 64.2% of the businesses failed in a 10-year period -- if failure was measured as discontinuance of ownership -- but only 5.3% actually filed for bankruptcy during a decade.



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