Start-Up America

New York times writer Thomas Friedman had an interesting column recently where he encouraged President Obama to focus on entrepreneurship and innovation as a way to get the American economy going again. Imagine the impact of 1 million business start-ups.

Excerpts from Friedman’s article follow:

Obama should launch his own moon shot. What the country needs most now is not more government stimulus, but more stimulation. We need to get millions of American kids, not just the geniuses, excited about innovation and entrepreneurship again. We need to make 2010 what Obama should have made 2009: the year of innovation, the year of making our pie bigger, the year of “Start-Up America.”

Obama should make the centerpiece of his presidency mobilizing a million new start-up companies that won’t just give us temporary highway jobs, but lasting good jobs that keep America on the cutting edge. The best way to counter the Tea Party movement, which is all about stopping things, is with an Innovation Movement, which is all about starting things. Without inventing more new products and services that make people more productive, healthier or entertained — that we can sell around the world — we’ll never be able to afford the health care our people need, let alone pay off our debts.

Obama should bring together the country’s leading innovators and ask them: “What legislation, what tax incentives, do we need right now to replicate you all a million times over” — and make that his No. 1 priority. Inspiring, reviving and empowering Start-up America is his moon shot.

You want more good jobs, spawn more Steve Jobs. Obama should have focused on that from Day 1. He must focus on that for Year 2.

Today’s economy is all about innovation and the ability of companies to adapt quickly to change. Start-Up companies are typically small, innovative and quick to adapt to change. We need more Start-Up companies in Buffalo and across the country.

What do you think about focusing attention and resources on creating more Start-up companies?

An Innovation Agenda?

David Brooks of the New York Times has an interesting column that discusses the need for an Innovation Agenda to revive the American economy. Below is a copy of part of the Brooks’ article that puts forth nine actions to improve our economy. What do you think about these ideas?

“Moreover, there’s a straightforward way to revive innovation. In an unfairly neglected white paper on the subject, President Obama’s National Economic Council argued that the U.S. should not be in the industrial policy business. Governments that try to pick winners “too often end up wasting resources and stifling rather than promoting innovation.” But there are several things the government can do to improve the economic ecology. If you begin with that framework, you can quickly come up with a bipartisan innovation agenda.

First, push hard to fulfill the Obama administration’s education reforms. Those reforms, embraced by Republicans and Democrats, encourage charter school innovation, improve teacher quality, support community colleges and simplify finances for college students and war veterans. That’s the surest way to improve human capital.

Second, pay for basic research. Federal research money has been astonishingly productive, leading to DNA sequencing, semiconductors, lasers and many other technologies. Yet this financing has slipped, especially in physics, math and engineering. Overall research-and-development funding has slipped, too. The U.S. should aim to spend 3 percent of G.D.P. on research, as it did in the 1960s.

Third, rebuild the nation’s infrastructure. Abraham Lincoln spent the first half of his career promoting canals and railroads. Today, the updated needs are just as great, and there’s widespread agreement that decisions should be made by a National Infrastructure Bank, not pork-seeking politicians.

Fourth, find a fiscal exit strategy. If the deficits continue to surge, interest payments on the debt will be stifling. More important, the mounting deficits destroy confidence by sending the message that the American government is dysfunctional. The only way to realistically fix this problem is to appoint a binding commission, already supported by Republicans and Democrats, which would create a roadmap toward fiscal responsibility and then allow the Congress to vote on it, up or down.

Fifth, gradually address global imbalances. American consumers are now spending less and saving more. But the world economy will be out of whack if the Chinese continue to consume too little. The only solution is slow diplomacy to rebalance exchange rates and other distorting policies.

Sixth, loosen the so-called H-1B visa quotas to attract skilled immigrants.

Seventh, encourage regional innovation clusters. Innovation doesn’t happen at the national level. It happens within hot spots — places where hordes of entrepreneurs gather to compete, meet face to face, pollinate ideas. Regional authorities can’t innovate themselves, but they can encourage those who do to cluster.

Eighth, lower the corporate tax rate so it matches international norms.

Ninth, don’t be stupid. Don’t make labor markets rigid. Don’t pick trade fights with the Chinese. Don’t get infatuated with research tax credits and other gimmicks, which don’t increase overall research-and-development spending but just increase the salaries of the people who would be doing it anyway.

This sort of agenda doesn’t rely on politicians who think they can predict the next new thing. Nor does it mean merely letting the market go its own way. (The market seems to have a preference for useless financial instruments and insane compensation packages.)

Instead, it’s an agenda that would steer and spark innovation without controlling it, which is what government has done since the days of Alexander Hamilton. It’s the sort of thing the country does periodically, each time we need to recover from one of our binges of national stupidity.”

Economic Development 2.0

“If you could get the right ten thousand people to move from Silicon Valley to Buffalo, Buffalo would become Silicon Valley.” – Paul Graham in his essay “How To Be Silicon Valley”

In many ways, the notion of “imported innovation” is the core tenet of our local economic development strategy.  We strive to identify companies who will move here or we struggle to keep existing companies here, but we do little to help generate innovation and entrepreneurship.

This is odd as Buffalo has a rich history of innovative entrepreneurs who powered the growth of Buffalo and WNY at the turn of the last century.  At some point, we seem to have lost our way, we lost our network effect.

The reason Buffalo struggles to innovate is related to the lack of innovators, a self-perpetuating problem.  We lack a thriving community of innovative and energetic entrepreneurs who are willing to take risks.  There is no center of the city which fosters shared ideas and creative entrepreneurial energy.  Sure, we have a couple of areas in the city chasing the Richard Florida model of huddling hipsters and creatives into small alcoves to create an economic impact, but there is no effort to create an Artspace-like environment for business.

In cities where innovation thrives, you’ll find strong academic universities surrounded by an urban area populated by entrepreneurs with access to capital investors who are willing to fund risky ideas. You need a confluence of wealth and energy to create a network effect.

Chairman Emeritus, IBM Academy of Technology, Irving Wladawsky-Berger had this to say about innovation and network effects:

Throughout history, certain cities and the regions around them have been the major centers of innovation in a variety of different fields as a result of their unique accumulation of talent and wealth. Innovation is very susceptible to network effects – that is, the more talented people you have in close proximity, the more their ideas and their work influence each other and stimulate them to innovate. While talent is necessary to becoming an innovation hub, it is not sufficient. You need wealth, in order to support the talented people and bring their work to market. You also need an open culture that values a diversity of ideas and experiences.

So, we lack a thriving urban area which creates shared energy.  We lack access to innovation capital as most of our local wealth is inherited and descended from the casino capitalism tree (those interested in collecting wealth for the sake of collecting it).  Our talent base is drained each year as they migrate to greener pastures.  Most importantly, we lack people willing to invest in what Keynes called the “real economy”, the economy of production capital, long-term investment and job creation.

So, how do we overcome all of these factors?  The answer from the likes of BNE/BNP and most IDA’s is to keep paying a vig to companies like Geico and Yahoo! to set up shop in our fair region and bless us with midlevel jobs.  Those jobs are designed to create wealth for plutocrats in other regions of the country.  While this strategy has merit as a force multiplier for the local economy, it’s shouldn’t be the primary driver of economic development, it should be a tactic in a wider strategy.

I’d posit that we need to build our own network effect.  No longer should we look to the local “business leaders” for handouts and capital.  We rebuild our culture of innovation from the ashes of closed steel mills and shuttered auto factories.  Looking to ourselves to fund a new wave of innovation, a rising tide of locals who want to build a better future for themselves and their neighbors.  To give this city back the entrepreneurial roar that was heard around the world at the turn of the last century.

We start with a community wide venture capital investment fund.  One in which we all pay what we can to fund the next wave of companies that will employ our friends, neighbors and our children.  Let’s stop looking for someone else to save us when the answer is right in our own wallets.

What follows is a skeleton idea that emerged from discussions with a dozen or so young emerging entrepreneurs over the last couple of weeks (our own pocket network effect).  We figured if we want to empower entrepreneurship, we should start by asking others to help us create the vision.  Which is why we need your help.

Not every idea needs a $500,000-$10,000,000 initial investment.  Most need seed funding for basic salaries, access to technology and office space, time, mentorship and community.  A good example of what this would look like is a community funded version of Y-Combinator.

Y Combinator does seed funding for startups. Seed funding is the earliest stage of venture funding. It pays your expenses while you’re getting started.

Some companies may need no more than seed funding. Others will go through several rounds. There is no right answer; how much funding you need depends on the kind of company you start.

At Y Combinator, our goal is to get you through the first phase. This usually means: get you to the point where you’ve built something impressive enough to raise money on a larger scale.  We make small investments (rarely more than $20,000) in return for small stakes in the companies we fund (usually 2-10%).

Y Combinator has a novel approach to seed funding: we fund startups in batches. There are two each year, one from January through March and one from June through August. During each cycle we fund multiple startups.

We estimate that we’ll need live/work space and an initial funding stream of $2,000,000 to fund 8-10 companies at a maximum of $20,000 in the first year.  Ideally, we want to raise money from the community, in small denominations.  We want everyone invested in the idea of creating innovation and the companies which will employ the people of our region.  Let’s stop thinking of economic development as a top-down planning mechanism and treat it like a grassroots campaign.  When people are invested in the business community, even at a small scale, they become active participants in the local business environment.  Not pawns in a multi-national corporate game of pleasing distant shareholders.  We begin to think locally, we begin to empower entrepreneurs, we begin to see what’s possible.

Is it possible to raise $2,000,000 in Western New York through small donations from Joe Six-Pack in Lancaster and Tom Twelve-Pack in Hamburg?  Maybe.  However, we’d need to identify some larger investors who are not part of the existing power structure to provide our own seed funding and provide the mentorship for these budding entrepreneurs.

Each investor, no matter how small, get a weighted vote on which businesses get funded.  There will be a fund manager and a CEO hired who will report to a board of directors elected by the wider membership.  The board will manage the program, provide leadership and advise the membership.  Everyone is eligible for a leadership position as half of the board would rotate each year.  This would be a corporation, not a non-profit.

During the startup phase, we group the entreprenuers together and they hack away at their projects with legal oversight and receive guidance from guest speakers, advisers, and business planners.  We set them up for success by letting them focus on their business idea while giving them the tools to grow the idea.

So, I’ll leave it to you to tell me what you think.  Add to the idea, tell me what we’re missing or what we have right.  We’re walking the idea around town to people we’ve identified as potential partners and seed investors and I’ll post updates as the idea either blossoms or stalls.

It’s time we took control of our economic future, help make it happen.

General Motors Bankruptcy, What's Next?

Like most of you, I’ve been following the news and analysis on the drawdown and bankruptcy of General Motors.  

There have quite literally been thousands of obituaries written about the automaker and tens of thousands of opinion articles written about what went wrong.  Hindsight is 20/20 and it seems everyone is an all-knowing expert after the music stops. Jason Kottke has a nice roundup of some of the analysis.

It seems that in recent days, the discussion has been reduced to typical he said/she said punditry flamewars on the nightly opinion shows.  These debates have begun to inform the daytime discussions about General Motors and we’re all getting dumber because of them.  As a result, I think there is a sizable number of people in this country who really don’t give a rat’s ass if GM goes under.  Whether those people are motivated by resentment of union employees, anti-corporatist beliefs, or a general malevolence towards the automobile and its deleterious effect on our society, their numbers seem to be growing.

However, I recently stumbled across an article that I thought was really quite compelling and educational about the demise of GM and potential recovery.  It moves aside the traditional talking points that GM didn’t respond to a purported market desire for smaller cars or that heavy labor costs destroyed the company and instead lays the blame on a lack of general innovation and broken manufacturing processes.  I’d like to share it with you and hopefully have a sensible discussion about what you’re thinking about the future of the automobile industry in America.

Detroit’s Big Three automakers have for decades been notoriously hostile to outside innovation; Flash of Genius and Tucker, films that decry the industry’s insularity, are both based on true stories. No small US company has grown into a big carmaker in the past 50 years—one of the reasons that the automobile itself hasn’t changed more fundamentally during that time. “It’s as if the computer industry were still dominated by Wang and Data General and DEC, and they were still selling minicomputers,” says Henry Chesbrough, executive director at UC Berkeley’s Center for Open Innovation.

By seeking to match the likes of Toyota, Detroit has been trying to come from behind in a game where its adversaries set the rules. To Klepper, the Carnegie Mellon economist, the Big Three today resemble the American television-receiver industry in the 1970s and 1980s, pioneered by US corporations that, after decades of domination, were suddenly confronted by foreign innovation. Companies like RCA and Zenith were slow to incorporate new technologies until it was too late; all exited or sold out to foreign firms. “Every time American companies catch up to the competition,” Klepper says, “the competition already has moved on and instituted new things. In that situation, it’s extremely difficult to get ahead.”

The only escape from this conundrum is to pursue what Harvard Business School professor Clayton Christensen has called disruptive innovation—the kind of change that alters the trajectory of an industry. As Christensen argued in his 1997 book, The Innovator’s Dilemma, successful companies in mature industries rarely embrace disruptive innovation because, by definition, it threatens their business models.

With GM in bankruptcy, now is the time for the company to push its proverbial chips to the center of the table and embrace the disruptive innovation detailed in the article.  The multiplier effect of such a move by General Motors would be enormous and have an incredibly positive effect on entrepreneurship and the national economy on the whole.  

If they embrace it, the discussion might shift to how soon GM returns to dominance rather than whether it will survive at all.