Archive for Entrepreneurship

Response to “Private Sector Dynamics: The Key to Understanding U.S. Growth”

by Christine Hamilton-Pennell
Growing Local Economies, Inc.
August 15, 2011

Since my blog article, “The Role of Startups in Job Creation and Destruction”, is cited in the first paragraph of economist Donald W. Walls’ report, “Private Sector Dynamics: The Key to Understanding U.S. Growth”, I’d like to offer a response. My article was based on reports produced by the Kauffman Foundation and the Small Business Administration. I don’t believe a “serious misperception” of the data by these reputable sources, as claimed by Walls in the first paragraph of his report, is the issue, so much as which data we rely upon to guide the design of entrepreneurship support efforts in our communities.

The factors that produce economic growth in a community are extremely complex, and have been much-researched and debated for decades. Economic and business datasets used to measure economic activity, whether micro- or macro-based, provide a different snapshot based on their methodology and sources. Do they measure nonemployer or employer firms? How is company growth defined and measured? How are start-ups, entrepreneurs, high growth companies, and exporting companies defined and identified? What unit of measure is used for the geographic area? How is the data parsed and analyzed? There is conflicting data on most things, and business and economic statistics are no different. Depending on what question you want to answer, there is a number for that.

Strong conclusions have been drawn from the data over the years that are widely accepted in the field. One is the crucial role small businesses (particularly high-growth companies) play in creating jobs. Another is the role of traded-sector, exporting companies in bringing wealth into a region.

I believe that the recent research on the role of startups is also significant and must be considered by policy makers. Walls has provided another useful view by looking at the role of expanding businesses in creating job growth, a view that has not received as much attention in recent years.

In his paper, sponsored by the Edward Lowe Foundation, Walls argues that expansion startups (defined as “new establishments launched by existing companies in a new geographic location or new line of business”), outpaced new startups in job creation by 71 percent. This appears to be supported by his data. I have always asserted that it is expanding companies that create the lion’s share of new job growth. (See also David Neumark, Junfu Zhang, and Jed Kolko,“Interstate Business Relocation: An Industry-Level Analysis, Public Policy Institute of California”, 2006).

Walls’ paper does not comprehensively address the issue of company size and its relationship to job growth. Expansion startups by his definition are adding a new establishment or product line to their already existing company. What size is that initial company? Is it stage 1, stage 2 or stage 3? If you add together all the new employees, what size is it then? More research on the correlation between the size of existing employer firms (which excludes sole proprietors or nonemployer firms) and job growth characteristics is certainly needed, particularly for firms with five or more employees. It will be helpful to know by the numbers whether a company of a certain size (e.g., stage 1 or stage 2) creates the most sustainable job growth, or whether size is not a key factor.

Prior research has indicated that “once we control for firm age there is no systematic relationship between firm size and growth.” (Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. “Who Creates Jobs? Small vs. Large vs. Young” NBER Working Paper No. 16300, August 2010). Obviously, expanding stage 1 companies (defined as 1-9 employees by YourEconomy.org), create fewer jobs apiece, or they wouldn’t be categorized as stage 1. However, the greater number of stage 1 companies means that there are many more of them to contribute to sustainable job growth.

I have synthesized available research to identify what appears to be the ideal target audience for an economic gardening program:

“The ‘sweet spot’ for most economic gardening programs is to target entrepreneurs who have started a venture that is between one and five years old and want to grow it, regardless of its size. These ventures aren’t necessarily “high-tech,” but they have developed some sort of innovation in their product, process or delivery method. They also have a potential or actual market outside the local economic region, and create quality, living-wage jobs.” (Reflections on the Ideal Economic Gardening Audience).

Walls’ report does not appear to contradict these conclusions.

I have also frequently made the argument that so-called high-growth or “exceptional growth” companies are not only extremely rare, but they will also create jobs no matter what economic development or economic gardening programs offer to them. As Chris Gibbons has often stated, “It’s entrepreneurs who create jobs, not economic developers.” And these high-growth entrepreneurs are going to do it with or without us.

Practically speaking, I believe the weight of research evidence and on-the-ground experience with entrepreneurs—especially in small and rural areas—points most communities towards designing entrepreneurship support efforts that focus on smaller growth-oriented existing companies. In the early stages of growth these companies can often benefit from developing a strategic focus to lead them to expand into the next stage. These may very well be companies that don’t yet meet the threshold for stage 2 companies, and may never become “exceptional growth companies.” Nevertheless, they have great potential for expanding and creating high-wage, sustainable jobs in their communities.

I welcome continued dialogue on this topic.

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Out of Poverty: Design Thinking for Survival Entrepreneurs

By Christine Hamilton-Pennell
Growing Local Economies, Inc.
February 24, 2011

Dr. Paul Polak, psychiatrist, entrepreneur, innovator, and founder of International Development Enterprises (IDE), has a crazy notion. He believes that poor people are poor because they need to make more money. This simple but revolutionary concept has spurred his work among the world’s poorest people for 30 years. Polak asserts that traditional development approaches to ending poverty have been misguided, expensive, and mostly haven’t worked. There are around 800 million people who live on a dollar a day, mostly rural farmers with less than an acre of land. These subsistence-level farmers typically grow staple crops during the monsoon season, sometimes supplementing them with vegetables such as tomatoes and cucumbers. Most of the food is consumed by their families, and if they are lucky, they have enough to cover their basic needs and a little left over to sell in the marketplace. In bad years, they may go hungry for part of the year.

After talking to thousands of such farmers in Nepal, Bangladesh, India, Vietnam, and other developing countries, Polak determined that if they could irrigate their plots during the dry season, they could grow and sell high-value, labor-intensive products, such as off-season fruits and vegetables, to customers who can afford them. The challenge, then, was to figure out how to develop and market low-cost drip-irrigation systems that would be affordable and accessible to dollar-a-day farmers and allow them to increase the revenue from their land.

So, in the spirit of Thomas Edison, Polak and his team at IDE set out to develop just such a technology. IDE used the principles of “design thinking,” long before it was a fashionable concept, to solve this problem. Tim Brown, CEO and President of IDEO, an innovation and design firm headquartered in Palo Alto, defines design thinking in a recent Harvard Business Review article as “a discipline that uses the designer’s sensibility and methods to match people’s needs with what is technologically feasible and what a viable business strategy can convert into customer value and market opportunity.”

After much trial and error, IDE designed and developed a human-powered treadle pump that cost $25.00 and could irrigate a half acre of land.

Polak knew that this was not enough. Subsistence farmers also needed new markets capable of bringing them the inputs they needed to grow their crops, such as seeds and fertilizer, as well as new value chains capable of bringing their goods to market at reasonable prices. Polak and his colleagues took eight practical steps to make this happen. IDE:

1. Did not accept subsidies from government or development agencies for their products, choosing instead to sell them at fair market value to the farmers. Their experience showed that subsidizing the costs of products and services undercut the local market mechanisms.
2. Lowered the cost of their products by simplifying the design and finding less expensive materials, and by providing different quality standards at different price points for consumers.
3. Recruited small-scale manufacturers to build the pumps.
4. Recruited village dealers to sell the pumps.
5. Trained well-drillers to install the pumps.
6. Opened access to microcredit.
7. Implemented marketing and promotion initiatives.
8. Established strategically placed demonstration plots.

IDE energized 75 small-volume workshop entrepreneurs who each invested $500 to $2,000 (US) to get into the treadle-pump business. In addition, more than 2,000 village dealers and 3,000 well-drillers now earn their living by making, selling, and installing treadle pumps at an unsubsidized fair market price of $25.00.

The results? More than one-and-a-half million treadle pumps have been sold to subsistence farmers through these private sector supply chains, irrigating more than 750,000 acres at a fraction of the cost of conventional systems. More than 17 million people have been able to move out of poverty because of the additional income their land has been able to generate. IDE has gone on to develop many other devices and systems that allow subsistence farmers to efficiently store and deliver water to their fields and homes.

Polak hasn’t stopped there. He sees market opportunities among the millions of dollar-a-day slum dwellers as well. Instead of viewing slums as hellholes of misery and deprivation, he sees them as “a beehive of grassroots enterprises” where people who eke out a living making and selling simple products could leverage their low-cost labor and learn to produce higher-value goods to sell outside their local areas.

Polak doesn’t minimize the need for international aid to support education, healthcare, and infrastructure in poor communities. He has repeatedly found, however, that when farmers and slum dwellers begin to move out of poverty, they do make investments in education and healthcare for their families.

If design thinking and simple market mechanisms such as these can have such a profound impact on the world’s survival entrepreneurs, what lessons can be learned for our situation here in the U.S.? Research shows that the number of “necessity entrepreneurs” in this country—those who have launched a new business out of necessity after losing a job or not being able find employment—has risen dramatically in the past several years. How can we find simple and affordable solutions to support the business, technical, financial, and market needs of these start-up entrepreneurs, many of whom live in low-income communities with minimal business support systems, and help them move to the next stage of becoming “opportunity entrepreneurs?”

I welcome your thoughts.

©2011 Christine Hamilton-Pennell, Growing Local Economies, Inc.

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