Wednesday, October 16th, 2013
[ Quality of place improvements tend to be targeted at high end demographics downtown and such. In this piece Rod Stevens and Gregory Tung talk about how the needs of industry for better quality places should not be overlooked - Aaron. ]
In a recent posting on “The Promise and Peril of Rust Belt Chic” Aaron Renn contrasts the goals of self-affirmation with the Richard Florida approach of hipster havens. There is a division here between creating jobs and place-making, a gulf that has never been bridged between economic gardening and New Urbanism. Recently, we may have found a way of uniting these approaches, by focusing on the work districts themselves and the place-making needs of the firms already located there. We did this as part of a strategy for a 21st Century workplace district in San Leandro, California.
San Leandro is located just south of Oakland, in the San Francisco East Bay, and in recent years the city has seen most of the good new jobs go north to Berkeley and Emeryville. At one time San Leandro was an industrial powerhouse, a suburban center where factories were moving into farm fields. As California grew after WW II, this became a lunch bucket paradise where Portuguese and Italian families moving out of Oakland could earn a good middle class income working at the Caterpillar plant, the Dodge factory or one of a hundred other companies. By 1970, more than 20,000 people worked there in manufacturing. With its focus on making ordinary, everyday things, San Leandro was more like Muncie, Indiana than Mountain View, another Portuguese farm town to the south that was going electronic in what would become Silicon Valley.
Then, in the mid 1970s, the factories started to close and the jobs move away. The factory buildings stayed, but instead of being used to make things, they became places to store things. Today there are only about a third as many people working in manufacturing as there were 40 years ago.
Today the vacancy rate for this industrial space is just 5%, a rate brokers point to with pride, but their value is far less than in Berkeley, just 15 miles away, where there has been a renaissance of small, urban manufacturing. Like Brooklyn and San Francisco, Berkeley has become a center for making niche goods, not only food and apparel but also very technical items like scientific glassware. Those specialty skills have, in turn, drawn in companies that need them as part of their supply chain.
This realization that, effectively, many of the local buildings in San Leandro are barren of people led us to our first strategic goal: “IQ per acre”. This means raising the value-added in each building, whether by man or machine. This doesn’t have to require a masters degree. A lot of people are smart with their hands, and advanced manufacturing is all about combining technical skill with computer-controlled machinery that leverages this skill.
As we looked around the area and began compiling lists of interesting companies that worked there, we realized that much of the original DNA of making things is still there—but these companies had been forgotten or gone unrecognized by the city. We found companies still working in food processing, metals and machining, and instruments and process control. We also found vestiges of older companies that had moved away to cheaper places where it was easier to pollute, but in which the orphaned child had grown up and found success. INX Digital, founded as the subsidiary of a local paint company, now serves as the worldwide R&D center for a company that makes the inks that go in wide-bed printers. People working there wear lab coats.
As we talked with the managers of these companies, many of whom simply commuted into work there and felt no particular attachment to the place, we realized that some of their business needs were going unmet. They told us that they had no place to go to lunch and that local hotels were so tired that they put customers and suppliers up in other cities. They said that the curbs needed to be restriped to create more on-street parking, so that women coming off the night shift would not have to walk so far to their cars. They told us that the younger generation of tech talent coming from San Francisco and the North Bay could not take the BART trains, because the shuttle connections were too slow and infrequent. And they told us that their workers would like to have a nice place to walk to at lunch, someplace green that would be an alternative to the drab, industrial landscape.
This led us to our second strategic goal, “Serve existing customers first”.
Why? Because not only are these firms already there and producing jobs, but they are the best source of referrals for new business. You want them talking up the place at their next industry conference. You want them telling other companies in their supply chain that this is a good place to do business. But how to get them involved? A manager running a computerized chocolate factory probably is not going to take two hours off in the middle of the day to attend a planning meeting. You have to make it worth their while to get involved, to take care of that parking problem today. Only then will they get interested in the longer-term planning issues.
As we drove around the area, we realized that we ourselves were lost within it, despite many trips there. Key roads do not connect, most of the buildings are sun-bleached, and there are few landmarks. Nearby there is a Kinkos and there is a Starbucks, but they are buried in an outlet mall, across the freeway. In all, it reminded us of the movie “The Sheltering Sky”, in which Debra Winger wanders through the Sahara with nomads. How and where to create some oases that people could actually attach themselves to?
This led us to our third strategic goal, “Humanize the place”. With more than 2,000 acres to deal with, however, you cannot spread the peanut butter too thin. You have to concentrate the investment.
Our first tactic, then, became a “backstreets strategy” of attracting smaller companies to the cul-de-sacs and lanes with smaller buildings that are easier to change and upgrade, where changing a few facades, adding a parklet and improving parking will improve the overall place. The city has a façade program, but this has always been targeted at Main Street merchants, not factory managers.
A new, $1 billion Kaiser hospital is opening in the area, one that will bring more than 2,000 workers as well as countless patients, and so we encouraged putting a pod of food carts on its front door. Not food trucks but food carts. These are stationary and are far less costly to buy and operate than trucks. With more than 500 of these, Portland has proven that these can operate in a variety of places. Why not an industrial district barren of eating opportunities, next to a hospital where thousands of workers will want an alternative to the cafeteria?
And we recommended other bargain-basement ways to humanize this area. Things like pedestrian-level street lights that can be attached to the base of existing cobra-heads. Filling in the missing links on the bike routes, so that people can ride to work without fear of being side-swiped by a semi. Or, very simply, reversing the direction of the BART shuttle so that it does not have to make so many left-turns across traffic.
The fact is, we have over-looked the place-needs of industry for a very long time, simply taking the tax revenue from these places without reinvesting in them. A place like Detroit is proud of its Campus Martius Park, where Quicken workers can eat their lunch outside, but where is the equivalent investment for the machinist who makes jet engine parts, or the brewer who makes your local micro brew? More often than not, these people are sitting outside at a rough picnic table eating under razor wire.
Using place-making for economic development means taking care of the basic, day-to-day needs of business by providing safer, easier ways to get to work, service and amenities, and a nicer setting right outside the front door. It is no accident that there has been a kind of revenge of the cities in Millennials wanting to work in urban centers. These places are more convenient and interesting, in part because we have spent the last 15 years making them better places to live and shop. Now it is time to turn to the “productive” side of urban life- work, and in particular to making things, especially with advanced manufacturing.
In planning for these places, if we do it at all, there is a tendency to treat them as white spaces on the map, like “Indian Territory” to be settled by new white people. Yet there are successful businesses in these places, and the trick is to figure out how the place itself can make them more successful and draw in other companies in their supply chain. This requires the ability to talk to business, to tour the operations on the plant floor, what makes a given worker so good, and to listen for the opportunities to make the work district around the company better. This is the next frontier in place-making. The communities that do it well will be the economic winners.
Rod Stevens is a management consultant on Bainbridge Island, WA.
Gregory Tung is an urban designer with Freedman Tung + Sasaki (FTS), based in San Francisco.
Wednesday, November 28th, 2012
Here’s a gorgeous time lapse of San Francisco. The only thing I would have changed is the music, since they used the same track as the incredibly awesome Le Flâneur (Intro by The XX). In any event, definitely full screen for this one. If the video doesn’t display for you, click here.
If you still want more, here’s a San Francisco installment from the “Empty America” series. If the video doesn’t display, click here.
Tuesday, July 31st, 2012
[ Mark Suster is a former Accenture guy like me who left to become a serial entrepreneur and is now a partner in a Los Angeles based venture capital firm. He writes an excellent blog on the tech industry called Both Sides of the Table that draws on both his entrepreneurial and VC experience. I consider it a must-read for those interested in tech. A recent story of Mark's caught my eye as it's relevant to cities and comes from a bona fide investor, not urban booster, perspective. He graciously gave me permission to repost it here - Aaron. ]
Like many I read the headlines about Pinterest moving from Palo Alto to San Francisco and thought about the trend it portends. For those not familiar with the local geography, Palo Alto is the north end of what most consider “Silicon Valley” although nobody local calls it that. Palo Also is about 35 miles south of San Francisco.
Palo Alto is home to Stanford. It is the birthplace of Hewlett Packard. And Facebook. It is adjacent to Mountain View, home to Google. Further to the south are the legendary companies of Cisco, Apple, Intel, eBay, Yahoo!, Juniper and countless others.
Back in 2006/07 when I sold my company and then worked at Salesforce.com there were very few options in SF for technology folk to build their careers at big, growing companies.
Today there’s many. In addition to Salesforce.com (the 800 pound gorilla) there is also Twitter, Zynga and Square – just to name a few. And now Pinterest.
So why all the movements towards cities? It’s clearly more expensive for office space and living. In addition to higher rents many cities impose city taxes on local businesses. It’s clearly a complex topic without black-and-white answers.
Fred Wilson ponders this in his post “Cause and Effect”
Technology innovation doesn’t occur in a vacuum. It happens in a dialog with society. And sci-fi writers are but one example of the way society impacts technology.
I think that’s one of the reasons that many of the most interesting Bay Area startups are choosing to locate themselves in the city. And it is one of the reasons that NYC is developing a vibrant technology community.
Society is at its most dense in rich urban environments where society and technology can inspire each other on a daily basis.”
I’m sure there’s a lot of truth to that. I see it first hand in Los Angeles where given the growth of YouTube networks the worlds of art & technology are colliding. It’s becoming harder to distinguish tech companies from media companies.
Many “tech companies” now have green screens. And make-up artists. And costume & set designers. And sound engineers. And post production. And writers! And even … yes … actors.
I can’t say for sure, but it feels to me like the re-urbanization of technology companies is driven by a broader trend of the tech industry overall – cloud computing. In driving down the costs of building businesses it’s driving down the age of startup founders and thus they’re starting companies where young people want to live – in urban environments.
I’ve been meeting with LPs (those who invest in VC funds) over the past year and discussing trends I see in the market and where I think we need to be as a firm to be near to and meet the needs of our customers.
One of the major trends I’ve outlined is this movement of entrepreneurs (and as a lagging indicator venture funds) to more urban environments.
And it’s not just the movement from Palo Alto to San Francisco.
The same phenomenon is happening in many places.
- In Massachusetts companies (and VCs) have migrated from out by Waltham to Back Bay (Boston) or Cambridge.
- In LA companies used to be concentrated near Pasadena or in the San Fernando Valley. These days it’s Santa Monica and Venice. Not exactly “urban” in the way you think of SF or NY but certainly relative to the suburban communities of LA and at a minimum it’s where young people want to live / hang out
- In England they were all in The Thames Valley (45 minutes west of London) and these days they’re all near Shoreditch east of London
- I think NY has always – by definition – been urban. But there does seem to be huge startup energy around the Flatiron District / Union Square.
For those that aren’t aware of the broader technology shifts of cloud computing, the trend is described in a post I did about changes in the software industry.
The costs of building a company have gone down dramatically, from $5 million to get to launch in the late 90’s to $500,000 (or even lower) today for web companies.
As a result younger people are creating startups because they can. It’s far easier as an inexperienced 23-year-old to get $200,000 from somebody than $2 million or $5 million.
So we’ve seen an explosion in the number of startup companies and subsequently a huge burst in the number of incubators.
I think the urban tech renewal is happening for the same reason.
It’s not that young people wanted to live in Mountain View in the past. In fact, so many DID NOT that companies like Google & Yahoo! had free buses with wifi from San Francisco to their Palo Alto and Sunnyvale headquarters.
Young people want to live where the action is. They want to live amongst other young people. They want nightly restaurants, bars, dance clubs, karaoke, or whatever other late night activities are available to those with fewer encumbrances.
You know the story. You get older. You get married. You have a kid. Then another. Suddenly you feel the pull for a backyard and nearby parks. And a bigger house wouldn’t hurt so that when your mother-in-law is in town for 3 weeks it doesn’t feel like you see her quite so much.
So you move outside the city – even though you feel a strong pull to stay. It’s why many of the older executives at San Francisco startups live in Marin County and commute in. Or they do so from Burlingame, San Ramon or even Palo Alto.
I suspect the shift from the burbs to urban environments – or more specifically to places where young, single, technical startup people WANT to live – will continue into the future and will not decline.
And with startups so go VCs. Spark Capital, Flybridge, Founder Collective, NextView Ventures … all in Boston or Cambridge not west of the city.
In San Fran you find more recently established VCs like True Ventures, First Round Capital, Freestyle, Kii Capital and others.
And there has been a similar move from Sand Hill Road to Palo Alto itself with firms like SoftTech VC, Felicis Ventures, K9, Accel, True Ventures (other office) and Floodgate.
In NY you find the broader Flatiron / Union Square are home to USV (obviously), IA Ventures, First Round Capital, FF Ventures and the incubators General Assembly and TechStars.
I’m sure I’ve forgotten many who have moved or set up anew since I wrote the list in one sitting and with no research.
In LA the VC shift is clearly to Santa Monica / Venice, home of Rustic Canyon, Greycroft, Anthem and just about every incubator (Amplify, Launchpad, Mucker, Science).
GRP’s offices are near Beverly Hills. Our lease runs out in 2013. No prizes for guessing where our new offices will be located
This post originally appeared in Both Sides of the Table on July 10, 2012.
Wednesday, May 9th, 2012
For my email subscribers who missed this update, the OECD report on Chicago actually now is available online. Thanks to Jim Russell for pointing this out.
Researchers at Carnegie Mellon University have developed a new way of looking at neighborhood definitions they call livehoods that determines de facto neighborhoods using an algorithm that looks at Foursquare checkins. It’s pretty cool, especially as the maps they generate are interactive. Here’s a static shot of San Francisco though to show you want they look like:
I found this via the excellent Flowing Data blog that I’d encourage any data visualization geeks to check out.
Think, Act, Impact Indianapolis
Another interesting infographic comes to us from the folks at People for Urban Progress. They put together an infographic showing how things get done in Indianapolis city government. If the zoomable image embedded below doesn’t display, click here to check it out on PUP’s site.
Wednesday, January 18th, 2012
I have a few miscellaneous items for you today. First I’ll highlight this brief piece from Chicago reporter Tracy Swartz, who rode all 139 Chicago bus routes end to end.
Next, an interactive infographic on Silicon Valley (California) vs. Silicon Alley (New York). I clipped it slightly to fit my blog template, so to get a full sized version, or if it doesn’t display for you, click on over to the University of North Carolina site where it came from.
Economic Security Report Card
The Urban Institute also put out an interactive map that let’s you explore economic security in US metros. They’ve got various factors that go into this, and while you can’t add your own, you can adjust the weightings on theirs to create your own overall score. This one won’t fit on my page, so you’ll have to click on over to check it out. Here’s a static screen shot for you, however.
Via RecreActiva – Guadalajara’s Ciclovia
Streetfilms did a nice short piece on the the Ciclovia program in Guadalajara, Mexico’s second city. (If the video doesn’t display, click here).
Thursday, November 10th, 2011
Update: The NYT just ran an interesting story called “In Shift, More People Move In to New York Than Out” that provides further info on this trend using recent Census data.
My latest post is online over at New Geography. It is called “Back to the City?” and examines the question of whether in fact there has been a movement back to the city. Census figures suggest that while many downtowns flourished, albeit often showing large percentage gains on a small base, cities generally underperformed in the 2000s vs. the 1990s.
In this piece I look at intra-metro migration to measure people moving from the city to the suburbs and vice versa. Because data is only available at the county level, I selected four cities where counties offered a good proxy for the urban core: New York, Philadelphia, San Francisco, and Washington, DC.
As you can see from the chart above, there has been a shift in trends in the 2000s, with out-migration falling off late in the decade, while in-migration remained steady or even increased. The most striking trend was in Philadelphia, as shown above. That chart shows the migration values plotted as a index to render them in the same scale. There is still a net out-migration to the suburbs, but the gap has narrowed in these places. Here we see that on the chart with raw numbers:
Obviously with the late decade featuring a steep recession and housing bust, migration has been affected. It remains to be seen what will happen in the future. But these numbers do clearly show improvements for core cities in the underlying migration trends.
Wednesday, September 28th, 2011
I can’t resist yet another great urban time lapse, this one of San Francisco. If the video doesn’t display for you, click here.
Friday, January 28th, 2011
[ As a follow-up to my Cost of Clout piece I am re-running this 2008 post demonstrating the important of social structures and culture to urban success. ]
There seems to be a popular belief that what it takes to create an industry cluster in bioscience or whatever is to pair research with commerce. That is, to find an academic institution doing cutting edge research, and connect it with venture capital and entrepreneurs to start companies to commercialize it. Soon enough, you have a “cluster” of businesses that takes off like a rocket. This is the perceived Silicon Valley model, and no company epitomizes it more than Google, which was started by two Stanford students to commercialize their graduate research.
But is this true? There are many top flight research universities in this country, but few major startup clusters. When major research institutions fail to generate commercial spinoffs, this is often blamed on a lack of venture capital. But is that really the case, or is something else at work?
Anyone interested in this matter simply must read AnnaLee Saxenian’s seminal book, “Regional Advantage: Culture and Competition in Silicon Valley and Route 128“. A social scientist at UC Berkeley, Saxenian lived and worked in both Silicon Valley and Boston’s Route 128 technology corridor. She wondered why Route 128, which started out with far more of a technology business and economic base than Silicon Valley, eventually lost ground to become a clear number two. She sees this resulting from the different social structures that exist in the various areas.
According to Saxenian, Route 128 suffered from a culture that was oriented towards a traditional maturing industry, not a rapidly changing one like technology. This included more deliberative decision making; vertical integration and self-sufficiency; hierarchical, centralized command structures; focus on economies of scale; a high friction job market; geographically dispersed locations; and low levels of cooperation and sparse networks between firms in the region. In other words, all the standard traits of a typical large corporation. While she doesn’t dwell on this point, it also comes across that Boston, probably due to its New England locale with all the history there, was a much more closed society. The social network and hierarchy was more fixed (the phrase never appeared in the book, but I couldn’t help but think Boston Brahmin) and the process of establishing trust and credibility much slower than California. While famous as one of the bluest states, Massachusetts is socially conservative in many ways, and highly risk averse. This is the land of the suit and tie, and the difference between that environment and California casual was more than just a surface thing.
Silicon Valley, of course, was just the opposite. It adopted social structures that were very focused around innovation and time to market. It was open, with rapid, decentralized decision making. Firms quickly specialized, focusing on their core competency, and established close links with suppliers to fill in the rest of the value chain. These links were often such that it was not clear where one company ended and the other began. The clearly functioned on high degrees of trust. Even direct competitors often talk to exchange ideas and help each other solve problems. Here’s a quote:
Competitors consulted one another with a frequency unheard of in other areas of the country. According to one executive: ‘I have people call me quite frequently and say, “Hey, have you ever run into this one?” and you say “Yeah, about seven or eight years ago. Why don’t you try this, that or the other thing.” We all get calls like that.’ (33)
Clearly this is quite unique. I’m not even sure if it’s all legal, but hey, it works for them.
The job market in Silicon Valley is extremely fluid, with people constantly changing jobs, starting companies, etc. It is expected that you won’t stay that long with any given employer. Route 128 operated on the “company man” model and to leave was to show disloyalty, often resulting in ostracism. Since Silicon Valley was a new country with almost all immigrants of one type or another, family history and credentials meant little. What mattered was whether you could perform.
Now of course it was almost entirely men, originally white men, who set this up. The tech industry is famous for being one of the most gender imbalanced. What I found particularly interesting was that many of the founders had Midwestern roots. Again quoting:
This collective identity was strengthened by the homogeneity of Silicon Valley’s founders. Virtually all were white men; most were in their early 20′s. Many had studied engineering at Stanford or MIT, and most had no industrial experience. None had roots in the region; a surprising number of the community’s major figures had grown up in small towns in the Midwest and shared a distrust for established East Coast institutions and attitudes. They repeatedly expressed their opposition to ‘established’ or ‘old-line’ industry, and the ‘Eastern establishment.’ (30, emphasis added)
The many examples of engineers with humble origins who became millionaires by starting successful companies had no parallel in the more stable social structures of the East. Jerry Sanders, founder of Advanced Micros Devices … grew up in south Chicago, the son of a traffic light repairman. (38, emphasis added)
To digress for a moment, remember how I said the contrarian, ornery Hoosier/Midwestern attitude is, in the right context, a huge strength, not a weakness. This shows that in action. These guys didn’t toe the conventional wisdom line. Instead they created a whole new business model. I’ve got to believe the Midwest mindset played a huge role in making this possible. The unfortunate thing is that they had to leave the Midwest to do it. Imagine if they’d stayed home and made it happen around one of the great engineering schools there? Alas, to this day Midwesterners often have to leave to turn things into reality. Famously, Marc Andreessen had to leave Illinois to start Netscape, and in fact had U of I actively hampering him all the way. If the Midwest cracks the code on this piece alone, it would be a huge step in the right direction.
(By the way, for a wonderful look at how these Midwesterners invented Silicon Valley and the “elder days” of semiconductor business, see Tom Wolfe’s 1983 Esquire essay, “The Tinkerings of Robert Noyce“.)
These extremely fluid job markets, open social institutions, high trust customer and supplier interactions, and competitor information exchange create an environment of so-called “dense networks”. In a period of rapid change and innovation, these networks, by efficiently distributing information and dispersing risk, create an environment with very rapid speed to market and high levels of adaptability. A traditional Route 128 do it all yourself model simply can’t keep up with the power of this vast network.
It was this network, more than anything, that created the Silicon Valley we know today. The “cluster” we see in Silicon Valley is not an artifact of spatial co-location. It comes from the network. According to Saxenian:
Spatial clustering alone does not create mutually beneficial interdependencies. An industrial system many be geographically agglomerated and yet have limited capacity for adaptation. This is overwhelmingly a function of organizational structure, not of technology or firm size … The current difficulties of Route 128 are to a great extent a product of its history. The region’s technology firms inherited a business model and social and institutional setting from an earlier industrial area. (161-162).
Sound familiar? It describes the Midwest perfectly. What I find interesting is how Saxenian illustrates her thesis not using a struggling Midwestern burg as a case study, but rather Boston’s Route 128, the second largest technology hub in America, home to possibly the greatest collection of universities in the country, with massive access to capital, etc. If this town had its problems, how much more so places without those advantages? It certainly shows the scale of the challenge in building industry clusters.
Obviously, changing the social structure, culture, and institutions of a region is difficult to do. Even positive articles highlight the scale of the challenge. I’ll refer a recent article on Milwaukee startups that I linked that quotes a local businessman saying, with some pride I gather, “Milwaukee is a one-strike-you’re-out town.” That’s not a good thing. Silicon Valley shows that failure and risk taking are good. The way to innovate is to figure out how to try lots of things and to fail quickly and cheaply. If you are overly concerned that you’ll be permanently ruined if your business goes bankrupt, you’re not that likely to take a chance.
It reminds me of a discussion I once had with a friend from Germany. He told me, “We’re the children of the people who stayed” and bemoaned the highly conservative outlook of his countrymen. He noted the extreme reluctance to take risks because in Germany, if you go bankrupt, you’re stigmatized for life. Obvious some of that carried over to heavily German Milwaukee.
I should note that one should not over-internalize Saxenian’s case studies into some sort of cookbook solution. Every city and region needs to find its own unique path to success based on its own culture, institutions, history, etc.
I would be remiss I did not point out a few areas where I was skeptical of the Silicon Valley model. One intriguing factoid from the book was that in 1962 federal government purchases, principally defense related, accounted for over half of Route 128′s sales. Indeed, the area got its start in technology through defense related research during World War II. Could it be that dependency on government contracts is really what caused the dysfunctional culture there? Government largesse encourages rent seeking behavior at the expense of building a competitive business.
Also, Saxenian highlights how the non-business social networks in Boston substitute for the type of technology networks in Silicon Valley. But is this a bad thing? The books paints a portrait of Silicon Valley as a bunch of geeky guys who toil away long hours on tech projects and even talk about technology at the bar when they do go out. It’s like a community of idiot savants. Some might say “get a life!”
What’s more, there is some research that suggests dense networks themselves aren’t a recipe for success. In an thought provoking paper called “Why the Garden Club Couldn’t Save Youngstown” Sean Safford contrasts the experiences of Youngstown and Allentown, both small steelmaking cities. Despite similar dense networks, Youngstown failed while Allentown fared much better. His conclusion that was the dense networks in Youngstown only reinforced an already closed leadership circle who were economically aligned, while Allentown’s served to bridge otherwise non-overlapping groups.
Perhaps to a great extent, the key attribute is less the networks themselves, than the ability of outsiders and new thinking to penetrate them. Silicon Valley’s social structure was open, Route 128′s wasn’t exactly closed, but there were barriers to entry. In a globalized world of ever faster change, the ability to respond and adapt, to process new ideas and react to rapidly shifting global forces, is critical. This puts a bit premium on dense social networks that are also open and flexible.
This is somewhat the thesis also of Richard Florida. He has a somewhat different spin, saying that the economy is now powered by the creative class, and they want to live in places that are open, tolerant, etc. This is his “three T’s” model: talent, technology, and tolerance. The last appears not to be so much valuable in its own right, but for what it says about the openness of social networks. Thus a large number of gays in a community isn’t what drives economic growth per se. Rather, a thriving gay community is a signaling mechanism that lets people know that diverse ideas and people are welcome.
I think we all know places where the social network is impenetrable. This isn’t necessarily a function of size, prosperity level, etc. I mentioned the Boston old money, social register concept. In any number of southern cities, who your daddy is, or what sorority you went to in college is a huge determinant of your place in a social hierarchy. If you don’t come from the right family, the right schools, etc., you can forget it.
Perhaps this explains my Cincinnati conundrum. Here’s a city with better assets than almost any in America, but it is one of the all time relative decline stories in US history and to this day is on a moderately stagnant, slow growth path. Why is that? There was an intriguing study I saw recently called Who Rules Cincinnati? [dead link] This is by an independent researcher named Dan La Botz, who I get the impression is some sort of hard core left activist, so keep that in mind. Nevertheless, he uses a similar approach to the Garden Club study to track social networks in the city, coming to the conclusion that officers of seven major corporations basically run Cincinnati, mostly to that city’s detriment. Another person I know offered the interesting insight that when he meets someone in a bar in Cincinnati, the first question they ask him is where he went to high school. This both indicates a highly inbred culture as evidenced by the assumption one must have gone to high school in Cincinnati, and shows that the school you attended is an important social marker. (It perhaps also shows a lack of regard for higher education).
It could be that the Midwestern cities that have the best potential for future growth are those with the most open social networks, as well as exhibiting other of the characteristics Saxenian cites. I think this would be fertile ground for social science research. It also makes me wonder if perhaps that goes part of the way to explaining the relative success of the Midwest’s larger state capitals. State capitals constantly have people traveling and doing business there from all corners of the state. This flow in and out might potentially prevent a social structure from completely congealing into a small, impenetrable elite. I sense another potential dissertation topic here.
The key takeaway is not to focus on purely the institutional infrastructure (universities, venture capital funds, labor force, etc.) when trying to set out an economic strategy. The local culture, norms, and social practices, and in particular the density and openness of the social networks is critical. Clearly, as anyone who has found themselves mired in a corporate or governmental bureaucratic organization, changing a culture is an extremely difficult thing to do. But it is something that clearly warrants an examination.
This post originally ran on July 13, 2008.
Thursday, December 16th, 2010
Lots of cities are trying to build up high tech/internet industry clusters. I think there’s room for a lot of places to significantly boost their employment and business formation here, particularly in focused areas, but the top hubs like Silicon Valley have huge advantages that mean they’ll likely stay on top of the heap for quite some time.
A brief story about a company called Formspring illustrates this. Formspring is a spin-off of an Indianapolis online form vendor called Formstack. (Actually, Formstack was originally called Formspring, but the spinoff business became so big they changed their name). Formspring was one of those crazy social media growth juggernauts that signed up something like 15 million users in only eight months.
Of course, they needed money to keep up with this, and so went looking for investors. In the interview below from July with Formspring CEO Ade Olonoh, the interviewer described this as an “iconic super-angel funding round where every bold faced Silicon Valley name put money into you guys.”
The entire process end to end lasted 12 days. Somehow they got a conversation with Steve Anderson of Baseline Ventures. After a few phone calls over the first week, the Formspring team flew out to Silicon Valley where Steve arranged about 10 meetings over two days with a who’s who of investors, people Olonoh admitted he couldn’t have even listed on a whiteboard before the process started. Shortly thereafter the funding round was closed and Formspring relocated to Silicon Valley. Here is the entire interview, if you are interested. (If the video doesn’t display, click here).
In Silicon Valley they just plain move faster than everywhere else. That’s a huge advantage. And they have a huge reservoir of strategic investors who bring not only dollars to the table, but significant experience and expertise in growing businesses.
Another advantage is talent. In staffing up the business, Formspring was able to hire a couple people who worked on Second Life. Though the competition for developers in Silicon Valley is intense right now, the talent pool is still the world’s most robust for this type of business.
Similarly, talent and access to capital led a couple of University of Chicago entrepreneurs to relocate their enterprise to Silicon Valley. As WBEZ reports in “The One That Got Away.”
They didn’t go with the intention of staying. After all, Lieb and Mintz still had another year of B-School ahead of them. But like lots of good tech companies, the train barreled down the tracks at breakneck speed.
They took part in a summer business incubator program run by Y Combinator. By the end, they got a big, fat $3 million check from the venture-capital firm Sequoia Capital and some Valley angel investors.
But just because they got the money there didn’t mean they had to stay. They could have come back to Chicago. But they didn’t. They opened their headquarters in Mountain View, California, and now have 15 employees there and are “aggressively hiring.”
Lieb says the main reason was because Huibers lived in California already. But there was another reason that speaks to Silicon Valley’s dominance.
“We knew we needed to hire a bunch of people, and being here in the Valley is really where all that technical talent is,” Lieb said in an interview.
And even though they did talk with venture capitalists in Chicago, there aren’t as many of them and they’re more cautious, Lieb says.
Now all is not doom and gloom here. I don’t think a place like Indianapolis was a great fit for Formspring. It’s a perfect fit for B2B businesses like Exact Target, but a mass-consumer social networking site is not the city’s sweet spot. So I wouldn’t feel too bad about losing the business. Similarly, WBEZ also reported how Groupon has ignited a startup boom in Chicago.
But I think this story shows some important differences in the capabilities and ways of doing business between the Midwest generally and Silicon Valley. (For example, there appears to have been a media blackout in Indy regarding the relocation. I read about it in the New York Times). It shows why the Valley has had such staying power, and why it is so hard to build and sustain an innovative tech cluster like this over time.
Friday, October 15th, 2010
California has a case of the same disease that felled the Rust Belt. Will the patient survive?
The troubles of California, and their causes, are a widely discussed topic these days. America’s most populated state by far, its successes and failures always loom large in the national consciousness. In the last year we’ve seen the state face a massive $42 billion budget deficit and the humiliation of having to issue IOU’s as payments. Its pensions are radically underfunded and there are other long term structural budgetary problems. Parts of the state were ground zero for the housing collapse and among the highest foreclosure zones in the country. Unemployment, high everywhere, is particularly so in parts of California. California, the place people once moved to, is now the place the move from, as the state is experiencing net domestic out-migration, leading to the prospect of losing a representative in Congress for the first time in its history. A complicated political system has led to decision making paralysis. Even disasters like wildfires have been played up.
There are no end to explanations for this which, unsurprisingly, tend to follow people’s political beliefs. To those on the right, California is the ultimate blue state, with high taxes, an anti-business mindset, and environmental and other regulations designed to send people and businesses fleeing for the exits. To those on the left, California’s problems are the comeuppance for decades of unchecked sprawl, the ultimate car culture, and runaway exploitation of resources. Whatever your particular policy pet peeve, California must be it.
But is this really the case?
The real problem could be much more simple and yet much more terrifying in its implications. California has simply now outgrown its youth and is now well into its middle age. Like the Rust Belt before it, California is now old. As with people as they age, “chronic lifestyle diseases” hit places too. These are: unfunded liabilities, the end of growth economics, and institutional rigidity, each of which builds on the one before it.
I’ve long noted that places have an incredible tendency to accumulate unfunded liabilities, most of them of the “off balance sheet” variety. The temptation to defer problems into the future is simply too great for most governments to resist, hence structural imbalances build up over time. The sources of these liabilities are many, but here are some key ones:
- Deferred Infrastructure Investment. As populations and development grow, infrastructure is built with a lag and generally there is a lack of funds for completion. As a result, cities and states end up with deficient infrastructure for their size, leading to all sorts of problems such as traffic and transit congestion. Clearly, California is suffering here.
- Infrastructure Maintenance. Similarly, cities build some infrastructure, then “sweat the assets” as long as possible. Infrastructure is often not well-maintained, and the periodic capital refresh unbudgeted. Condo associations do reserve studies and set aside funds to meet future capital needs such as roof replacements to avoid painfully huge special assessments, but government do not. I have yet to see any city or state that even has a schedule of major assets and infrastructure with needed maintenance and replacement timeframes, much less funding for any it. California’s Golden Age infrastructure is now aging, and it is facing repair bills merely to maintain what it has.
- Underfunded Pensions. Politicians love to sweeten public sector pensions. This buys both labor peace and a powerful political constituency. These are seldom funded at adequate levels – and with the rapid growth in life extending technology, it’s questionable whether any level of funding is sufficient – leading to major problems downstream. California’s pensions are unfunded by upwards of $300 billion.
- Other Redevelopment Costs. When ever homes and buildings are shiny and new, things are great. But what happens when your building stock gets old like in Rust Belt inner cities, and often no longer meet the functional and technical demands of the modern day, such as sizes, layouts, energy efficiency, etc.?
Add this all up, and it’s a huge bill that eventually comes due. The most important thing to understand about this is that the bill attaches to the territory, not to the people. So residents and businesses can avoid paying up simply by leaving for another jurisdiction. It’s like being able to run up a huge credit card bill in someone else’s name, then skip town.
This ability to run up massive deferred and unfunded liabilities, then leave, sticking other people with the bill, is one of the most powerful forces driving greenfield development. Even if there weren’t a drop of subsidies to, say, suburban expansion, the financial incentive to escape the huge liabilities of central cities and older suburbs is a key incentive on its own.
This why I’ve said it is critical to find ways to prevent governments from accumulating these liabilities in the first place.
The End of Growth Economics
Look at companies and industries. There is a standard growth curve to them. They start out in incubation and infancy, then, if successful, on to growth, then finally to maturity and decline. Why would we think that what is true for firms would be different for places? Why would we think that cities or states are immune from the forces of creative destruction? The answer is, they aren’t.
Having done consulting in the retail industry for some years, I often observed the growth curves played out in companies. Category killers came along and grew and grew and grew, seemingly as unstoppable juggernauts. But eventually, they hit the end of their growth phase, and had to endure a period of wandering in the wilderness. The reasons for this are varied – market saturation and consequent over expansion, changes in the marketplace, insufficient infrastructure and operational disciplines, more nimble competitors – but we’ve seen it played out before our eyes in America. Think McDonald’s, Home Depot, and the Gap.
The logic and economics of high growth are fundamentally different from that of operating a more or less steady state or low growth business. In the growth phase, everything is oriented towards expansion, mostly building more infrastructure to keep up with it. Also, scale economics are in your favor. With more people, for example, you are spreading fixed costs across more bodies and more buildings, so you can spend more money and tax less per capita all the same time. Your brand value is expanding with size, etc. That’s all great if you can pull it off.
But when something causes growth to take a hit – maybe accumulated liabilities, resource exhaustion, jurisdictional limits, etc – the equation changes radically. You can no longer rely on growth to provide unit cost efficiency. You have to start thinking like an operator. That is an extremely difficult mindset shift and requires a totally different set of skills. From what I’ve seen, companies have an extremely difficult time doing this. They generally have to struggle for some time, usually bring in new leadership, and undergo painful structuring. Many of them never really recover. But some do. I think of McDonald’s, which stopped relying on store growth to fuel its engine, but now relies on product innovation (Angus burgers, coffee, salads, etc) and operational effectiveness.
California, for whatever reason, stopped growing. The trends in domestic out migration make this very clear. The fact that total population has not declined doesn’t matter. Most Rust Belt states never actually physically lost population. Their growth simply slowed to a crawl. And it was the most entrepreneurial and high skill classes that fled. In California that his been somewhat masked by outsized productivity in the technology sector and international immigration, but the overall trend is clear. California now has to think like an operator. Welcome to the world of legacy. California is now a gigantic “brownfield”.
As California struggles with this transition, the scale economics start to go in reverse. As people and businesses leave, the unit cost of all those unfunded liabilities looms large. Just as growth begets growth, decline begets decline. If you are young and ambitious, why stay in California and pay off all those pensions? All things being equal, it is much better to leave for a more greenfield location, where you can benefit from running up the credit card, not paying off someone else’s bill. If not arrested, decline eventually reaches a tipping point, as we’ve seen in so many Rust Belt cities.
The third symptom of civic aging is a creeping institutional rigidity that makes change difficult. In established, mature places, there many, many powerful institutions and interest groups. These can often be forces for good, but too often become barriers to change or getting things done. What’s more, these institutions were typically created in the past to meet the perceived challenges of that time and age, but survive today in a world that is very different. As most institutions are never sunset, and new ones form over time, there is a gradual accumulation of friction over time. Eventually, the gears and seize up.
These institutions can take many forms. Constitutions and political structures, non-profits, clubs and social networks, various trade-offs and political accommodations and deals from over the years, power structures, corruption, local business practices, unions, recipients of government funding, taxpayer or other advocacy groups, political party organizations, business groups, etc. Much is made of California’s many times amended constitution as a barrier to change, but that is only the tip of the iceberg.
As decline sets in, a toxic dynamic takes hold. In a growth mode, it is very easy for everyone to hold hands and sing kum-bah-ya. It’s comparatively easy to cut deals to divide the fruits of prosperity. In decline, those deals come back to haunt. The status quo is failing, but people are still profiting from it. Even in Detroit, America’s ultimate failed city, so many people and groups benefit from the current system that there is complete paralysis. No one wants to give up an inch of hard won gains, especially since in a dismal region there’s little hope of replicating that privileged position or income. Hard times promote solidarity, some say. But the reality is that hard times also often produce selfishness and civic dysfunction as well as people cling desperately to what they have instead of looking boldly forward to the future.
I’ve seen this shift happen in a few cities. Where once civic boosters dreamed of glory and invested their own money into the city, now they focus on what they can get out of it. So too in California. Everyone knows the Titanic has hit the iceberg, but they are determined to loot as many state rooms as they can before shoving the women and children out of the way and commandeering the life boats.
This institutional rigidity is another force driving people to greenfield locations. It’s a global phenomenon. Consider this Newsweek coverage of a study of Chinese industry that notes much lower levels of corruption and better governance in new cities than old.
An intriguing pattern is that governance is best in coastal cities that had very little industry when reform began in 1978. Shenzhen now has the highest per capita GDP in China. The same holds in Jiangmen, Dongguan, Suzhou–all were industrial backwaters in 1978, and responded to China’s opening by creating good environments for private investment and learning from outsiders. Cities that already had industry tended to protect what they had and reform less aggressively.
Jim Russell hypothesizes that this effect of frontier geography explains a lot of the success of the Sunbelt, which industrialized late.
Cities such as Austin, TX and Charlotte, NC have offered a frontier opportunity akin to the one observed in the boomtowns of China. On the other hand, Pittsburgh stagnates. Governmental reform is key for attracting investment and stimulating growth. This is unlikely to happen in Western Pennsylvania, leaving this region at the rear of economic globalization.
For Pittsburgh, substitute California and you’ve got a pretty good picture.
Writers like Joel Kotkin like to reminisce about the Golden Age of California, and the leadership of that age from enlightened members of both parties like Pat Brown and Ronald Reagan. But you can never go home again. That letter jacket from your high school glory days might still fit, but you’re never going back to the state finals. Brown and Reagan were products of their era – an era that no longer exists. While they might be better executives than Gray Davis and Arnold Schwarzenegger, even if you assume they could get elected today – unlikely – I doubt they’d prove much more effective.
It’s been said that China will get old before it gets rich. Well, California got rich first – but it still got old. Not old demographically, but old civically. The polity of California is now well into middle age. As with people, places that reach that point experience a mid-life crisis as they look back longingly at the optimism, energy, flexibility, dynamism, and endless capacity for reinvention of youth. That’s often a bitter pill to swallow.
Can California Recover?
Can California pull out of this? It’s hard to point to a lot of examples that offer hope. But California has a lot going for it. It’s got the stunning climate and physical geography. Cities like San Francisco and Los Angeles remain powerful. In addition to the technology and film industries, California also has a robust agricultural sector, an entrepreneurial immigrant base, as well as an American hub for contemporary art and other creative fields besides the movie business. So there’s a lot of assets to build on.
The challenge is that these existing strengths are part of the institutional rigidity. Another way to say “build on assets” is “defend the past”. Other than the its physical setting, the assets of California only exist because previous generations didn’t build on assets. If they did, Silicon Valley would still be orchards, not the powerhouse of the global technology industry. If a city or state is failing to create new industries, it has economically stagnated, no matter how prosperous it might be or appear for a time.
Looking at the Rust Belt, we do see that tier one global cities have managed to renew their cores. Chicago, New York, and Boston have glittering city centers and a migration back to the city of upscale residents. This is a far cry from the sour days of the 70′s. But if you look beyond those zones, you see places with surprisingly unimpressive metro area statistics in many regards. And the states they are in look at lot like, well, California. A handful of metro thriving cores can’t energize an entire state or even metro area. Places like New York and Illinois have major structural challenges of their own. And California has already followed this program, with booming regions that are among globalization’s winners, with many larger areas of losers. Of course the alternative is worse – look at Michigan, with the same failures and no global city to even partially make up for it.
The global city phenomenon perhaps illustrates the way. Cities that have experienced that boom like to pat themselves on the back. Indeed, there has been some good leadership along the way. But when something happens in most similarly situated cities, you have to look first to a common force acting on them. Chicago, New York, London, etc. all had their own Rust Belt eras and suffered in the 70′s and 80′s. Starting in the 90′s a large number of what we now call global cities had urban core booms. As Saskia Sassen noted, the new networked global economy requires new financial and producer services, that tend to be concentrated in global cities. In effect, the global city is an emergent property of the globalized economy, just like the company town was in a previous era. I noted previously with regards to Chicago that it was the artifact, not the architect.
To me that shows that a state like California needs to look at and understand the macrotrends affecting it and the world, and figure out how to position itself to profit from them. One area it is trying to do so is in the “green economy”. I’ve got a few problems with “green jobs”. The first is that the entire concept of a green economy is a transitory one. Likely in a decade or so it will be gone. There will no longer be green industry, but only industry – it will all be green. This immediately prompts the question of whether, since we’re not going a very good job of competing in traditional industry, we’ll do any better in green industry. Indeed, China and others are already making a move here.
The other aspect of this is the huge gamble California is placing on the environmental trend. That is, it has imposed the strictest environmental controls in the world. There is no doubt this is one factor causing a lot of short term pain. But the state hopes that in the long term this will attract talent and, what’s more, position it for future success because other states will be forced into the same painful restructuring for environmental issues in the future and California will be ahead of the game. California’s ultimate goal here is clearly to push to federalize its policies to prevent any other states from not following its lead and producing a differentiated product. Because international migration is so much more difficult than domestic, this would, in theory, eventually help staunch the flow of people out of the state. Other states no doubt realize this and will resist the push at the federal level. It remains to be seen how this turns out on many fronts.
Other than that, it is difficult to identify a strategy California has other than more of the same. While the green realm might be a good place for California to put some chips, I don’t think piling everything on one square is a good idea, so new ideas are clearly needed.
And these economic strategies will only be ultimately a success to the extent that they enable California to reach an equilibrium and either successfully make the transition to an operator, or somehow reignite growth.
I would suggest that California and other maturing jurisdictions should look to partner with academics in our economics departments, and especially our schools of business, who have studied industry growth and maturity curves, and how to manage that transition over time, strategically and operationally.
Has the United States Reached Maturity?
Given the problems of California and the current Great Recession and associated talk of American decline, it’s worth asking the question: has the United States matured? That is, are the life cycle forces that are hurting California now affecting America as a whole?
Let’s consider our three harbingers: unfunded liabilities, the end of growth, and institutional rigidity. Clearly, we’ve racked up huge unfunded liabilities, just like every industrialized nation. I believe we are projecting a deficit of $1.8 trillion this year alone and that doesn’t even count off balance sheet problems like social security and medicare. So a definite check mark in that box.
As far as institutional rigidity, clearly we observe some. There is no doubt that it has gotten harder to do things in America and that one of the key advantages of China is its greenfield location and lack of this cruft, not just its low labor costs. Regulatory arbitrage, for example, can be a powerful motivator. Still, I haven’t observed a ridiculous amount of change here in my lifetime. At the federal level, it has always been hard to do things in America, by design. I do argue that in some areas we’ve turned the dial too far. In a country that desperately needs to make transportation investments, it shouldn’t take a decade to get approval to build a new transit line, for example. But on the whole the United States still feels like a fairly dynamic society to me.
Which brings us to growth. Clearly we have been in a major recession. The question is whether our best days are behind us. I say clearly No here. America is demographically healthy. Compared to Europe we have comparatively high birth rates, more or less replacement rate, in our native born population. This shows a society with confidence in the future. Also, people from around the world are still voting with their feet to come here. And I believe we’ll get back on economic track eventually.
But this is where the warnings signs should be looked for. If growth dries up, I believe the institutional rigidity will enter that toxic cycle and we could be in trouble. Keep an eye on immigration. When people stop wanting to come here – because they don’t want to pay taxes merely to pay off yesterday’s unfunded liabilities, because they think there are better opportunities elsewhere, or whatever – and especially if Americans start leaving in any material numbers, we’ll know we have a major problem on our hands.
Obviously no one can predict the future, but I remain bullish on America.
This post originally ran on October 8, 2009.