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Wednesday, January 30th, 2013

Reinventing Metro Providence

I was very pleased this week to be a guest on Ted Nesi’s “Executive Suite” talk show on WPRI-TV in Providence. We spent about half an hour talking about the challenges and opportunities facing the region. Here’s the show, without commercial interruption even. We cover a lot of ground, and I think much of the thinking is relevant to many other cities. If the video doesn’t display for you, click here.

A big point I made was the need to think metro, not Rhode Island. But gosh darnit didn’t I go and talk Rhode Island myself for most of the rest of the piece? I think it just goes to show how difficult it is even for the diligent newcomer to maintain a perspective that’s different from the one that’s basically in the air he breathes.

Tuesday, January 29th, 2013

Chicagoism, Part 3: Reinventing Services, Starting Accountability Reforms by Robert Munson

This photo represents what historians could come to regard as the Chicago Spring. At this moment in May 2011, there were two big breaks with history. First and obvious, the person leading Chicago’s transformation changed from Richard to Rahm. Richie Daley’s two decades made Chicago half-ready as a leader of the Sustainable Century. Making us fully ready depends on fulfilling Rahm’s campaign promise of “fiscal sustainability.” This is his key challenge… and our responsibility, too. This photo also captures the good fortune of Chicagoans to have political genius-follow-genius in the Mayor’s Office.

Seemingly staged to capture a second and larger historical transformation, officials from all levels of government are present: the Vice President (hidden partially by Daley and whom Rahm has just shaken hands with), the Governor and Cook County officials. The photo implies an unspoken acknowledgement that governing cities well requires a Realignment of authorities, one of the 3Rs in the update of Chicagoism.

The second R — Reinventing services — was central to Rahm’s Inaugural. And the third R — Reforming accountability — was symbolized by his first official acts; what I call The Five Ethical Executive Orders, including the Mayor not taking campaign gifts from City contractors.

As a useful way to picture Rahm’s challenges and our transition to a government that can address today’s challenges, let’s quickly introduce how these 3Rs build a framework that generalizes a key problem, suggests how a principle of sustainability can guide solutions (see bubble diagram in Section 2) and summarizes solutions as Sustainability’s 3Rs.

Back to the details of Chicago’s transition under Rahm…. The positives of a new era were apparent quickly. Many Chicagoans also knew we should start girding ourselves to make the tough choices ahead. Details may differ, but many of these decisions are common to America’s cities today. To contrast the difference between talking about Big Changes and actually getting things done, the tale immediately below is instructive.

Compare Occupy Chicago to Chicago Spring

These two simultaneous events tell us a lot about how government will reconnect to its citizens. Occupy Chicago resulted in little more than an inchoate protest. While serving as a resonant response to our deadened federal and state democracy, Occupy Chicago still was three or four stages removed from the practical reforms needed to remake governments so they work again. Some 18 months from starting its talk, the Occupy movement is mostly memory.

While much of the nation was struggling in a democracy-of-irons, Chicago Spring launched our city on a path that can break through democracy’s complications. Chicago Spring accelerated the previous decade’s changes using governing strategies that this series synthesizes as an updated Chicagoism. Consider this practical -ism as a framework to categorize the first two years of changes and, more important, craft the deal needed for sustainable progress.

Rahm’s First 100 Days Opens Horizons to a Deal

During his transition, Emanuel talked straight to the City Council with comments such as “Nothing ahead of us is easy. It’s all hard.” Welcoming frankness and rapid changes, Chicagoans seemed to like what they got. Rahm’s honeymoon was applauded with an astounding approval rate pushing over 80% by Labor Day.

Accompanied by a PR machine producing prodigious press releases announcing an amazing and full range of improvements, here are some samples gleaned from the many 100 Days reviews offered by opinion-makers; most of whom were impressed, but felt it was too early for conclusive results. This condensed list only glimpses at Rahm’s enormously energetic display of remaking municipal government.

* Outlined $75 million in savings in before the Inauguration; realizing $50M before September 2011.

* Expanded the privatization of recycling. Plus, continued re-routing garbage collection.

* Created the city’s first ever interactive budget website at chicagobudget.org.

* Hosted the first Facebook town hall and several other innovative public forums.

* Announced securing 4,000 private sector jobs downtown and some neighborhoods.

On the fraud and abuse front, Rahm even reined in credit card use by City managers.

Further Acts of Accountability

To show his intent to cleanup the bigger money, he also tried to resolve Daley’s primary blemish by creating a task force to recommend reforms to Tax Increment Financing. In an assertive effort to avoid future TIF scandals and to minimize the ever-present appearances of impropriety in the particularly murky world of real estate deals, Rahm had the Task Force deliver proposals quickly by late August.

Accepted by most mainstream observers as a genuine effort at reform, the TIF report and the five Executive Orders served to give many Chicagoans pause to ponder that the “city that works” might actually do so in a reasonably ethical manner.

As a hindsight summary, consider Rahm’s first 100 Days as a political triumph because it made possible the changes that were to follow.

With its honeymoon faded, the Emanuel Administration’s rapid progress slowed as 2011 ended. Running out of low-hanging fruit to harvest, the Administration also had to contend with the dissatisfactions bred by budget cuts.

While big statement changes — such as the Five Ethical Executive Orders — were less frequent and the PR machine made more muted music, Rahm’s Administration still made solid progress during 2012. If you need more convincing, make a quick revisit to “The Urbanophile” September 2012 post, “Fixing Chicago: Rahm’s Work In Progress.”

In part, progress continued when the governed started sensing a new reality: Rahm’s strategy ameliorated small sacrifices by making things better in multiple ways.

How A Multi-Benefit Strategy Works for “The City That Works” and Can Work for Your City, Too

Compare Chicago’s 2012 results to those of Uncle Sam or Illinois. What level of government is creating “the new order of things” and which levels are preventing it?

While every government’s dilemmas are different, Rahm’s strategy produces progress because it markets multiple benefits: one change helps citizens in multiple ways. For example, Rahm tells the administration to publish the City’s data and let the private sector profit by adding value. Characteristic of how sustainable strategies produce multiple benefits, Rahm’s strategy has three wins.

First, sharing data makes possible greater accountability, a break from Daley’s secretive years.

Second, greater information flow can boost Rahm’s present problem: making services more efficient. Emerging when Daley was Mayor, the biggest example is BusTracker because it reduces waiting time and increases ridership and revenue. Other innovations also are creating the incremental use of data that, in total, makes noticeable progress.

Third, this governing strategy also stimulates local startups in the information economy by developing micro-applications. This last area could prime the pump to grow an industry that helps update Chicago’s role as a global center. While industrial Chicago took raw materials and added value to consumer products, an information-based Chicago today can convert more data into sustainable practices.

(If all this multi-benefits stuff sounds familiar, it should. It is a verbal rendition of the same dynamic describing the bubble diagram in Section 2.)

While we have too few results to judge how well Rahm’s overall tech strategy is working, it helped carry him over bumps during 2012. And for a few risks and pitfalls that may become apparent, go to the end of “The Urbanophile” post “Thoughts On Chicago’s Tech Scene.”

Whether or not Rahm’s tech emphasis is a triumph for economic growth, his information strategy helps two of the three “R” principles emerging in the 21st Century Chicagoism: Reinventing services and Reforming accountability. While seeking the Synergy “thing” certainly helps give the impression of progress, we explore two key examples of what we hope is lasting progress in the next installment.

Chicagoism Series Index
Part 1: Lessons from the 20th Century
Part 2: Starting the Transition to Sustainability
Part 3: Reinventing Services, Starting Accountability Reforms (this post)
Part 4: How Chicagoism Works Again
Part 5: Where Do We Go From Here?

Robert Munson sharpened his interest in regional planning while serving on the Citizens Advisory Committee for the metropolitan plan released in 2010. Out of that experience, he started the website CCC or Chicagoland Citizens Central where you can find his profile. Readers can contact him directly at robertmunson@earthlink.net.

Tuesday, December 4th, 2012

The State of Chicago Index

Although less ambitious than I originally intended, my State of Chicago series still ended up taking 20 installments spread out over several months. For those of you who did not see it all, I’m presenting here a complete index of the articles in the series.

Prologue
The Second-Rate City? (published in City Journal)

Part One: Civic Conditions
The Decline and Rise – Chicago’s Rust Belt malaise of the 70s and 80s followed by the boom years of the 90s.
New Century Struggles – Chicago takes a hard fall in the 2000s
New Century Strengths – Things that remain right with Chicago
Chicago, Summer Crime, and the Slide Towards Detroit – Mark Bergen writes an aside on Chicago’s recent crime problems, and it’s affect on the city
Explaining the 1990s vs. the 2000s – A look at why, if the structural problems I will outline in subsequent posts were always there, did Chicago’s performance diverge so much between these two decades
The Risks of Recovery – Don’t let an uptick lull you into a false sense of security

Part Two: Framing the Problems
Lacking a Calling Card Industry – How Chicago’s lack of a signature industry that can drive superior wealth generation and economic output hampers the city
What Is a Global City? – Some general thoughts on what a global citi s
Chicago As a Global City – Chicago’s weakness as a global city
Hog Butcher No More, But Service Purveyor to Same? – Chicago Fed Economist Bill Testa shows that Chicago’s economy is still linked to the greater Midwest and the manufacturing cycle as a whole
Gaps in Chicago’s Global City Fabric – Chicago’s weaknesses as a global city in areas like media and fashion.

Part Three: Fixing Chicago
Rahm’s Work in Progress – Things Mayor Rahm Emanuel is already doing to address Chicago’s challenges.
Rethinking Brand Chicago – It’s time for Chicago to stop branding itself as global city goo and give the world a punch in the face with a little old school Chicago.
Some Additional Chicago Fixes – A roundup of items I’ve already covered in depth elsewhere, and so won’t repost as part of this series.
Thought’s on Chicago’s Tech Scene – Chicago tech is strong – stronger than I anticipated it would be. But a few tweaks would help.
The Midwest’s Global Gateway – Aligning Chicago’s global ambitions with being the regional capital of the Midwest
Improving Chicago’s Business Climate – A number of specific recommendations for improving the business climate of the city, particularly in the neighborhoods and for small businesses.
Chicago’s Northwest Indiana Advantage

Epilogue
Goodbye, Chicago – Thoughts on leaving Chicago.

Tuesday, November 27th, 2012

Regarding Smart Cities

I was in Barcelona a couple weeks ago for the Smart City Expo and World Congress, where I moderated a session on the impact of smart city technologies on cities. Not only is Barcelona an amazing city itself, it was great to get to see European urbanists we don’t always run across in the US, like Charles Landry and Ricky Burdett. As is often the case, I think we here in America (myself included) end up trapped in a US-centric bubble in our thinking. So it’s good to break out of it.

My session brought out a number of interesting points in thinking about smart city technology. Peter Hirsberg gave the keynote that was frankly what I thought was the best presentation I saw in the conference. Unfortunately I don’t believe it will be online.

One thing he noted was that when we develop new technological solutions, we have a tendency to build highly centralized “command and control” type operations initially. The paradigmatic example of this in smart cities today is IBM’s command center in Rio, which has been frequently highlighted in urbanists circles as pretty cool tech.

Hirshberg in a pretty mind blowing way showed how this was typical of how technology has been deployed, and showed how the Rio center in concept was nearly identical to IBM’s SAGE system for air defense in the 1950s and 60s. In fact, he played IBM’s own promotional videos for the two systems that, despite being separated in time by several decades, were nearly identical in what they said.

He wasn’t necessarily critical of these centralized systems, noting the immense utility they provide. But ultimately technology transcends this to enable more decentralized modes of operations as well. This set up a few tensions that we explored further, including:

• Centralized vs. decentralized systems
• Proprietary vs. open technology
• Technology driven by government (e.g., efficiency) or society as a whole (e.g., environmental) goals versus value delivery or life enhancements for citizens and consumers.

These are definitely items that should be thought about when trying to get a handle around all the things that go into what we think of as “smart cities.” I think a lot of what we conceive of as smart cities today consists in vendor led automation/efficiency solutions. These are important, particularly in an era of fiscal constraints in which business as usual is no longer tenable. These types of systems might actually have significant citizen benefits as well, such as the Rio center or even something like CompStat.

But as Hirshberg also noted, that puts too narrow a lens on it. And it may be that the ultimately the most important smart city company isn’t or won’t be something we think of as smart cities at all today. He highlighted Airbnb, Uber and many others in this regard, and especially noted how some of these firms came to the fore during Hurricane Sandy, with better information about conditions on the ground, and a better way to help people (such as by using Airbnb to find a place to stay) on a completely decentralized basis than through official channels. Some of these private efforts ended up de facto deputized and adopted by the authorities. I believe these sorts of decentralized, private networks will play a key role in urban resiliency in coming years.

My own view falls somewhat in line with this. While the centralized model is important, we will only see an explosion in value to the extent that we are able to create platforms on which the public and entrepreneurs can themselves innovate.

To me it is similar to the evolution of tech to the present internet age. It used to be you needed a mainframe system to be in the computer business. That was expensive and only big companies could do it. Then we had minicomputers, client/server, desktops, etc. These lowered the cost but it still remained a “professional” endeavor. Even during the dotcom era, to start a company you needed to raise millions of dollars to buy Sun servers and Oracle licenses, plus to build out a ton of software architecture to underpin what you wanted to do.

Today, we’ve reached a place where a very new paradigm exists. The emergence of two things – open source development frameworks and the cloud – has created an environment on which even lone developers can innovate. Everyone with a certain basic knowledge of development is now capable of creating and releasing applications, and even starting companies, with next to no money. You can literally do it from your bedroom. Yet, most apps may end up as junk, but so much amazing stuff is being created too. We now have an incredible environment for technical creativity out there.

I think this is where cities should be aiming for: to build “the open source cloud” for smart cities, whereby it isn’t up to only the city or high priced contractors to deliver value, but the marketplace and even citizens will have that ability to innovate on top of the platform such that they’ll generate value we never imagined possible – and at no cost to the public. And it will generate amazing positive side effects like improved urban resiliency.

I won’t pretend to know what this will look like, just as I couldn’t have predicted our current environment even five years ago. But to me the future is in marketplace and citizen innovation, with vendors and cities providing a big part of the critical platform infrastructure to enable it.

Sunday, September 30th, 2012

Thoughts on Chicago’s Tech Scene

This article is part of the State of Chicago.

I wasn’t planning to write a piece on Chicago tech, but I did a radio interview about it this week and since I never know how much might be used from me in a space constrained medium, I thought I’d lay out something here too.

I’ve said before that I don’t think Chicago is well positioned to become some type of dominant tech hub, but should only seek to get its “fair share” of tech. However, as the third largest city in America, Chicago’s fair share on tech is still pretty darn big. If you look at what’s been happening in the city the last couple of years, I think you’d have to have to say it’s something real. Built in Chicago lists 1145 companies in its inventory, and that’s definitely something. I’ll give a bit of a mea culpa by admitting that the tech community has done better than I probably thought it would a couple years ago, though I still stand behind the statement I made at the beginning of the paragraph.

Part of what has happened in Chicago is the general decentralization of technology in America. It used to be that tech in America was heavily concentrated in the Bay Area and Boston. In an era when pretty much literally anybody can start a company, you simply don’t need to be in any particular place to be successful these days.

Mark Suster made this point in his Tech Crunch post, 12 Tips To Building A Successful Startup Community Where You Live:

I would point out that these days there are really talented tech developers and teams everywhere. And I really mean everywhere. Ever play Zynga’s “Words with Friends” or any of their “with Friends” games? Didn’t come out of the SF facility. It came from an amazing small startup in McKinney, Texas (30 miles North of Dallas) called NewToy, which they acquired.

Think the next big startup can’t come from Dallas? Think again. Angry Birds? From startup Rovio in Finland.

Think USV is only invested around Union Square in NYC? How about in the last 12 months deals were announced with Dwolla (Iowa) and Pollenware (Kansas City). I met the Pollenware team myself – they were KILLER.

In this environment, it’s possible for lots of cities to find success. This is why places like New York and Chicago have been table to reboot their tech ambitions, and why some of those hot startups Suster mentioned are in smaller Midwest cities. Strong tech/startup scenes have been emerging all over the country. Being a startup hub isn’t what it used to be in terms of joining a highly exclusive club.

This is a case where there aren’t of necessity winners and losers. It isn’t like the Midwest can have just one tech center, for example, and thus the battle for Chicago is to be the winner, while everyone else gets to be a loser. The good news here is that Chicago can win and other places can win too. This might be one economic change that really can start rebranding a region.

Not only has there been legitimate strength in the Chicago tech community of late, it is also starting to get some good press. For example, just this week the New York Times ran a story on tech businesses moving into the Merchandise Mart. (An unfortunate subtext of this piece appears to be a serious decline in Chicago’s vaunted design community, however). This is one of a number of positive pieces that have appeared recently.

The city has really put on the full court press for tech, with Mayor Rahm Emanuel in effect making it the signature economic development cluster of his administration. I cannot think of any other sector of the economy in which Emanuel has so put his personal imprimatur. He has repeatedly stood up to endorse Chicago tech and its ambitions, and I think it’s fair to say he’s got a lot riding on it being successful – and not just successful, but an outsized success compared to peer cities.

Rahm has also put city action behind the marketing. For example, making an open data push, and also the recent broadband deployment initiative to underserved areas.

The trendlines certainly appear positive for Chicago at this point, but I want to highlight a few areas I find lacking and/or risky to the future.

The Booster Club Society

I’ll lead off a video from last year’s Chicago Ideas Week. This is JB Pritzker’s keynote at the Midwest Entrepreneur’s Summit. (If the video doesn’t display for you, click here).

This is a pretty good talk, but thinking about it a bit, a few things jumped out at me.

First, this is a talk in the finest tradition of “the sun is always shining on Chicago.” I’ve noted many times that under the Daley administration there was in effect a gag rule against saying anything that could be construed as even slightly negative about the city. I’ve noticed a change in that under Emanuel, but there’s one big exception, and that’s the tech sector. In Chicago tech pretty much everybody is pretty much 100% on the rails of the marketing message all of the time.

Listening to this, you’d think Chicago basically is tech nirvana, with the exception of a central gathering place for techies, something that Pritzker conveniently has a plan to create. Strong as Chicago may be, I can’t believe everything could possibly be this rosy. Similar sentiments from various members of the tech community are prominently on display in pretty much every article out there.

There’s nothing wrong with being a champion for your city, but when you become too much the booster club society, it’s not healthy. A little more paranoia and a little less spin would probably do the city good. Chicagoans would clearly recognize the excess earnestness that characterizes such rhetoric if they saw it in another city – I see it all over the place, as all kinds of cities make the case for why they too are one of the next great tech hubs by closing ranks and presenting a unified, totally positive marketing front to the outside world – so I’d suggest they think about how they’d evaluate the statements they make if those same statements were being made by boosters of another place like say Kansas City.

Here’s another example. Announcing some additional protected bike lanes, Rahm Emanuel had this to say:

It’s part of a planned bike lane network that Mayor Rahm Emanuel on Sunday said will help Chicago to attract and keep high tech companies and their workers who favor bicycles.

“By next year I believe the city of Chicago will lead the country in protected bike lanes and dedicated bike lanes, and it will be the bike friendliest city in the country,” Emanuel said Sunday at Malcolm X College.

“It will help us recruit the type of people that have been leaving for the coast. They will now come to the city of Chicago. The type of companies that have been leaving for the coast will stay in the city of Chicago.”

I like protected bike lanes. I applaud Chicago’s protected bike lane program. But this is a bit over the top. I got unsolicited email from as far away as the West Coast mocking this.

I think Emanuel’s media savvy and willingness to sell Chicago is a big plus for the city. But he has had a tendency to sometimes step over the line and make extravagant statements that just don’t pass the sniff test. I think this comes from his days in Washington where that sort of thing is expected, understood, and discounted by everyone. It’s just the way the game is played there. But for mayors there’s a different standard of judgement. Yes, everyone expects you to make the aggressive case for your city. But mayoral statements that seem un-moored from reality – like the various claims that have been made about crime and shootings, for example – end up calling into question the truth of everything else you say. This in my view is a danger for Rahm or anyone else who has been overly steeped in Beltway style communications.

So I would suggest that Chicago continue to be aggressive on marketing, but tone down some of the orgasmic rhetoric and take care that they don’t end up believing too much of their own press. This can be a fine line to walk. I hope that in private at least the city’s tech community has a huge punch list of things that need to be better they are actively working on.

Better Tech Media

Another aspect of Pritzker’s talk that jumped out at me immediately at the time he gave it (I attended the event), was his failure to mention that Chicago already had a very successful version of his own 1871 incubator called Tech Nexus. Tech Nexus is a self-described “clubhouse” for Chicago’s tech community, a co-working space, and an incubator (ranked one of the top ten in the United States by Forbes) that has served over 100 companies. Tech Nexus also hosts tons of meetups and other events, and through the affiliated Illinois Technology Association has been an instrumental booster of the Chicago tech scene the last few years.

Now Pritzker did mention them in passing in a long list of institutions he gave in the talk. But to claim Chicago lacked the central gathering place for tech until he, JB, rode to the rescue with 1871 is a) not true and b) pretty obviously a deliberate snub of Tech Nexus.

I certainly don’t think everybody needs to be on the same page in a city’s tech community. I actually think that would be a weakness. I think it’s healthy to have different groups of people with different visions each pushing them. Building a space like 1871 is a positive. The more the merrier I say. But this type of talk smells to me like pretty much just a political power play in the Chicago tech community.

Speaking of which, Pritzker may be a venture capitalist, but he’s also an heir to the Pritzker family fortune and one of the richest men in America. (Oh, the irony of having as the keynote speaker for your entrepreneurship conference a guy who inherited over a billion dollars – that tells you a lot about how Chicago works). The Pritzkers have long been power players in Chicago and a key part of what I’ve called the Nexus. So being on the executive committee of World Business Chicago is not so far a leap as he may have us believe. (I also wonder if perhaps Pritzker is the guy who convinced Emanuel to make the very risky move of piling all those chips on the tech square, as he’d appear to be one of the few guys with an interest who would have the clout to do it).

My point here isn’t to bash JB Pritzker, but rather to wonder why no one is asking questions or talking about stuff like this in the press. There are lots of very rich guys with no doubt big egos involved Chicago tech. There’s bound to be lots of interesting politics and personality clashes and maneuverings going on behind the scenes. I want to be able to pop some popcorn and follow the drama. But it doesn’t get covered. I think the local media is basically out of their depth when it comes to covering Chicago tech.

My believe is that Chicago needs a new, independent media source covering the local tech market. This would not be part of the marketing machine of Chicago tech, though like TechCrunch would of course be institutionally favorable to the industry, but instead would provide real, credible coverage of the what’s what and who’s who of the community. As Mark Suster said in the post I linked to earlier, “Local press matters.”

In my review of Enrico Moretti’s book, I noted how he took a face value some mainstream media reports on how tech giants like Facebook were acquiring startups just to get their talent while shutting down the actual companies. He apparently didn’t read Gawker, which gave a fuller story. New York tech community also benefits from other sites, such as the irreverent Betabeat from the New York Observer. Suster mentions sites like GeekWire in Seattle and SoCalTech as well but I don’t know them personally so can’t say they’d be the models to replicate.

In any event, I believe Chicago needs a first class tech media site. A site like Technori does a good job, but it strikes me more as a “how to” site than a media property. Chicago needs a someone asking tough questions, and looking at the people and politics around tech, not just the bits and the bytes. Because IMO the traditional Chicago media hasn’t really shown any interest in pursuing this.

Why Digital?

I’m also a bit puzzled as to why Chicago is leading its marketing with the digital/social media/consumer space. Obviously Groupon (which seems to be in the process of getting airbrushed out of the Chicago tech politburo photo) played a role in this. But this seems like a shaky place to stake a claim. I don’t see consumer type brands as Chicago’s strong suit, and the digital market seems weak in any case. Even juggernaut type companies like Facebook and Groupon have struggled financially. There’s a big question mark over the whole space. What’s more, it seems like lots of places, ranging from San Francisco to New York, are rushing to tell basically the same story in digital and are frankly ahead in the space.

By contrast, Chicago has a long and successful history of business to business and information technology. Flip Filipowski’s Platinum Technology was a great example of this. These types of companies might not have the sexiest brands, but they deliver value and make money. What’s more, because of the support demands of corporate clients, these businesses often employ a material amount of highly skill, highly paid people, unlike most digital startups.

Also, Chicago has been a major center of corporate IT for a long time. This is often not valued by the pure tech crowd, but is a huge source of value and good paying jobs. Terry Howerton (who runs TechNexus) said of State Farm:

“State Farm has 12,000 employees in IT in Bloomington,” Howerton said. “I’m sure many of those employees are really smart people, but how innovative can you be with 12,000 IT workers in your bureaucratic corporate environment in an industry as historic as insurance?”

Well, to start with, 12,000 IT employees is likely more than the total local employee count of every digital startup in Chicago combined. And that’s just one company. Howerton is the best advocate out there for a B2B vision for Chicago tech, but I would also add the IT part to the equation as well.

Chicago’s IT shops have a long track record of innovation going back to before a lot today’s digital folks were even born. Walgreen’s Intercom system, for example, linked all their pharmacies nationwide together back in the 1980s so that you could get your prescription refilled anywhere you needed it. And they didn’t have today’s open systems and frameworks to make life easy. They had to use a proprietary satellite system and a specialized high volume, 24×7 uptime mainframe operating system called TPF (originally developed for airline reservations). I’m not sure most of today’s digital coders could figure out how to build and support a TPF application if their lives depended on it.

Given Chicago’s heritage as a center for professional and business services, and corporate headquarters, I believe its natural strengths in technology are in B2B tech companies, technology consulting, and corporate IT. If you can get digital/consumer startups that’s great, but I wouldn’t make that the public face of the city. Instead, take all that corporate services mojo and embed it in tech.

The Big Risk

If you look at what I’ve written about changes so far, most of them are tweaks around the margins. They don’t indicate core weaknesses. Frankly they are sort of nit-picky. That should tell you something. As I said, I think the Chicago market has been doing well – better than I thought it would. I’m not even concerned about the so-called “developer drought” of which I’m extremely skeptical (see more here).

But there’s one thing that is a clear risk to Chicago, one that could undo all its effors – and it’s one that the city can’t do anything about. That’s the risk of another tech crash.

Technology is very cyclical. Every so often, Silicon Valley has had a major crash. I believe it is these crashes that have actually helped to keep the tech industry concentrated in its major hubs. That’s because when crashes come, industries retrench and reconsolidate. For example, Joel Kotkin has said that it was actually the 1980’s energy crash, the one that devastated Houston, that actually helped trigger the industry consolidation there. We’re seeing something similar in media, where financial pressure is consolidating it into NYC and to a somewhat lesser extent DC while secondary markets get wiped out.

So too in tech. Think about the dot com era. Lots of cities had their startup dreams back then too, and it seemed like parts of the country outside the major hubs would be able to get their bite at the apple. Chicago had its “Silicon Prairie” and New York its “Silicon Alley.” All of them got blown up by the dot com crash. But Silicon Valley and Boston survived. Chicago and New York tech eventually came back, but it was on a totally new basis.

There’s a tendency locally in Chicago to now talk about the flaws of the city’s tech ambitions in the Silicon Prairie days in contrast to how it now has its act together. The idea is that Silicon Prairie collapsed because people didn’t get along, or because they chased away their entrepreneurs, etc. But the reality is that it most likely collapsed simply because the market did, not because of flaws or mistakes. I’m not convinced there’s anything the city could have done to survive that shakeout. And if another crash hit, the same thing might easily happen all over again.

We’re seeing the early part of the cycle repeat again today. We’ve had a frothy investment climate with a spread of tech around the country to a whole slew of me-too places. But as I said, the whole digital startup thing has questions marks. It’s not clear that there’s a lot of sustainable, cash generating businesses out there. Many of them (e.g. Groupon) are not even really tech companies. A lot of them are basically media type entities, and like much media in the world have more eyeballs than profits.

Regardless of whether the digital wave crashes soon, another tech crash would appear to be inevitable at some point. If it happens at a time when Chicago hasn’t built some sort of a sustainable franchise, that would be bad. Right now, I don’t believe the Chicago tech scene as currently conceived would survive a major crash. I’m somewhat skeptical New York’s would either. That’s not because the city is doing anything wrong, but because of where it is in the maturity cycle.

That is really the key weakness in the Chicago story. It’s not the fortress hub that Silicon Valley is. I believe it is benefiting from a general decentralization of tech along with a boom cycle investment climate. That can be very good for Chicago, but unless and until it can turn the corner into something that can survive the next big crash, there will continue to be a major question mark over its viability.

This is what I find most interesting about Rahm’s all-in bet on tech. The last go round ended badly. There’s lots of reasons to believe Chicago can be a strong player in the current market, but the city doesn’t have intuitive structural advantages that would make it a slam dunk candidate to become a fortress hub in tech. The digital market is looking somewhat questionable, as the stock charts on Groupon and Facebook show. This was a risky bet. Not to say a bad one, but a risky one. That’s why I think it would be a very intriguing story to find out how it came to be.

In the meantime, while we wait for the judgement of history, Chicago should enjoy where it’s at, build on the present success, and look to shore up those addressable areas of weakness around an excessive booster club mentality, the need for stronger media, and getting away from an overly digital based marketing approach to Chicago tech.

Sunday, September 23rd, 2012

Review: The New Geography of Jobs

The New Geography of Jobs
by Enrico Moretti
Houghton Mifflin Harcourt (2012)

If there’s one current book I’d recommend to leaders in American cities today, it’s Enrico Moretti’s The New Geography of Jobs. It’s not without flaws. However, this book lays out a readable and compelling vision of the innovation economy in the 21st century and what it means to America’s cities. And it should accomplish what is desperately needed in many places, namely lighting a fire under people’s asses to realize that they and their city are likely in a fight for their very economic survival.

Moretti lays out what has happened in America over the past 30-40 years. It’s a trend he labels the “Great Divergence” that is illustrated by the quote at the top of this piece. There has been an increasing division among American communities between the haves and the have-nots. As radical productivity enhancements and global competition reduced employment and wages in traditional sectors like manufacturing, new knowledge based industries took their place. However, these knowledge industries require, of course, highly educated workers with specialized skills. This leads to clustering of workers and jobs in select hubs, leaving many communities out the cold.

Moretti illustrates this with a few examples. His first was a comparison of Menlo Park with Visalia, California. Forty years ago these communities were similar enough that a middle class, educated professional might well choose to make the move from Menlo Park to Visalia. Fast forward and these communities could not be more different. Menlo Park is part of Silicon Valley, while Visalia has the second lowest percentage of college educated workers in the country, with one of the lowest average wages to boot, along with high crime, poor K-12 schools, terrible pollution, etc.

On a larger scale he contrasts Albuquerque to Seattle. Microsoft had been founded in Albuquerque, but moved to Seattle in 1979. This wasn’t because Seattle was a garden spot. Far from it. This was the era of the infamous billboard that said, “Will the last one leaving Seattle please turn out the lights?” The Economist had labeled it the “city of despair.” People forget that places like Seattle also suffered greatly in the Rust Belt era.

Forty years ago, Albuquerque and Seattle were fairly similar. In 1970 Seattle had a five percent edge in college educated workers (adjusted for population) and slightly higher salaries – both likely because of Boeing – but the gap was not huge. Today, Seattle has 45 percent more college educated workers (adjusted for population), and the income gap has widened considerably as well. Though it was not obvious at the time, Microsoft’s relocation – which was simply because Gates and Allen wanted to move back to their hometown – was the catalyst that transformed Seattle’s economy into a tech hub. Now companies like Amazon set up shop there even though the founder doesn’t have a personal connection.

Not only did Seattle, Menlo Park, and other places that successfully made the transition to the innovation economy win by getting the new high paying innovation jobs directly. Those jobs also caused huge spillover benefits into other areas of the community. There’s a multiplier effect of five on tech jobs, meaning every tech job supports five other non-tech jobs in the community. This is a much higher multiplier than export industries like manufacturing. Innovation jobs also raise incomes across the board, support higher quality public services through the taxes they generate, and a slew of other civic benefits. Places that did not make the transition not only did not see the benefits of the innovation economy, they also experienced severe dysfunction as their older industries crumbled.

This divergence of fortunes has happened in cities across America. Rather than a red vs. blue America, Moretti sees three Americas: the winners, the losers, and those on the bubble.

A large number of the cities that I’ve traditionally covered on this blog, especially smaller major Midwest metros, are places that I would classify as on the bubble in Moretti’s classification system. These are places that haven’t become Flint, Michigan yet, but they aren’t Austin, Texas either. They are cities that could go either way. They may in some cases be winning, but they have not yet won. It’s not inconceivable that any of them could flame out and implode.

Yet I see in places across America little sense of this existential struggle. Leaders are missing a framework like Moretti’s (or anyone else’s) to help them make sense of what has been happening in the world. They do not appear to have a sense of urgency around change. In particular, they are not serious about attracting talent or knowledge industries. They might pay it lip service, but everything they do says otherwise. It is actually those who are already in the best shape that are the most worried about securing their future. Parable of the talents indeed.

One of the key takeways for me from the book is that cities should be extremely keen not to go backwards. To the extent that you have a nascent talent cluster, you should take care of those young shoots until they mature. That’s because Moretti examined various strategies for trying to turn around one of the “loser” cities, and basically came up empty. They all failed. As he noted:

Regions without an innovation cluster will find it difficult to start one. It is a chicken-and-egg problem. Specialized high-tech workers will not move to a city that does not have a cluster because it will be hard to find an employer that values their unique skills. High-tech companies will not move there because finding specialized labor will be difficult. This presents a terrible challenge for communities that have fallen on hard times and are struggling to reinvent themselves.

Moretti’s only recipe is what he terms the “Big Push”:

A city stuck in a poverty trap faces the same challenges. It is trapped by its past. The only way to move a city from a bad equilibrium to a good one is with a big push: a coordinated policy that breaks the impasse and simultaneously brings skilled workers, employers, and specialized business services to a new location. Only the government can initiate these big push policies.

In short, Moretti advocates industrial policy on steroids. There’s just one problem: he never actually cites a single example of where it works for a city. There’s only one success story that’s at all relevant that he mentions, and that’s the Tennessee Valley Authority. And the TVA, however successful it might have been, was not dealing at all with knowledge or innovation industries.

We do have a few examples out there today of at least partial big push type efforts, both private and public. New York and Chicago both have put major efforts into trying to build tech hubs from scratch. Both of these places were already talent hubs, however. Billionaire Dan Gilbert is trying to do a sort of one man big push in downtown Detroit and Zappos founder Tony Hsieh is trying something similar in Las Vegas. These two both have money to spend and also have clout in their communities to bring others along with them. These will be interesting to watch.

Where Moretti does provide some hope is in a observations about the genesis of clusters that already exist. For many of them, the key factor seems to be the presence of “superstars” at a critical phase. In our Seattle example, Gates and Allen were the superstars. (Tony Hsieh may yet prove to be the superstar for Vegas).

The superstar theory is especially applicable to biotech. Tons of cities have great academic medical centers and such. Why did biotech then end up disproportionately concentrated in Boston, the Bay Area, and San Diego? (Other economists like Joe Cortright have a somewhat broader list that includes Los Angeles, Philadelphia, Raleigh-Durham, Washington-Baltimore, and New York). According to researchers, it was the presence of superstars that drove this. As Moretti notes:

What really explains the location and success of private biotech companies is the presence of academic stars – researchers who have published the most articles reporting specific gene-sequencing discoveries…The data suggest that the magnetic effect of academic stars is impressive. Zucker and Darby estimate that stars are more important than proximity to venture capital firms or the effects of government spending….Success in high technology, especially in its formative years, comes down to a small number of extraordinary scientists with vision and a mastery of breakthrough technology. Indeed, we can’t overestimate the impact that these unusual individuals have on the economic development of cities and regions.

Looking at stars would then appear to be the best bet. As the Seattle example showed, a couple of stars showing up at the right time can literally change the entire economic trajectory of a failing region. The legion of cities that experienced rebirth after Rust Belt malaise suggests that stars can’t be the entire story, however. Saskia Sassen, for example, takes a very different view based on structural changes from globalization increasing demand for advanced producer services linked to historical economic functions in select global cities. This was not a superstar phenomenon, though we see tremendous innovation.

And of course it’s hard to just say “go get me some stars.” The stars mentioned helped launch new clusters in new industries. It’s not clear that they’d start a new hub in an established industry with already established hubs. So hiring the top biotech guns right now might not be the best idea. Also, one can perhaps only recognize stars in retrospect. I think again of the story of Mark Andreessen, who was in Illinois but ended up getting run out of town. Tomorrows stars are very likely people who don’t look like it today. I won’t pretend to have all the answers here, but these is clearly an area to think about.

While I think Moretti had a lot of great things to say, I think he missed a few points as well. First, in addition to a divergence between the haves and have-nots, there’s another divergence we’ve been between what I call “vertical” cities like the Bay Area, Boston, and New York, and “horizontal” cities like Houston, Austin, and Charlotte. Vertical cities are producing stunning growth in output and wages, but very few jobs. The horizontal cities are producing lots of new jobs, but little or no per capita output or wage growth.

Moretti describes both the Bay Area and Austin has tech innovation hubs, yet these cities have staggeringly different profiles. For all its tech growth, the Bay Area has added almost no net new jobs since 1990 (4.6% total growth). During the same period the US as a whole grew jobs by 20%, so the Bay Area radically underperformed. Meanwhile Austin doubled its employment.

On the other hand, the Bay Area grew per capita personal income much more strongly than Austin. In fact, during the 2000s, Austin actually suffered a severe erosion in relative incomes, as its PCPI dropped from 108.1% of the US average to 97.0% (This after a 16 percentage point gain in the 90s!) Clearly being an innovation hub didn’t help there, and Moretti doesn’t address these issues.

He does hit on how restrictive housing policies drive up prices in places like California, and thus effects the purchasing power of those high salaries. But I would like to have seen more on the different philosophies of places like SF and Boston vs. Austin and Raleigh-Durham. These are not all just vanilla “innovation hubs.”

Moretti himself seems to side with the global city crowd, being a bit enamoured of the vertical style economy. He mentions how high costs, for example, don’t deter businesses from locating in these places since talent matters more than costs. That’s why, for example, Wal-Mart located its e-commerce division in the Bay Area not Bentonville. This trumpeting of defects as virtues (e.g., treating high costs and huge regulatory burdens as actual signs of health) is common, but the job creation record of those hubs suggests most businesses don’t find them attractive places to locate. Rather, they are like boutiques, specializing in a narrow, high end niche. Certainly America can, and perhaps should, sustain a few such places. The Bay Area may be the creative capital of the world. New York is New York. But these are not templates to follow.

Moretti also focuses in on fairly obvious examples like Silicon Valley and Detroit. As a research economist, I would have expected some more interesting choices. There weren’t a lot of a-ha’s in here. It seems a bit superficial when it comes to examples, and may actually mislead some people. For example, Fargo, North Dakota has been doing very well thanks to not just the energy boom (more on that later) but also because Microsoft has a huge operation there (reputedly its second largest in the US) because of the purchase of Great Plains software. America is littered with places apart from the obvious that are doing well, and more exploration of these would have given the book more depth. As it is, it can seem a bit superficial.

This superficiality shows up, for example, in the way Moretti highlighted companies that do acquisitions ostensibly just to acquire the talent. He cited the example of Sam Lessin, founder of drop.io, whose company was acquired by Facebook and shut down. The idea was that Facebook really wanted Lessin because he was just an amazing talent. However, as Gawker reported, Mark Zuckerberg had a longstanding relationship with Lessin going back to when Zuckerberg was still in college. Lessin’s father is an investment banker, and Lessin was apparently instrumental in making a number of early introductions for Zuckerberg’s nascent Facebook empire. The story isn’t quite what it might have seemed.

Also, back to Fargo, Moretti doesn’t mention anything at all about the domestic energy boom we’ve experienced in America in recent years. He managed to cover trends like urban manufacturing, but overlooked fracking? Assuming environmentalists don’t manage to choke off exploitation of our vast energy resources, the energy industry should be entering a growth super-cycle. (Even George Monbiot has thrown in the towel on peak oil).

I wonder too whether the trends Moretti cites, while valid over a 40 year cycle, are less true today. One way economists measure clusters is by using a metric called Location Quotient. This measures the concentration of employment in a particular industry in a specific industry relative to America as a whole. But the math works for lots of things. So we can look, for example, at literal clusters of talent by looking at the location quotient of college degree attainment. Here is a map of changes in the location quotient for college degree attainment from 2000 to 2011.

This is certainly interesting. Many of Moretti’s talent hubs actually are less concentrated in brainpower relative to America today than they were in 2000. Out of 51 metro areas with more than a million people, Austin ranked 50th on this metric. San Jose and San Francisco were 42nd and 43rd respectively. (Pittsburgh was #1, incidentally).

Now the changes are very small and could be statistical noise. But this doesn’t look to me like the vast divergence we saw looking over that 40 year span. Instead, what it looks like to me is that a number of cities that weren’t in the game at all back in the day have started to turn the corner on talent. This foots to my anecdotal view of the livability of cities. Back in 1990 moving to say Indianapolis from a tier one city would have been getting exiled to Siberia. Today it’s shocking how little you give up. This is true of other strong talent performers like Fargo and Des Moines as well. And you’re definitely seeing at least some level of innovation based economic activity showing up in all these cities.

The strong may well be getting stronger, but those who were behind are growing their brainpower at an even faster rate. I wonder if perhaps innovation/knowledge work has reached the point on the maturity curve (as Moretti talked about for other industries) where it has stopped concentrating and started de-concentrating?

Lastly, I would urge caution in looking at Moretti’s maps. I know Indianapolis extremely well so wanted to see how it fared in his rankings. I was very surprised to see it rank in the bottom group on basically every map. According to Moretti, Indy’s share of workers with a college degree could not exceed 20.4% Yet it has a college degree attainment rate of 31.1% These aren’t the same metric, and I don’t have the worker share handy, but that big of a gap seems suspect. Indy is showing as lower than far less educated metros in Indiana like Evansville and Terre Haute. Indy also showed as “no data” on the patent map, which seemed odd. I wonder if perhaps there was a coding error in the map generation? I’m not sure, but it looked possibly off. I tried to get clarification on this point, but wasn’t able to, so I’d simply suggest being careful with the maps.

Despite a few things I thought could have been more developed or stronger, I think that, as a book making the case for the innovation economy and what it means, The New Geography of Jobs is a strong one, and I again would suggest it to people in cities that have not yet fully found their place in the new century.

Thursday, August 2nd, 2012

The Good, the Bad, and the Ugly

A few recent news stories caught my eye that I wanted to highlight.

Transport Tax Crushed at the Polls in Atlanta

The proposed sales tax increase in Atlanta that would have funded a large capital program for transit and highways went down to a bigtime defeat. This was interesting since capital referendums generally seem to do well.

There’s still a lot to process on this. Richard Layman had some thoughts on his blog that are worth a read. A couple things stuck out at me.

First is the unlikely anti-tax coalition of the Tea Party, the Sierra Club, and the NAACP. When I noted how the Tea Party types and the NAACP had joined forces in Cincinnati to oppose a streetcar, I was assured by locals this was not the start of a trend but came from the personalities involved. But here we see it again. I’m not sure if this is the start of a trend or not, but it’s something to watch. I’ve noted for a while now that the populist wings of the left and the right are fed up with the establishments of their respective parties. At some point could there be a left-right populist alliance against the big money interests? I’m not saying that’s the case here, but there are interesting points to ponder.

The second is where this leaves at Atlanta. As I noted in my piece “Is It Game Over for Atlanta?.” this is a troubled region that lost huge amounts of jobs, saw the worst erosion of per capita income of pretty much any big city, and even saw per capita GDP declines. And it’s choked with traffic and other assorted infrastructure ills. Meanwhile, places like Charlotte, Raleigh, and Nashville offer a lot of the Atlanta experience without the same level of problems. Atlanta is no longer the only game in town in the Southeast. Maybe a big infrastructure program isn’t what Atlanta needs, but if not, what’s the plan?

Lastly, with the federal spigot drying up and states broke, urban regions are going to have to find ways to invest in their own highway and transit infrastructure the way they’ve largely invested in their own airports. We see many cities stepping up and voting in infrastructure spending (albeit excessively skewed to transit in my view) while others vote it down. If this keeps going, we’ll get a real life test of where the choice of investment vs. disinvestment gets you.

Google’s Motorola Mobility Unit Moving to Downtown Chicago

In the wake of Google’s acquisition of Motorola Mobility, it is moving the headquarters and 3,000 employees downtown from suburban Libertyville. This is being touted as a huge coup for Chicago’s tech hub ambitions.

From a regional perspective, this is a net nothing. However, it clearly goes to show the ongoing power of the Chicago Loop not just as a tourist and quasi-public sector downtown like so many, but as a bona fide commercial powerhouse. I can’t prove this with data, but it seems to me that Chicago may have the strongest trend of any city in America of corporate relocations from the suburbs to downtown.

This is also a tribute to Rahm Emanuel’s star power. Economic development via Rahm’s Rolodex appears to be working. He started courting Google’s then CEO-Eric Schmidt for major investment in the city some time ago. This goes to show the advantage a city like Chicago has. Very few cities have mayors that can get any CEO in the country on the phone whenever they want. Chicago does.

On the other hand, I can’t agree with the schadenfreude some are feeling over the prospect of wind swept parking lots at vacant suburban office complexes. This is really no different than suburbanites who left rejoicing over the city’s ills. Ultimately, Chicagoland is a single economic region. And I hate to break it to you, but while moves like this make huge headlines, the majority of the economic and population growth will continue to be in the suburbs. At some point the burbs may get fed up with Rahm’s poaching, and that would bode ill for the type of regional cooperation that’s critical needed to move the area forward. I think Rahm should think about bringing his era of active recruitment of suburban firms to a close in the reasonably near future.

Why Detroit Deserves to Lose

Yet another saga out of Detroit illustrates why this city and region have fallen so far. The city has been hemorrhaging people and jobs for decades, has likewise been mis-managed for decades, and is flat broke. Basically, the city would go bankrupt without state financial support. Unsurprisingly, when the state gives you money, they put strings on it. This has resulted in a big tussle back and forth over the degree of state control, some of which is legitimate and natural.

But a recent debate over the future of Belle Isle, a Frederick Law Olmsted designed park on an island in the Detroit River that’s owned by the city, has shown the type of attitude that’s held Detroit back so long.

The city is broke and can’t afford the park anymore. The park also needs major repairs. The state said they’d take it over under a long term lease as a state park and make the investment to fix it up. Sounds like a win-win to me.

Apparently not to Detroit’s leadership, which has gone apoplectic. Saying “hands off our island” they are protesting state control over the park. What do they want instead? It’s pretty simple. As someone put it, “state support without state control.” In other words, give us your money and go away.

This is the exact same attitude Detroit has taken on everything. It’s why, for example, the Cobo Center sat in a decrepit state for so long with no action, for example. Detroit wanted suburbanites to pay, but wanted the city to retain control of the asset. We’ve seen where this has gotten Detroit.

Regarding Belle Isle, Mayor Dave Bing said, “I have never in my 46 years in this city seen a governor of the state of Michigan involved in city politics like this one.” Given the state of Detroit today, one can’t help but ask, what took the state so long? It should have intervened long ago.

As always, Detroit’s leaders continue to try to point the blame at outside people and forces instead of taking a cold hard look in the mirror. These guys just aren’t serious.

Louisville Aging Cluster

The New York Times has a piece on Louisville’s efforts to build an economic cluster around care for the aging. I can’t say how successful this is likely to be, but I think it illustrates good thinking. Everybody and their brother is saying their economic future is some variant of life sciences (and high tech, advanced manufacturing and logistics, and green tech). They can’t all win in those general markets. And Louisville in my view really isn’t that well positioned.

So rather than try to make some big generalized push, the idea is to look for a specialized part of the industry where you do have more leading capabilities, and try to focus on that. That’s exactly what Louisville is doing here with aging care. There are supposedly something like 500 local companies doing work related to that. It’s also right down the rails of the demographic changes happening in America and the world. We’ll see how this plays out, but this sort of more specialized thinking is how cities ought to be looking at economic development strategies.

Tuesday, July 31st, 2012

Why Technology Is Driving More Urban Redevelopment by Mark Suster

[ 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

Image courtesy of Philip Bouchard from Flickr

This post originally appeared in Both Sides of the Table on July 10, 2012.

Thursday, July 19th, 2012

Why I Don’t Live In Indianapolis

It’s no secret that Indianapolis has been a huge focus of my blog over the years. One of the biggest criticisms I get here, especially when I ding some other city, is that I’m nothing more than a mindless booster for Indy. While I like to think I’ve given the city a lot of tough love over the years, it’s definitely true that I’ve had many, many good things to say, and I have no problem saying that I’m a big fan of the city overall.

Why then, might one ask, don’t I actually live in Indianapolis?

The answer is multifaceted, but without a doubt one key reason is that I simply can’t sign up to what the city is doing in its urban environment. Indy is going one direction, I’m going another. It’s as simple as that.

Let me give you an example of what I’m talking about. The city recently announced a plan to subsidize a mixed used development on a parcel in the core of downtown, a project called “Block 400.” It would include apartments, retail, etc – all good. While the concept is great, the design is another matter. I could go into depth on the monotony of the structure and other matters, but what I want to show you instead is a parking garage that will house employees from One America insurance. Here was an initial rendering of the garage:

It’s about as boring a garage as can be imagined. It’s on a prime block just steps from Monument Circle, but has no street level retail or other interest. It’s just a dead parking garage.

Various folks took umbrage at this, so the developer decided to tack on some awnings, which got them approved by the city’s hearing examiner. Here’s their updated design:

Let’s be honest: this isn’t a garage, it’s urban design garbage. And guess what? The city of Indianapolis itself is paying to build it.

I don’t want to let the perfect be the enemy of the good. I can certainly understand that there are economic constraints, tradeoffs to be made, etc. And not every project can be a home run.

But this isn’t unusual at all – this is standard operating procedure for Indianapolis. This is par for the course. This is just what Indianapolis builds. I cannot name another major city in the United States where the city’s own developer community (including Flaherty and Collins, the developer of this property), own architectural firms (including CSO Architects, who designed this) and own city government so consistently produce subpar development.

I’m not exaggerating at all. And this isn’t even the worst offender. For example, here’s another downtown development that not only sucks out loud, but the state fire marshal condemned it and forced residents to move out:

While I’ve named the names of the folks involved in the parking garage and they certainly deserve it, let’s not focus overly on them. This trend goes back a really long way, and is pervasive. The previous city administration, which was of a different political party, behaved no differently. Partially it’s a result of a lack of good urban history of the type that exists in other places. So there isn’t a good template ingrained in the city to follow.

But ultimately, as I’ve written before, it’s a crisis of values.

Indianapolis is the place where, as a rule, not good enough is more than good enough for most people, even community leadership.

That’s why I don’t live there. Because that’s not good enough for me. I may not be perfect, but I aspire to more than mediocrity. I don’t expect any city to be perfect or all the way there yet. You can inspire people, including me, to join your army to take hamburger hill or to get behind the rock and push, if you provide a vision of what can be. That’s one reason people are planting their flag in Detroit. It’s the hope of the possible.

But when it’s clear that the city itself – and I mean that in the broadest sense – has decided it wants to go march off in a different direction, it’s a lot harder to enlist in that army, no matter how much you might want to.

Alas, it seems lots of people agree with me – on the actions if not the reasons – as Center Township (the urban core) lost another 24,000 people in the 2000s. They voted with their feet – just like tens of thousands of others have been continuously voting with their feet since 1950 – to go build a better life for themselves somewhere else.

And in a decade where downtowns made strong residential comebacks, with young people streaming in to live in them, Indianapolis was an exception. Its downtown* added less than a 1000 residents, and their distribution suggests that almost all of that might be a result of jail population expansion. Even downtown Cleveland did better.

I’m sure Indy’s boosters will be happy to talk about world class parts of downtown like Monument Circle, the Cultural Trail, Georgia St., etc. And these are legitimately first rate. Actually, that makes it worse. It shows that Indianapolis can compete with the best if it wants to, but most of the time it just doesn’t care to. It’s not ignorance. The city knows that to do, it just doesn’t want to do it.

For some reason locals seem to think that doing it right should be reserved for a handful of special places and occasions. But the mark of at great city isn’t how it treats its special places – everybody does that right – but how it treats its ordinary ones. Indy is like the guy who thinks he can get away with wearing the same old dirty clothes fives days in a row and not taking showers, as long he slaps on a little top shelf cologne before he leaves the house. I’ve got news for you, people are going to notice.

Indianapolis retains a very compelling regional story to tell. There are tons of reasons for people to come to or build a business in, metropolitan Indianapolis. But the real story there is mostly in the suburbs.

Yet I believe even the urban core of this not very historically urban city could be compelling as well – if it wanted to be. Indianapolis has all the potential in the world. Indy is like the up and coming star at a company whose boss pulls him aside one day and says, “You’ve got all the potential in the world, but if you want to get that big promotion, you need to stop doing/start doing X, Y, or Z.” Anybody who has made it to the top was fortunately enough to have somebody give them one or more of those good kicks in the pants along the way.

Indy, unfortunately, has heard the message many times before from many different people, and has elected not to do anything about it.

Locals love to make excuses for why things can’t be better. F&C’s development director for the project said of the garage, “Some things aren’t achievable.” What is so different about Indianapolis that makes that true there but no where else? What miracle of economics allowed similar cities like Nashville or Cincinnati or Columbus to build many urbanistically correct new developments in those places while somehow it is impossible in Indianapolis? Maybe it’s time to recruit some out of town developers and architectural firms who have a different attitude towards the possible.

I would encourage Indy’s leaders to take a short hour and a half drive to downtown Cincinnati and take a look around what’s there. Not the old buildings, but the new ones. Most of them are candidly quite bland architecturally, but from an urbanism perspective – and be sure to take someone with you know what’s what they are talking about on this so that they can point it all out – even the bottom quartile of new buildings in downtown Cincinnati beat most of the top 5% of what’s been build in downtown Indy.

I’ve listened to various civic leaders of late talk about how rebuilding the urban core is now a big priority of the city. If that’s true, and business as usual has been leading to a catastrophic population collapse for some time, wouldn’t you think that you might, you know, try something different? Apparently not.

When people in Indy want to do something, they can. That’s why they built an amazing franchise in events hosting, particularly sports. They understand what world class is there, they understand the competitive marketplace, and they do what it takes to succeed – including building world class venues, districts, and capabilities to make it happen. So why hasn’t it happened elsewhere?

I was involved in a discussion about building a high tech industry in Indianapolis a few years ago. Someone boldly said that since Indy had been able to pull off building the sports cluster, it should be very capable of equally pulling off a high tech cluster to rival top hubs in the country. A friend of mine was very dubious about this, and said insightfully, “Sports succeeded because sports is consistent with the state of mind (i.e, the culture, values, and patterns of life) of Indiana. But high tech is more consistent with the state of mind of other places and not so much with Indiana.” Indianapolis is #1 in sports. And while it’s done well in some parts of tech, I don’t see how you could really rate it as more than the middle of the pack nationally on that.

“State of mind” makes a big difference. That’s ultimately a question people ask themselves these days, whether it is a company and a prospective employee sizing each other up, a consultant and client, or a city and a prospective resident or business. The most important question is always, “Is there a cultural fit?”

In an era where an ability to attract talent is perhaps the defining characteristic of urban success over the long term, Indy needs to ask itself the hard questions. How competitive is it? I’d have to say right now that it does a great job for people who want to live in a suburban environment like Carmel or Fishers. That’s very, very important and not to be minimized.

But there are people out there that want more, who prefer different types of environments. Right now Indy is simply not very competitive in that market. And if it keeps on its current path, it never will be. Convince yourself otherwise by finding the exceptions to the rule and getting them to gush about how great things are. But the numbers don’t lie.

Like that young up and coming employee who’s got the goods but has a few problem areas that will, if not fixed, hold him back, Indy needs to take a serious gut check about the things that hold it back – and an embrace of mediocrity and lack of seriousness in its approach to urban core development are chief among them.

Ultimately as I said it’s a question a values. There’s nothing wrong with being happy about where you are. Most people don’t have that burning ambition to make it higher, nor a passion for excellence. In this competitive world a lax attitude will probably undermine your performance in the end, but if that’s what you want be, go for it. I won’t judge a place for that. Just don’t expect those who want better for themselves to sign up for it.

In any choice a city makes, somebody is going to be unhappy. Any branding choice is, in a sense, a choice to exclude by focusing on something rather than something else. There’s nothing wrong with setting down a marker of what you’re going after – and being comfortable with fall out from that.

Ultimately it’s not about me or any other specific individual. I’m under no illusion that I’m someone who is personally important to future of any city I might find myself. But it about people generally, and being able to attract enough of them – particular of those that are critical to the 21st century economy – to make the city successful and indeed sustainable over the long term.

Just remember, talented, ambitious people – those with big dreams and hopes for themselves and their societies – want to live in a place where the civic aspiration matches their personal aspiration.

What do you aspire to, Indianapolis?

* Downtown defined as the area inside the inner freeway loop and the White River.

Sunday, July 15th, 2012

State of Chicago: Explaining the 1990s Versus the 2000s

In my article “The Second-Rate City?” I noted Chicago’s very strong economic and demographic performance in the 1990s and contrasted it with the very poor performance in the 2000s. Then I outlined several problems with Chicago I thought helped drive the struggles. A few people asked a very fair question, saying, “All the negative factors you cite about Chicago (e.g., clout, business climate) were equally as true in the 1990s as in the 2000s, so what really made the difference?” I want to try to respond to that today.

First, let’s ask ourselves, why did Chicago decline into its Rust Belt malaise? Was it some unique to Chicago factor? No, clearly not, as a broad swath of the industrial United States experienced a similar collapse. Likewise, lots of big cities (I mentioned New York before) seemed to be on the fast track to oblivion in the 1970s. In a sense, the city was a victim of outside macro-economic forces and secular trends.

Next, why did Chicago come back? Saskia Sassen helps us understand why. Globalization, which enabled the global distribution of many functions of production, also simultaneously created the demand for new types of functions to help control and manage these far flung networks, especially new types of financial and producer services. These require very specialized, high skill workers operating in dense knowledge networks, which led to agglomeration effects and the emergence of so-called “global cities.”

So, in a sense, the rise of global cities is simply an emergent property of the new global economy. The global transformation that renewed Chicago, New York, London, etc. had little to do with good leadership or great mayors, and everything to do with a historical context that was ripe for repositioning in a new world economy that demanded it. In other words: outside forces again. This includes other secular changes like the start of a new wave of people who prefer urban to suburban living. These forces laid the cities low and they brought them back.

So as I’ve said before, when it comes to Chicago’s transformation, the city was the artifact, not the architect.

The 1990s were a great decade nationally. Combine that with these forces I mentioned, and Chicago really had the wind at its back. It’s easy to do well in that environment. However, when the national economy took at turn for the worse in the 2000s and we experienced a “lost decade,” things were very different. It’s when the tide goes out that, as Warren Buffett likes to put it, you get to see who’s been swimming naked.

In a sense, the 2000s tough times exposed the weaknesses of Chicago in the same way that the financial meltdown blew up so many Ponzi schemes.

Also, I believe there were some particular characteristics about the way the markets changed in the 1990s and 2000s that particularly benefited Chicago in the 1990s and hurt it in the 2000s. I can’t claim to have done a rigorous study on it (though I think there is some good research to be done), but working in the industries affected and living it myself – and having some personal knowledge of various firm employee counts during the period – I feel somewhat qualified to state this as a hypothesis.

I’ve outlined this before, particularly in a very extensive post called “A Better Tomorrow” but I’ll restate it in part here.

There were two main forces that converged on Chicago in the 1990s: the tech revolution and the nationalization of industry. Note that I consider the 1990s really the prelude to globalization, which was the dominant force of the 2000s.

Consider the technology world of 1990. It was an era dominated by staid mainframe shops. By the end of the decade, the world was completely transformed. Just think of some of what we went through: the client/server revolution, the emergence of the web and the dot com boom, the ERP revolution, the Y2K retrofit problem, and the emergence of mobile telephony and laptops as ubiquitous. These were all huge, gut wrenching changes that required not just incredibly large numbers of people skilled in new technologies themselves, but also with tremendous business, functional, and people skills so they could be deployed effectively.

At the same time, the 1990s was the Great Rollup era. Back in the 1980s most cities had their three big local banks, their local electric and gas companies, their local retailers, even their local manufacturers. Only AT&T seemed to be a true national player of the type we know today. Fast forward through the 1990s and industry after industry was subject to national rollups. First was the emergence of “super-regional” banks, which led to today’s huge giants. (It was also when Glass-Steagall fell, arguably to our chagrin). Utilities merged, department stores merged, and major big boxes and category killers like Wal-Mart, Target, Walgreens, Best Buy, and Home Depot developed national footprints. Integrating these businesses, and building scalable processes and technology to manage these huge enterprises, was another gigantic effort.

Both of these worked enormously to Chicago’s benefit. Chicago had always been the dominant location in the interior for professional services, with core sub-industries including: management consulting (e.g., McKinsey), technology consulting (e.g., Accenture), IT/business process outsourcing (e.g., TCS), accounting (e.g., KPMG), and law (e.g., Mayer Brown).

Both the technology and nationalization trends generated huge amounts of demand for new people to manage them, which drove a huge increased demand generally for consultants and other service providers. What’s more, unlike the old back office “data processing” mainframes, the new technology was directly embedded into the fabric of the business. This meant that people working with it needed industry knowledge like never before. Clearly, to help executives merge and manage large national firms, consultants and such needed a lot of industry expertise as well, and needed to be able to serve their clients on a national, not just local basis.

This led to a sea change in the organization of professional services firms. Historically they had been organized by local office practice. But in the 1990s they reorganized along industry lines, with national practices. Instead of a Chicago consultant serving Chicago clients primarily, you’d have, for example, a retail consultant serving retailers where ever they might be nationally.

If you need to fly consultants all over the country to work with clients, where do you want to do it from? The two best options are Chicago and Dallas. So Chicago, with its huge labor market, its urban environment hitting at the emerging youth trend, its status as a major air hub, its central location, and its head start through its already robust professional services sector, became the best location in America for professional services overstaffing. That is, hiring people into a city with the idea that they’ll fly around the country servicing clients coast to coast. I believe this explains why Chicago boomed like nobody’s business during the 1990s. I suspect most major professional services companies doubled or tripled employment in Chicago in this period.

The 2000s were very different. First, the dotcom bust deflated demand for tech generally and Chicago as a hub got blasted. Second, the 2000s really didn’t see the same sorts of technology revolutions that we saw in the 1990s. I believe that things like Web 2.0 were mostly evolutionary. (Smart devices and such may be leading us through another fundamental revolution, but that wasn’t mostly a 2000s phenomenon). Third, the rise of the global age led to the emergence of offshore software development and business process delivery. Thus, much of the new demand, and existing demand, could be satisfied offshore, and didn’t require an army of expensive onshore consultants anymore. This new competition caused traditional firms to have to revamp themselves to become much more efficient internal business operators. (Law seems to be the last holdout, and is in the early stages today of a major shakeup in how legal business gets done).

This hurt Chicago badly. You didn’t need to overstaff in Chicago because you could do it in India. When there was recovery from the dotcom bust, much of it was offshore. I suspect that even 12 years later, there isn’t a single technology consultancy that employs as many people in Chicago as it did in 2000, new companies excepted. Consider that major firms like Arthur Andersen and Whitman-Hart don’t even exist anymore. Many smaller sized internet era firms also experienced the same fate, and Chicago’s “Silicon Prairie” ambitions more or less got wiped out, which cost a huge number of telecom jobs. Also, industries like finance have been subject to increasing centralization in global hubs. Chicago went from being #2 nationally as a financial hub to something further down the chart in a global hierarchy. Chicago retains great strengths in derivatives and risk management generally, but second tier financial hubs like Chicago and Boston have been feeling the pinch.

This, in a nutshell, is what I think explains the difference in performance. The general “wind at the back” of Chicago and big cities in a boomtime economy papered over a multitude of civic sins in the 1990s that the lean years of the 2000 exposed. And the tech/nationalization era of the 1990s particularly benefited Chicago, helping to explain why it rated so highly in that decade.

I’ve got one more piece in my “current conditions” segment of State of Chicago. Then I’ll turn to articulating my rationale for some of the structural weakness factors I outline in the article, then move on to a series of proposed fix-its.

This article is part of the “The State of Chicago.”

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