Tuesday, December 16th, 2014

The Silent Killer – The Company Your Community Never Created by Mark Suster

[ My fellow Accenture alum Mark Suster is a former startup founder and now a VC based out of Los Angeles. Hence he writes the fantastic tech startup blog Both Sides of the Table that’s a must read if you’re into tech startups. This recent piece particularly caught my eye as it’s relevant to so many cities’ startup scenes. Mark graciously gave me permission to repost it here – Aaron. ]

I was at a dinner recently in Chicago and the table discussion was about building great companies outside of Silicon Valley. Of course this can be done and of course I am a big proponent of the rise of startup centers across the country as the Internet has moved from the “infrastructure phase” to the “application phase” dominated by the three C’s: content, communications and commerce. But the dinner discussion included too much denial for my liking.

I think startup communities being simple cheerleaders doesn’t help anyone. Those of us outside Silicon Valley need to make an effort to effect change not just wish for it.

At the dinner some of those arguing that Chicago has everything it needs now that it has built: Groupon, Braintree, GrubHub and others and that it has “come along way” and “will never get the full respect it deserves just because it’s not Silicon Valley.” But I think this misses the point. I’m a very big fan of Chicago. I started my career at Andersen Consulting (now Accenture) so I went to Chicago many times a year for nearly 9 years. I then got my MBA at University of Chicago so I secretly pull for local entrepreneurs as long as they don’t make me visit in the Winter any more.

But no community can become complacent with the wins that it has. It’s not the great companies you build, it’s the silent killer of those that should have been build locally and weren’t. It’s the thousands of jobs that weren’t created but you don’t even know it.

Think about Facebook had it stayed in Boston. Could it have become the behemoth that it is today? Who knows. But I’ll bet the Boston community would take 50% of the success of Facebook built locally. And the truth is that successful startups beget more successful local startups, wealthy VPs who go on to build their next startups, etc. Even Mark has acknowledged moving wasn’t the be all, end all in this famous interview:

“If I were starting now, I would have stayed in Boston. [Silicon Valley] is a little short-term focused and that bothers me.”

Boston is still a great tech hub. But wouldn’t it want to be great PLUS have Facebook?

We have similar stories in LA and most people don’t know it. For example, Lookout is a mobile security company that was founded by three talented graduates of USC. They started their company in LA but a couple of years after raising capital from Khosla Ventures in the Bay Area they ended up relocating there. A few years later they announced $150 million in a funding round at $1 billion+ valuation and are ramping up jobs to secure their market-leading position. You could say the team would have gone North anyways. Perhaps – who knows? But I know with local funding and local support that’s certainly less likely.

And consider Snapchat – one of our hometown favorites as they’re based in LA (Venice Beach). Luckily for our community the founders decided they wanted to build their company in LA regardless of not having local funding from LA. That’s our great gain as Snapchat has also raised a lot of money at a monster valuation ($10 billion reported) and has been scooping up talented Stanford engineers and relocating them to LA. Locally we call it “the Snapchat effect.” The VPs of SnapChat will be LA’s great founders 5 years from now.

Silicon Valley is littered with startups where the founders were originally in LA. Klout was an LA company – sold for $200 million to Lithium. As was FarmVille (sold to Zynga) and many, many others.

Local capital matters. Local mentors matter.

That was my original idea behind Launchpad LA. I figured if we couldn’t fund every company locally we should at least embrace them as a community and show that we’re willing to mentor them whether they raise their money in town or not.

So what can a community do?

I often point out the story of when we raised our fourth fund a few years ago. I went to see several LP funds in Boston. At least twice I had conversations that went like this, “Yes. It’s true. Your fund performance has been great. But there’s also several great funds in Boston and while our first priority is to returns we have an equal responsibility to local funds and local jobs.”

LA public pension funds and endowments have historically been the opposite. I think government and community members need to understand that capital formation is an incredibly important part of economic revival. People often say, “Great entrepreneurs will build a community and the capital will follow.” I don’t see much evidence of that. I think it’s a combination of the two. It’s clear capital with no talent ends up having to travel to do deals. But talent with no capital is another word for migration.

And then there is public policy. Historically the City of LA has been hostile to startups. I’m reminded of LegalZoom who was founded in LA but moved it’s headquarters to Glendale and much of its operations to Austin, Texas. While LA was trying to impose archaic taxes on the firm and seemed to care less about its existence since it was a “startup” – the first lady of Texas welcomed them to Austin by picking up the CEO at the airport on his first visit there. It’s no wonder hundreds of jobs migrated. Luckily since then we elected Mayor Eric Garcetti who understands the importance of startups and of technology and venture capital on job creation.

But we still need more funds. No – I’m not worried about the competition. We’ll win our fair share of deals. But when you remember the Snapchat effect you see that I gain even from the deals we didn’t get to do. I’m guessing the future leaders of Lookout will build companies in the Bay Area.

Communities can make a difference. I wrote about the awesome efforts of Cincinnati to stimulate its startup community and the role of Paddy Cosgrave in Dublin, Ireland as well the entire Irish business community, the IDA, etc. who woo businesses to put their headquarters there. I also covered the impact of Brad Feld in Boulder or Fred Wilson in NYC as observed from my keynote on a trip to Seattle, which I felt could have a huge boom if its elder statesmen embraced startups a bit more.

Don’t get me wrong. Chicago has made strides. The Pritzker Family has been very active and the opening of 1871 as an entrepreneurial hub is a great example. But my conversations with countless Chicago entrepreneurs suggests it has similar issues to all non-Silicon Valley centers: not enough venture capital, too few tech angel investors, not enough talent for product management or engineering, not enough local tech powerhouses to drive local biz dev / keiretsu. I think this is true of LA, NY and many other tech communities so I’m not singling out Chicago.

My point is this … cheerleading isn’t enough. We need to help create local venture capital funds who may be national in investment strategy (as we are) but who will do more than their fair share of fundings locally (for us that’s 50%). Fund formation + local mentors + local talent = a shot at creating successes that drive the future job growth of our great cities.

This post originally appeared in Both Sides of the Table on November 15, 2014.

Tuesday, November 11th, 2014

Flatness by Drew Austin

“Two extremes of redundancy in English prose are represented by Basic English and James Joyce’s book Finnegans Wake. The Basic English vocabulary is limited to 850 words and the redundancy is very high. This is reflected in the expansion that occurs when a passage is translated into Basic English. Joyce on the other hand enlarges the vocabulary and is able to achieve a compression of semantic content.” — Claude Shannon

Bandwidth is a late machine age term that helps illuminate the millennia of technology and culture that preceded its coinage. The definitions of bandwidth vary, but its most basic meaning is a channel’s capacity to carry information. Smoke signals and telegraphs are low-bandwidth media, transmitting one bit at a time in slow succession, while human vision transmits information to the brain at a much faster rate. The past century has yielded tools for measuring bandwidth and quantifying information (see Claude Shannon) as the channels for carrying that information have advanced rapidly.

matrix

Source: Ceasefire

In any era, but never more so than now, the landscape of existing technology is a palimpsest in which the cutting-edge, the obsolete, and the old-but-durable all coexist as layers of varying intensity and visibility. New, unprecedented means of information exchange and communication are invented constantly, while their older equivalents live on long after they’ve stopped being state of the art. Information reaches each of us—and often assaults us—through a multitude of high-bandwidth and low-bandwidth channels, some of which we permit to speak to us, and some of which do so uninvited. Sitting down to watch TV, checking one’s iPhone during dinner with a friend, or finding a quiet place to read a book all represent conscious choices to block certain channels and pay attention to others. Marshall McLuhan recognized that technologies in our environment have a rebalancing effect on our senses, writing that each medium is an “intensification, an amplification of an organ, sense or function, and whenever it takes place, the central nervous system appears to institute a self-protective numbing of the affected area, insulating and anesthetizing it from conscious awareness of what’s happening to it.”

Human attention, then, is a finite resource. A variety of criteria inform everyone’s small, constant choices about which media to focus on and which to tune out, and those choices often have little to do with their bandwidth, but today one thing is certain: Our own brains, not anything manmade, are the bottlenecks that limit how much information we can receive at once. The contemporary world offers as much space for storing information as we’ll ever need, and we can instantly send any amount of it to the other side of the planet. Well before either were the case, however, humans learned to ignore the features of our environments that we deemed irrelevant—the noise surrounding the valuable signals we actually wanted or needed to receive.

Claude Shannon’s quote above, from his Mathematical Theory of Communication, introduces a qualitative layer to the question of human bandwidth and the environments we seek: People move continuously through information-rich and information-poor environments and are affected differently by each. Basic English is “redundant,” meaning it’s a language that requires many words to convey even simple messages—and is therefore a language that few would choose to use for anything but utilitarian purposes. Finnegans Wake, at the opposite extreme, could not be richer in information or content, to the point that it can barely be compressed or summarized. In Shannon’s example, the rich, information-dense content of Joyce’s novel represents a higher quality of communication, and Basic English a lower quality, although the latter fulfills plenty of functional roles.

Low-information, redundant content has a flatness to it. It’s less interesting. The Residents expressed this a different way on their Commercial Album, which comprises 40 one-minute-long pop songs. The liner notes explain:

“Point one: Pop music is mostly a repetition of two types of musical and lyrical phrases, the verse and the chorus. Point two: These elements usually repeat three times in a three-minute song, the type usually found on top-40 radio. Point three: Cut out the fat and a pop song is only one minute long.”

Plenty of pop music, in other words, is redundant and can be compressed without losing anything. This might be too harsh and cynical a judgment, but it’s valuable as a polemic. Modern environments, from top-40 radio to architecture to fiction, are full of redundancy and thus thin on information. The ease of digital information storage and transmission help explain why we can afford to be less economical with information than we were in the past, but getting used to redundancy, like getting used to a diet full of salt and sugar, reinforces our appetite for it and actually influences the types of information we produce. If the manmade world seems like a flatter place in the Information Age (not in the Thomas Friedman sense), this might be part of the reason.

As communication technology improves, the argument periodically surfaces that face-to-face interaction and cities in general will become obsolete. Joel Garreau rebutted this argument a few years ago in his article “Santa Fe-ing of the World,” in which he praises the high bandwidth that physical proximity and direct experience afford. He writes, “Humans always default to the highest available bandwidth that does the job, and face-to-face is the gold standard. Some tasks require maximum connection to all senses. When you’re trying to build trust, or engage in high-stress, high-value negotiation, or determine intent, or fall in love, or even have fun, face-to-face is hard to beat.” Even the most advanced digital media, in other words, are limited compared to full sensory engagement with one’s environment—the digital, closer to Basic English than Finnegans Wake, is still a utilitarian solution to problems like distance more than it’s an ideal theater for the highest levels of human contact. As our reality becomes more automated and algorithmic, our truly complex, nuanced, information-rich activities will continue to justify their existence, while the flat and redundant will increasingly disappear into the digital. By recognizing this condition, we can learn to preserve the depth of the former instead of simplifying our reality for easier absorption into lower-bandwidth channels.

This post originally appeared in Kneeling Bus on October 5, 2014.

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Topics: Technology, Urban Culture

Thursday, November 6th, 2014

Building the Responsive City

The Responsive City: Engaging Communities Through Data Smart Governance
by Stephen Goldsmith and Susan Crawford

Technology, and especially the use of data and analytics, has been transforming the way cities manage service delivery. Former Indianapolis mayor New York City deputy mayor Steve Goldsmith, and his colleague at Harvard Susan Crawford, recently wrote a book called “The Responsive City” looking at this technology revolution. I recently read the book and posted some thoughts in a review posted at City Journal. Here’s an excerpt:

The book chronicles more than just technology’s potential; it also highlights what some local governments have already achieved with innovative approaches. After several fires resulted in the deaths of five people, New York City built a system to identify buildings at high fire risk, using predictive models and integrating data from multiple sources. City inspectors are now aggressively targeting those buildings for upgrades. To fight its rat problem, Chicago is using data analytics to predict where rats will gather, instead of waiting for resident complaints. Boston has developed a civic customer-relationship management system, with mobile-device apps, to link residents more easily with city services. Mimicking the way that Yelp collects restaurant reviews, Washington, D.C. uses a website to solicit ratings of city services. Cities around the country are adopting open-data portals.

Goldsmith and Crawford are candid about the challenges facing their responsive-city vision. Progressive-era reforms designed to eliminate corruption also curtailed government employees’ discretion, leaving them with narrowly defined roles and limited ability to respond effectively to real-world problems. Rigid job descriptions, such as “temporary full-time permanent intermittent police officer,” are common in cities like New York, which has more than 2,000 such classifications. Procurement rules require that detailed specifications be prepared in advance, unlike in the private sector, where technology and other solutions are often developed iteratively. Government’s rigid contracting processes make it tough to respond to findings during development.

You can click over to read the entire thing

I also sat down with Steve Goldsmith recently to talk about the book, and some of the challenges and pitfalls of this technology-drive approach. If the audio embed doesn’t display for you, click over to listen on Soundcloud.

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Topics: Public Policy, Technology

Sunday, November 2nd, 2014

The Urbanophile Interview: Portland Mayor Charlie Hales

I was out in Portland, Oregon last week and while there I sat down for an interview with Mayor Charlie Hales. We talked about the real Portland vs. the idea of Portland, the city’s industrial base, retrofitting suburban infrastructure, and a lot more. If the audio doesn’t display for you, click over to Soundcloud.

Mayor Charlie Hales. Image via Wikipedia

Here are some edited highlights of our conversation. For those who prefer reading to listening, a complete transcript is available.

Mayor Hales rejects the idea that we will have to strategically abandon infrastructure because the finances don’t add up:

My point here is that this is about political will. It is not inevitable or immutable that America is going watch its infrastructure decline. It’s a choice. It’s a bad choice to dither and do nothing. And it’s a good choice to step up and do something. And I think you’ll see more cities doing what we’re doing here in Portland. Which is to say, we’re going act locally, and then keep the pressure on Congress and the State House to do their part too.

Regarding how hard it really is to find a job in Portland:

Not hard. In fact, I think it’s 4.8% – the unemployment rate – among 25-34 year olds here – lower than New York, lower than a lot of places. We’re the 3rd greatest city in terms of college educated immigrants moving here deliberately. They move here, and then not long after, they find work. Or they create work by starting their own business because we’re a very entrepreneurial city as well. I did this in 1979. It’s not an original thing for Portland. In fact you could say it’s been happening since Lewis and Clark that we – that people immigrated here from elsewhere because they saw some opportunity here. We’ve been absorbing those people as they come to Portland. They find work. But that’s the value set of that 25-34 year old cohort. They care about quality of place, quality of life, and what they’re going do when they’re not working. And that doesn’t include, say, sitting in traffic in suburbia. So they like the idea of living in Portland, and they come here and try to make it work. And most of them do. Again, we have a better employment situation for those folks than New York City does. So it’s not true that young people come here and are stuck in jobs that they’re way over qualified for indefinitely.

About how the real Portland differs from the idea of Portland people have from the media:

Like all good caricatures, Portlandia makes fun of some things about us that are true. I mean, we do love localism, so Colin the Chicken is somebody that we would care about here in Portland. And we are relentlessly earnest about our values.

There some other ways that we don’t. We’re still an industrial city. We’re a big hands, port industrial city. We build boxcars and barges. We just cut the ribbon on the biggest dry dock in North America last weekend. So we employ a lot of welders and steel fitters and plumbers and pipe fitters, and all those hands-on trades. We build trucks here. We build boxcars. We make steel pipe. There’s a lot of traditional “old economy” industry here.

Another part of Portland that doesn’t show up in the caricature is…the other half of the neighborhoods that were half-baked suburbia when they got annexed into the city. And we’re trying to make them complete communities with a local economy in that neighborhood and those kind of services that you can walk to. And, oh yeah, in many cases, there aren’t even sidewalks, and there’s no neighborhood park. So, we’re spending a lot of effort and money on trying to retrofit those suburban parts of Portland, to not be physically identical to the old neighborhoods, but have those ingredients of a complete neighborhood that Portlanders like to see.

Tuesday, September 16th, 2014

Technology Assimilation and Generational Change by George Mattei

[ This week a guest post from George Mattei on technology and generational change – Aaron. ]

I remember clearly the first time I saw the internet. It was circa 1992, I was in my late teens, and my best friend’s uncle had just installed an early version of Prodigy internet service on his computer. He showed it to us – describing how you could look up news, get weather and even send letters all electronically. It was a really neat service, and I immediately saw that it would be popular. However, I’m not sure if I realized how transformative the internet would be.

Looking back on that moment, and projecting forwards to the golden years of my life, I can’t help imagining that one day I will be like those old ladies you would meet every once in a while that would tell the story about the first time they saw a “horseless carriage”. Those are great stories, if only because of the context – it’s interesting to imagine what life was like back when cars were a rare and fascinating and before they had permanently transformed life as we know it.

I has been rare so far that a truly transformative technology appears that absolutely revolutionizes our everyday lives. 70-80 years ago it was 2 things – automobiles and the infrastructure they begat, and alternating current electricity – which suddenly empowered people to live in far flung locations and still have access to all of the amenities that previously were only reserved for those in the cores. In recent years clearly the internet and communications innovations have revolutionized how we live and work and play.

A hallmark of these technologies is that few realize at first how transformative they will be, and it takes at least 20-30 years for their effect to be fully realized. After all, by the year 2000 everyone knew the internet was the next big technology, but few realized how powerful social networking would soon become. In the same way few realized in the early 20th century the impact that automobiles would have on depopulating cities and creating vast, sprawling metro areas.

Interestingly, generations seem to react to these disruptive technologies differently, often based on the period in their life cycle when they appear. There appears to be a definable pattern which – in my opinion at least – is as follows:

  • The old guard fears it
  • The new guard embraces it and molds their life around it
  • The children of the new guard moderate it to fit into but not define their lives

We can draw parallels between the Boomers and Millennials, both the first generations to come of age during the blooming of a disruptive technology, by looking at some of the criticisms of these generations by older generations:

  • They are self-centered
  • They are too wrapped up in their lifestyle which is dominated by (automobiles) (the internet).
  • Their embrace of this technology leads to social ills:
    • For Boomers, the love of automobiles and suburbia drained our cities, led to de facto segregation and stretched our ability to fund infrastructure
    • For Millennials, the love of the internet has led to decreased face-to-face social skills, a need for instant gratification and no less than the death of privacy itself.

To some degree these statements are probably correct. This is not to downplay the obvious advantages that new technologies bring to the table – clearly automobiles and the internet have contributed tremendously to our economic and cultural advancement – but to illustrate a cultural phenomenon. A generation raised during the early blooming of a transformative technology tends to embrace it. They seek to change the world, and see technology as one of the main tools to mold their own future and their generational aspirations. The ascendant generation is quite willing to overlook or minimize the detrimental effects that new technology can have. Even more, their blatant disregard for past social norms and constructs is necessary in order to rewrite the world in their vision. Just as the Boomer’s Summer of Love and Woodstock (not possible without cars) destroyed the Ozzie and Harriet/Superman vision of America, the internet is transforming our society today, with all the benefits and risks that entails.

Older generations, on the other hand, seem to see disruptive technology primarily as a threat – after all, they were once young world-changers too, and they formed the world to their liking. And now suddenly here comes this new generation with this new technology that will upend their functional social framework in favor of a new paradigm…a frightening prospect for them. How else to explain the legions of Boomers and older people that cannot bring themselves to become functionally literate with computers? They are often afraid they will “break it”, when this fear is mostly unfounded. Contrast this to driving. It is one of the most dangerous things we do in a typical day, and yet few of us think much about it. Some of this is due to brain plasticity-studies show that younger brains are more adaptable to technology than older ones are. This combination of less adaptable minds and well-established social construct are leading Boomers to join the legions of past generations bemoaning the ills of a new generation.

This “best of times, worst of times” narrative has another act, however. To explore this, we can look at another interesting phenomenon – that is the trend of Millennials to live in urban areas. As an interconnected generation, Millennials truly are more communal. Even though, as some studies show, their face-to-face skills may suffer from frequent use of digital communication, they have an ethos – partly born of the internet – that respects everyone’s ability to provide input and be part of the group – and this bleeds into how they live. For example, it’s much easier to go down the block in an urban neighborhood to visit your buddy that just posted a good new bar on Foursquare than it is to get in the car to drive 5 miles. That kind of interconnectedness and immediate social gratification seems to be driving Millennials’ living choices.

This is not totally unlike – if somewhat opposite from – the Boomer’s drive for independence. Automobiles at the time represented freedom- from public transit, from parents and from general locational dependence. Suddenly the individual’s ability to choose their own path was paramount, and the freedom of driving seemed to represent this best. While this may have led to the depopulation of our urban neighborhoods, it’s also highly unlikely that the Civil Rights movement would have ever been successful without the Boomer’s viewpoints. They may relish the freedom to live far away from those of a different race or lower income, but Boomers also favor the right of a person of any race to achieve all they are able to. This manifested itself in strong support for the Civil Rights acts of the 1960’s which ended legal segregation in this nation.

While the type of technology itself may partly explain this change, there may be another more overarching reason that Millennials are embracing urban living. The automobile is not the Millennial’s technology of choice. To them a car is a utility, much like electricity. They don’t see it as defining their world or their lives, and they will not allow cars to do so. That’s not to say they don’t use them, but the way in which they use them changes greatly from how Boomers used them. This is why services like Uber and Lyft – not possible without the internet and smartphones – are gaining in popularity in urban areas.

So we see the final phase of this pattern – Millennials are reversing some of the ills of the automobile age, while still recognizing their utility. In fact this is not surprising. Having grown up in the maturing age of the automobile, Millennials are much more likely to have a balanced view of the technology. They have seen both the good and bad it can bring, and will likely keep the best parts of the technology while mitigating the worst parts of it.

Since it appears that timing can shape generational proclivities as much as anything else, we can project this pattern forward to the future of the Internet age. Just as we can now see the side-effects the automobile caused in because of the passage of time, the negative side-effects of Millennial’s technology embrace is just beginning to be understood. But we should anticipate that, as with the Boomers, there will be a more critical judgment applied to the Millennials’ choices as time goes on. Furthermore, while today’s Millennials are likely to overdose on smartphone technology, their children may revolt somewhat against this technology and move towards a more balanced integration of these tools into their lives. In truth, this is where the final assimilation of a new technology occurs.

What will the future bring for our cities and for our communications, and hence for ourselves? No one really knows. However, if I were a betting man, I would bet that this pattern of pendulum swings will continue. For our cities, this is good news – it means that the trend towards urban living is not likely a fad and will continue to strengthen over time until cities reach a more balanced equilibrium with the suburbs. However, for those urbanists that believe the suburb is dead and cities will once again rule the day, a note of caution is in order. Modulation is not conquest, and it’s unlikely that Millennials will give up the best features of the automobile and the benefits they convey.

Sunday, July 27th, 2014

The Citizen Perspective on Smart Cities

One of the more highly touted concepts in the urbanism world is the idea of “smart cities.” Wikipedia says of the smart city: “A city can be defined as ‘smart’ when investments in human and social capital and traditional (transport) and modern (ICT) communication infrastructure fuel sustainable economic development and a high quality of life, with a wise management of natural resources, through participatory action and engagement.” The basic idea is “better urban living through technology”.

That smart cities has captured a huge amount of media and mindshare is unsurprising, given our technophilic society and the sums of money being spent by major corporations to promote it. But the smart city has proven to be elusive in practice and slow to materialize. What is it a city is actually supposed to do to become smart? And why haven’t we seen more of it?

As I said, smart city tech vendors have been making a major marketing push and so they are a fixture sponsors of conferences. Last month at New Cities, I saw several tech firms present their ideas on the topic, and it helped me understand more about why smart cities has proven elusive.

It’s already been observed that the citizen perspective is all too often missing in the smart city discussion. But listening to the providers in the space, it became clearer why. Namely because all of them are B2B companies who sell to the corporate C-suite and its public sector equivalent. They do not have a consumer heritage and thus they don’t have a lot of experience or heritage in end user applications, hence by default don’t see the city from the citizen perspective.

Think about a company like Cisco. Cisco sells most of the gear that makes the internet run. The people who buy their stuff expect it to work, all the time. They have to have carrier grade five 9’s reliability. These systems have to have the so-called traits of reliability, availability, and serviceability. They also have to be efficient and predictable in their operations. The idea is sort of like the Maytag repairman mentality. It just has to work.

This produces an operating model that would be, from the standpoint of a person, stifling or even dehumanizing. So it shouldn’t be any surprise the public and politicians by and large haven’t jumped in with both feet.

I want to stress that there’s actually huge value potential in this B2B, carrier grade type model. Not just Cisco’s business customers but all of us absolutely expect our phone to work and our internet to be up. All. The. Time. Comedians like Louis CK have skits mocking our entitled, unrealistic expectations about our technology (“I hate Verzion!”) The minute our home internet goes down, what do we do? Pick up our phones and start Tweeting about how much we hate AT&T/Comcast/Cox/etc. One reason we are so annoyed by them is that outages are so rare. Thank folks like Cisco for that.

Similarly, a Bombardier rep was talking at New Cities about his firm’s desire to sell managed services, not just trains, into the public transit market. If they were able to make trains run as reliably as phones work, there would be huge public benefit there.

So I don’t want to downplay the importance of that kind of stuff. In everything from water to 911 emergency dispatch, we need a whole lot of stuff in our cities to just work and work reliably. This necessitates the type of approach to gear and its implementation and management that comes from the B2B, sell to the CIO or operations manager mentality. It’s mission critical to public safety and quality of life.

On the other hand, that’s not the only type of application there is. Unfortunately, the smart city dialog has been dominated by it, with the exception of the open data movement, which I don’t generally see labeled as falling under the smart cities domain.

One thing I might suggest that these major vendors explore in trying to better capture the public imagination and drive uptake is to create a connection to the citizen by getting into some consumer businesses. Now this would be problematic strategically I know. Investors would probably hate it. But at least something small scale might be interesting. There’s probably a lot that could be learned.

Google is a B2B and B2C company, but one predominantly focused on software. They’ve been diversifying into hardware however, both by creating their own products like Google Glasses, and buying smart thermostat maker Nest. The latter I find particularly intriguing as these are in a sense a type of smart city application, but focused on the person in the city instead of back end infrastructure. Google is trying to learn the hardware space to be sure they don’t end up outflanked in the “internet of things.” (They are also getting into the infrastructure business as well though things like Google Fiber).

Potentially something like buying a Nest type vendor could be something these major smart city companies could do to put their toes in the water of the consumer space. Obviously any deal has to make sense from an investor perspective, but the idea here is that this is almost an R&D operation to create a pipeline of knowledge about the citizens of the city and what they value and how they live and create their lives. That then informs the smart city vision beyond efficiency and RAS, notably the “participatory action and engagement,” which is something you definitely don’t want on your router configuration.

This raises an interesting competitive question: will the majority of the profits in say the application of smart city ideas to energy efficiency go to someone like the smart meter vendor or to someone like Google/Nest? If I were the vendors in the space conventionally labeled smart cities, I’d be working hard to make sure the answer to that question was “me”. In the meantime, building relationships to citizens/consumers can help to shape the smart city idea into something with more marketplace uptake and public resonance.

For further perspectives on smart cities, see my previous post with my thoughts after I moderated a technology panel at Barcelona’s Smart City World Expo in 2012. Also, Adam Greenfield took a very negative view of the idea in his eBook that gives a different perspective on the issue.

Sunday, July 13th, 2014

Starter Ideas For Improving Rhode Island’s Economic Competitiveness

This is the third and last part in my series on Rhode Island. You can go back and read part one and part two if you missed them.

Justin Katz, writing at a web site called the Ocean State Current that appears to be published by a libertarian think tank in the state, is unhappy with my proposals. In fact, he’s giving a point by point rebuttal to my six part toolkit, which you can read here, here, here, here, here and here. I think it’s fair to say he thinks Rhode Island needs much more radical change than I prescribe, and can’t rely on a gradual approach among many other complaints.

Right or wrong, here is my thesis. A free market agenda along the lines of a Tennessee or Texas is dead on a arrival in Rhode Island. It’s simply not possible to pass. Among other reasons, this is because the people of Rhode Island by and large have some degree of progressive orientation. That’s very different from say Indiana, where every other person you meet on the street has Tea Party sympathies, and it takes a lot of police possibilities off the table. I also believe that most progressives in Rhode Island genuinely want to see a better economy in the state. Hence my pitch is aimed at providing analysis and policy recommendations that might have a chance at appealing to the Rhode Island electorate, and thus have some hope of getting implemented or affecting how people think about the issues. If Katz & Co. prefer a different approach, I’m all in favor of the marketplace of ideas.

By the way, even if you go on Atkins or some other rapid change program of weight loss and are successful, the weight seldom stays off as we know. Slow and steady changes in lifestyle are the best way for sustainable change.

Today I want to give a starter set of policy ideas for changing the trajectory in Rhode Island. I won’t claim these are a panacea or represent a comprehensive to do list, but you have to start somewhere. This is an expanded list from my City Journal piece.

Taxes and Fees

1. Seek a “grand bargain” on revenue neutral tax reform. Here the idea is not necessarily to reduce tax revenue overall, but to adjust the levers to make the system less onerous on entrepreneurship and small business. One conceptual idea – and I stress this is a hypothetical – might be to raise the income tax on top earners making over say $500K/yr (a shibboleth of the left) to eliminate the 7% sales tax businesses pay on utility bills. I’ll be returning to the matter of utilities again as it’s an important issue.

2. Repeal the $500 minimum corporation tax. Rhode Island shouldn’t add insult to injury by making a business that loses money pay a tax on top of it just for the privilege of existing. I know at least one person who killed off a side business just for this reason. To be sure it was a hobby, but hobbies sometimes germinate into actual full time businesses.

3. Waive permit and other fees for the first year for new businesses. So many startup businesses don’t even last a year. Why not wait until we see until there’s at least baseline viability before socking them with a bunch of fees? You could easily implement this by charging in arrears. Obviously you’d have to be careful to avoid burdening the system with people getting “just in case” permits such as creating tons of shell companies, but I think this can be managed.

4. Reform unemployment insurance. Benefits are too high and ideally Rhode Island should be closer to the national median. But this would be hard to achieve and a start at reform can be achieved without it. The focus here would be eliminating market-distorting cross-subsidies that favor frequent users of the system, and revisiting business successor rules that punish people for buying and saving failing or bankrupt businesses.

Regulations and Mandates

5. Reform temporary disability insurance (TDI). This is one that wasn’t on my radar until I heard Republican gubernatorial candidate Ken Block call for reform. But when I looked into it this appears to be an even bigger problem than he suggests. Rhode Island is one of only five states with mandatory TDI. The others are California, New York, New Jersey, and Hawaii, all states with fortress industries and such that make them most definitely not Rhode Island’s peer group. It has the second highest benefit levels. It has a state run monopoly system. It allows employees to double dip. And I believe Rhode Island’s program is one of only two along with California that has a temporary caregiver leave component. I’d completely repeal mandatory TDI. But again, reform of some sort should be possible without triggering political nuclear war. Eliminate the state run system and tell businesses to buy coverage from the marketplace. Eliminate double-dipping. Make temporary caregiver leave a one time only or one per decade type benefit instead of annual recurring one. Put a lifetime cap on weeks of benefits and beyond that claimants should utilize long term disability coverage. Again, whatever we think about the idea of this system, Rhode Island is a huge outlier here and has little leverage to lead the way on this.

6. Perform a post-Obamamcare health insurance mandate review. Rhode Island has more items of mandated insurance coverage than any other state. Coming from Illinois – a blue state mind you – I was stunned at how much individual health insurance costs in Rhode Island. Obamacare seems to have largely standardized coverage and I would suggest defaulting to its coverage guidelines. If Rhode Island has items that go beyond this, it should eliminate any where at least ten other states (including at least MA and CT) don’t already mandate it.

7. Pass a clean semi-monthly payroll act. Until last year, Rhode Island was the only state in America that required companies to pay their employees weekly. That was changed to enable bi-weekly/semi-monthly payroll, but only for businesses whose average pay is twice the minimum wage and can post a surety bond, get the written permission of any unions affected, and recertify with the state every four years. You know what I call that? Progress. That’s good news. But in keeping with the continuous improvement theme, the legislature should follow-up with a clean semi-monthly payroll bill.

8. Create a “most favored nation” regulatory policy with regards to Massachusetts and Connecticut. It’s hard to argue that neighboring states have different core values. So their regulatory systems should be considered prima facie adequate for Rhode Island. Unlike California, a big and rich state, businesses are not going to jump through hoops for the privilege of serving small and economically challenged Rhode Island. So to make it easy, I suggest harmonizing regulations with Massachusetts (and if possible Connecticut) to create a mini type of EU style common market effect. This could be implemented via a most favored nation policy saying that “If it’s legal in MA or CT, it’s legal in Rhode Island. If you’re licensed to do it in MA or CT, you’re licensed to do it in Rhode Island.” Rhode Island is really subscale to be running its own regulatory system anyway, so outsource it.

This doesn’t even scratch the surface of what’s needed on the regulatory front. Many of you probably saw the recent Thumbtack survey that ranked Rhode Island the worst state in the country for its small business climate, as rated by small businesses themselves. Metro Providence was ranked the second worst metro. Fixing this is actually much more critical than taxes in my view, but also harder as many of the worst regulations around land use and such are at the local level. So this is where local reformers should focus.

Utilities

When I spoke to the Rhode Island House of Representative earlier this year, the other speaker was a representative from CVS sharing his perspectives on what that company looks for in places to invest. One item he mentioned as important is utility costs. Hence my thought about utility taxes above. But beyond that, Rhode Island’s electric bills are among the highest in the country and gas prices are high too. There needs to be a focus on bringing those down. Lowering electric rates doesn’t deprive the treasury of much and actually saves money on government electricity purchases. Unfortunately, as someone pointed out to me, in Rhode Island it works just the opposite; because it doesn’t appear to be a tax, the legislature feels free to pass laws that send rates through the roof.

9. Kill Deepwater Wind by any means necessary. Deepwater Wind is a crony capitalism fiasco of epic proportions involving an offshore wind farm. Billed by some as the “next 38 Studios”, it’s actually even worse as the price tag will be hundreds of millions of dollars. IIRC, the increased cost to governments alone from purchasing inflated electricity will be $1.5 million a year. The environmentalists I know don’t even like the project. The only plus side to anybody other than cronies appears to be reduced electric rates on Block Island. Well, I may have cheaper electricity, but I don’t get to live on an amazing island. Nevertheless, if it’s important to bring those rates down, then direct subsidies would be cheaper.

10. Partner with other New England states on increasing gas pipeline capacity into New England. A while back City Lab ran a story talking about a new gas pipeline under the Hudson River into New York City. As you probably know, gas is dirt cheap right now because of plentiful supplies from fracking in places like Pennsylvania. But that doesn’t help if the gas can’t get there. The Northeast has been under-pipelined. But as you can see, New York City is seeing the infrastructure investment to bring this online. New England isn’t. Here’s the money chart showing the price spikes this produces:

I’m not sure why no new pipelines have come into New England, but I’d certainly make it my business to find out. By the way, some residents do heat their homes with natural gas. I did when I lived in the state. So beyond industrial customers, think about what that chart means to struggling Rhode Islanders’ winter heating bills.

Sadly, the state seems to be moving in the opposite direction as the legislature passed more laws this year that will at first glance raise rates still higher.

Infrastructure

11. Cut to Invest With a Major Infrastructure Bond. Bruce Katz at the Brookings Institution likes to talk about a principle called “cut to invest.” That means making cuts in current spending in order to invest in critical items like infrastructure. Rhode Island’s infrastructure is in rough shape so that approach is needed here. Interest rates are rock bottom right now so there’s no better time to borrow. As the Fed dials back on quantitative easing, the window may start closing on this. Rhode Island needs to identify cuts in ongoing spending sufficient to finance payment on a major infrastructure bond targeting roads, bridges, and schools. I’m not talking about adding any new road capacity here, just doing things like rehabbing or replacing the existing crumbling bridges and obsolete school buildings.

As the Sakonnet River Bridge debacle shows, this money is going to be spent one way or another. Better to do it now on the state’s terms instead of later when it will cost a whole lot more to, for example, fully replace decayed structures that could have been saved if they’d only been properly maintained.

Under no circumstances should Rhode Island issue a bond without the full necessary funding stream for repayment allocated up front.

12. Investigate shared startup/co-working facilities. Instead of paying companies to set up shop in Rhode Island, invest the sales effort into luring operators like TechShop to create locations in Rhode Island. These types of co-working facilities can reduce the cost of capital and risk of entrepreneurship. I’m not a big fan of government building these directly, but they are a key part of the startup infrastructure of a community these days.

Miscellaneous

13. Build more Quonsets. NYU economist Paul Romer has advocated for a “charter city” concept in developing countries along the lines of a charter school as a way to bypass dysfunction. Rhode Island already basically applied that concept at the former Quonset naval base. Quonset is everything Rhode Island is not. They’ve invested in first class infrastructure. They have a single zoning classification, business friendly performance-based development standards, pre-permitted sites, a single point of contact for approvals, and a 90 days to groundbreaking pledge. Port users even have a tax advantage in that they are exempt from the Army Corps of Engineers import duty because the state instead of the feds paid for the port improvements. The result: 9,000 jobs, including 3,500 created in just the last few years.

Why not replace this model elsewhere by partnering with towns to create more Quonsets? When I pitched this idea at a RIPEC event, an economist with Beacon Hill Institute in Boston wasn’t a big fan. He critiqued it on two basic points. One is that the businesses who located there probably would have been elsewhere in Rhode Island. The other was that the $10,000 a job in infrastructure investment was too high.

I think the first criticism is fair and must be true to some extent. Additionally, some of the jobs are directly port related and there isn’t another deepwater port handy that I’m aware of. However, there’s no hard data on this and my assumption would be that at least some of the non-port jobs must represent a net gain to the state. In any case, Quonset is the best thing going in the state right now, so why not give the model another chance? Also, keep in mind that a state like Tennessee paid $250,000+ per job for a VW plant. $10K/job – not in subsidies, but infrastructure – is small potatoes as these things go, particularly in state where the infrastructure is decrepit. I’m pretty sure if I told the legislature they could create middle class jobs at $10K a pop in infrastructure, they’d sign checks all day long.

At Quonset, the state is the developer. For new sites, I’d look to partner with a private developer, with a state authority as infrastructure partner and approval provider a la Quonset.

I won’t suggest this list is anywhere near where the state needs to be. It doesn’t address key issues as the local level like regulations that hobble building, or the corruption/cronyism issues. But hopefully this provides at least some tangible first steps that could get the state pointing in the direction it needs to go.

As with my guiding principles list, some of these items were originally suggested by other people.

Tuesday, June 24th, 2014

Alternative Energy For Liberia by Andrew Falk

[ I had lunch a few weeks back with Donald Cassell, who works on the Africa program at the Sagamore Institute. He’s Liberian and his focus is Liberia. He sent me some very interesting material on the country, including this piece on an alternative energy project there written by his colleague Andrew Falk. Please look at the original version for footnotes – Aaron. ]

President Ellen Johnson Sirleaf recently wrote an article in Foreign Policy in which she lamented that Liberia’s twenty-three year civil war left the country’s energy infrastructure “in shambles.” She observed that of Liberia’s 4.1 million citizens, only about one percent of urbanites – and almost no one living in rural settings has access to electricity.

President Sirleaf is not making up excuses when she cites the impact of the country’s civil war: in 1980, when the war began, Liberia was producing 852 million kilowatts of electricity, and using 792 million kilowatts. By 1991, production and consumption had fallen by about sixty-eight percent to 273 million kilowatts and 253 million kilowatts, respectively. By 2010, the most recent year for which data is available, production and consumption had only risen to 335 million kilowatts and 311 million kilowatts, respectively.

A startling analogy employed by President Sirleaf in the same article puts Liberia’s electrical woes into perspective: AT&T Stadium, the home of the Dallas Cowboys, uses more electricity than the total installed capacity of Liberia. While this analogy could be misleading as the Wall Street Journal noted, AT&T Stadium only consumes that amount of power for several hours a day on eight regular-season NFL games it is staggering to consider that AT&T Stadium’s ten megawatt electrical usage is more than three times the amount that Liberia can put into its national grid.

President Barack Obama visited Africa during the summer of 2013 and announced a new initiative, Power Africa, which is designed to work with six African countries, including Liberia, to increase electrical production and provide electrical access to twenty million new households and businesses.

In contrast to the large-scale programs proposed by President Obama and being planned by multinational corporations, several individuals and small organizations are already on the ground making a difference in Liberia. One such organization is the Liberian Energy Network (LEN), a nonprofit organization started by Richard Fahey, a retired environmental attorney from the United States. LEN imported two hundred solar lights in May 2013, and two more shipments are anticipated before the end of the year. LEN sells the lights through retail shops in Monrovia and through partner organizations such as Ganta Methodist Mission Hospital, Advanced Youth Project, and the Christ Network for Good. It charges only enough to cover its costs of manufacturing, shipment, and operating expenses. Several types of lights are available, from a small reading light to a much larger unit capable of lighting a hospital ward. A third model also has the ability to charge a cell phone.

Meanwhile, a Liberian construction company is seeking to address the country’s electrical shortage by building sustainable, off-the-grid homes. MenKaR Construction Company is in discussions with John Waters and Donald Cassell, Sagamore Institute Senior Fellows, to design and build housing units powered by lithium batteries that are recharged by solar power. The proposed units will be close to the University of Liberia in one of Monrovia’s suburbs.

Waters is an expert in alternative energy with a long history in battery design and development. He was one of the General Motors engineers who helped develop the EV1, one of the earliest successful electric vehicles. Since then, Waters has worked on battery research for Delphi, Segway, and Bright Automotive.

Waters has developed a battery that he calls a Universal Battery Module (UBM). The UBM has a ten-year life in the worst-case scenario where it would be completely drained of power every day, 300 days a year, and completely recharged. The battery is designed to provide 3,000 one hundred percent discharge cycles. If, for example, the battery were only drained halfway every day, its life could extend to twenty years.

The UBM can be used to power lights and cooking appliances in the home; to run water pumps for drinking, bathing, and washing; and to recharge cell phones. The UBMs are also designed to be compact and light enough that they may be removed from the home to power electric scooters, motorcycles, four-wheel devices, and small tractors. For example, one application in the active planning stages is powering motorized water carts in Nigeria, where Waters is working with an international company to provide battery-powered carts to replace those presently pushed by eighteen to twenty-two year old young men.

Waters has also integrated his UBMs into a design for off-the grid homes. In designing a concept called Light Village, Waters envisions an off-grid family using ten compact florescent lights (CFLs) in their house (to replace kerosene or candles). Each CFL requires ten watts for ten hours, which is one kilowatt hour (kWh) for 10 lights used on a daily basis, and throughout the week. The family may use five hundred watts for cooking for three hours a day (for three meals) for a cumulative total of 1.5 kWh. The same family could use five hundred watts for an hour to pump water (0.5 kWh). And they move one battery to their scooter, which they ride for at least twenty-five miles for transportation to work or the market, which would use another 2 kWh. All together, the family has used 5 kWh.

To meet this need, the family mounts a 1 kW solar panel on the roof of their home. With six hours of sun, they generate 6 kWh, which they can store in three 2kW batteries. The 6 kWh is more than the 5 kWh the family needs daily, but it could be either shared, saved, or used for other electrical needs. The solar energy used to meet the family’s needs is abundant, “free,” quiet, and produces no emissions.

One of the unique aspects of Waters’ model is the mobility of the battery. The battery’s mobility makes it possible to also have a battery station in the village where a station owner invests in solar panels. The residents of the village could come in every two days and swap batteries for a fee. This option would relieve most people from having to invest in and install solar panels for their homes. Expanding the model further, Waters is in discussions with large capital companies that would purchase the UBMs and lease electrons back to customers at lower cost than they spend daily on firewood, charcoal, kerosene, and candles.

In addition to the solar power and battery packs, Waters has worked with Architects and Sagamore Institute Senior Fellows, Scott Truex and Donald Cassell, to design the Light Village homes to collect rainwater on the roof, which is then used in the kitchen and in the toilet. The resulting brown water could be then flushed outside the house where it is filtered and could even provide natural fertilizer for the family’s micro garden. Waters hopes the western idea of complex, expensive, and centralized energy and sewage infrastructures will be a thing of the past.

While it will probably be many years before Liberia begins to generate and consume electricity at rates similar to cities in the West, thanks to organizations such as LEN and projects such as Waters’ Light Village, many Liberians could be enjoying the benefits of sustainable electricity much sooner.

Andrew Falk is a senior fellow with the Sagamore Institute. His research focuses primarily on environmental and energy issues.

Friday, June 20th, 2014

Disrupting the Disruptors

Jill Lepore’s attack on “disruption” and on Clayton Christensen’s “innovator’s dilemma” model of industry dynamics in the New Yorker kicked up quite a stir. Called “The Disruption Machine: What the gospel of innovation gets wrong,” Lehore lays out a multifaceted skeptical case against the notion of disruption. Her piece combines several different arguments together without clearly distinguishing them, but I identify four basic questions she attempts to answer:

1. Does disruptive innovation exist, at least as a model for understanding industries?
2. Can incumbents successfully respond to a disruptive innovation?
3. Can disruptive innovations be identified prospectively or only retrospectively?
4. Are disruptive innovations net beneficial to society?

I’ll start by observing that she twice references traditional print journalism incumbents as examples. One is the New York Times innovation strategy, which makes explicit reference to Christensen’s theory. The second is when she talks about the public interest rationale for the separation of business and editorial in the traditional news business, making reference to both the NYT and the New Yorker.

This explicit link to journalism, along with the general tone of offense that pervade the article, betrays something more than a professional interest in the topic. Indeed, she’s hardly a neutral observer as her paycheck in part comes from an industry that’s being disrupted (she’s also a Harvard professor). The impression I get once again is of someone in deep love with the culture and traditions of her trade, something I’ve noticed over and over again in the incredible resistance and even hostility newsrooms have shown over the last decade or so to change and innovation. There’s a reason that people who experience an involuntary rupture can often never get over it. There’s a reason, after all, the Israelites who saw the miracles in Egypt never got to enter the Promised Land.

This points to a legitimate add on to Christensen’s theory. He views the innovator’s dilemma as purely about logical business decisions. But he overlooks the cultural aspects. The culture of firms emerging from traditional business practices are resistant to change because legacy practices are part of the core value set, maybe only implicitly. I lived it. I started out after school doing IT consulting where we operated in an onsite, onshore model in a traditional “mountain moving” operating style. The switch to global delivery in response to upstarts from places like India disrupted that way of doing business. And while I enjoy aspects of global and remote site delivery and successful ran projects using the model, I never had the love for it that I did for the first one. I still have a nostalgia for the “good old days.” So I can relate myself.

In this sense I think we should see the piece as written by someone who is party to the phenomenon in question, and perhaps as an expression of some of her own personal angst on the topic.

With that let me attempt to address her questions.

1. Does disruptive innovation exist, at least as a model for understanding industries? Lepore says No, and that Christensen’s model is based on flawed case studies. I personally have some sympathy for this argument. She correctly notes that “disruptive innovation” is a sort of modern gloss on Schumpeter’s “creative destruction.” Certainly in the real world theoretical abstractions like this are seldom seen in a clean or pure form.

But there’s a long way between critiquing Christensen’s theory as a model of understanding firms and industries, and critiquing the idea of a disruptive innovation itself. All of us can take a look around and see the digital technology has radically disrupted the newspapers, the music industry, fixed line telephony, etc. It’s obvious. Disruptive innovation is trivial to see all around us.

2. Can incumbents successfully respond to disruptive innovations? Lepore says Yes and I agree. Clearly disruptive innovation is not a death sentence for a company. But what we see is that disruption often triggers an industry shakeout, and while often the top players survive and come through stronger, weaker players fail or consolidated away.

Consider the mainframe industry back in the day, with “IBM and the Seven Dwarves.” Minicomputers and PCs disrupted that old business. IBM is still alive and kicking – and even still making money off mainframes. Basically everybody else is out of the business or selling IBM clone stuff. Sperry and Burroughs, for example, merged to form Unisys. Unisys is still around as a company, but they are no longer a mainframe firm. They are now basically an IT services company. That’s a success story as far as it goes. Many of the other players are dead or completely flushed out of the industry.

We’re seeing the same thing in newspapers. The Wall Street Journal seems to be adapting. The New York Times is holding its own as well. It may well be that ten years from now the NYT and Journal are stronger than ever. We already see that the NYT is a national paper in the way that it never used to be, for example. But your local newspaper, now likely owned by a chain like Gannett, is already a zombie that’s probably not even worth reading today.

So just because some firms survive and even become more dominant, doesn’t mean a disruptive innovation doesn’t have profound industry effects.

3. Can disruptive innovations be identified prospectively or only retrospectively? Lepore cities Christensen’s investment fund failure here, and I’d have to agree that predicting the future is hard. Even the best venture capitalists are looking for the minority of grand slam investments and know most of their bets won’t really pan out. Just having a theory doesn’t necessarily mean you can profit from it as we know.

4. Are disruptive innovations net beneficial to society? Here’s where Lepore makes her most explicit defense of the present model of journalism, saying:

It’s readily apparent that, in a democracy, the important business interests of institutions like the press might at times conflict with what became known as the “public interest.” That’s why, a very long time ago, newspapers like the Times and magazines like this one established a wall of separation between the editorial side of affairs and the business side. (The metaphor is to the Jeffersonian wall between church and state.) “The wall dividing the newsroom and business side has served The Times well for decades,” according to the Times’ Innovation Report, “allowing one side to focus on readers and the other to focus on advertisers,” as if this had been, all along, simply a matter of office efficiency. But the notion of a wall should be abandoned, according to the report, because it has “hidden costs” that thwart innovation. Earlier this year, the Times tried to recruit, as its new head of audience development, Michael Wertheim, the former head of promotion at the disruptive media outfit Upworthy. Wertheim turned the Times job down, citing its wall as too big an obstacle to disruptive innovation.

Here I think Lepore mixed disruptive innovation as a theory of industrial change and disruptive innovation as a theory of value. The championing of “disruption” by the tech crowd obviously grates, as well it should. She sees that the thesis of investment for many tech firms is about mutilating existing industries and capturing all the value, heedless of what non-monetary values (or human costs) might result.

I think there’s something to this. I tend to take a Burkean view of institutions in which we have values that are invisibly embedded in them that are in a sense critical to the healthy functioning of our society, and we tamper with them at our peril. When we impose radical change rather than relying on organic evolution, the law of unintended consequences is sure to kick in at some point. Today’s Randian entrepreneurs are hardly the only ones who want radical change, however. Radical social reformers of various stripes have tried to radically remake societies (say Karl Marx or the French Revolutionaries) with similar disregard or even contempt for what would be lost.

Lepore actually makes this point implicitly when she links contemporary business school thinking to the decline of faith, saying, “Faith in disruption is the best illustration, and the worst case, of a larger historical transformation having to do with secularization, and what happens when the invisible hand replaces the hand of God as explanation and justification.”

She in a sense argues that we shouldn’t just equate change with progress. In that regard, I think of disruptive innovation as similar to the “paradigm shift” model from Thomas Kuhn’s The Structure of Scientific Revolutions. A paradigm shift is a move from something like Newtonian to Einsteinian physics. As a practitioner of the history and philosophy of science, Kuhn critiqued the notion that these paradigms shifts represented progress towards knowledge of the ultimate truths. In fact, a paradigm shift could easily result in a decline of explanatory power in some cases, a phenomenon known as “Kuhnian loss.” For Kuhn, scientific change wasn’t necessarily progress towards truth as such.

I think it is similar to evolution, an analog Lepore rejects because she believes disruptive innovation theory engages in circular logic. But evolution proceeds on a similar logic. I think her real critique is that she sees evolution as producing genuine progress while disruptive innovation is fake progress. But evolution, like disruptive innovation or paradigms, has no inherent concept of progress. Mankind is not a the apex of evolution compared to an amoeba simply because we came along later and are more complex. There’s no guarantee we will we not find homo sapiens “disrupted” at some point in favor of the proverbial cockroach or something.

So I agree there can be genuine loss, and self-interested tech advocates aside, I don’t even see disruptive innovation as promising progress on every dimension. It’s a theory of business.

The problem is that not only is there a sort of Kuhnian loss from innovation, as with paradigm shifts you can’t escape it by refusing to participate. A scientists who sticks with the old paradigm when the new is accepted ends up no longer in a sense a scientist, as normal science takes place within a paradigm, or shared set of assumptions and models about how the world works.

Similarly, I may like physical newspapers, but that doesn’t mean I’ll be able to keep reading one forever. The disruption that’s hitting that industry will likely make it impossible some day. The joy I get from print will be lost, even though I may get many benefits from digital, not least of which the potential to have a platform like this one. My firm couldn’t just keep doing IT systems they development the way it used to; it would have gone out of business. We are deprived of the choice to stay the same.

Prior to the 1970s, we used regulation to try to manage the process of destruction by innovation by in a sense outlawing it. Telephony has probably changed more from a consumer perspective since the 1984 AT&T breakup than it did in the entire period previous to that back to Alexander Graham Bell, for example. Are we better off or worse off? As a society, we’ve clearly embedded a deregulating principle into our approach. This prioritizes dynamism and change, and treats the losses as acceptable. One can debate whether this is the right principle or not. But let us not pretend that we don’t have trade-offs to make.

Sunday, February 16th, 2014

What Entrepreneurs Want

A new study from Endeavor Insight called “What Do the Best Entrepreneurs Want In a City?” has been making the rounds. They interviewed 150 founders of fast growing companies in America to determine what those founders valued in a place to start a company.

Their conclusions are probably not news to most. Most people started companies where they already live (i.e., they didn’t move somewhere to start one), the most important thing they wanted in the city was access to talent, and the second thing was access to customers and suppliers. The report highlights that taxes and regulations were not major considerations. Quality of life items were mentioned by many. The “vast majority” of founders were in metro areas of over one million people and they were described as “highly mobile as young adults.” Their very direct conclusion stated up front is: “We believe that the magic formula for attracting and retaining the best entrepreneurs is this: a great place to live plus a talented pool of potential employees, and excellent access to customers and suppliers.”

This got a lot of press because it supports the standard urbanist narrative. And while I think there’s significant value and truth here, it’s important to drill down to understand the limits. Since many others have already touted the headline findings, I’ll take care of the caveats.

First, the reason people gave for picking a city to live was most frequently having “personal connections” or “specific quality of life factors.” The report doesn’t break down who said what, so we don’t know the ratio of these or their overlap. It shouldn’t be any surprise that personal connections such as being born in a place, family, etc. play a dominant role in people’s decisions on where to live. As for quality of life, I’ve yet to visit a place where people don’t boast of it. Think about it, how many people live in a place they think sucks, even if they do have a connection there? Some, surely (say a child moving to a place he doesn’t want to live to care for an aging parent), but I suspect not many. I think it’s natural for people to brag about the quality of life in places where they live, so I wouldn’t read too much into this. Based on what the report actually says, personal history or connections could overwhelmingly account for location decisions, with quality of life mostly an overlapping secondary indicator.

The companies whose founders were interviewed weren’t specified. It was only said that they were on the Inc. 500, had an average of 100 employees and $20 million in revenue, and had revenue growth of 600%. In other words, these are predominantly early to mezzanine stage companies. Unsurprisingly, a big concern of new and smaller companies is finding customers and suppliers, as well as employees. Often these firms are not even profitable, so things like taxes are irrelevant. But no customer means no company. And small, rapidly growing firms can’t afford to carry a lot of deadweight employees. Traditional business climate items generally loom larger as companies mature and already have an established customer, supplier, and employee base.

It may be that these companies tended to stay located where they were founded when they reach maturity, but that doesn’t mean they grew their operations in that place. That’s why Silicon Valley has fewer jobs than it did back in 2000 even though its companies have thrived. Many of them have grown their jobs base in places like Salt Lake City and Austin.

Additionally, the survey says the companies represent dozens of sectors, but doesn’t give a lot of detail. However, “media” and “software” were mentioned. Also, the among those founders citing talent as a key location factor, “technical” talent was the most commonly mentioned.

This implies to me that tech/media startups loom large in this survey. If true, this would also explain the lack of concern around business climate items. These industries are among the most lightly regulated out there. There have even been specific legislative exemptions to keep the internet space clear of regulation and taxes (such as on internet retail). Most communities think tech startups are key to their future, so bend over backwards to cater to them. You don’t need complex permits to start a tech company.

This means the business climate for technology firms and startups can be very different from what is experienced by other businesses. For example, a recent Rhode Island PBS roundtable featured executives from Hasbro and Banneker industries lamenting the state’s attitude towards business while Allan Tear of tech accelerator Betaspring took a much more positive view. They are all probably right. Life’s probably great if you’re Betaspring, but not quite so good if your company’s name includes “Industries” in it. In short, the experience of tech/media startups is relevant mostly only to other such startups.

Blogger Alon Levy once made a provocative observation that one reason India specialized in software and BPO industries was because those were the only ones that are viable in a country without much infrastructure. The China manufacturing strategy would be a non-starter there. You actually don’t need to invest much in real quality of life items like even universal sanitation or paved roads to have a tech cluster, as many cities in India prove. As long as you have an internet connection to other places you can sell your services to, you’re in business. (Did I mention that Indian outsourcing firms had a massive tax holiday on export revenues for an extended period of time?)

So media/tech are the companies naturally less likely to talk about old school type business climate items, especially when younger. But it’s worth pointing out what mature hypergrowth tech companies have tended to do at some point, namely put their European headquarters on the Emerald Isle where they can take advantage of the “Double Irish” and similar such techniques to all but zero out their tax bill.

I mention this because that the end of the report the authors cite a couple case studies to try to demonstrate the irrelevancy of taxes. Yet this study was in part funded by the Omidyar Network, the philanthropy of eBay founder Pierre Omidyar. Where is eBay’s European Headquarters? Dublin, Ireland. Think that’s because the CEO likes to drink Guinness?

I don’t want to suggest that talent is irrelevant or that taxes mean everything. I’ve clearly pounded the table on the opposite. But just because this survey flatters our conceits in such matters doesn’t mean we should take it to the bank. I see it useful information, but limited in scope to only a narrow segment of firms. I just don’t think this study justified the forcefully stated conclusion

Also, regarding the mobility of youth, this was defined from a Kauffman Foundation study that noted 75% of entrepreneurs started their company in a different city from where they received their final university degree. This is unsurprising and irrelevant. Colleges can be understood as “education factories” whose nature is to produce graduates. Much as actual factories export their widgets, colleges export graduates. This is especially true since many great schools are in proverbial “college towns.” I went to school at Indiana University which is in Bloomington. Bloomington is an awesome town, but how many of the 30,000+ students at IU can a town that’s otherwise only about 50,000 people absorb? This is a not very useful statistic of mobility in my view.

Lastly, the notion that regions of one million people or more are economically advantaged seems very right to me. In this regard, their survey foots to everything I’ve seen and written about. These cities have thicker labor markets, more talent, unique infrastructure (e.g., major airports), bigger local markets, more specialized suppliers, and more entrepreneurial ferment. I’ve long said that there’s a “minimum viable scale” of around 1-1.5 million people in a region you need to have to really succeed in the modern economy. Smaller places generally only have thrived to the extent that they’ve got a unique amenity like Bloomington’s Big Ten university. Since I took a critical eye towards this survey’s actual support for its findings, I thought I’d end on one where I think they hit it.

The Urban State of Mind: Meditations on the City is the first Urbanophile e-book, featuring provocative essays on the key issues facing our cities, including innovation, talent attraction and brain drain, global soft power, sustainability, economic development, and localism. Included are 28 carefully curated essays out of nearly 1,200 posts in the first seven years of the Urbanophile, plus 9 original pieces. It's great for anyone who cares about our cities.

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Aaron M. Renn is an opinion-leading urban analyst, consultant, speaker, and writer on a mission to help America’s cities thrive and find sustainable success in the 21st century.

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