Today I read a story in the Wall Street journal about the changes occurring  in Boise ID due to influx of population (Boise ID feels the growing pains WSJ April 15, 2018 ) .  Why the influx of people to this rural western state capital?  The same things that have kept residents in Boise for years apparently…beautiful scenery, small town feel, great recreational amenities, affordable housing, low cost of doing business…wait, when did this story become an economic development marketing piece? This article starts out sounding like it was written by the city’s economic development team, even including a quote from a CEO who relocated his company from Redwood City, CA (N. Silicon Valley)  and doubled the number of employees after the move. Later in the piece you read about “…low crime rate, affordability and scenery have attracted Californians especially.”  

And then comes this: 

“But…as Idaho and (Boise) have boomed, ...is struggling to cope with byproducts of its success: soaring housing prices, labor shortages and worsening traffic.” 

I do not claim to know what Boise’s leaders envisioned as they crafted and executed the strategies that have lead the community to this moment.  I do know that from an economic development perspective the growth in jobs and companies is EXACTLY what economic developers want for their communities.

It is here we must say hello to “The Law of Unintended Consequences”  (The Encyclopedia of Economics ) or “LUC”as I will call it. While primarily ascribed to impacts caused by government regulation,  LUC is also used in terms of policy in general.  American Sociologist Robert Merton identified five sources of unintended consequences (The Unanticipated Consequences of Purposive Social Action, 1936).  One source is truly applicable here, “Imperious Immediacy of Interest” where:

“…the actor’s paramount concern…excludes the consideration of further or other consequences of the same act….and precisely because a particular action is not carried out in a psychological or social vacuum, its effects will ramify into other spheres of value and interest.”

In other words, we strive for more jobs, more companies and more people without concerning ourselves with how those changes will truly and fully impact our community.  [When was the last time you heard that type of discussion in a City Council meeting on economic development that did not start with someone in the NIMBY section of the audience!]

Create a community where people want to live and there will be impacts caused as people move there! Increased housing demand will lead to rising housing prices (it is called supply and demand). More people means increased traffic, increased needs for water and waste disposal, etc.  New construction means the look/feel of a place will change and not necessarily for the better. Sure there may be some better paying jobs, but at what cost? Amazon changed Seattle forever (When Amazon Comes to Town - Politico, Oct 17, 2017 ~ housing costs, homelessness, traffic, ex-urban sprawl ~ are you HQ2 finalists paying attention?!). Silicon Valley’s livability woes are well documented, despite its being the global hub of innovation.  Austin, TX; Greenville, SC; Denver and Colorado Springs, CO; Sioux Fall; SD are further examples of LUC resulting from failing to truly assess the burdens accompanying success. The question economic developers and community leaders need to ask themselves is this:

“If we succeed, how will our community, and our way of life, truly look?”  

With all the strategic planning and visioning I have seen in my long career I have yet to see this question asked and answered with eyes truly open, looking for what might not be easy to accept. If asked, it is always glossed over by phrases like “better paying jobs”, “more revenues for schools and parks”, or “our kids will not have to move away anymore”.  One phrase I heard while in a planning session on an Amazon HQ2 proposal was “whoever gets this, it changes who they are”. The question is, will it be for better or worse?

Perhaps economist Frederic Bastiat has the best advice for us in economic development when he said:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen. ~ Frederic Bastiat, “What is Seen and What Is Not Seen” 1850.

My last blog post on January 30 introduced the topic of Why Silicon Valley firms are not leaving the pricey center of the tech universe for less costly areas…as your community may be pitching.  I pointed out the first reason, that being “Cost reduction doesn’t matter”.  Today I conclude with two more reasons that pitching a lower cost environment is of little to no draw to the startup community.

VC funding is Abundant.  There is a ever increasing flow of VC funding out there. In its Q3 Venture Monitor report, Pitchbook and the National Venture Capital Association stated that 2017 was on pace to be the highest year of VC dollars invested in the last ten years. And this was just for US VC funds.  The report goes on to state that the number of deals done was on track to be the lowest since 2012 as VC funds look to invest more dollars but into fewer companies. The reason is called the Unicorn effect as funds are seeking to lock up the next $1B startup valuation before its acquired/goes public.  

At a Keiretsu Forum event in Mountain View last spring, VC fund representatives grilled startups about potential competitors, status of prototype development, customer adoption scenarios but not one mention of locational cost structure impacts on operations.  This has been the case in every VC/pitch event I have attended in Silicon Valley over the past 2+ years.  VC money does not appear to care about locational costs, thus there is little incentive to look at cutting costs in this area.

Startup Exit Strategy. This may be most telling when it comes to no interest in relocating. The exit strategy of most startups is acquisition. In January 2017, CNBC stated that 80% of startups go the acquisition route versus IPO. If you are being purchased, your product is more important that your locational cost structure. Period.  Why concern ourselves with where we are if we are looking to be bought out? Let the buyer worry about that issue!

Well that leaves 20% of startups going IPO you say.  Isn’t that a market opportunity?  Yes and no.  Just getting to IPO is no assurance of a “viable” locational prospect.  Just check out Blue Apron and its post IPO travails.  And if an IPO happens, you bring in a whole other group of investors seeking to maximize shareholder value.  But that is another blog post for another day!

I know some of you are saying “hey I have seen stories of startups moving to lower their cost!”  Yes, there are isolated examples of startups leaving SV/San Francisco for cost reasons. SupportPay moved to Sacramento in 2016;  Business Apps moved to La Jolla in 2016 (which is somewhat less costly than the Bay Area). But on the whole, mass company exodus due to cost factors is simply not happening and there are no signs of this changing anytime soon.

The simple message I have is this: Stop trying to recruit startups out of the Silicon Valley…that energy would be better served working with the startups already in your community, working out of the co-working or innovation hubs in your area.  Even if their exit is a buy out, at least they are already in your community and retaining that talent and expertise keeps that buy out reward at work in your local economy!  Especially if they become a serial entrepreneur.

I live in the Sacramento region where  a major effort is underway to recruit companies out of the high cost Silicon Valley to  lower cost, fill-in the blank communities.  While this has been going on for a several years, less than a handful of companies have actually moved by my count.  Similar efforts are being employed by other communities looking to bring innovation and the potential next Amazon to their towns,  all with similarly dismal results. This begs the question: Why aren’t startups jumping at the chance to come to a lower cost environment?  We hear a non-stop stream of crazy Silicon Valley cost issues from high housing cost to ridiculous commercial and industrial space rent rates and yet there is no mass exodus.  Why aren’t startups leaving in droves given this costly environment?

I have spent the better part of the past two years meeting with Silicon Valley based startups, accelerators and innovation hub operators, and investors and three reasons for a lack of interest in startup relocation have become clear to me:

1. Cost reduction is not important
2. Capital is abundant and chasing yield regardless
3. Exit strategy

Cost Reduction ~ Not Important. The recruitment point I see promoted THE MOST is cost reduction.  This makes total sense in response to the ever recurring Silicon Valley cost story.  Savvy communities often phrase it in VC terms like “Come and lower your burn rate”. Seems logical right? Business seeks a lower cost environment. This is a fundamental in an economic development recruitment pitch to industry, “we have a cost advantage”.  But the lower cost proposition is flawed when it comes to startups funded by Angels & VCs.  

One core tenant of the startup world is “fail fast”; finding out if this product, app or tech is or is not viable sooner rather than later. Eric Reis author of The Lean Startup; serial entrepreneur and founder of  Stanford’s LeanLaunch Pad Steve Blank; and Brad Feld, author of “Startup Communities” are some better known tech influencers who promote the concept of fail fast.  Brad Feld phrases this as

“..the notion of continually trying new things, measuring the results, and either modifying the approach or doubling down, depending on the outcome”

Startup Communities, page 100

And an even more telling viewpoint from Eric Reis

What if we found ourselves building something that nobody wanted? In that case what did it matter if we did it on time and on budget?

Eric Reis,  The Lean Startup, page 37

Further impacting the issue is the conflict within many VC funds in terms of their investing. Aaron Harris, a partner at Y Combinator, a major accelerator in Silicon Valley stated that VC funds have “misaligned incentives” when it comes to the matter of burn rate. (Y Comb blog.Nov. 21, 2016 ) VC’s know that, while returns comes from a handful of their investments, there must be significant time invested in startups to determine potential success.  On the other side of the ledger is the pressure for the fund to produce returns quickly so the VC funds can raise more funds in the future.  In addition, many VC funds “make more money off management fees than than they do from investing well”. The result is that these two competing incentives:

“…create a situation in which it is better for a VC firm to push a company to demonstrate success or failure quickly…

Aaron Harris, Y Comb Blog

Thus, startups and their investors are focused on the product and whether that product will succeed in the marketplace.  Burn rate, particularly when it comes to location related costs, is simply NOT part of the equation…at least not yet.

In my next post, we will looking into Capital Abundance and the chilling effect it has on startups moving out.  Stay tuned!

Years ago during radio’s “Golden Age” there was a show called "The Bickerson’s”  (you can find it on Audible or You Tube) that starred Don Ameche (John) and Frances Langford (Blanche) as a middle-aged married couple arguing their way through daily life. At least once in every episode, either John or Blanche would say to the other the show’s noted catch phrase “You say it but you won’t do it!”. As I look at the state of economic development today, I find this phrase particularly truthful of one alleged pillar of many cities/regions strategies…that of business retention. 

“Economic development research shows that retaining and growing early-stage and existing businesses is the most effective way of supporting entrepreneurs and economic growth.” SOURCE: breguru.com

Practically every community strategic plan makes extensive mention of the importance, even the pre-eminence, of business retention as opposed to business attraction/recruitment. Yet despite several references to working with existing businesses, I more often hear Blanche or John exclaiming “You say it but you won’t do it!” when it comes to real retention activity. 

I have found this to be the case in dozens of communities and EDC’s I have met through speaking and teaching engagements. Lots of words on paper, statements on websites or promotional materials, but when you ask what staff is actually doing day in and day out I hear “We were going to do such and such…” or “the Chamber was supposed to set up…” and the very common “there just isn’t a lot of time left to do that and my Council (insert any stakeholder group) is all about recruitment”. If economic growth in your community is a priority and retention IS “the most effective way of supporting…economic growth” than should it not be job #1? 

In the second half of my nearly 40 year career in the field, business retention and expansion has been a passion of mine. In 2018, I hope to reignite that passion in my economic development colleagues through the work of my firm, A2B Consulting Group, as well as me personally. I am striving to raise interest in recapturing business retention as THE cornerstone of economic development, not just in words but in action. In future posts, I will highlight communities that are excelling in business retention efforts, along with sharing some of my thoughts on business retention fundamentals.  Please feel free to recommend your community for consideration in future posts by contacting me through our website, A2Bconsultinggroup.com.  

Let’s make 2018 the year we, as economic developers, get back to our roots of helping our communities establish strong economic foundations through the businesses that already call our communities home.

The above article from today's Silicon Valley Business Journal discusses Facebook's deal with the City of Menlo Park, CA regarding its plans to expand its presence with an additional 960,000 square feet of office space and an additional 6,500 jobs.

Just my thoughts on a BETTER  option for Facebook: Put 50% of the 960,000 sq. ft. of office space and 3,200 of the new jobs in San Joaquin County! Plenty of lower cost space options; affordable housing ALREADY AVAILABLE and a talented workforce with the skills needed for those 3,200 positions!

Yes, Menlo Park needs more affordable housing and cheers to Facebook for making an effort to address one of the critical problems facing the Bay Area. But the contributions Facebook is making in this transaction will NOT move the needle in any meaningful way! For example: Facebook will provide $1M to a "Housing Preservation fund to identify and purchase housing...".  This contribution will buy 60% of a house in Menlo Park today (Per Trulia median sales price ~ 3bd home in Menlo Park is $1.6M!). 

Facebook plans to build 1,500 homes in the City and subsidize 15% of them to make them affordable.  Subsidizing only 225 homes (15% of 1,500) to be built in the future will hardly help the majority of the additional 6,500 folks Facebook is bringing in…unless Facebook plans to pay them about $450,000 per year to qualify for a standard 30-yr mortgage in order to afford that median $1.6M price tag. Oh wait, that is the 2016 value, what will that value be when Facebook finally get those homes built, and will these folks have the needed 20% downpayment ($320,000 for $1.6M today)?

Subsidizing rent on 22 units at 777 Hamilton (a self described luxury apartment complex) for $435K per year works out to about $19,700 per unit per year, or $1,600 per month. Hamilton is still in construction, but according to Apartments.com, the lowest rental rate at Hamilton is $3,200 per month. This 50% subsidy on the lowest price units is helpful, but still only a "band-aid" for these 22 “community serving professions”.  They will still have to move out of Menlo Park when they want to buy a home (see above)…and probably end up in places like San Joaquin County! Chances are when they get to San Joaquin they will be able to secure a job in their field and avoid the nightmare commute back into the Peninsula, so Menlo Park ends up losing these community serving folks anyway; AND the underlying problem of lack of affordability is still not addressed.  Facebook is paying the City's full affordable housing impact fee of $6.3M. [However it is interesting to note that when the Hamilton project was approved by the City back in 2015, there was no affordability restrictions put in place for the project.]  Perhaps some of these funds will be used for more of the 1,500 Facebook "to be built" homes?

Call me crazy, but perhaps if Facebook and other tech firms had spread their offices and workforce around the region (like in San Joaquin County), maybe there would not be such a housing problem in Menlo Park?

Again, at least Facebook is making an effort…but the better play is for Facebook and other expanding Silicon Valley based firms to look outside the Bay Area at places like San Joaquin County for expansion of operations. You do not have to make the problems of housing and congestion worse and still be part of Greater Silicon Valley(greatersiliconvalley.com )!

Again, just my thoughts...

From my client the San Joaquin Partnership:
Spec building critical to future San Joaquin USA growth

The San Joaquin Partnership has made, over the past couple of years, community presentations to keep staff decision makers and elected leaders up to date on the results of our "attraction of investment" marketing program that creates and retains jobs. Development of empty spec buildings is critical to our communities' growth in jobs. Why? Empty spec buildings mean economic opportunity and shows the prospective new employer or existing growth employer that the community is prepared and ready for growth. This critical part of attracting and retaining manufacturing and commercial business investment that grows San Joaquin's wages has been a hallmark of the San Joaquin Partnership's marketing program.

A unique willingness of landowners, developers, brokers and community development staff to work together to take multi-million dollar risks in development of modern industrial buildings in anticipation of selling or leasing to a new employer is a competitive advantage.
Without a stock of ready to use spec buildings in the market to attract jobs, the prospects just drive by and look for another nearby community that is ready for growth.

Currently three vacant spec buildings over 250,000 square feet are available and another 12 are planned or under construction in San Joaquin communities. Compare that to only one new spec building under development in Stanislaus County.

Available buildings are up in Lathrop, Lodi, Stockton and Tracy. Planned buildings include a 550,000 square foot in Centerpoint in Manteca. 
As the East Bay and Silicon Valley continue to build out available industrial zoned sites, our communities' willingness to plan, quickly permit and team to market spec buildings will continue to be essential for the success of attracting and retaining new jobs and wages