The Blog of Burgher Jon

Mike Madison asked whether it’s possible for local startups to get local funding and remain local.  He points out that there are many people who still contend that local investors are too conservative.  This stringency of funding puts pressure on companies to move to the funding.   Mike points out that there is another crowd that claims that there is money for quality startups.  Which of these camps is correct?  Who knows, probably a mix of the two.  To my (untrained) eye there is plenty of room for improvement in both the startups and the capital available to them.  It’s one of the reasons I built this blog.

While we’re on the subject of businesses leaving Pittsburgh, what the hell is a “business-recruitment office”?  Jim Russell quotes the Atlanta Journal Constitution as saying that Georgia has “business-recruitment offices” in Pennsylvania and California.  It disturbs me a little that states are coming after our businesses.  I did a Google search and could not locate whether PA engages in this activity.  As I pointed out here, I don’t think it’s the best idea to “go after” established businesses, but it concerns me that other states are coming after ours.

While I use sauerkraut as a way to describe my Sunday hodge-podge posts, I don’t actually like to eat the stuff.  I do however, LOVE to eat kielbasa.  In fact, I just had some great kielbasa yesterday, over Mrs. T’s Pirogies.  Anyways, on to the good stuff.

As I go through the week, I use twitter to send out little updates and links.  I realize that I do this quite a bit and that not all of you have Twitter, so with that in mind I’d like to take Sunday to do sort of a week in review.  I’ve selected the most useful of my tweets from the last week and placed them in to the categories that I use in this blog.

Business

• Interesting stuff from @FredWilson Nature vs Nurture for Entrepreneurs. http://tinyurl.com/yhqyas2

Local Politics

• Great Idea by PUMP to host a forum on running for committee. Too much neglect here. http://tinyurl.com/ykejtyy
• #whereisluke he should be allowed to take a vacation he’s mayor not president. Though being a dick shouldn’t be excused.
• Join Pittsburgh Technology Council’s efforts against the Computer Services Tax http://tinyurl.com/y8lfvst
• Why was Jason Altmire so Hostile When asked to Comment on Buchanan’s Decision to Run? http://tinyurl.com/ycgzsqx

Personal Technology

• Gowalla to release Android App! http://tinyurl.com/yj4xjph
• Ha! PMSBuddy.com tracks (for men) when the women in their life will be… http://tinyurl.com/ykwvfnr

Pittsburgh

• Urban Back Country Skiing in Downtown Pittsburgh via @janepitthttp://tinyurl.com/yhkhvdz
• I wonder why Nakama got $2M in stimulus backed loans? Did they expand? http://tinyurl.com/y86lfbn
• Haha, Microsoft Maps, never tore down 3 Rivers, so it appears IN PNC Park on their map. http://tinyurl.com/ylzrpub

Sports

• You have to watch the colbert interview to the end. Or skip to it.http://tinyurl.com/yfjeusq
• Hanrahan to miss first part of season! Seriously?http://tinyurl.com/ykhj9nc
• Today = Pitchers, Catchers and BASEBALL!
• This just in: America Kicks Ass http://tinyurl.com/yzmf2s3
• The only native Pittsburgher in the olympics, Ryan Malone, scores in the first game! http://tinyurl.com/ylmpppe

Startups

• RT @Fin4Founders: “The venture world is the R&D for the United States, it’s not a good idea to shrink it.” #FoF

Tech News

• RT @msuster “Cloud Computing made sense for our desktop applications it’s … going to make sense for [mobile]  http://tinyurl.com/ykfpj9c
• Twitter just passed 140 employees. Any future employees will have to be shrunk by bit.ly. http://tinyurl.com/s7jff
• Brian Solis – Social Media Optimization is the new SEO  http://tinyurl.com/yckvypb
• Where will profits come from in Geotagging. @cdixon takes a shot.  http://tinyurl.com/s7jff

A few months ago (actually back in April) Fred Wilson took a look at how much money can be in the VC world and still allow for profitability.  He ended up concluding, “I think ‘back to the future’ is the answer to most of the venture capital asset class problems. Less capital in the asset class, smaller fund sizes, smaller partnerships, smaller deals, and smaller exits.”  Of course he believes that though, he’s an established VC.  The fewer VCs he competes with, the higher his margins and the better his business.

Yesterday, while delivering the Keynote address at the Future of Funding event in San Mateo, Chris Dixon commented (as quoted by @Fin4Founders on Twitter), “The venture world is the R&D for the United States, it’s not a good idea to shrink it.”  Of course he believes that though, he’s an established entrepreneur.  The more VC money that exists, the easier it is to get his company funded, the more competition there is to fund it and the better valuation he gets.

The question is, where’s the middle ground?  Is there room for growth in the venture world?  Will it shrink?  I’m not involved in the VC world enough to responsibly speculate on the answers to the questions of what will happen.  I can tell you what I think should happen. 

Having a little too much money in the venture world is a good thing.  It means there are too many “buyers” of good ideas.  Hopefully that leads to a market correction in the form of more and better “sellers” of good ideas to fulfill that demand.

The Heinz Endowments, specifically the Innovation Economy Program, recently commissioned a report on Growing Pennsylvania’s High-Tech Economy.  It took me a while to make it through the whole report (I don’t have tons of free time), but I wanted to share some of it and comment on it briefly.  I’ll do this in two parts.  Yesterday I discussed the findings and how those findings lead to goals for creating effective policies.  Tomorrow I’ll discuss the recommendations that the report included.    The disclaimer, of course, is that I come from the computer/IT side of the “high-tech” world.  The report gives more thought to medical, engineering and scientific jobs then I can.

Here are the recommendations that make up the executive summary of the report (each point has been summarized by me):

1. Do no more harm to the tax code.  Specifically, do not give breaks to big companies to lure them in to the state.
2. Continue to integrate the workforce development plan (what training and degrees get incentives) and the economic development plan (what kind of industries are we trying to attract?)
3. Continue to build on occupational cluster advantages.  For example the bio-medical haven that is Pittsburgh.
4. Grow your own (existing) employers rather than recruiting employers from other states.
5. Make the “Investment Tracker” (which the state uses to publically track how effective programs have been) part of the program.
6. Create a unified development budget which would include all economic development programs.  This would be instead of seeing each development program individually for a vote.
7. Consider more support for small, local and young businesses.  The report points out that many times the incentives put in to “lure” jobs from other states actually place local companies at a disadvantage.
8. When considering job flight, focus on federal trade policy.

My primary concern with this list is the lack of focus on entrepreneurship.  Though points 3 and 6 allude to an entrepreneurial community, they don’t do so firmly enough.  Any report of this nature needs to be focused not only on nurturing small businesses but creating new ones.  Yes, the model of nurturing the internet mom and pop (say a small IT consulting company) is great and sustainable.  It shouldn’t be done at the expense of looking for the next FreeMarkets.

I want to address number 8 as well.  I completely disagree with it.  I have spoken before in this space about how limiting outsourcing (or any other way to spread the efficient/effective use of technology) will not solve any problems.

I’m also tempted to disagree with number 5.  An “investment tracker” for economic development programs is VERY tricky.  The numbers are going to be debated no matter what the state does, no sense in bothering with building them in the first place.  Need proof?  Listen to how different the statistics on Obama’s job plan sound on Fox News and MSNBC.

Number 6 sounds like a great idea to me.  It would help representatives see the cost of various programs next to each other.  This might allow them to realize the error of their ways when they do things like cut funding for The Technology Collaborative.  Relative to other, less effective, job creation programs it was relatively cheap.

Numbers 2 and 4 work towards the “build vs buy” decision.  As was discussed yesterday with the findings, all the evidence suggests it is better to build jobs then to buy them from a company who wants a big tax break in exchange for opening up a new plant.

The Heinz Endowments, specifically the Innovation Economy Program, recently commissioned a report on Growing Pennsylvania’s High-Tech Economy.  It took me a while to make it through the whole report (I don’t have tons of free time), but I wanted to share some of it and comment on it briefly.  I’ll do this in two parts.  Today I’ll discuss the findings and how those findings lead to goals for creating effective policies.  Tomorrow I’ll discuss the recommendations that the report included.    The disclaimer, of course, is that I come from the computer/IT side of the “high-tech” world.  The report gives more thought to medical, engineering and scientific jobs then I can.

Here are the findings that make up the executive summary of the report (each point has been summarized by me):

1. Pennsylvania is in the middle of the pack of comparable states on high-tech tax rates.
2. High-tech job creation and loss is driven by events that happen in states rather than companies moving between states.
3. Globalization is responsible for 30 times more high-tech job shifting then domestic out-migration.
4. High-tech companies that are more mature resemble “old economy” companies when negotiating breaks.
5. Pennsylvania has an advantage over comparable states in the amount of existing skill.  These skills however are in medical and engineering rather than math and computers.
6. Tax reductions and exemptions for specific firms “crude tools for economic development.”
7. Pennsylvania has a more balanced approach to high-tech jobs than many states.  The balance comes from not just tax breaks but programs to foster early-stage companies and other programs.

These are the facts and so often we make policies that completely ignore them.  I want to call out numbers 2, 3 and 4.  I think points 2, 3 and 4 together can be used to advocate a strategy of build over buy.  What I mean by this is that Pennsylvania as a whole (and Pittsburgh as a city) should not be attempting to offer Google a bigger tax cut then North Carolina does, they should be trying to make sure the next Google is a Pittsburgh company.  Once a company has reached the size of Google any truly location-independent factory, lab or datacenter that they want to build becomes a counterproductive bidding war between states.  Politicians that want to take credit for creating 600 high-tech jobs offer too much and the city or state loses money.

The better alternative is to build a technology and entrepreneurial community.  Then worry about having favorable enough tax structures to convince people to stay.  Specifically, policy should be organized around creating a community that has the following outcomes:

1. Creates an imbalance of skill so strong that established high-tech companies feel the need to setup shop in the city without getting gigantic tax breaks.   We’re already making some progress on this because of CMU.  For example, the Google Office.
2. Becomes an incubator for the kinds of ideas that launch companies.  This involves getting the entrepreneurial community in Pittsburgh beyond the “tipping point” that Silicon Valley and New York have already passed.  Luring a company to Pittsburgh can be a very costly process.  As number 4 above suggests, this is sometimes more costly than it’s worth.  It is much better to find ways to plant seeds then to find ways to move full-grown trees.  Great forests are grown, not bought.
3. Encourage companies to stay in Pittsburgh.  This is perhaps the biggest correction PA and Pittsburgh need to address.   CMU economist Robert Strauss points out (in a Trib article released about the Heinz study) that the unfair/unusual property taxes and the state capital and franchise taxes (which taxes companies that aren’t making profits), make it difficult for companies to stay in PA.  In fact Dr. Strauss is quoted as saying some companies “are told by their venture capitalists to get out of Pennsylvania.”

Tomorrow I’ll look at the recommendations that the Heinz report contains.  I’ll be looking for them to address these three outcomes.