Entrepreneurial Businesses Drive Job Growth, says Harvard

Politicians are too likely to guess wrong about which industries are worth attracting. With job growth worrying politicians, Toronto City Hall may be tempted to chase big companies to take a tax break and set up shop.
"That's a misguided approach," says Ed Glaeser and Bill Kerr, Harvard.
Job growth and the big economic development coming from these new work roles is now proven to come from the successful incubation of "small, entrepreneurial employees--not a few big companies." Even adjusting for variables such as tax or industry, Glaeser and Kerr say, "the relationship between small firms and job growth rate stands."
Industries with smaller firms and more start-ups had faster job growth than an industry an industry in the city without a cluster of start-ups. So a gnat like cloud of small companies buzzing around larger companies will be far better suited to job growth.
According to Glaeser and Kerr, apparently large companies generate less job growth than these "gnat" sized businesses. Also, once a city establishes itself as entrepreneurial, it tends to be self perpetuating.
So Toronto needs to market itself as a City for Entrepreneurs.
A big thank you to The Globe & Mail for organizing a 6 Mayor Candidate Town hall on what to do for business.
Give your views on Facebook to:
Sarah Thomson
Rocco Rossi

4 Reasons Governments want to help Business

Business owners will be able to attend a town hall on how Toronto can help business. Thanks to the Globe & Mail for sponsoring the Sept 9th discussion with the 6 mayor candidates.

The economy has changed business as usual approach by government from city to country levels and encouraging a return to government involvement from puppet master to financial supporters of business. 

Four main forces are driving this revival of industrial policy. 

First is the weak state of the world economy. Governments are under pressure to reduce unemployment and stimulate growth: support for chosen industries is a way of saving jobs and helping local firms fight foreign competitors. 

Second, some countries, such as America and Britain, want to rebalance their economies away from finance and property. Along with older manufacturing, clean technology is emerging as a favourite direction. Nearly every large economy has plans to win global market share and create green jobs.

Third, emergency use of industrial-policy tools leads to demands for more. Mr Obama has responded to complaints that only big companies such as General Motors and AIG, an insurer, have enjoyed the state’s largesse by setting up a $30 billion small-business lending fund. 

Fourth, rich countries are responding to the apparently successful policies of fast-growing economies, notably China and South Korea.

Industrial policy remains controversial. Defined as the attempt by government to promote the growth of particular industrial sectors and companies, there have been successes, but also many expensive failures. Policy may be designed to support or restructure old, struggling sectors, such as steel or textiles, or to try to construct new industries, such as robotics or nanotechnology. 

Does Government Involvement in Business Help or Hinder?

Toronto's Mayor candidates will talk to entrepreneurs about how the City can help. I have been asking business owners about their thoughts. These owners tend to run companies that are making a decent cash and the majority say,  "Simplify paperwork, taxes, hiring and firing rules and stay out of the way." They do not reach out for government programs like SREDS and find these annoying. Lawyers, who make a good living from explaining the difficult rules, may not like these ideas. I have also noticed that the companies that look for help from the government are often the ones who should not be getting a subsidy, while the stronger ones do not reach out for programs.

So, does Government involvement help or hinder business development? Many governments are now looking at industrial policy. Justin Lin’s book is well worth reading on the topic. He tries to sort out good industrial policy from bad. 

When does state intervention lead to structural upgrading, a la East Asia, and when does it merely generate a bunch of uncompetitive companies being kept on artificial life support by state subsidies, as sometimes happened elsewhere? His conclusion is that the state should not depart too far from a country’s comparative advantage, but consciously push it towards upgrading by imitating neighbours that are similar, but have travelled further along the upgrading path – basically the East Asian ‘flying geese’ model. 
Think of it as the state pulling a country along by a piece of elastic – pull too little and nothing happens, pull too hard and the elastic snaps. 
For a review of his paper, and Justin’s response in a guest blogpost, visit Oxfam’s From Poverty to Power blog onhttp://www.oxfamblogs.org/fp2p/?p=2982.

A useful industry that will probably become more useful as it becomes less grandiose

Less Pomp and Circumstance and more humbleness is wanted from private equity, according to The Economist.  The recent article goes on to go over the same, tired hypothesis that private equity developed a weak model of using bank debt madly (which the banks were throwing at Private Equity) and buying up companies like drunken sailors.
Yes, and the government policies and mortgage craziness had nothing to do with the last three years?
The Economist does grudgingly admit that zero of the top 20 companies owned by private equity have gone under or needed a bail out, while banks have been wiped from the top 100 Bank list. Canadian banks find themselves in the top 20 banks in the WORLD!
Here is a look at the article:

IF PRIVATE-EQUITY outfits were once the kings of capitalism then during the credit crunch they behaved a bit like George III. Gripped by a bout of madness, they overpaid for firms at the top of the economic cycle and loaded them with too much debt. Today private-equity types are quick to admit things got out of control, just as in the buy-out booms of the late 1980s and 1990s. Most big shops, including Blackstone (see article), are keen to clean up the mess and move on. Yet it will take the industry a long time to rebuild its credibility.

Capitalism still needs private equity in its pure form. The stockmarket is not good at dealing with some firms—those that need surgery, are in the grip of bad bosses, or in industries that fund managers sniff at. Then it can make sense to have a lone, obsessive owner—particularly if it uses a dollop of debt to concentrate managers’ minds and locks in its own investors so long-term decisions can be made. The mere threat of a buy-out also helps keep managers at all listed firms on their toes.

The 2005-07 boom was damaging because it was so wild. Some $1.6 trillion of buy-outs took place—not far off the total for the preceding three decades, after adjusting for inflation. There was also a shameless degree of mission creep, with buy-out firms investing in volatile industries that are allergic to debt, such as semiconductors, and taking stakes in listed firms much as any investor might. A few private-equity outfits even listed their own shares and managed to keep a straight face.

READ MORE

Pay to Get Investor Ready

"Founders, do not fall in love with your product or your people.  Before you talk to anyone about funding get experienced people to rip your strategy and pitch apart.   You only get a few chances to get it done so make sure they count. Network like there’s no tomorrow.  Gather people around you who have proven “big league” execution skills.  Talk to everybody who can spread the message and bring value.  Get yourself down to the Valley. Cold-call and get connected to anyone who can make your business move faster and smarter.  If you don’t your competitor will."
Howard Gwin tells Canadian owners, "Bring it or stay home.  If you are in the Canadian technology ecosystem, run faster, harder and set higher goals or we are going to fall behind – and we will not catch up."
READ MORE of Howard Gwin
I read  Howard's article just after I saw yet another owner-operator who had a healthy company at $20M, but waited until it dropped to $9M to speak with Loewen & Partners. The damage was too bad by then. The worst part was that he had bought out his partner and debt and it was ALL his own capital in the business. Rule # 1: Use other people's money. Rule #2: As Howard Gwin says - Bring it or stay home. Realize that this is the time of private equity and the money is here now. If you don't, your competitors will be accessing private equity and think how much market share they could gain.

What do mayor candidates say about business owners?

Business owners, here is worthwhile an event by the Globe & Mail, September 9th, 2010 to the first major debate to start off the fall mayoral campaign.  This is for business owners in the city and how the mayoral candidates plan to address them. The town hall will be streamed live and be interactive on the web.  We know that small & medium businesses create the most jobs. Governments the world over recognize this and are putting forward efforts to stimulate their growth. What do the candidates have to say about what they would do to make Toronto a place for entrepreneurship, small & medium businesses?
Quick Facts:

• Toronto has the highest small business growth rate 7.5% between 2008-09: national average is only 2.7%
• 240,000+ self-employed people in Toronto & at 17%, Toronto has the highest rate of self-employment in Canada. 
• There are about 84,000 employer businesses in Toronto. 
• Toronto serves a constituency of about 300,000 micro-enterprises in Toronto (self-employed + businesses with fewer than 10 employees). 
• 1-10 women are self-employed 

Mayor Miller won with 332,969 votes in 2006.  It is a constituency that can certainly make a difference to a candidate.
Candidates:
• Rob Ford
• Joe Pantalone
• Rocco Rossi
• George Smitherman
• Sarah Thomson
Media Questioners:
• Marcus Gee, Columnist, The Globe & Mail
• Julie King, Publisher & Managing Editor, CanadaOne.com
• Rick Spence, Columnist, Financial Post

A big thank you to the Globe & Mail for making this topic a worthwhile issue. The Ontario Government leadership vote sure did not even mention business until they announced the Family Day Holiday which cost me a day's wages for my staff at a time when the economy was imploding. 

So big shout out to Globe & Mail. Also, quite a few of the candidates are business owners so that will be useful.

Finally, stop calling it SMALL business. There was a magazine called that and they had to rebrand. We hate to be called small - early stage, business operator, owner managed, but not SMALL.

If You Gave Toronto Mayor Advice on Business Development

If you could give the top six mayor candidates advice on what to do to help entrepreneurship and early stage companies, what would it be? I have been asking various people and came across a blog by Jevron MacDonald who is the entrepreneur-in-house for Innovacorp and he has a sensational set of ideas that I have posted below. I am attending the town hall held by the Globe & Mail, September 16th which will be live streamed on the Globe's website. I will send Jevron's point of action ahead of time to Sarah Thomson and Rocco Rossi, maybe even the others too - Facebook makes it so much easier. Here is Jevron:

Disconnected government policy-making is problematic. Outside of the impressive moves by the government of Quebec, there have been no signals from governments (provincial or federal) that they understand the changes taking place in the landscape or that they intend to proactively support them. So what are we supposed to do?

Early stage opportunities are here, and we need to develop a virtuous cycle of angels, superseed funds, and follow-on capability that is able to benefit from the aggregate of activity taking place in cities across the country. We do not have a single place to look for opportunities, but a set of active mini-hubs that each need attention.

We need to start small and encourage the development of superseed funds that are able to source deals within their specific geographies and spheres of influence. Fundamentally, we have to believe this is all worth doing and that Canada is capable of developing a scalable and high-return environment for venture investment. Until we stop imitating the outside world, however, we will never figure out just what it takes to make things work right here at home.

Then, when we have something unique, we can tell the story of our successes as they happen. It is time to put our pride on the line and measure ourselves against the best in the world.

If it’s a choice between go big or go home, I know which I want to do. We need to take advantage of growth-stage opportunities as they come out of our unique network of cities and seed funds in order to develop the mega-exits we all see in our future. This will require coordination and focus from government, LPs, and a new breed of venture investors who are willing to connect more closely with the entrepreneurs who are creating the financing opportunities they need.

There are a lot of returns to be earned here and those who roll up their sleeves and get a little messy will be the ones to profit.

Read Jevron more at his blog HERE

African Private Equity Investments Up One Third

After the embarrassing comments on China made in a private meeting with the head of GE, is the bloom off the Asian rose? The GE leader mentioned that GE would be exploring Africa. It appears that Private Equity is catching that African fever too. Financial Times reports:

Private equity investors have started to put more money to work in emerging markets following a sharp fall in allocations during the financial crisis. Funds targeting the region raised $11bn (£6.8bn, €8.3bn) of fresh investment in the first half of 2010, up from $9bn in the same period last year, according to the Emerging Markets Private Equity Association“African funds raised through June already exceeded the full year 2009 total, and some sizeable funds being raised point to a return to pre-crisis levels,” said Sarah Alexander, president of Empea.

More than a third of institutional private equity investors are currently making allocations to Africa, compared to just 4 per cent four years ago, according to Empea.

Emerging Capital Partners, a US house, said last month it had raised $613m for a fund dedicated to the continent, while Aureos Capital said earlier in the year it had amassed $381m for a vehicle targeting smaller and medium-sized African companies.

The volume of transactions by emerging markets private equity funds has also picked up “significantly” since the crisis, according to Empea, a Washington, DC-based trade body. Some $13bn of deals were struck in the first half of the year, up from $8bn in the same period of 2009, while the number of transactions rose 44 per cent to 402, led by a “surge” into Latin America, China and India.

“There are more and better quality deals in the pipelines; the continued easing of price expectations among sellers means managers have been more successful in closing transactions. Emerging market fund managers are increasingly bullish in light of stabilising markets and lower valuations,” said Ms Alexander..

Pension Funds Still See Private Equity Managers as Worthwhile

Mega funds like Ontario Teachers have been in the press about side stepping private equity funds and investing directly into companies, taking on the responsibility of board governance to ensure performance. This is a nice thought, but really, the private equity funds, in general, do a very difficult job very well, and I find it hard to see their skills being done by the larger funds. The big fund's time is better suited doing the bigger picture and leaving the PE funds to do the dirty work. 

David Currie at SL Capital has just put out an article explaining the reasoning of this. David says:

"The majority of global pension funds remain open to the idea that the additional layer of fees charged by private equity fund of funds represents a price worth paying to get the requisite access and the assurance over administration and compliance that an experienced manager can bring. Our pension fund clients engage us to provide a complete private equity solution for what is typically only ever up to 5 per cent of their total investment portfolio."

The majority of pension funds do not have the €100m (£83m, $132m) allocation to private equity that has been noted as the level that would allow them to invest directly in a structured long-term way into private equity. For these schemes, the hurdles of minimum allocation, administration of the investments and the risk diversification mean that a fund of funds is the only viable route.

In SL Capital’s fund of funds, the average commitment by a client is €12m, which would normally represent the pension fund’s entire private equity commitment, or at least its entire US or European private equity commitment. It is impossible to get true diversification, across at least 10 private equity funds, with a €12m allocation, as most funds require a minimum commitment of €5m.

It is also worth noting that the larger funds of funds sit on the private equity funds’ advisory boards as a matter of course. These positions are open only to the largest or most sophisticated investors and offer a deeper access and relationship to the manager, enabling added insight, a view on strategic direction and a first look at valuations and performance. This really matters when times are difficult, as the experienced fund of funds investors can deploy their team’s deep knowledge and expertise to help restore confidence in leadership or offer solutions to ensure all investors are protected.

While the world’s largest pension funds operate significant teams globally, we as a fund of funds also work closely with them to deploy capital. In this case we are providing support in a specific area of the European or US markets that they find hard to access, due to their proximity to the market or knowledge of the best managers in that segment. In these terms we are the “eyes and ears” for these larger groups in specific areas, such as smaller, regional or local funds, secondaries and direct co-investments. They recognise the advantages of working with fund of funds that can add value to their overall programme.