Category Archives: Southeast Economy

A geographic analog to the process of creative destruction

The growth corridors of the high-tech South enjoy several advantages familiar to NVSE readers: growth-oriented tax policieslower public sector debt burdens, stronger job creation, the best climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

Additional proof now comes courtesy of the CATO Institute:  millions of Americans and trillions of annual income have migrated among the states, to the benefit of our region.

 

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Money walks because opportunity talks.

 

This migration of economic clout within the US has been more subtle than the California Gold Rush or Irish Potato Famine but is just as significant.  Some states are chasing away their earners, workers, and entrepreneurs; this is their tax base.

Daniel Mitchell (of CATO) picks one example (California) from the Tax Foundation’s map and concludes it’s a “slow-motion economic suicide.”

Voting for a tax hike isn’t akin to jumping off the Golden Gate bridge. Instead, by further penalizing success and expanding the burden of government, California is engaging in the economic equivalent of smoking four packs of cigarettes every day instead of three and one-half packs… In the long run, though, people can move, reorganize their finances, and take other steps to reduce their exposure to the greed of the political class.  In other words, people can vote with their feet … and with their money…

The state is going to become the France of America—assuming Illinois doesn’t get there first.  California has some natural advantages that make it very desirable. And I suspect that the state’s politicians could get away with above-average taxes simply because certain people will pay some sort of premium to enjoy the climate and geography.

But the number of people willing to pay will shrink as the premium rises.

In The Spread of Start-up America and the Rise of the High-tech South, Richard Florida, senior editor of The Atlantic combined Joseph Schumpeter‘s theory of creative destruction with Mancur Olson‘s theory for the rise and decline of nations and concludes that the Southeast would have a mercantile-like advantage but for the fact that employers can (and do!) simply move and join its attractive business climate:

Leading nations as well as leading regions, he (Olson) concluded, decline as a result of one overwhelming factor that he dubbed “organizational sclerosis” — a hardening of institutional, economic, and cultural arteries that leaves them incapable of dealing with a new and rapidly changing economic environment. Sound familiar? Practices, patterns, and norms of organizing and doing business that once worked so well become a constraint, a fetter, an obstacle to further progress. Decline sets in as once-dominant places get locked into the past and are unable to adapt to new circumstances, new technologies, and new conditions. A geographic analog to the process of creative destruction takes hold as new technologies, new business models, new values and norms, new industries and ultimately new institutions, and new ways of organizing economic activity shift to new places.

In Olson’s view the United States was fortunate, because it is a big country. While previous epochs of economic and geographic change tended to jump from country to country — moving, say, from Holland to England and later from England to the United States — America is so large that this process of rebirth and remaking can occur within its own boundaries.

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What California can learn from Texas

When a state’s manufacturing base is escaping, and its citizens are agitating to break up, that state is no stranger to bad news.  AEI’s Carpe Diem blog reports:  Texas has created one million more jobs than California since the end of the Great Recession.

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What’s different about Texas and California that would explain why one state (Texas) has added more than one million net new jobs since 2007, while the other (California) has created almost no new net jobs over the last six and-a-half years? Let’s start by pointing out that one of those states — Texas — is pro-energy (i.e. fossil fuel energy), it’s a right-to-work state, it has no state income tax, its electricity prices are significantly lower because it doesn’t have a renewable energy mandate, and its regulatory burden on businesses is much lighter. In other words, Texas has created a pro-business and pro-growth environment that has helped to nurture the creation of more than one million jobs since December 2007. Meanwhile, California has created an increasingly anti-business climate with some of the highest state tax and regulatory burdens in the country, which along with sky-high industrial electricity prices (83% higher than in Texas), have stifled business and job creation, with almost no net job gains in more than six years.

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Lost: $1 trillion

Today’s Wall Street Journal reports:  since 2005 productivity has declined 8% off its long-run trend, which has meant $1 trillion less in business output.  The reason?  Fewer start-ups.  From Behind the Productivity Plunge:  Fewer Start-ups

Lagging productivity growth is an enormous problem because virtually all of the increase in Americans’ standard of living is made possible by rising worker productivity. In our view, an important factor contributing to declining productivity growth is the large decline in the creation of new businesses. The creation rate of new businesses, as well as new plants built by existing firms, was about 30% lower in 2011 (the most recent year of data) compared with the annual average rate for the 1980s. (The data is the Census Bureau’s Business Dynamic Statistics.) The decline affected nearly all business sectors.

Steven Malanga coined the term startupicide – “suffocating regulations, inflated business taxes and fees, a lawsuit-friendly legal environment, and a political class uninterested in business concerns” – which gets sprayed on every business, large and small.  At the margins those factors clearly affect the viability of new businesses and new projects.  Here’s how we once put it, discussing just one of the four ingredients:

For Costco (one example) to build a new store, a 40% tax rate on the income will require much higher sales expectations for the store than if taxes were 30%, or 20%, or 0%.  It’s the same analysis regardless of who is making the investment decision: rich angel investor, venture capitalist, Fortune 500 CFO.  When taxes are higher, fewer stores get built and fewer companies get started.

The WSJ piece continues:

New businesses are critical for the U.S. economy to grow because a small fraction of today’s startups will become tomorrow’s economic heavyweights. Most of today’s workers are employed at older, established businesses, but the country cannot rely on existing companies to boost the economy. Businesses have a life cycle, in which even the largest and most successful reach a stage at which they stop expanding.

If history is any indication, many of today’s economic heavyweights will ultimately decline as new businesses take their place. Research by the Kaufman Foundation shows that only about half of the 1995 Fortune 500 firms remained on the list in 2010.

That’s the funny thing about those large companies:  they all have birthdays, either as start-ups themselves or as spin-offs from other companies (who were once start-ups).  Many of them are born during very bad times – as long as the entrepreneurial incentives, and entrepreneurial optimism, remain intact.

Over half the companies on the Fortune 500 were started during a recession or bear market.  The patents for the Television, Jukebox, and Nylon were granted during the greatest period of job destruction in our history:  The Great Depression.  (Although we can’t confirm any patent information on the chocolate chip cookie, it too was invented at the same time.)  This is precisely the creative destruction that makes our economy an engine of innovation and wealth creation.

That $1 trillion in forfeited economic output demonstrates that a growing economy, with plenty of opportunity, and no shortage of entrepreneurial activity (at start-ups and within firms) should not be taken for granted.

 

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BPV invests in PowerDMS

logo-PowerDMSBallast Point Ventures is pleased to announce a growth equity investment in PowerDMS, a cloud-based document management software company whose platform organizes policies and procedures online, allowing companies to distribute crucial documents collaboratively, message employees and capture signatures.  Proceeds of the investment will be used to augment the company’s sales and marketing team and enhance its technology platform by offering new features to its customer base, which includes customers in law enforcement, public safety, healthcare, and retail.

Founded in 2001 by CEO Josh Brown, the robust software platform provides practical tools necessary to organize and manage crucial documents and industry standards, thereby helping organizations maintain compliance with constantly evolving industry accreditation protocols. Created as a software-as-a-service (SaaS) model, PowerDMS combines attributes of Governance and Risk Compliance (GRC) and Enterprise Content Management (ECM) into its software platform.

Toyota escapes to Texas

texansOn Monday we tweeted a brief story about this but today’s Wall Street Journal does a more complete job of “counting the ways” that is a must-share.  (This might count as a check-raise in social media?  Tweet then blog?)

Toyota’s chief executive for North America Jim Lentz stressed that its move isn’t motivated by [targeted] incentives. He listed the friendly Texas business climate, proximity to other Toyota operations and two major airports, as well as such lifestyle benefits as affordable housing and zero income tax.

The bigger picture is that Texas has become more economically competitive while California has become less so, particularly for energy- and labor-intensive industries. Let us count the ways.

Start with right-to-work laws in southern states that have limited unionization and thus labor costs. Just 4.8% of workers in Texas and 6.1% in Tennessee belong to a union compared to 16.4% in California. Real estate is also cheaper in the South due to less restrictive zoning and environmental regulations, and taxes are lower. According to the Tax Foundation, the state-local tax burden is more than 50% higher in California than in Tennessee and Texas, which don’t levy a personal income tax. California’s top 13.3% marginal rate is the highest in the country.

Electricity prices are also about 50% higher in California than in the South due to the Golden State’s renewable-energy mandate, and its gas is 70 to 80 cents per gallon more expensive because of taxes and blending requirements.

The hostility to fossil fuels has cut California’s oil production in half from its 1985 peak while output in Texas has doubled in three years and lifted incomes. The Bureau of Economic Analysis has ranked Midland the country’s fastest growing metropolitan area in personal income for the past three years. Nearby Odessa was second for the last two. Between 2008 and 2012, personal income grew 8.05% in Midland and 6.98% in Odessa compared to 4.48% in San Jose and 1.81% in Los Angeles. In March, the unemployment rate was 3.2% in Odessa versus 6.8% in San Jose and 9.7% in L.A.

No city epitomizes California’s malaise better than Los Angeles, which hasn’t recovered its mojo since the post-Cold War aerospace wind-down. Since 1990 its employment base has declined by 3.1%, which is more than even Detroit (-2.8%). Job growth in Dallas, Houston and San Antonio exceeded 50% over the same period.

The article later cites a compelling datum about the Rise of the High-Tech South and what Joel Kotkin has called the end of the California era

According to TechAmerica Foundation, Texas in 2012 surpassed California in high-tech exports. The completion of the Panama Canal’s expansion next year will further erode what’s left of California’s commercial edge.

…and provides a money quote from California’s governor Jerry Brown about the flight of high-quality jobs from his state:

We’ve got a few problems, we have lots of little burdens and regulations and taxes,” the Governor said on Monday, “but smart people figure out how to make it.” California’s problem is that smart people have figured out they can make it better elsewhere.

The growth corridors of the high-tech South enjoy several advantages familiar to NVSE readers: growth-oriented tax policieslower public sector debt burdens, stronger job creation, the best climate for entrepreneurs, and a superior overall business climate.  (The actual climate happens to be conducive to a great quality of life as well.)

Four new additions to our libraries

In The Spirit of the Laws Montesquieu posited that the invention of The Letter of Exchange was politically transforming because capital could now travel.   In his view it has always been true that:

Commerce is sometimes destroyed by conquerors, sometimes cramped by monarchs; it traverses the earth, flies from the places where it is oppressed, and stays where it has liberty to breathe.

The latest addition to The Library in St. Pete offers excruciatingly detailed data (and interactive map) in support of Montesquieu’s notion, applied to the migration of economic clout within the United States.  Author Travis H. Brown uses data mapping of IRS taxpayer records over the past two decades to show the movement of millions of Americans and over $2 trillion in adjusted gross income among the states.  Or, as he puts it, “Money walks because opportunity talks.”

Our regular readers will not be surprised to learn that the migration of working wealth is primarily to the Southeastern growth corridors; nor will they be surprised to learn the money is walking to states with the best climate for entrepreneurs.  While this migration has been more subtle than the California Gold Rush or Irish Potato Famine, Mr. Brown argues it is just as significant:

If you are losing your working wealth to other states, you are losing your most precious cargo.  These are your earners, your workers, your entrepreneurs; this is your tax base.  This great movement of working wealth into and out of states is staggering and has serious economic ramifications.

Kevin D. Williamson agrees with that assessment, and in Suicide Pact takes a look at Brown’s data and devises five easy steps to “cripple” your state:

1. Make work expensive.
2. Attack lifetime savings.
3. Run up your state’s long-term liabilities.
4. Tax fanciful things.
5. Don’t just be crazy — be California crazy.

Williamson thinks the trends will only get worse for those states surviving on legacy industries:

There was a time — and it really wasn’t that long ago — when if you were a  financial firm, you had to have an office in Lower Manhattan, when film studios  had to have offices in Los Angeles, and high-tech firms really needed to be in  Silicon Valley.  If Travis Brown’s big data set shows us anything it is that  those days are done.  You can build very fine automobiles in the United States,  but if you aren’t already in Detroit, you’d be a fool to set up shop there.

 ~ ~ ~

A second recently-added book makes essentially the same point in a global/historical context.  Our popular 4-part series based on Professor Geoffrey Jones’s book concluded that since 1850 those countries with the most friendly environments for entrepreneurs have innovated and prospered.

Why, after the Industrial Revolution began in the West, did the Rest struggle to catch up?  Entrepreneurs are the missing gap in the analysis of what creates a prosperous modern economy.  Institutions and human capital are treated as the first order causes of economic growth. The assumption is that if a society evolves or adopts the right institutions, or else has good human capital investment, firms and entrepreneurs will more or less appear spontaneously and create economic growth. The business history literature suggests that this is a considerable over-simplification… To have entrepreneurship, there must be entrepreneurial opportunities.

~ ~ ~

In conjunction with these additions to The Library in St. Pete, we’ve updated the library of resources for entrepreneurs at our website as well.  “Worry less about the idea, more about the execution” explains why investors are often reluctant to sign NDAs, and “Growth Equity is All Grown Up” describes how growth equity has matured as an asset class and incorporates the best characteristics of both venture capital and private equity.

We hope you will find these four additions interesting and enjoyable.

VC investment rises sharply in Florida

SE mapThe Miami Herald recently reported that venture capital investment in our state doubled from 2012 to 2013 and was the best year since 2004.

Nationally, venture capital investments rose to $29.4 billion (in 3,995 deals), an increase of 7% in dollars (4% in deals) over 2012, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association.

The article also quotes BPV partner Matt Rice on the state of the healthcare, life science, and technology-enabled business services sectors and Florida’s attractiveness to entrepreneurs and investors:

Even though life sciences may have fallen out of favor during the recession, “I do see the sector as rebounding — 2013 was a very successful year for life science IPOs,” said Rice…

Looking ahead, Rice believes that in addition to healthcare, which will see “quick and massive change,” companies in technology-enabled business services will also see continued investor interest. He sees software-as-a-service platforms becoming much more specialized and industry specific.

To be sure, Florida’s take is still a tiny slice of the total venture capital pie — in 2013 it was just 1.4 percent for the country’s fourth most populous state.

But that old VC adage still applies — money follows opportunities. “The entrepreneurs are here, the opportunities are here, compared to California it’s a much more business friendly state, colleges are providing the talent,” said Rice. “This combination over time will attract more capital to the state.”

Will voters split The Golden State into Six Californias?

sixStatesA prominent Silicon Valley venture capitalist, frustrated by his state’s broken institutions, has launched a ballot initiative to split California into 6 states.  (Named Jefferson, North California, Silicon Valley, Central California, West California, and South California.  Fwiw.)

These pages have often extolled the virtues of doing business in the Southeast and Texas, the best climate for entrepreneurs and where we have focused our investment efforts for over twenty years.  Along the way we may have poked gentle fun at our friends in California whenever the state’s business environment fared poorly in surveys or did something like retroactively tax entrepreneurs.

So we can try to imagine the frustration engendered when a large and diverse geographic area strains under distant and schlerotic governing institutions – and we love the idea of having a state named after our 3rd president.  Hard to see how this becomes a political reality though.

But Cali ballot initiatives can get gnarly so perhaps it bears watching…

From the 12/23/13 San Jose Mercury News:

Lots of folks believe California is ungovernable. Venture capitalist Tim Draper has a solution: Six Californias, including one called Silicon Valley…

Veteran political observers were quick and unanimous in assessing the plan’s odds of success at zero. At the same time, they said Draper’s modest proposal could spark discussion about how to fix the state’s manifold problems, such as bursting prisons and jockeying over water rights.

The sheer size of California raises questions about representation and accountability. A single state Senate district has more people than all of South Dakota,” said John J. Pitney, a political science professor at Claremont McKenna College, east of Los Angeles…

(Draper) argued that the status quo in Sacramento, which regularly features budget gridlock and statehouse gamesmanship, “is not cutting it for our schools, our businesses, our infrastructure or our people.”

Asked by this newspaper how much of his own fortune he plans to sink into his latest political crusade, Draper deadpanned: “As little as possible.” Then he added, “I’ll make sure it gets on the ballot, so that Californians have a chance to make the decision.”

 

 

 

See you next month in Orlando

If you are an entrepreneur or part of thehodge-podge of scientists, institutions, and fundingthat make up our state’s entrepreneurial ecosystem, please join us at the 2014 Florida Venture Capital Conference. 

On January 28 & 29, hundreds of venture capitalists and private equity investors from across the U.S. and the world will be at the Hyatt Regency Orlando to listen to some of the most dynamic high-growth companies in Florida.  (You can click here to register.)FVFCC_logo(1)

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The conference will feature expert panel discussions, exclusive networking opportunities, featured speakers and many of Florida’s top companies presenting to a national audience of venture capitalists, investment bankers and private equity investors.

The Florida Venture Capital Conference highlights both mid and later stage investment opportunities throughout the State of Florida.  Past Presenters have attracted more than $2.8 billion in investments.

Tower Cloud named to Inc. 500 List of Fastest-Growing Private Companies

With 3-Year Sales Growth of 964%, the BPV portfolio company ranked #478 on the 2013 Inc. 500 List of America’s Fastest-Growing Private Companies.

The 2013 Inc. 500, unveiled in the September issue of Inc., is the most competitive crop in the list’s history.  To make the cut, companies had to have achieved a staggering minimum of 918.59% in sales growth.

 

Tower cloud inc500 profile

“We are honored to be recognized by the 2013 Inc. 500 for the tremendous growth Tower Cloud has achieved over the last three years,” said Ronald Mudry, Tower Cloud’s founder and CEO. “Our placement as the 7th fastest growing telecommunication company in the nation, and the fastest growing wireless backhaul provider is a testament to all the hard work, dedication and customer focus of the Tower Cloud team.”

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