This Again: Entrepreneurship

When Pop City announced that it would host a forum on entrepreneurship, I was skeptical that the event would offer anything new.

Turns out that I was right.  Just about all the talk was about the importance of creating an entrepreneurial culture, one that promotes risk-taking and accepts the idea of failure.  Where have I heard that before?

If Pop City and its panelists are re-hashing themes that have been on Pittsburgh's plate for years (years!), then clearly something is not right.

It turns out that a community can't create a new culture for itself just by wishing that it were so. 

It also turns out that a community can't create a new culture for itself by promoting its good ideas (Pittsburgh has lots of those) and matching those ideas with investment capital (Pittsburgh has lots of that).

A key variable usually missing from public conversations about entrepreneurship -- and something that either did not come up at the recent session or was spun in an unfortunately backwards way, judging from the PC report -- is the structure of labor markets, and labor mobility.

I mean the following, related things:

One -- All of the talk about persuading Pittsburgh's college grads and grad students to stay in Pittsburgh -- talk that apparently was repeated by the panel -- is misguided.  See earlier posts here, at Null Space, and at the Burgh Diaspora -- three of the wonkiest blogs you will ever read --  trying, apparently apparently unsuccessfully, to banish the concept of "Border Guard Bob" from the local lexicon.  The game plan has to be *attract* people to Pittsburgh. Attract their energy, their enthusiasm, their passion, their ideas, and their money.  Let the college grads go away.  Some of them will come back.  The rest become part of the Pittsburgh Diaspora.

Two -- Pursue public policy reform that frees people to change jobs.  Developing human capital is the route to Pittsburgh's future. 

Three -- If you're considering starting a new company, think hard about labor and employment complications *before* you get started.  The mythos of entrepreneurship is two people with an idea and a sketch of a business plan.  When I was a practicing lawyer, occasionally these people would wind up in my office.  My first questions were always these:  Who do you work for?  Are you students?  Do you work in a lab or as a research assistant for someone?  Are you employed in some other way?  Do you have a partnership agreement or other formalized business arrangement between the two of you?  No one can build a company on a new idea until you sort out whether someone has the legal right to do that.  The biggest complication is usually a potential claim that a university or a company or a friend, family member, or earlier investor has some claim on the idea.   The sooner those complications can get sorted out, the better off everyone will be. 

Pittsburgh Grows?

Sunday's Post-Gazette featured the latest "Regional Insights" column by Harold Miller.  It's all about the need to start and grow new businesses in the Pittsburgh region:  by encouraging new research and development, supporting and investing in local funders, supporting and investing in service firms that provide technical assistance to local startups, and buying the products and services that local startups produce.  (A version of the column appears at Harold's blog.)

I don't disagree with any of Harold's basic points.  I would add two more:

First, Pittsburgh's existing combination of basic research and investment capital is exceptional for a region of this size, and it has been exceptional for many years.  As Harold argues, more is always better.

But what is truly missing here -- and what has been missing for many years -- is an infrastructure of professional services and community culture that can bring people, knowledge, and money together in productive ways.  You can put investment capital in the same room as new ideas -- literally, as Project Olympus will do again tomorrow afternoon -- and that will not be enough to generate a good and sustainable flow of new little companies.  That's because Project Olympus (like Innovation Works, or the Idea Foundry, etc. etc.) is only one node on the network, and it can't do much more than push new ideas out the doors into the waiting hands of a small number of investors.

A robust infrastructure to grow new companies -- a large and frequently refreshed pool of managers to take over from researchers/founders, and a broad, accessible, flexible, and reasonably priced legal community to shepherd those companies through successive challenges of capital formation, entity organization, employment, tax, and immigration hurdles, compliance issues, and intellectual property problems -- doesn't yet exist.  (A legal and regulatory climate in Pennsylvania and Pittsburgh that is more new empoyment-friendly than the current climate would help, too.)  Until that infrastructure evolves, and until Pittsburgh's business and educational leaders focus on that issue, then Pittsburgh will continue to struggle in the league table for new business formation.

Second, anyone in the business of new business should be focused on where the customers are and on what the customers want, and what they will want.  Go, as Willie Sutton never said, where the money is.  And while it is warm and fuzzy and not a bad thing at all to recommend that Pittsburgh regional consumers support new local companies by buying their products, the truth is that there just isn't enough cash in the region to make our own startup economy grow.

I kid at Pittsblog about the Cupcake Class, but the real point of that idea is regional income:  In aggregate terms, Pittsburgh does *not* have the levels of income to support lots of new companies selling primarily to local customers.  Take Dozen, a local company that started by selling cupcakes but succeeded by growing out of the cupcake business.  (That may well have been the plan all along.)  Dozen is a baker and a caterer.  Dozen still sells cupcakes, but Dozen also sells lunch at the Warhol.  It's a diversified enterprise.  Why diversify?  My guess is that the margins in cupcakes are good, but a Pittsburgh company can't sell enough cupcakes -- and just cupcakes -- to make the business go and grow.   Pittsburghers are happy with donuts.   I am not talking just about retail and end-consumers.  The only firms in town that I hear about really kicking down doors with new business, new customers, and new hires are selling to -- China.  That's not just Westinghouse.  Every time I turn around in my own neighborhood I'm listening to tales of business trips to China.  That's where the money is.

What should Pittsburgh do about that?  Stop obsessing about nonstop flights to Paris.  Figure out a way to increase nonstop flights from PIT to the West Coast -- Seattle, San Francisco, and Los Angeles.  From there, it's easy to hop on a flight to Beijing or Shanghai.

Pittsburgh's Start-Up Culture

Jefferson Provost is blogging again at The Q Function. He has a terrific post up today, prompted by a NY Times piece on the Seattle economy: Does Pittsburgh have a Spin-Off Culture? A taste:

People often ask why Pittsburgh, with it’s great universities, isn’t
seeding more startups. Maybe it’s because an essential missing component is a
large pool of large tech companies to employ university engineers and scientists
after graduation, until the stars align properly for them to start their own
ventures.

What Pittsburgh Needs from Young Entrepreneurs

Harold Miller has a good post up featuring Project Olympus, a new effort at Carnegie Mellon to promote local careers for its computer science graduates and generally to build a robust infrastructure for an IT sector in the region.

Lenore Blum, Director of Project Olympus, estimated that only 20 (5%) of Carnegie Mellon's 2007 Computer Science graduates were staying in Pittsburgh. That means another 400 could potentially stay here. If Project Olympus merely doubles the current percentage of CMU's CS graduates who stay each year through entrepreneurship, it could significantly expand the number of startup companies in Pittsburgh.

Maybe so -- though that all depends on lots of other things falling into place locally. And what happens to the other 380 graduates? Where do they go? Where do they work? What kinds of Pittsburgh connections do they or their employers have -- if any? In the absence of a local entrepreneurial infrastructure that can easily absorb another two dozen CS grads each year, is Pittsburgh better off spreading the gospel according to CMU as those folks migrate around the world? Or should Pittsburgh try to keep them here in town and hope that the infrastructure eventually emerges?

Perhaps that's a false choice:

What do these students want/need in order to stay? Based on a survey of students conducted by Project Olympus, three things are key:

(1) Access to angel/venture capital and other assistance through networking opportunities;
(2) A "safety net," i.e., other job opportunities if the initial one falls through; and
(3) A region that views entrepreneurship, even in failure, as a valuable learning experience.

In other words, recent graduates want people to give them money, give them jobs, and treat them nicely. At one time or another on Pittsblog, I've argued for the very same things. What Pittsburgh needs to do, etc. etc. Much of Harold's post is a plea for the same things, and he's right.

What's missing here, though, is a commitment from the grads themselves. The sleep-on-the-sofa, max-out-your-credit-cards, borrow-from-friends-and-family, believe-in-your-dream-no-matter-the-cost kind of commitment that entrepreneurs know that it takes to succeed even in the face of failure after failure. Pittsburgh absolutely needs to develop the kind of infrastructure that Harold Miller and Project Olympus are referring to, but Pittsburgh needs something in the bargain, too, and what it needs is a commitment by those would-be entrepreneurs to stick to it. What three things are new grads willing to do? Find the resources yourselves. Go around institutional obstacles. Persevere. Force change.

Easier said than done, I know, especially when money is tight here and seems to flow freely elsewhere. One solution is to import the money. The Olympus board is interesting to me because it seems to reflect what might be a diasporan mentality -- investors from elsewhere looking to Pittsburgh in order to keep Pittsburgh tech here, rather than export it to the West Coast. Is that a correct perception?

Up, Up, and Away

Another promising local tech startup is leaving Pittsburgh for Boston. Why? As Willie Sutton never said, because that's where the money is, and moving is what the money wants.

Cori Shropshire's P-G report on the impending departure of Logical Therapeutics does a good job of pointing out some of the other problems that keep Pittsburgh biotech/biomed startups on the launch pad for other destinations:

(1) Depth. Boston has it; Pittsburgh doesn't. "Moreover, biotech firms are risky, so it's difficult to persuade experienced workers to relocate to Pittsburgh without guarantee of success, [Logical Therapeutics co-founder Carolyn] Green said. In Boston, there are several hundred companies where workers can go if a venture doesn't work out, she said." I've written about this before.

(2) Infrastructure that supports biotech operations. "Despite the University of Pittsburgh Medical Center's global reputation in basic research and clinical trials, particularly in drug development, 'What's missing is the expertise in designing and carrying out early tests for new drugs, managing the federal regulatory process and manufacturing material used in clinical trials,' [Logical Thereapeutics c-founder Dr. Mitchell] Fink said." I may not have blogged about that problem before, but I've certainly heard about it in private conversations. Pittsburgh has a lot of magnificent scientists, and Pitt and UPMC are getting better at pushing technology into the private sector. But the regulatory gauntlet is daunting, and there aren't enough people in town who are trained to manage it.

Updated and extended with most of the text of a comment that I left on an earlier Pittsblog post:

Is LT's departure fair to PA taxpayers, in view of PA-subsidized investments in the firm? One thing to note is that PA taxpayer money in LT (or in any private co. with university-developed technology) may be dwarfed by indirect money coming from the federal treasury. Pitt and UPMC take in several hundred million dollars in federal grant money each year, a huge chunk of which goes into biotech/bioscience research. I don't know how much federal money went into the technology that LT is developing, but federal indirect cost reimbursement funds facilities that likely housed much of the early work.

Federal law (Bayh/Dole) gives university researchers using federal funds the right to patent and license resulting inventions; the researchers split licensing proceeds with their employers under the terms of policies set by the employers. Here, that means Pitt and UPMC. State interests usually end up taking a back seat to federal policy. Biotech investing is a particularly high-stakes version of poker, and state-related investment funds are playing with public money. But they are investors nonetheless, placing bets with their investments and hoping to win a hand or two. Returns are never guaranteed.

The question in my mind isn't whether the PA funds are entitled to their money back, but whether they should be playing at all, given the amounts that they are able to invest, and the stakes. Are they are playing at a table where they don't have enough cash to compete effectively over the long term? Biotech and biomed investing is a long-term game, and every play is risky. While LT is leaving with PA money and has chance to succeed elsewhere, would we as PA taxpayers be happier if it stayed in Pittsburgh -- and was more likely to fail? Personally -- no. Remember, you're a federal taxpayer as well as a PA taxpayer. When you combine your taxpaying hats, that's the point at which you should ask whether you're getting a fair deal while the government invests your betting money. In some ways yes, you are, and in some ways no, you're not. I'll save more for a later post.