When it comes to job creation, Israel is outpacing the rest of the world. The country is near full employment and at the end of 2012, the economy had risen 3.5 percent, doubling the pace of its Organization for Economic Development (OECD) peers. In addition, Israel is the second most educated OECD country. The increased jobs are being credited to population growth, robust exports and sound monetary policy. While a sound monetary policy and exports contribute to job creation, capital investments are part of the “secret sauce” of their success.
In 1993, the Israeli government began an initiative of offering tax incentives to foreign venture-capital investments and promising to double any investment with funds from the government. As a result, between 1991 and 2000, Israel’s annual venture-capital outlays rose nearly 60-fold, from $58 million to $3.3 billion during that decade and companies launched by Israeli venture funds rose from 100 to 800. According to Dun & Bradstreet/Israel, twenty Israeli venture capital funds raised $796 million in 2011, compared with $256 million in 2009 . . . and with all the investment came job creation and full employment.
In the playbook of economic development and job growth, the City of San Antonio recently invested $300,000 in Innovative Trauma Care out of a total investment of both public and private funds of $2 million. A page from Israel’s economic development playbook? “The City of San Antonio has done something very radical – they invested city money into the equity of a startup,” said Texas Intrepid Ventures President, David Spencer. “It’s the first time we’ve ever done that. It is similar to
what we’ve done at the state level with the Emerging Technology Fund.” As the inaugural chair of the Emerging Technology Fund Advisory Committee and a private investor, David Spencer (who has also invested in the Innovative Trauma Care deal with his own funds) recognizes the potential of mixing public and private funds for starting or growing a business.
Other strategies for job growth ? Thirty-four years ago the University of Texas at San Antonio launched the Institute for Economic Development (IED). IED’s mission, coming out of the Vietnam era, was to diversify an economy largely based in federal government military jobs. By creating new jobs, working parents could support their children going to school and at the same time create a demand for UTSA’s graduates. It’s a strategy that’s worked well for San Antonio whose unemployment rate is 5.5 percent – versus the national average of 7.9 percent.
In a conversation about job creation and investing, in cooperation with SA 2020, five San Antonio experts shared their views on allocation, strategy and their own experiences at a recent Texas CEO Magazine Enlightened Speaker Series breakfast.
Startups or Scale Ups?
Texas has over 70 programs and incentives for economic development falling into four areas: tax incentives, grant programs, financing tools and provision of services. Some of the investments are made in big projects like using the Texas Enterprise Fund to bring Toyota’s manufacturing plant to San Antonio or the Events Trust Fund to bring Formula One to Austin.
Is it better to put those resources into startups or into scale ups?
Whether public dollars or private, is it better to invest money in launching a business or into a company that’s achieved some success and is ready to scale and expand?
Much has been written about entrepreneurs in startups – those businesses launched with a good idea, a spin-off from an existing business or incubated within an industry cluster. Startups are full of energy, draw lots of funding interest and capture the headlines. Startups also fail in big numbers or can use big resources with a low return of job creation.
Less is written about scale ups and entrepreneurial growth after the startup – yet, it is often more difficult to scale a company than to start a company. With growth there’s more hiring, more capital, more energy and often more knowledge needed than with a startup . . . and a never ending need for talent. Yet, a successful scale up can lead to hundreds of jobs, or more.
In his recent Harvard Business Review blog, Professor Daniel Isenberg compared the startup to giving birth and scaling-up to raising a child well – the startup to a one-time event and the scale up to a lifetime commitment. Isenberg contends public monies should be used to scale businesses because the long term returns are higher.
The Investors View
Three speakers, Bob McKinley, Roy Terracina and David Spencer, are all investors and each brought a different view to the conversation.
Bob McKinley, Associate Vice President for Economic Development at UTSA, noted there are three classic ways to grow an economy: industrial recruitment, business retention & expansion, and organic growth. The San Antonio Economic Development Foundation has responsibility for industrial recruitment, and last year created about 4,200 jobs. McKinley observed, “One of the main tools for investing was the Texas Enterprise Fund, complimented by city, county, and school districts, providing a mix of incentive deal makers.”
The second area of growth, business retention & expansion is hard to measure, said McKinley, “Because you’re measuring something that hopefully, doesn’t happen – somebody is leaving.”
On organic growth, McKinley’s IED at UTSA created 4,300 jobs – some of them startups and some scale ups.
While McKinley’s philosophy is to invest in both startups and scale ups because both investments grow the economy, there is a difference in returns. The dollars invested in start-ups were $87 million and $137 million for the scale-up businesses. In looking at incremental revenues from increased sales, contracts and exports, there was a big difference. “The start up businesses grew at $77 million in increased sales. The scale-up businesses grew with $613 million in increased revenue. You can see building on that base brings more business activity,” said McKinley. “My short answer is: you need both to grow the economy.”
David Spencer has started his thirteenth company . . . his track record to date is one home run, one double, a whole lot of strike outs and two self described “smoking craters” that went right into the side of the mountain. Observed Spencer, “I’ve been a quintessential failure, myself, and I confess it freely. I’ve done more wrong than good in my life as an entrepreneur.” Spencer’s home run was creating then selling OnBoard software. OnBoard began with a staff of two, then scaled-up over eight years to more than 90 employees. He sold OnBoard for $34 million in 2005.
Spencer’s experience as a serial entrepreneur and ETF chair has given him a counterintuitive view of success and failure.
“Let’s talk about a $2 million investment that doesn’t work. What does that mean for our community and where is that money going to be spent?” asked Spencer. He sees the money not being sent to Wall Street because it’s going for rent, salaries and attorneys and being spent locally. And just as importantly, said Spencer, “It’s also building some folks who will come out with scars on their backs because when it doesn’t work, you say, ‘I’m going to make a bunch of mistakes going forward, but they will be new mistakes, not the old mistakes,’ and that’s not a bad thing.”
As the President of Texas Intrepid Ventures, Spencer doesn’t want to see failure because it’s the investors who take the hit, but the community profits. “So every time SAEDF brings somebody here and it doesn’t work, I argue that’s actually a really good thing,” noted Spencer. “What I want to bring into this conversation is building the capacity and then understanding the value of when it doesn’t work. What are we doing as a community to encourage the ‘not works’ enough that the ‘works’ work.” Spencer sees Isenberg’s philosophy of backing scale ups as having a survivor bias.
As the CEO of Sunshine Ventures, and a member of the Board of Directors of U.S. Global Investors since 1997 and on the boards of Access Venture Partners, Milestone Partners, and the Najim Family Foundation, Roy Terracina has evaluated deals and invested in companies for two decades. Terracina’s view of investing has no basis in either starting a business or scaling one.
After growing up in Chicago’s inner city as a street gang member and prize fighter, Terracina has learned to invest by picking people. “When you’re raised on a street corner, you have the ability to read people pretty quickly because you have to know who to trust,” said Terracina. “That’s how I pick businesses for investing – not because of the business – but because of the people.”
The Operators View
Nick Longo, Mentor-In-Chief of Geekdom, is an advocate for startups, yet he is not a big proponent of giving startups money. “I have successfully started two tech startups and sold them both and started them with virtually no money . . . one was zero dollars and the other was $500.” Longo contends success comes from what’s inside an entrepreneur. Longo’s definition of an entrepreneur is someone who is standing on the edge of the cliff, and when pushed, learns to fly on the way down. Longo has succeeded and now brings that expertise to Geekdom.
Geekdom was initially a vision of Rackspace Chairman, Graham Weston, and now is a reality providing an environment for exploring ideas in entrepreneurship, technology, leadership and creativity by developing businesses in San Antonio. Geekdom is now the largest co-working space in Texas and the tenth largest in the U.S. Geekdom has 600 members – businesses and individual members – who join either as community members who share the use of space at $50 per month or dedicated members who spend $200 per month for a desk, parking, a mailing address and conference room access.
Are the entrepreneurs flying? One of the most prestigious programs for tech startups is TechStars. TechStars is backed by 75 venture capital firms and angels who invest $118,000 in every company funded – $18,000 in seed funding and an optional $100,000 convertible debt note. “Two of our Texas teams who got into TechStars this year are from San Antonio and came out of Geekdom. That’s never happened and they were born less than a year ago,” said Longo.
Skeeter Lieberum is an advocate for investing in scale ups. As COO of Global Dynamic Consulting, he sees the operational side of what it takes for a company to scale up: structure and cost efficiency. Lieberum works with companies that have done well over a three to five year period and have leadership, contracts, and technology, yet are scrambling to keep up with what is coming through the door and are not able to look ahead. What these scale ups need is more capital for growth.
“To get the capital they need, they have to have a good balance sheet and financial statements because the banks won’t talk without them,” observed Lieberum. “The groups bringing us in as consultants are the ones who have the capital to invest and what these investors are looking for is maturity and leadership.”
Taking a scale up to the next level is a lot different than a startup, said Lieberum. “It has the same level of excitement but at a different level of maturity.” Scale ups, he noted, have done well to get to where they are, but most lack the plan for what’s next.
Where to Invest?
In the Q&A following, the question of where to invest came up. For Terracina, Longo and Lieberum, it’s all about people.
“Graham Weston (Chairman of Rackspace) tried to buy my bakery many years ago,” said Terracina. “I recently told him, ‘You could have been in the military food business.’ Several years later, Rackspace came back to me and said, ‘We need some money.’ As I said earlier, I invest in people and I knew Graham and Lanham (Napier, Rackspace CEO) were guys to invest in, so I did.”
Longo said, “I am committed to working with startups. I spend 75 percent of my time mentoring and 50 percent of my time on operations . . . that’s 125 percent. It is always about the people, not their ideas.”
“Beware of one-trick ponies who are so focused they lose perspective,” offered Lieberum. “What is it they are bringing to market that’s different? It’s the people – the people, the ideas, the energy and persistence in understanding what they bring to the market and what’s different. Hopes and dreams aren’t plans or research.”
McKinley’s focus is to find companies who can fill out the San Antonio supply chain. “In automotive we have job multipliers of 2.5 to 3. In other words, for every automotive manufacturing job in Detroit, they create six more jobs and in San Antonio we create closer to three jobs. We have the potential for a strong multiplier base when you go down through our key industries like aerospace, health care, security and automotive.”
Finding Enlightened Investors
When asked how to create an enlightened investor community in Texas, those who are willing to invest in people versus ideas, David Spencer said that’s a tough one. “I have struggled with that question since starting to do some economic development work statewide in 2005,” he said. Spencer sees an area of tremendous opportunity at the state level with institutional money. “We have very little institutional money invested in startup or scale up work. UTIMCO is my favorite example, but the Texas Teachers Retirement System is another,” he said.
The City of San Antonio has been working to get some of that institutional money. “If we even put one-half of one percent of institutional money at work in Texas in startups, we would have a profound infusion of cash and opportunity, but we don’t,” said Spencer. “We have less than one-half of one-half of one percent invested. That’s something that’s an opportunity out there from a portfolio investment perspective.”
A new page in the economic playbook for Texas? It couldn’t hurt.
Our thanks to our Speaker Series Sponsors:
Jan 14, 2017 Comments Off on The Changing Of The Guard: San Antonio’s Economic Development Future
#TexasCEO's 10 Most Read Articles Of 2017 #2 The Changing Of The Guard: San Antonio’s #Economic #Development Future texasceomagazine.com/features… @SanAntonioEDF #1 Deep Roots In The Heart Of #Texas: The Kaspar Family’s #Holistic Approach To #Ranching texasceomagazine.com/features…
#TexasCEO's 10 Most Read Articles Of 2017 #4 @Jim_nyquist: At The Inflection Point Of #IIoT texasceomagazine.com/features… #3 Building #Innovation: @turner_talk Builds On Empowering Individuals texasceomagazine.com/features… @Turner_DAL @TurnerSouthTX #MiddleMarket #entrepreneurs
#TexasCEO's 10 Most Read Articles Of 2017 #6 The Cilantro Diaries: #Business Lessons From The Most Unlikely Places texasceomagazine.com/book-rev… @lgomez123 #5 From #Franchisee To #Franchisor: How Gordon Logan Built @SportClips texasceomagazine.com/features… #MiddleMarket #entrepreneurs
#TexasCEO's 10 Most Read Articles Of 2017 #8 #Mexico Is The New #China by @DrPippaM texasceomagazine.com/departme… #7 Growing The Next Generation Of Texas #CEOs: #CEO-to-CEO #Mentoring texasceomagazine.com/features… #Texas #MiddleMarket #business #entrepreneurs