Entrepreneurship

Is St. Louis a Top Engineering City?

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Historically, St. Louis has seen itself as a engineering-oriented sort of place. As the starting off point for people heading to the West, St. Louis’s blacksmiths made all sorts of products. Later in the 19th century, St. Louis on the river and at the hub or railroads, became a major manufacturing city. By the middle of the 20th Century, St. Louis was the nation’s second largest manufacturer of cars, and one of the five biggest for planes. Behind all that was an army of engineers – designing, building, and troubleshooting. We prided ourselves on our engineering achievements – ranging from the Mercury and Gemini spacecraft to the Gateway Arch.

With that tradition in all of our minds, we assume we remain one of the great engineering cities of the USA. Earlier this week Forbes published a piece by Joel Kotkin titled “America’s Engineering Hubs: The Cities With The Greatest Capacity For Innovation.” In it Joel reports on a study from the Houston Partnership that looked at the 85 largest metro areas in the country, ranked in terms of the number of engineers per capita. The Forbes piece mentions the Top 10, with San Jose tops at 45 engineers per 1000 employees. Number 10, Denver, was at 17. I personally reached out to Joel Kotkin and asked for our city’s ranking. He was kind enough to send me the complete list. St. Louis was 46th, with 10.6 engineers per 1000 employees. Kansas City was 53rd at 10.1.

This suggests that our historical recollection and modern situation might not be fitting together well. Why might that be? We have several fine engineering schools in the region – MUST, SLU and WashU immediately come to mind. Education News lists 24 in the state. One question though is do we need to grow these schools, or programs? If so, the state can take an aggressive role in promoting and supporting that type of growth, as can Missouri companies who are the eventual employer of so many of these graduates.

Another question is are we doing enough to keep graduates here. Today an increasing number of engineering students come from overseas, and the American visa system requires them to leave as soon as they finish, unless they can find a job and pay to get their work visa. This is basically forcing American-trained engineers to leave the country as soon as we finished adding value to their education. This problem can only be dealt with by the Congress.

The other issue is long-term. A lot of what is powering the high concentration of engineers in those Top 10 cities is a focus on the types of industries that make high levels of use of engineers. Those industries tend to be high-tech, and high-value-added sorts of industries. Today that includes St. Louis staples like aerospace and biotech, but also advanced manufacturing (think robotics), exotic materials (think nanotech), and of course IT and the Internet. St. Louis and Missouri is making strides in all of these areas. SLU attracted a top nanotech researcher (Eugene Pinkhassik) from the University of Memphis last year to anchor that campus’ efforts, and SLU’s not alone in that effort or area. But these areas need more support from state and local government, foundations and corporations to build these industries as eventual homes for the engineers we turn out.

Trained engineers are invariably a bright bunch. They know enough to go where the money is, and the money usually comes from the jobs. We need to make more engineering jobs to make Missouri the right place for our in-state-trained engineers to stay.

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How Missouri Fares as an Entrepreneurial Powerhouse

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The US Chamber of Commerce posted a report last month on how the states were doing in promoting enterprise. Entitled Enterprising States: Policies That Produce (get the report here), the report rated states on 33 attributes the Chamber felt were essential to economic (and entrepreneurial) growth in areas such as Economic Performance, Exports & International Trade, Innovation & Entrepreneurship, Taxes & Regulation, Talent Pipeline and Infrastructure.

Missourians are probably curious how we did. Of 33 measures, Missouri scores in the top 10% (i.e. the top 5 states) on none. We had 2 measures (Entrepreneurial Activity and Higher Education Degree Output) that were in the top 20% (a.k.a the top 10 states) and 10 more measures in the top half of states. The chamber gave top 10 state lists in the six areas mentioned above, and Missouri did not have one mention on any of the lists. On the list of “The Next Boom States,” Missouri did not get mentioned.

As a state that prides itself on low taxes and being a haven for business,  state leaders and a host of politicians would probably expect the Show-me State to fare well, but in comparison to other states on those Taxes & Regulation measures, Missouri’s performance is anemic. There are six measures (Business Closure, Tax Environment for Mature Firms, Tax Environment for New Firms, State business tax climate index, Small Business Survival Index, and State Cost of Living Index). Missouri is in the bottom half of states on the first three, and ranked between 11 and 25 for the last three. And this is one of the categories where our state’s performance is strongest, along with the Talent Pipeline.

In the report’s narrative on our state, the Chamber applauds Missouri’s efforts to improve the economic climate and mentions advances in training and promoting manufacturing and exporting. It is gratifying to see the state getting recognition for making strides, but reports like this, which are really compendia of already existing surveys, bring into sharp relief the need for the state legislature to do more to help promote efforts to grow our economy. Some of these, like an angel tax credit, higher education supports, funding for economic development, or supports for improved Internet access, are relatively inexpensive, and provide relatively fast paybacks in improved business and job results. Improving the tax climate in ways that groups like the Tax Foundation recommend would help, but also require more legislative energy and pose bigger challenges in making sure the state has enough revenue to meet its own obligations.

Missouri’s entrepreneurs did their part, starting businesses at the 6th highest rate in the nation in 2011, despite the less-than-ideal conditions in the overall economy and (as the Chamber’s report indicated) the state. It would be a great time for our legislators to step up their own game.

The Silent Crisis – Unrealistically High Business Valuations

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One Million Dollars
Image by JeffreyPutman via Flickr

GM is about to pull the plug on Saab, since it cannot successfully conclude negotiations with any buyer. Tens of thousands of businesses will silently close down over each of the next 10 years as their owners are also unable to find anyone willing to buy their businesses. And at the other end of the small business life-cycle, there are thousands of start-ups seeking outside investment who won’t get it.

The common factor in all of these is a valuation of the business set too high. It is widespread enough and significant enough to warrant being called a crisis, but it is one rarely discussed.

Over the past year for example, the angel group I manage saw over 100 business plans, over 80% for start-ups. Most of these had no customers, no sales, no revenue stream. Most of them had no protected (or in many cases protectable) intellectual property, but the vast majority had valuations of $1 million. You can see what that amount of money looks like in the photo to the right. The causes of this kind of thinking? In part it is following a norm – blindly – since the typical amount given is $1 million. But when asked to defend the number, most entrepreneurs vigorously promote their sweat equity and underlying concept as worth the valuation.

Inc. Magazine has an annual valuation section which gives the worth for operating companies in more than 100 industries, but few start-up entrepreneurs refer to this in assessing their own plans. So lacking hard data, why do entrepreneurs persist? Hubris comes to mind, and in that version of passion, the start-up entrepreneur, the established entrepreneur, and the CEO of a billion-dollar corporation find a common ground.

Family business experts suggest that about one-third of family businesses (maybe more) will face the retirement of the founder over the upcoming decade. The same will be true for small businesses in general. Even with family successors, less than 30% of family firms make it into the next generation, and the statistics for transfer of non-family small businesses are even more bleak. These closure hurt customers and employees, and basically mean that the owner gets no value out of the business at the point it closes.

On the other hand, when asked to sell the business, suddenly a business with no value if closed down takes on all sorts of value, producing multi-million dollar valuations, again with little or no basis in fact, like even the rough rubrics given in the Inc. Magazine valuation guide. Typically owners who have taken decades to build a businesses value, and who know what their cash flow looks like, want nearly all the value of the business in cash, and the sooner the better – tomorrow for instance!

The July 24, 2006 issue of Fortune, featuring ...
Image via Wikipedia

Amazingly, it is little different for Fortune 500 corporations. Monsanto saddled their Solutia spin-out with mountains of Monsanto’s own debt, as a way to improve Monsanto’s bottom line – and make it less likely for a competitor to buy Solutia. In the case of GM’s Saab, the valuation placed on Saab as well as the liabilities GM has likely been pushing on any eventual Saab buyers, have become deal-breakers. For cash-flush Chinese businesses eager to break into the American market, such inflated deals are acceptable, but for less-motivated buyers, the hubris-inspired valuations are deal-breakers.

The solutions are the same regardless of the size of the business – pick honest valuations, structure deals so that the buyers can pay off the purchase over an extended period, and don’t saddle the business on the block with outrageous debt or valuations. Half a loaf is better than none goes the old saw, and for the shareholders of GM and the owners of millions of American businesses destined to close up over the next ten years, that old saw should have new relevance.

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