Entrepreneurial impact on Ninth District economy grows

David Fettig | Managing Editor

Published July 1, 1991  | July 1991 issue

As a sales and marketing executive for a large biomedical firm, Robert L. Young found himself frustrated. He was certain that a market existed for a new product that would measure oxygen levels in blood, but he could not convince his company to commit to the idea.

The company was unable to move the product, Young says, because in a large company with many managers, nobody was willing to take a risk "that might hurt their own domain."

So, with his company unwilling to take a chance on a new product, Young made the biggest decision of his 11-year professional career: He took the risk himself. In March of last year, Sensor Devices Inc. (SDI) of Waukesha, Wis., began with just Young and a part-time secretary. SDI now has five full-time employees and soon plans to open a new manufacturing facility.

For Young, who says he is competitive by nature, the decision to make the leap from the relative security of the corporate life to entrepreneurial uncertainty was primarily one of personal character. "It has a lot to do with the spirit of the person," he says. "You have to be willing to take risks and make decisions."

In an economic age when the Upper Midwest is best known for the farm crisis of the mid-'80s and the drought of the late '80s, Robert Young's risk- taking is reflective of an entrepreneurial spirit that is working to create the majority of the region's jobs.

A recent report by US West, based on a study by Cognetics Consultants Inc., a Massachusetts business research firm, shows that recent job growth in Western states—including most of the Ninth Federal Reserve District—was largely fueled by the formation of small businesses (100 employees or fewer). Nowhere is this more true than in Montana, where net employment change went from -0.9 percent in 1986-88 to 9.8 percent in 1988-90, and where 82.5 percent of all businesses employ fewer than 10 people. Montana's entrepreneurial growth caused the state Legislature this year to create a unique state agency that is charged with financing start-up companies.

Whether this entrepreneurial activity exists despite economic hardships or because of them is a matter of conjecture, but Fortune magazine recently proclaimed these post-recessionary times to be "A Golden Age for Entrepreneurs" and suggested that a big wave of entrepreneurial activity will persist in the coming years. During the 1980s, the number of non-farm business tax returns in the United States increased about 50 percent, to about 20 million.

Such optimism doesn't belie the fact that many start-up businesses fail, however: Small Business Administration figures show that 60 percent of new companies close their doors within six years.

Growth in new businesses has drawn attention to a particular breed of business people about whom little is known, except anecdotally. In this issue of the fedgazette, we examine the nature of entrepreneurs, the impact of the Upper Midwest region on their development and the role of government in the formation of new businesses. We also provide brief stories about the successes and hardships of Ninth District entrepreneurs who, as one Montana businessman says, have taken "the great leap into space."

The nature of an entrepreneur

Dr. Rajiv Tandon, who teaches MBA-level courses in venture management and franchising at the University of St. Thomas in St. Paul, can look out over his classroom and just about tell who the entrepreneurs will eventually be. Tandon has his beginning students complete a sort of entrepreneurial assessment, and, after reading those results, the former corporate executive says he can accurately predict which students will ultimately drop out of the program.

Those who stay in the program, according to Tandon, possess the primary determinant of an entrepreneurial character: flexibility. The structured student—the kind who needs a detailed syllabus of the entire semester—will likely never become an entrepreneur, he says. The entrepreneur must be ready for an 18-hour day on any day of the week, and must be able to live with an uncertain source of income and an ad hoc schedule, among other things.

"It can be exhilarating, frustrating, delightful and terrible all in a matter of hours," Bob Thornberg says about starting a business. Thornberg is president of SweetPro in Walhalla, N.D.

Daryl Erdman, director of the St. Thomas entrepreneurship program, says that an entrepreneur doesn't consider long working hours and uncertain income levels as a source of anxiety, but rather as a source of freedom and opportunity. As one St. Thomas student told the teachers: He wanted to become an entrepreneur because he thought it would be easier to create a job than to find one.

"That is the kernel [of entrepreneurship] that can't be taught," Erdman says. But there is much about entrepreneurship that St. Thomas believes can be taught. The school offers the only MBA program in the nation for both franchising and entrepreneurship, and also offers an MBA in family business, as well as an undergraduate degree in entrepreneurship. Tandon believes St. Thomas' entrepreneurship program is answering a growing need. "Twenty-five years ago," he says, "the dream was to get a job with AT&T; now, I have sense that that is not necessarily the case anymore."

Dana Gleason would likely agree with that assessment. A persistent entrepreneur, he is an avid Montana outdoorsman whose third attempt at a start-up business, Dana Design of Bozeman, Mont., has made him one of the nation's top manufacturers of advanced mountaineering equipment—namely, backpacks.

From annual sales of $50,000 in 1985 and a staff of five, Dana Design has grown to $3 million in sales and 80 employees between two plants in Bozeman and Livingston. And Gleason has achieved those sales while eschewing one of the highly touted principles of corporate business—marketing.

"I don't consider marketing a dirty word," Gleason says, but he blames the death of his two earlier businesses (backpacks and camera bags) on the "short-sighted" selling techniques of marketing persons who were more concerned about lowering the price of his products to increase sales, than they were about the actual quality of the product. In his current venture he sells specially fitted backpacks for $300 to $400, a premium price in the current market. In most companies, he says, the heroes are the sales people; at Dana Design, "the heroes are the production workers."

Aside from a wariness of marketing techniques, Gleason's advice to budding entrepreneurs is to be extremely careful when choosing partners. Practical humility is a virtue, he says: "The worst mistakes get made when you're dealing with someone who thinks they know what they're doing."

Also, like so many others, Gleason started his venture with little money, a condition he says is beneficial to entrepreneurs for two reasons:

  1. There is not much money to lose.
  2. You can't afford to lose.

Geographic impetus for entrepreneurism

That notion of being "unable to afford to lose" may be what inspired some of the region's earliest entrepreneurs, according to John Borchert, professor of geography at the University of Minnesota in Minneapolis. Writing in a 1975 paper, Borchert describes a relationship between entrepreneurs and the land that began as early as the mid-19th century: "In Minnesota local entrepreneurship may well be even more necessary for local job creation than it is in some other parts of the United States. For this region has always lacked important resources or energy; it is on the geographical margin of the national market; and it is not a geographical concentration of low-priced labor."

He still holds those views today, but adds that Minnesota, and especially the Twin Cities, benefits from a high degree of centralization within the Upper Midwest. There has been a migration of people, industry, retailers, professionals and academia over the past 100 years to the Twin Cities that has helped create ideal circumstances for entrepreneurs, he says.

A number of wealthy, successful families helped form the large corporations that would be the cornerstone of present-day Minnesota, Borchert says, but many of those companies owed much of their success to the centralization of the Upper Midwest toward the Twin Cities.

A case for that centralization is made by Brett Johnson, one of the founders of the Minnesota New Venture Collaborative—an entrepreneurial support group in the Twin Cities—who says that the recent wave of computer and biomedical entrepreneurial activity in Minnesota can be traced to the formation of Control Data Corp. and Medtronic, and to the research support of the University of Minnesota.

"Legions of knowledgeable middle managers came from those companies and created many successful spin-offs," he says; and it's a process that continues today.

The key to the entrepreneurial success of the Twin Cities—and, by proxy, the rest of the region—is that it is "information rich," according to Borchert. The historically intensive interaction between the Twin Cities and the land, the visibility of the Twin Cities in America, the mobility of the people, and the presence of world-class companies and a top-notch university have created a region that is wise in the ways of the world as well as in the ways of its next-door neighbors, he says.

"Anything that fosters economic, social and educational mobility increases the chances of creativity within a population," he says, referring also to other Upper Midwest states, as well as Minnesota. Borchert, who thinks area citizens should consider themselves as citizens of the Upper Midwest rather than of a particular state—says that the quality of life in North Dakota, for example, is higher because of the Twin Cities (although he admits that such an idea may be a tough sell in the Dakotas).

The role of government

That may also be a tough sell in Montana, a state, as mentioned earlier, that has become increasingly dependent on small business for its employment growth. The state's growth in "micro" businesses (those with fewer than 10 employees) has ranked it near the top in the nation; and rather than allowing that trend to continue on its own, the Montana Legislature has decided to help micro businesses by creating the Micro-Business Finance Program (MBFP).

The MBFP will use $3.25 million from the state's Coal Tax Fund to lend money at 4 percent to 12 Regional Revolving Loan Funds, which will then lend up to $20,000 to qualified businesses. Loans will be made at the market rate plus a premium to help ensure that businesses will first apply to conventional lenders. Those businesses must employ 10 people or fewer and have an annual gross income of less than $500,000. The state will also provide training and management oversight as needed.

Bob Heffner, chief administrator of the project for the state's Department of Commerce, says Montana's venture into small business financing is one of the first of its kind in the country, and he believes it is the right role for the state. After examining the growth of micro businesses in the state and considering the need for additional capital, Heffner says the state eventually came to the conclusion that there is a definite link between capital availability and job growth.

"We get calls daily from small businesses that need debt capital," he says. Capital is not provided by local lenders, Heffner says, because the cost to the lender of evaluating such small loans doesn't justify the transaction.

One 1990 economic study may give credence to Montana's plans. In a working paper for the National Bureau of Economic Research, economists David Blanchflower and Andrew Oswald of Dartmouth College primarily use British data because of the lack of information on American entrepreneurs, but their conclusions are given in a broad context. "What is it that makes a young entrepreneur? Our empirical analysis identifies many factors, but one stands out. These British data support the hypothesis—recently examined by U.S. economists—that entrepreneurs face capital and liquidity constraints. It appears that the effect is large." The authors suggest that a gift or inheritance approximately doubles a person's probability of establishing a new business.

"The conclusion that capital and liquidity constraints are influential has implications for economic policy," the economists write. "Although any econometric result should be treated cautiously, the estimates in this paper are consistent with the idea that entrepreneurship can be fostered by financial grants, and they provide tentative information about the size of the response to different levels of such transfers."

But Rajiv Tandon of St. Thomas is highly skeptical of a governmental role. "Sometimes the government, in its effort to do good, does more harm," he says, speaking of government's general role and not Montana's particular plan. Tandon says that government's role should be reserved for the macro level, to help create a positive economic climate and to provide informational services, as well as to do what government does best—invest in infrastructure.

As for direct business investment by government, Tandon is blunt: "Government has always been lousy at it and will always be lousy at it." Among other reasons, Tandon says that politics invariably enters into questions of economic investment, and he cites the former Greater Minnesota Corp., a state-sponsored economic development commission, as an example of how political bickering and bureaucratic ineptness can foil the most honorable intentions.

Montana's Heffner, however, is confident that his state will avoid such problems, primarily through the creation of its regional funds, which will bring some local control to the process and will mean that all areas of the state will benefit from the funding. "This is not risky business," Heffner says. "Micro business is the real Montana economy. The state will get job creation, stability and diversification."

Established this spring by the state Legislature, Montana's Micro-Business Finance Program expects to make its first business loan before the year's end.