Article of the Day

19 Best New Business Ideas for 2016 – Business News Daily

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“I can’t understand why people are frightened of new ideas. I’m frightened of the old ones.”
~ John Cage
 

Evaluating New Business Ideas

The beginning idea for a startup business is only part of what’s necessary to get to a viable business, but it certainly helps to start with a quality idea.  So how should aspiring entrepreneurs both come up with and evaluate the potential of new business ideas?

A tool I’ve developed to help students evaluate their own and other student startup ideas is the Startup Evaluation Matrix.  It also serves as the rubric by which I formally evaluate and grade new startup business concept papers.  In addition, I increasingly use it when speaking to aspiring entrepreneurs from outside the course who are looking for feedback on their ideas.

Startup Evaluation Matrix - Kevin Kimle - Iowa State University

Each of the elements of the Startup Evaluation Matrix reflects a yin and yang relationship; complementary, interconnected, and interdependent forces that shape its attractiveness. This balance in a startup business idea is difficult to shape, yet one that consistently comes through in the most attractive startup concepts.

Migraine Problem/Value to Customer – I use Diana Kander’s all in startup book’s notion of a problem that represents a significant opportunity, a migraine problem. A business needs to solve a problem so significant that customers will do whatever it takes to solve it, including paying someone else for a solution.  Envision the problem as a migraine headache.  The flip side of the problem is the value of the solution to the customer.  Does the solution have a clear and significant advantage?  Does it hit the ‘homerun’ of being better, faster, and cheaper?  Does the solution deliver value while making life simpler for customers?  So many technology startups miss this mark in that they may be able to solve a problem, but they are so complex or require such significant changes in behavior that they simply will never be considered viable by most prospective customers.

Niche Now/Big Market Potential – Peter Thiel in Zero to One writes that entrepreneurs need to look for ‘monopoly’ opportunities; markets where they can shield their businesses through various means from competition that will bid their profits to zero.  I think of attractive market opportunities for startups as being markets that are niches currently, but with the potential of big growth.  When we started E-Markets in 1996, there was not really a market for Internet-based electronic applications in the agribusiness space.  However, the Internet was new as a platform, and clearly had significant growth potential as a better, faster, cheaper platform for e-business.  Today I see agricultural entrepreneurs working on indoor aquaculture, robotics, diagnostic software, and other areas that have an undefinable market opportunity today, but huge potential in tomorrow’s market.

Doable Now/Unique Solution Long Term – Rarely is their something completely new, whether a technology, production system, product, service, or method.  Rather, entrepreneurs combine old things in new ways, and new places to create new solutions to new audiences.  Quality startup ideas balance the do-ability of a new solution near-term with its long-term uniqueness.  A startup that will truly scale can’t be a copycat, it must aim to solutions that are unique and represent the target for which copycats aim.

Contrarian/Surprise Element – An attractive startup idea has some element that is contrarian.  It is treading left while everything else is treading right.  Perhaps that arises from the independent-minded nature of entrepreneurs who chart their own course.  The contrarian nature of interesting new business ideas also lends an degree of surprise or unexpectedness.  The highest impact startups will be something that could not be predicted by most people.  The innovations that disrupt an established market will be initially dismissed by businesses that will eventually be put out of business.  In 1996, I was involved in a consulting project for Kodak.  The Senior VP we worked with dismissed the strategic threat of digital cameras.  Kodak was the first company to market a digital camera in the 1990s, but ignored the opportunity enough that its business was knocked from beneath it and filed for bankruptcy in 2012.

Deciding the quality of a startup business idea is more art than science.  Malcolm Gladwell’s Blink explains that choices that seem to be made in an instant-in the blink of an eye-actually aren’t as simple as they seem.  I know great investors and entrepreneurs that very quickly assess a startup idea, a business plan, or the viability of a new product or service.  I suspect that they have some kind of internal matrix-like structure that enables them to make snap judgements that are most often on-target.  Their mental matrix has been developed based on experience, but I’ve found that the Startup Evaluation Matrix is a means to embed a beginning way of thinking for less experienced entrepreneurs too.

How would you apply the Startup Evaluation Matrix to the following new agricultural businesses?  Which of these business concepts holds the most promise?  Why?

Cybernated Farm Systems – CFS has designed Off-Grid Smart Aquaponic Greenhouses that will benefit people from the first to the developing world.

Tiny Farms – Tiny Farms is building a platform for the production and distribution of insects as commodity agricultural products.

Vital Herd – Vital Herd has developed a solution that captures each animal’s vital sign data and transmits it to a cloud platform for analysis.

Barn2Door, Inc. – A discoverable marketplace where anyone can buy or sell clean, sustainable food.

Iron Goat – Iron Goat is an agricultural robotics company with an autonomous self-fueling hay harvester technology.

 

Video of the Week

What do you know that no one else understands? – Peter Thiel

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“All great thinkers are initially ridiculed – and eventually revered.”
~ Robin S. Sharma

Contrarian Agriculture

Contrary
adjective
          Opposite in nature, direction, or meaning.

The most entrepreneurial paths are those that are new and untried.  Identifying those paths comes, at least in part, from the way the entrepreneur looks at and interacts with the world around him or her.  While pleasing other people is not a bad habit, agreeing too quickly with others on the way the world works today dampens one’s ability to identify interesting opportunities.

My contention is that entrepreneurs find ways to be contrarian.  In doing so they uncover ideas, pathways, and ultimately businesses that are trail-blazing.  Peter Thiel gets at this in interviews and his book Zero to One by asking ‘what truth do few people agree with you on?’

One method I suggest to students for putting your inner contrarian to work is to capture it in a persona.  In my case, I envision a neighbor of my grandfather named Vladi.  Vlcdi was dead before I was even born, but I still recall Grandpa’s tales about the sheer orneriness of Vladi, and some of the funny reactions to his behaviors.  So my inner contrarian takes the form in my mind of a German-accented farmer in 1930s bib overalls growling disagreement at those people and situations he encounters, just for the amusement of it really.

Another means of honing your contrarian skills is to examine bits of conventional wisdom and where you may differ from it.  Conventional wisdom is the body of ideas or explanations generally accepted as true by the public or by experts in a field.

Five examples of what I take as conventional wisdom in agriculture includes the following.

  1. Agriculture’s primary challenge between now and 2050 is how to feed the growth in world population from today’s 7.4 billion to the 9.4 to 10.0 billion in 2050.
  2. Cheaper energy means that supply chains in agriculture will be longer.  The distance between where agricultural and food products are produced and where they are further processed/consumed/used will increase.
  3. The most significant resource constraints for agriculture will be land and water.
  4. The emerging middle class in countries with rapid economic growth are adopting western diets.
  5. Economies of scale will continue to heavily impact farm and business size, with increasingly large farms and agricultural businesses occupying a bigger part of markets.

What does your inner (or outer!) contrarian tell you about any one of these five examples of conventional wisdom in agriculture?  Reply to this post.  In addition, reply not only to this post but to those of other respondents.  Do you disagree with any of these examples of conventional wisdom? Unleash your inner contrarian!

Podcast of the Week

Entrepreneurs go out of their way to interview other people, listening more than speaking – Chris Sacca

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“You shouldn’t focus on why you can’t do something, which is what most people do. You should focus on why perhaps you can, and be one of the exceptions.”
~ Steve Case, co-founder of AOL

Lessons Learned from Entrepreneurs

One of the best ways to become a better entrepreneur is to talk with other entrepreneurs.  If you want to learn something the goal should be more than just to visit, but to ask good questions. What are good questions to ask entrepreneurs?

Ask entrepreneurs about the hard stuff.  Don’t dwell on the stories of great success, but learn about what it was that was required to get to that point.

Ask about skills.  What are you really good at?  How did you get good at it?  What are you working to improve?  What skills do you admire in others?

Asks about habits and disciplines.  Do you read books?  How do you allocate your time?  How do you prioritize?  What things don’t you do that everyone else does?

Tim Ferriss does a great job asking questions that come from the perspective of personal improvement in his podcast, often interviewing entrepreneurs, investors, and others involved in startups.  Examples of his questions:

  • What are your favorite books?
  • Which book do you gift most often?
  • What do the first 90 minutes of your day look like?
  • Which famous historical figure do you most closely identify with?
  • What do you wish you knew 20 years ago that you know today?
  • When you hear the word ‘successful,’ who do you think of of?  Why?
  • Do you have any rules you follow when evaluating new opportunities or investments?

I’ve had the opportunity to meet and interview many entrepreneurs, and now I get to meet hundreds every year through my activities at the Agricultural Entrepreneurship Initiative and through the ~200 interviews students in my entrepreneurship course write about each year.  Without attribution to any individual entrepreneur, some of the significant lessons I’ve drawn from others include the following.

Work with people you like – One of the most sunny entrepreneurs I’ve ever met uses this rule across the spectrum of his professional life.  He does everything he can to avoid working with people he doesn’t like, whether a hiring decision, a business he buys from, a customer, or even an investor.  This seems an easy rule on the face of it, but is much more difficult to practically implement.  You meet with a prospective investor, for example, who is really interested in a piece of your latest deal.  The issue: Something in your gut tells you that you just don’t like the guy/gal.  Advice: Follow your gut, don’t take the next step.

Don’t skip opportunities to meet new people – A very successful entrepreneur I know offers this networking advice to others.  Sure you can’t give up all your evenings to go to this or that event, but you can make some of them.  Find ways to attend events you might not usually attend, and to overcome the very understandable hesitation to go to places where you know few if any people.  It’s the people you meet that will change your life, so find ways to meet more of them.

Work on stuff with significant upside potential and limited downside potential – A friend tells aspiring entrepreneurs that it is really a lot of work to start any business, so you might as well work on one with significant upside potential. If it’s just as much work to start a small, crappy business, try for something bigger.  The flip side of that coin is to avoid projects and businesses where there is huge downside risk.  There’s risk in anything new, but pursue opportunities where you can limit that downside through one means or another.

Don’t look at the averages, look at the outliers – A friend has spent a career and built a huge company on this principle.  If you look for products, services, and businesses that float around the average the results will be average (not very good).  Rather, look for results and issues that are the the boundaries of the bell curve, the outliers.  This contrarian search for outliers will result in outcomes that far exceed the average.

Dare to be different –  This is certainly a composite that I’ve learned from lots of entrepreneurs, but work on issues, think about things, and develop opportunities that not a lot of others are thinking about and working on.  One night we had an Entrepreneur’s Roundtable event where a handful of entrepreneurs shared dinner and conversation with students.  Three of the entrepreneurs were visiting with me at the end of the event and it came up that all three had struggled in grade school with dyslexia.  They laughed about their grade school struggles, teachers who held them back a grade, etc. in light of their extreme business success.  What occurred to me after the conversation was how each of them looked at the world differently from most other people at least in one way because of their disability.  Knowing each of them, I could see how it shaped their character in being secure even if different from others.

Video of the Day

The core of entrepreneurship is to make meaning – Guy Kawasaki

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“The entrepreneurial life is one of challenge, work, dedication, perseverance, exhilaration, agony, accomplishment, failure, sacrifice, control, powerlessness… but ultimately, extraordinary satisfaction.”
~ David S. Rose

Entrepreneurship as a Life Skill

“Can entrepreneurship be taught?” was one of the questions I got from an economics professor when I interviewed in 2009 for the position I now hold at Iowa State University.  If I’d been in a more snarky mood that day I might have responded with my own question: Can economics be taught?  But alas, I think I just replied with a ‘yes’ and an explanation of why I thought it true.

The question of whether entrepreneurs are born or made is an enduring one.  One very successful entrepreneur who speaks to my class occasionally equates entrepreneurial success with genetics.  Either you have the right genes or you don’t.  Another asks students to ask themselves whether they are leaders.  If they answer ‘no,’ he suggests they work for an entrepreneur rather than become one themselves.

While I realize not everyone will choose the life of an entrepreneur in the purest sense, starting a business, everyone does have the capacity to develop the skills important to an entrepreneur.  I am certainly happy that I haven’t been confined to the skills and inclinations I had when 20 years old!  While I suspect there were some nuggets of an entrepreneurial skill set in my 20 year old self, I continue to learn, work on weaknesses, and strive to be a more effective entrepreneur today than I was yesterday.

Today is the start of my fourteenth semester teaching entrepreneurship course at Iowa State University.  My experience has certainly borne out that entrepreneurship can be taught.  Not in classic lectures, un-ending war stories, or simulations, but through just doing it.  Students create concepts for new businesses and go through the process of developing and presenting a business plan.

This semester’s 96 students will join the ~1,100 past students who’ve taken the course who’ve went through the process of identifying opportunities, translating those opportunities into a new business, and developed an articulate plan for launching the business.  It’s not easy, but it’s been an outstanding way to help students begin to develop their own entrepreneurial skill set, hopefully the first steps in what will be become a professional life marked by continued skill development.

The students join the ranks of past students who have taken an idea from the class and launched a business.

  • ScoutPro – Launched by Michael Koenig, Stuart McCulloh, and Holden Nyhus based on a class project in 2011.
  • AccuGrain – Launched by Ryan Augustine based on a class project in 2012.
  • Track Till – Launched by Colin Hurd based on a class project in 2013.
  • Wolter’s Custom Yardens – Launched by Joshua Wolters based on a class project in 2015.

Each of these young entrepreneurs has done well not just to launch a business, but to continually push to develop their entrepreneurial skill set.  Skills important to entrepreneurs in my experience include the following, though certainly not an exhaustive list.

  • Make-it-happen – Entrepreneurs need to be able affect their circumstances and those around them.  This action-orientation is a big part of what sets apart the entrepreneurial from those who take things as they come.  Shape the world or be shaped by it.
  • Communication – Effective communication with others is at the center of many entrepreneurial activities such as presentations and sales.  Not every successful entrepreneur is necessarily a wildly-skilled presenter, but at some level they can effectively persuade other people.
  • Teamwork & networking – It goes along with communication, but understanding how to build teams and the value of meeting and seeking out new people  is important to effectiveness.  “Some of the strangest people you meet will make the biggest difference in your life,” says one of the entrepreneurs who speaks to my class each semester.
  • Opportunity identification – Looking at the world through an entrepreneurial lens involves being able to identify opportunities others may miss.  What problems can be solved in new and better ways?
  • Prioritization and focus – Effective entrepreneurs I’ve met not only see opportunities, they also effectively choose to work on those that are most attractive.  Time is life’s most limited resource, so managing your time and focus is key.  I recently saw a presentation where an entrepreneur said the projects he works on and invests in have to meet a ‘hell yes!’ hurdle.  They have to be so compelling he is yelling ‘hell yes!’ to them.  Not many things rise to that level of interest and excitement.

Which skills are most important for you to develop?  It depends highly on where you’re at in your career, your past experiences, and an honest assessment of what you’re good at and what you’re not.  Most importantly, development of your entrepreneurial skill set depends on your mindset.  Do you believe that you can develop your skills?  If you can answer ‘yes’ to that question then get after it!

 

Article of the Day

Biomimicry: using nature’s designs to transform agriculture – The Guardian

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Everything about my journey to get Spanx off the ground entailed me having to be a salesperson – from going to the hosiery mills to get a prototype made to calling Saks Fifth Avenue and Neiman Marcus. I had to position myself to get five minutes in the door with buyers.
~ Sara Blakely, Spanx Founder

Prototyping to Success

Startup companies by reputation have a high failure rate, as high as 50 or more percent depending on the analysis and author. Why?  The reasons are plentiful, but in looking through literature on startup failure there is one reason that doesn’t drive failure, product flaws.

Fundamental flaws in startup business’ products and technologies are rarely the primary source of failure; perhaps less than 20 percent.  Rather startup failures result from problems with early customer development, business model mistakes, financial mismanagement, etc.

I have served as a panelist for the Successful Farming Innovation Showcase. In this contest, contestants submit their inventions for evaluation of business potential.  The proverb ‘necessity is the mother of invention’ fits most of the inventions I have seen come through this contest in that farmers build things solve day-to-day problems they experience.  Time may be saved, a sore back avoided, or an improvement in method or machine is developed.

What many of the farm inventions lack, however, is substantial business potential.  The inventions may:

  • Lack scalability in that they solve a problem for the inventor but there is a lack of others that experience the problem in the same way
  • Not have enough value to compel customers to pay for the solution
  • Not present a unique solution that will differentiate the invention enough from existing alternatives to get to launch in a competitive marketplace
  • Be so complex that the likelihood of widespread adoption is low

Development of prototypes is one means for an entrepreneur to try to avoid these types of pitfalls in development of their business.  However, development of a prototype in isolation from prospective customers can also be an empty exercise.  Entrepreneurs need to develop prototypes.  Most importantly, they also need to test and evolve them while experimenting with prospective customers.

I experienced this, more by accident than design, at my first startup, E-Markets, in 1997.  I had developed a very crude prototype for a browser-based application.  Ultimately, our first customer pointed at the prototype on projector screen and said they wanted to buy it.  But they really didn’t want to buy the prototype.  Rather they wanted to buy a much more developed version of the prototype that was highly customized to their needs.  During about a 4 month process, we worked daily with the customer and their network of business partners to develop a solution.  In the end we had simultaneously developed a much better application, but had also achieved the buy-in of employees of the customer organization and a network of others involved in their business.

Prototype development, in the ideal, isn’t a linear process.  Instead it’s an iterative process of evolving the prototype or prototype idea based on rich interactions with prospective customers.  This interaction leads not just to a better prototype, but to the winning business model that contains the new product and/or service.

Company Building Model - Kevin Kimle - Iowa State University

Developing a prototype while engaging potential customers helps discover and validate the important details of their problems and needs.  Most importantly, the engagement process converts those potential customers into real, paying customers.  As you develop those paying customers you’ve developed and built a company and business.

In 1997 my prototype work was an Internet-based electronic commerce application.  It melded business processes in the agribusiness space with software that enabled new types of more efficient and effective behaviors.  Much to my pleasure, I have had Iowa State University students apply similar methods to their products.

Colin Hurd at Agriculture Concepts developed the roughest of prototypes while a junior at ISU for what became his Track Till product in 2012.  In 2013, prototype number 2 was a much more sophisticated product that has much resemblance to today’s commercial version and got Colin his first sale.  In 2014, he sold a more refined product, not anymore a prototype, that is now being scaled up.

Ryan Augustine was senior at ISU in 2012 when he developed the business concept for AccuGrain.  The business anticipated using an ISU-patented technology for using X-Rays to measure grain flow.  By 2013/14, Ryan had secured the funds and expertise to develop prototype number 1 for AccuGrain. In 2015 he developed prototype number 2, tested it, and now is making his first sales.

Clayton Mooney, Elise Kendall, Ella Gehrke, and Mikayla Sullivan developed the concept of a mobile food dehydration unit and formed Kinosol in 2014.  They competed in the Thought for Food Challenge, making the finals in 2014, and continued to evolve their product through testing and prototyping.  Today, the Kinosol team is on prototype number 7, marching ever closer to commercial launch through trial and error in various locations around the world with prospective customers.

Prototyping while developing customers is one way that entrepreneurs fail successfully.  The only thing you know when developing new product and service concepts, is that they will be wrong.  The technology won’t work as envisioned, it won’t have a clear value, it won’t meet the needs of a type of customer, etc.  Product successes arise from the learning that happens while interacting with prospective customers who are experiencing use of the new product.  Sales is an essential function of the prototyping process.

Article of the Day

Google Designs Low-Cost Degree On Building Startups – Forbes

____________________

“Even if you don’t have the perfect idea to begin with, you can likely adapt.”
~
Victoria Ransom, co-founder of Wildfire Interactive  

Evaluating Startup Ideas

Iowa State University students who take my entrepreneurship course create two or three concepts for new businesses in the first half of the semester.  It’s now my thirteenth semester teaching the course, and I’ve continued to evolve the course to help students create stronger new business concepts.  The beginning idea for a startup business is only part of what’s necessary to get to a viable business, but it certainly helps to start with a quality idea.

A tool I’ve developed to help students evaluate their own and other student startup ideas is the Startup Evaluation Matrix.  It also serves as the rubric by which I formally evaluate and grade new startup business concept papers.  In addition, I increasingly use it when speaking to aspiring entrepreneurs from outside the course who are looking for feedback on their ideas.

Startup Evaluation Matrix - Kevin Kimle - Iowa State University

Each of the elements of the Startup Evaluation Matrix reflects a yin and yang relationship; complementary, interconnected, and interdependent forces that shape its attractiveness. This balance in a startup business idea is difficult to shape, yet one that consistently comes through in the most attractive startup concepts.

Migraine Problem/Value to Customer – I use Diana Kander’s all in startup book to start the class, and have adopted her notion of a problem that represents a significant opportunity, a migraine problem. A business needs to solve a problem so significant that customers will do whatever it takes to solve it, including paying someone else for a solution.  Envision the problem as a migraine headache.  The flip side of the problem is the value of the solution to the customer.  Does the solution have a clear and significant advantage?  Does it hit the ‘homerun’ of being better, faster, and cheaper?  Does the solution deliver value while making life simpler for customers?  So many technology startups miss this mark in that they may be able to solve a problem, but they are so complex or require such significant changes in behavior that they simply will never be considered viable by most prospective customers.

Niche Now/Big Market Potential – Peter Thiel in Zero to One writes that entrepreneurs need to look for ‘monopoly’ opportunities; markets where they can shield their businesses through various means from competition that will bid their profits to zero.  I think of attractive market opportunities for startups as being markets that are niches currently, but with the potential of big growth.  When we started E-Markets in 1996, there was not really a market for Internet-based electronic applications in the agribusiness space.  However, the Internet was new as a platform, and clearly had significant growth potential as a better, faster, cheaper platform for e-business.  Today I see agricultural entrepreneurs working on indoor aquaculture, robotics, diagnostic software, and other areas that have an undefinable market opportunity today, but huge potential in tomorrow’s market.

Doable Now/Unique Solution Long Term – Rarely is their something completely new, whether a technology, production system, product, service, or method.  Rather, entrepreneurs combine old things in new ways, and new places to create new solutions to new audiences.  Quality startup ideas balance the do-ability of a new solution near-term with its long-term uniqueness.  A startup that will truly scale can’t be a copycat, it must aim to solutions that are unique and represent the target for which copycats aim.

Contrarian/Surprise Element – An attractive startup idea has some element that is contrarian.  It is treading left while everything else is treading right.  Perhaps that arises from the independent-minded nature of entrepreneurs who chart their own course.  I have an exercise for aspiring entrepreneurs where I ask them to find and unleash their inner contrarian, for its often from this character within us that we find the most interesting ideas and the perseverance to see them through.  The contrarian nature of interesting new business ideas also lends an degree of surprise or unexpectedness.  The highest impact startups will be something that could not be predicted by most people.  The innovations that disrupt an established market will be initially dismissed by businesses that will eventually be put out of business.  In 1996, I was involved in a consulting project for Kodak.  The Senior VP we worked with dismissed the strategic threat of digital cameras.  Kodak was the first company to market a digital camera in the 1990s, but ignored the opportunity enough that its business was knocked from beneath it and filed for bankruptcy in 2012.

Deciding the quality of a startup business idea is more art than science.  Malcolm Gladwell’s Blink explains that choices that seem to be made in an instant-in the blink of an eye-actually aren’t as simple as they seem.  I know great investors and entrepreneurs that very quickly assess a startup idea, a business plan, or the viability of a new product or service.  I suspect that they have some kind of internal matrix-like structure that enables them to make snap judgements that are most often on-target.  Their mental matrix has been developed based on experience, but I’ve found that the Startup Evaluation Matrix is a means to embed a beginning way of thinking for less experienced entrepreneurs too.

 

Article of the Day

Big Banks to America’s Firms: We Don’t Want Your Cash – Wall Street Journal

____________________

“The recognition by a people that their prosperity depends on the breadth and depth of their innovative activity is of huge importance.”  
~ Edmund S. Phelps

Virtuous Habits of Free Enterprise

I read the article above last weekend about banks discouraging large deposits of cash from certain types of clients.  Instead of paying interest, some banks are charging for holding cash in deposit.  Perhaps you learned in school that banks take deposits and loan part of them out as part of their business.  Apparently not in all cases.  The regulatory environment is such that bank examiners want banks to hold collateral such as U.S. treasury notes against a large portion of cash deposits that could be withdrawn quickly.  In other words, some types of cash deposits become liabilities for banks. Private sector assets backed by public sector debt!

The current regulatory and zero-interest environment results in a variety of Bizarro stories like this one.  Banks that charge interest for deposits while working not to lend money, and bank examiners explaining to bankers that they need collateral in the form of government debt (treasuries) to back up cash.  Right.

The blocking and tackling of economic growth and prosperity is really not that complex; work/produce, save and invest.  These three activities, carried out by individuals free to make choices about what they do each day, result in individual successes (and failures) that sum to general economic growth.  How is each of these three virtuous habits of free enterprise impacted by the current policy and regulatory environment in the U.S.?

Work/produce – The U.S. labor force participation rate, the percentage of working age adults working or looking for work, steadily grew between the 1970s and the 1990s, reaching its peak of 67.3% in 2000. During the 2000s, and especially since the 2008/09 recession, the participation rate began to drop. Part of that drop was in response to the economic problems that started in 2008, and part of the drop comes from demographic factors like the aging of the US population and the retirement of the baby boomers. Nonetheless, the labor force participation rate reported by the Bureau of Labor Statistics last month was 62.4 percent, lower than January 1978.

U.S. Labor Force Participation

U.S. Labor Force Participation

Incentives to work are reduced relative to historic norms.  Marginal tax rates on high income individuals, those with significant economic wakes, have continued to creep up, for example.  I had an Iowa State University (ISU) alumnus visit one of my classes last year.  He had moved to Iowa for an exchange student year during his senior year of high school, attended and graduated from ISU, and eventually started what became a very successful trading and investing business.  He explained to the students that in the 1980s, when he’d experienced his first financial success, he bit his lip each April and wrote the federal government a check for 28 percent of his annual income.  As the years went on, however, that number continued to creep up.  Around 2010 he wrote a check to government for taxes exceeding 50 percent of his income and decided it was enough.  He had homes and offices in multiple countries and moved his residence to one with a 17 percent tax rate.  There’s no reason to pity this very successful businessman as he will be fine financially no matter where he calls home.  There is a reason, however, to pity the U.S. which lost at least part of the economic wake created by this extremely talented person.

Incentives to employ are also reduced relative to historic norms in that It costs more to employ someone today than in the past.  The Bureau of Labor Statistics reports that it costs private sector employers on average of 30.5 percent above salary costs for each employee.  About one-third is for government-required contributions (social security, workers compensation) and close to another third health care.  Health care expenditures continue to increase at a rate exceeding all other costs with Obamacare only exasperating that trend.  In addition, Obamacare has created a whole new incentive for employers to employ only part-timers (otherwise healthcare benefits must be offered) and not to grow past 50 employees (otherwise healthcare benefits must be offered).  18.1 percent of U.S. workers report their employment as part-time, far above historic averages.

Save – The U.S. personal savings rate in September 2015 was 4.6 percent, part of a decreasing trend in savings rates since President Nixon removed the U.S. from the gold standard in the early 1970s.  Saving rates averaged 5.5 percent in the 1990s, 8.6 percent in the 1980s, 9.6 percent in the 1970s, and above 10 percent before the 1970s. In the short run, higher personal savings reduces consumption, but over the longer run higher personal saving lead to stronger economic growth. The correlation between a country’s saving rate and its investment rate remains large and significant. Savings lead to investment which leads to entrepreneurial innovation.

U.S. Personal Savings Rate

U.S. Personal Savings Rate

The idea of low interest rates is to increase spending and economic growth, but it severely punishes savers.  Looking at rates at my own bank tells the story. Savings accounts rates of 0.01%, and certificate of deposit (CD) rates of 0.2% for 26 months, 0.3% for 39 months, and 0.4% for 58 months.  Essentially zero return to the simplest and safest forms of saving money.

Invest – Savings flow to investment.  Investment is fundamentally about putting off consumption today for gaining bigger results later.  It is the ultimate virtue of free enterprise.  People put faith in the future in all kinds of forms.  They put more into a savings or retirement account, for example, planning to access those funds in the future.  In that process, however, they provide funds to entrepreneurs, businesses, and others that are building the elements of greater wealth that makes everyone better off.

Investment can be measured in all kinds of ways, but the the greatest faith in the future comes when investment flows to new businesses.  Individuals put their savings into launching a new business, transitioning from employee to small business owner and entrepreneur.  Other individuals put their savings into the dreams of an entrepreneur they believe in, ‘angel’ investors in the language of the startup community.  Finally, professional investors and funds or banks inject money into new businesses or new projects at established businesses that represent tomorrow’s way of doing things better than today.

Investment activity that results in new businesses being created is difficult to measure because of its many sources, but the results are not.  The U.S. Census Bureau reports that the total number of new business startups and business closures per year, the birth and death rates of American companies. These are employer businesses, those with one or more employees, the real engines of economic growth. Four hundred thousand new businesses are being born annually nationwide, while 470,000 per year are dying in the most recent data. Business startups outpaced business failures by about 100,000 per year until 2008. But in the past six years, that number reversed, and the net number of U.S. startups versus closures is minus 70,000.

Net Number of New U.S. Firms 

Net Number of New U.S. Firms

Source: U.S. Census Bureau, Longitudinal Business Database

Economic growth that results in widespread wealth creation and prosperity will not return until this dynamic of free enterprise, new firm creation, is re-established.  Current monetary and fiscal policies that throw a wrench in incentives to work, save and invest and channel limited resources away from private sector investment are destructive. When new businesses aren’t being born, growth stalls, jobs disappear and the dynamic of prosperity fades.

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