Monday, March 30, 2009

mobile skype: IPhone tomorrow, blackberry in May

Chicago (IL) - Beginning tomorrow, the Internet telephony giant Skype should release a mobile client for iPhone and iPod touch. The application will allow users to make free VoIP calls to other mobile and desktop Skype accounts, or to place cheap VoIP calls to landlines and mobile phone numbers, albeit only over the Wi-Fi network. The company also announced a Blackberry client slated for May, rounding up its initiative to expand aggressively into the lucrative mobile phone markets. Surprisingly, the advent of the most popular VoIP service for cellphones isn't chilling carriers anymore who have found ways to profit from the initiative.

Thursday, February 26, 2009

Jerry Huang for District 204 School Board

Please visit for more information.

Monday, February 9, 2009

FW: Super Bowl Ads and the Rise of the Prize Economy

February 9, 2009, 4:30 am

Super Bowl Ads and the Rise of the Prize Economy

By Steve Lohr

Mark Walsh, chief executive of the start-up Genius Rocket, loved this year’s Super Bowl — not so much the game, but the hit Doritos ad, the $1 million prize it won for the two brothers from Indiana and what their triumph represents. “The match lit the fuse with that Doritos ad,” Mr. Walsh said.

Mr. Walsh is truly an Internet commerce veteran. His online credentials go back more than two decades to Compucard and then through General Electric’s GEnie, America Online and VerticalNet.

His current venture, Genius Rocket, runs an online marketplace where people compete to get paid for their work, ranging from 90-second video ads for the Web to product logos and book covers.

Genius Rocket had nothing to do with the Doritos Super Bowl ad contest. But the site aims to be the kind of place where people like Joe and Dave Herbert, whose “Free Doritos” spot won the competition, can find customers for their creative work.

The buyers, mainly consumer marketers, issue a request for work, describing what they want. Then, far-flung creators submit their work and the buying company picks one or a few winners. The prizes typically range from $5,000 to $500, Mr. Walsh said.

By now, Genius Rocket, founded in 2007, has 8,000 registered “creative collaborators,” as Mr. Walsh calls the prize contest entrants, spread across 100 nations. To date, Genius Rocket has conducted contests for 50 projects for 40 companies.

His stable of enterprising amateurs and freelancers possess “incredible talent,” Mr. Walsh said, and they can do advertising and marketing projects for a tenth the cost of traditional ad agencies.

Genius Rocket is another proof point in a larger trend that may just be getting underway — the rise of the prize economy. It is already well established in science, as a more efficient way of eliciting breakthroughs than traditional federal funding or grant-making.

The Pentagon’s DARPA research agency awarded $1 million in 2007 to the winner of its Urban Challenge for the best and fastest unmanned vehicle. The X Prize Foundation is offering multimillion-dollar prizes for path-breaking advances in genomics, alternative-energy cars and private space exploration.

Economists have suggested federally sponsored prizes as the most promising path to deliver breakthrough technologies to combat climate change, and the Obama science team likes the prize model.

In big science, the prize model has great appeal. The participants in those contests are mainly tenured professors and graduate students supported by scholarship funding — categories of laborers utterly insulated from the rigors of the market economy.

If the prize model of buying work takes off, it would mean a huge transfer in the balance of power to the buyers — corporations — and from most workers. Maybe that’s inevitable, efficient and another byproduct of the Internet (which greatly reduces the transaction costs of running contests as Genius Rocket does). “The Internet disintermediates everything it hits,” Mr. Walsh observed.

Still, Mr. Walsh is no Dickensian capitalist. He is a lifelong liberal who handed out bumper stickers for Hubert Humphrey as a kid, served as a technology adviser for the Democratic National Committee, and was a former chief executive of liberal radio network Air America (where he still sits on the board). He is a big Obama backer. Another Genius Rocket founder is Joe Trippi, the grassroots strategist and Internet mastermind behind former Vermont Gov. Howard Dean’s 2004 presidential campaign.

“Like you, I am concerned about how we all make a buck in this world,” Mr. Walsh said. “But the free-agent nation is going to happen.”


Wednesday, February 4, 2009

Do you know where your kid is? Check Google's maps

Do you know where your kid is? Check Google's maps

By MICHAEL LIEDTKE - 29 minutes ago

SAN FRANCISCO (AP) - With an upgrade to its mobile maps, Google Inc. hopes to prove it can track people on the go as effectively as it searches for information on the Internet.

The new software released Wednesday will enable people with mobile phones and other wireless devices to automatically share their whereabouts with family and friends.

The feature, dubbed "Latitude," expands upon a tool introduced in 2007 to allow mobile phone users to check their own location on a Google map with the press of a button.

"This adds a social flavor to Google maps and makes it more fun," said Steve Lee, a Google product manager.

It could also raise privacy concerns, but Google is doing its best to avoid a backlash by requiring each user to manually turn on the tracking software and making it easy to turn off or limit access to the service.

Google also is promising not to retain any information about its users' movements. Only the last location picked up by the tracking service will be stored on Google's computers, Lee said.

The software plots a user's location - marked by a personal picture on Google's map - by relying on cell phone towers, global positioning systems or a Wi-Fi connection to deduce their location. The system can follow people's travels in the United States and 26 other countries.

It's left up to each user to decide who can monitor their location.

The social mapping approach is similar to a service already offered by Loopt Inc., a 3-year-old company located near Google's Mountain View headquarters.

Loopt's service is compatible with more than 100 types of mobile phones.

To start out, Google Latitude will work on Research In Motion Ltd.'s BlackBerry and devices running on Symbian software or Microsoft Corp.'s Windows Mobile. It will also operate on some T-Mobile phones running on Google's Android software and eventually will work on Apple Inc.'s iPhone and iTouch.

To widen the software's appeal, Google is offering a version that can be installed on personal computers as well.

The PC access is designed for people who don't have a mobile phone but still may want to keep tabs on their children or someone else special, Lee said. People using the PC version can also be watched if they are connected to the Internet through Wi-Fi.

Google can plot a person's location within a few yards if it's using GPS, or might be off by several miles if it's relying on transmission from cell phone towers. People who don't want to be precise about their whereabouts can choose to display just the city instead of a specific neighborhood.

There are no current plans to sell any advertising alongside Google's tracking service, although analysts believe knowing a person's location eventually will unleash new marketing opportunities. Google has been investing heavily in the mobile market during the past two years in an attempt to make its services more useful to people when they're away from their office or home computers.

Newsday: College seen as key, cost as barrier

College seen as key, cost as barrier
  Feb 4, 2009 Newsday  

By Karla Schuster

More than half of Americans believe that it's impossible to succeed without a college education, but an even larger number say that rising college costs are shutting out many students, a national survey has found.

As the nation's economic crisis deepened last year, frustration over tuition costs went up, with 67 percent of adults saying that many qualified students don't have the chance to attend college, according to the survey called "Squeeze Play 2009" that gauges public perceptions about higher education.

By comparison, 62 percent of adults felt that way in 2007, and just 57 percent did in 2003, according to the survey by the nonpartisan, nonprofit groups Public Agenda and the National Center for Public Policy and Higher Education.

"College is simultaneously being perceived as more essential than ever, but also less available than ever," said John Immerwahr, a researcher at Public Agenda, which conducted a telephone survey of 1,009 adults nationwide over five days in December.

The survey also highlights a dramatic shift in public attitudes about financial aid that tracks with the spiraling economy: Sixty-seven percent of those surveyed strongly believe that students have to borrow too much to pay for college, compared with 60 percent in 2007.

Over the same period, the number of people who think loans and financial aid are readily available went down to 57 percent in 2008, compared with 67 percent last year.

"A lot of parents say it's really getting out of control - if you want to send your kid to a private college, it gets very expensive," said Denyse Dreksler of Roslyn, who has one son in law school, another in a graduate nursing program and a third in high school.

College officials say the worst mistake families can make is assuming they can't afford higher education.

"We tell parents ... don't focus so much on the sticker price," said Joanne Graziano, assistant provost for enrollment services at the C.W. Post Campus of Long Island University in Brookville. "You can still qualify for types of aid that will reduce that sticker price to a net cost that is manageable."

However they pay for college, families seem skeptical about whether the cost is justified, the survey found. Fifty-five percent of those surveyed said colleges care more about the bottom line than providing a good educational experience. Just about the same proportion, 53 percent, believe colleges could spend less and still provide high-quality services.

"There's an openness to innovation and a belief that quality isn't defined in all the ways we have defined it in the past," said Patrick M. Callan, president of the National Center for Public Policy and Higher Education. "People believe we can do better with the resources we have."

Tuition squeeze

Some highlights from the Squeeze Play 2009 national survey on college costs:

55 percent of those surveyed believe that a college education is necessary for success, compared to 31 percent in 2000.

67 percent strongly believe students have to borrow too much to pay for college, compared to 56 percent in 2000.

Only 29 percent believe that the vast majority of people who are qualified to attend college have the chance to do so, compared to 45 percent in 2000.

SOURCE: Public Agenda and the National Center for Public Policy and Higher Education.



Wednesday, January 28, 2009

Google enables off-line gmail

McHenry County: College for free, but not a free ride; Volunteering a key part of program that pays tuition

College for free, but not a free ride; Volunteering a key part of program that pays tuition
  Jan 28, 2009 Chicago Tribune  

By Carolyn Starks

Carli Wilson's savings from a part-time job in a clothing store are a drop in the bucket compared with her looming college tuition costs, but the high school senior no longer has to worry about finding the money.

She and hundreds of others in McHenry County will attend college next fall for free.

Wilson, a senior at Huntley High School, plans to participate in a new McHenry County College program that offers paid tuition for two years to graduating seniors in exchange for volunteer hours. More than $3.5 million in pledges has been raised from three donors to fund the first year.

"I just think it is really cool that they were so nice to give that much money out to make our lives much easier," said Wilson, an honors student who wants to study math education and theater direction.

In light of the current economic crisis, parents and students say the tuition program, called MCC Promise, is an economic lifesaver. The prospect of paying for college is daunting to many.

"It really couldn't come at a better time," college spokeswoman Christina Haggerty said. "The timing is very helpful to people who thought college was not an option for them and for people who in the past may not have needed help."

The assistance is available to students regardless of economic status.

Tuition for a full-time student averages from $4,500 to $5,500 or more a year at MCC, depending on the course load, officials said.

In return for two years of tuition-free education, each student is required to volunteer for 16 hours each semester. The college has partnered with the United Way to help match students with local organizations that need help.

Colleges and universities increasingly are launching programs to help students stay in school, offering additional financial aid, work-study jobs, even eliminating tuition in some cases.

For example, Oakton Community College in Des Plaines recently announced that five career programs will be tuition-free to local residents who have lost a full-time job since last year. The 16-week semester courses are in such programs as computer diagnostics, project management to "green" marketing, manufacturing, and pharmaceutical preparation.

"We felt by creating these five specific programs that can be completed in just one semester it was a more substantive way to address what unemployed people are going through," said college spokesman Bill Paige.

MCC thought an extra effort was needed. The Friends of McHenry County College, a non-profit organization, modeled its program after a similar one in Michigan, Haggerty said.

Mike Luecht, chief executive officer of a real estate development company, pledged $1 million. He was inspired, he said, to help young students by his own struggle to pay his way through college. He attended three schools over eight years to earn a bachelor's degree.

The Lake in the Hills resident said he has spoken to several high school seniors about the program and was told they now know they are going to college. A couple of months ago, they weren't sure, he said.

"With all that's going on with the economy, access to college education should not be one of the things that is lost for today's high school graduates," Luecht said. "While college may not be for everybody, access to college has to be."

Vince Foglia, another of the principal donors, is chairman and chief executive officer of Sage Products Inc. of Cary. The third major donor is remaining anonymous.

The program will pay tuition for high school seniors graduating from a McHenry County College high school district. They also must live in the district and be full-time students pursuing a two-year associate's degree.

Last fall, the college had 1,500 new students. About half were full time. Officials estimate the new tuition program could benefit 400 to 600 students beginning in the fall.

There are no grade-point-average requirements to apply. But a student must maintain a 2.0 or better GPA while enrolled at MCC.

To ensure the program continues, college officials have launched a campaign to raise $300,000 annually.

Since Luecht and the two other donors stepped forward, the college has received several more gifts. Officials are confident they will be able to sustain the effort, Haggerty said.

Huntley High School senior Samantha Stephens thanked Luecht personally after he spoke at her school. She told him that attending college was not an option -- until he offered to help pay.

"I would have had to pay back a lot of loans, so I never would have thought of going to college without this program," she said.


The McHenry County College Promise program

McHenry County College has a main campus at 8900 U.S. Highway 14 in Crystal Lake, as well as several satellite locations. The college offers six associate's degrees and 17 associate of applied science degrees.


FW: The Great Consolidation < Jon Taplin's Blog

thought you might find this an interesting visual depiction

Tuesday, January 20, 2009

The Start-Ups We Don't Need

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A Magazine of Ideas

The Start-Ups We Don't Need

From the Magazine: Wednesday, January 7, 2009

Are we encouraging the creation of too many low-productivity businesses?

Policymakers believe a dangerous myth. They think that start-up companies are a magic bullet that will transform depressed economic regions, generate innovation, create jobs, and conduct all sorts of other economic wizardry. So they provide people with transfer payments, loans, subsidies, regulatory exemptions, and tax benefits if they start businesses. Any businesses.

Take, for example, the remarks of President George W. Bush, who said in a speech to the Small Business Week Conference in 2006, "Small businesses are vital for our workers…. That's why it makes sense to have the small business at the cornerstone of a pro-growth economic policy…. The Small Business Administration is working hard to make it easier for people to start up companies. We understand that sometimes people have got a good idea, but they're not sure how to get something started…. And so we've doubled the number of small business loans out of the SBA since I came to office."

In general, start-ups are not the source of our economic vitality or job creation.

This is bad public policy. Encouraging more and more people to start businesses won't enhance economic growth or create a lot of jobs because start-ups, in general, aren't the source of our economic vitality or job creation.

You might be startled by this position, going, as it does, against the grain of most popular arguments. It might even seem illogical to you. After all, companies such as Apple in computers, Microsoft in software, Google in Internet search, and Genentech in biotechnology are all examples of wildly successful start-ups. Federal Express and Wal-Mart were also start-up companies not too long ago. So, surely, these companies must have contributed to economic growth?

Yes, of course they have. But those companies are not typical start-ups. The typical start-up is a company capitalized with about $25,000 of the founder's savings that operates in retail or personal services. Odds are pretty good that it is a home-based business, and the founder aspires to generate around $100,000 in revenue in five years. So even at the time that Apple, Microsoft, Google, and FedEx were founded, they weren't anything like the typical new business.

To get more economic growth by having more start-ups, new companies would need to be more productive than existing companies. But they're not. A study by economists John Haltiwanger, Julia Lane, and James Spletzer, published in the American Economic Review Papers and Proceedings, combined data from the U.S. Census and other sources to look at the relationship between firm productivity and firm age. The results showed that firm productivity increases with firm age. This means that the average new firm makes worse use of resources than the average existing firm, which is not what you would expect if economic growth benefits more from the creation of new firms than from the expansion of existing ones. And you shouldn't think that the typical start-up makes up for its poor productivity when it gets older, because the typical start-up is dead in five years.

This pattern makes sense: there shouldn't be a positive correlation between economic growth and the rate at which typical start-ups are formed over the long term. Economist Niels Noorderhaven and his colleagues, in an article published in Entrepreneurship Theory and Practice, have explained how as countries become wealthier, the rate at which they create start-ups falls. Societal wealth leads average wages to go up, which encourages business owners to use machines to replace work that used to be done by hand. Capital (the machinery) is subject to greater economies of scale—the reduction in the cost of production that comes from generating things in higher volume—than labor. As a result, the increased use of capital leads companies to grow in size and hire people who would otherwise have gone into business for themselves.

Moreover, as economist Martin Caree and his colleagues have shown in a study published in Small Business Economics, when countries get wealthier and real wages rise, the opportunity cost of running your own business goes up, because the amount of money that you could have earned working for someone else increases. This increased opportunity cost leads more people to go to work for others than when real wages are lower.

Finally, as countries get richer, they change where economic value is created: first from agriculture to manufacturing, and then from manufacturing to services. Economist David Blau, in a study in the Journal of Political Economy, has explained that as the source of economic value shifts from activities where self-employment is more common, such as agriculture, toward activities where self-employment is less common, such as manufacturing, the proportion of people running their own businesses drops.

The typical entrepreneur is very bad at picking industries and chooses the ones that are easiest to enter, not the ones that are best for start-ups.

So if you want to find countries where there are a lot of entrepreneurs, go to Africa or South America. Rich countries are richer than poor countries because they had more economic growth in the past. So, if we measure new business creation and economic growth over a long enough horizon to see real differences in economic growth among countries, the countries that have had consistently faster economic growth (the rich ones) actually have declining rates of new firm formation.

In fact, if we look at the correlations between rates of new firm formation and economic growth over the medium to long term, we see that firm formation declines as economic growth increases. For instance, in an article in Work, Employment and Society, sociologists Dieter Bögenhold and Udo Staber report that the correlation between real GNP growth rates and the rate of self-employment in France, West Germany, and Italy between 1953 and 1987, and in Sweden between 1962 and 1987, was negative.

We also have ample evidence that when governments intervene to encourage the creation of new businesses, they stimulate more people to start new companies disproportionately in competitive industries with lower barriers to entry and high rates of failure. That's because the typical entrepreneur is very bad at picking industries and chooses the ones that are easiest to enter, not the ones that are best for start-ups. Rather than picking industries in which new companies are most successful, most entrepreneurs pick industries in which most start-ups fail. So by providing incentives for people to start businesses in general, we provide incentives for people to start the typical business, which is gone in five years.

And who is most likely to respond to those incentives and start businesses? Not the best entrepreneurs. We know that unemployed people are more likely to start businesses than people who have jobs. Why? Because they have less to lose by becoming entrepreneurs. After all, it's less costly to you to start a company if your alternative is watching daytime TV than if it is taking home a paycheck from a job.

The problem is that people who are unemployed also tend to perform worse when they start companies than people who quit their jobs to start businesses, probably because their bar for what kind of business to pursue is much lower. So policies designed to increase the total number of new businesses disproportionately attract the worst entrepreneurs.

Okay, new firm formation might not enhance economic growth, but, as everyone knows, new firms create more jobs than existing firms, right? As John Case, commentator for Inc. Magazine, explained, "Most of the 20 million new jobs created during the past 15 years came not from established giants, the companies that had led America's growth up till then. The jobs came from companies that were smaller, newer—or both. They came from that 'independent entrepreneurial sector.'"

But Case, and the others who make the same argument, are wrong. Very few people work in new firms. Companies with at least one employee that are less than two years old account for only 1 percent of all employment in the United States, according to analysis published in Regional Studies by economists Zoltan Acs and Catherine Armington. By contrast, companies with at least one employee that are more than ten years old account for 60 percent of all employment in this country.

So how many jobs do new businesses create? Data from the Bureau of Labor Statistics show that 31,472,000 jobs were created in the United States in 2004. That year, 580,900 new firms with at least one employee were started, each of which had an average of 3.8 employees. Thus, in 2004, new firms created 2,207,420 jobs, or 7 percent of the total number of jobs created in that year.

Measuring net job creation—new jobs created minus old jobs lost—is a whole lot harder than measuring gross job creation. So we have fewer estimates of it. But estimates of net job creation by new firms are remarkably similar to the estimates of gross job creation. A study in The Quarterly Journal of Economics by economists Steven Davis and John Haltiwanger shows that in manufacturing, one-year-old firms created 6.4 percent of the net new jobs, an estimate that is consistent across industries, regions, firm size, and type of firm ownership.

As countries become wealthier, the rate at which they create start-ups falls.

So every year a cohort of new firms is founded that generates about 6 percent or 7 percent of the new jobs created in that year. But how many jobs does that cohort of firms account for in its second year? And what about in its third year? And in all years after that? On average, the answer is none. For instance, in an article published in the Monthly Labor Review, Amy Knaup at the Bureau of Labor Statistics found that the cohort of new employer firms founded in the United States in 1998 employed 798,066 people in its first year but employed only 670,111 people in 2002. In other words, the number of jobs lost by new firms that close down in their second year, third year, fourth year, and so on, exceeds the number of jobs added by the expansion of the new firms that survive. Far from being job creators, as a whole, new firms have net job destruction after their first year.

It also takes a lot of entrepreneurs to create lasting jobs. To get one business employing at least one person ten years from now, we need 43 entrepreneurs to begin the process of starting a company. And how many jobs will that startup have, on average, ten years after it was founded? The answer is nine. In short, 43 people have to try to start companies so that we can have nine jobs a decade from now. That's not the spectacular yield that you might expect if you read the press reports about the job creation of start-ups.

So far we have talked about the jobs that start-ups create as if they are the same as the jobs in existing companies. But they're not. They're worse. On average, jobs in new firms pay less, offer fewer fringe benefits, and provide less job security than jobs in existing firms.

The data show that jobs in new firms are more likely to be part-time than jobs in existing fi rms. Moreover, jobs in the average new firm do not pay as well as jobs in the average existing business. In their book The Entrepreneurial Process: Economic Growth, Men, Women and Minorities, sociologists Paul Reynolds and Sammis White found that the average new job paid 72 percent of the average statewide wage in the firm's first year and that the wages in those firms were still below the state average when they were four years old.

Jobs in new firms also offer fewer benefits than jobs in existing firms. David Bernstein analyzes the Federal Reserve Board's survey of small business finances for an article in Applied Economics, and finds that businesses become more likely to offer a pension plan or health insurance coverage to their employees as they get older.

The size of the difference in the tendency of new and existing firms to offer health insurance is substantial. A study by Alison Wellington, published in Contemporary Economic Policy, showed that men who work for others are three times as likely, and women who work for others are six times as likely, to have health insurance as those who work for themselves. Moreover, preliminary data from the Kauffman Firm Survey show that, in 2004, only 23.2 percent of new firms offered health insurance to their full-time employees.

Clearly, creating typical start-ups isn't the way to enhance economic growth and create jobs. So what is? It's pretty straightforward. Stop subsidizing the formation of the typical start-up and focus on the subset of businesses with growth potential. Getting economic growth and jobs creation from entrepreneurs isn't a numbers game. It's about encouraging the founding of high-quality, high-growth companies.

To get more economic growth by having more start-ups, new companies would need to be more productive than existing companies. But they're not.

A tiny sliver of startups accounts for the vast majority of the contribution to job creation and economic growth that comes from entrepreneurial activity. According to data from the National Venture Capital Association, since 1970, venture capitalists have funded an average of 820 new companies per year. These 820 startups—out of the more than two million companies started in this country every year—have enormous economic impact. A report posted on the Venture Impact website explains that, in 2003, companies that were backed by venture capitalists employed 10 million people, or 9.4 percent of the private sector labor force in the United States, and generated $1.8 trillion in sales, or 9.6 percent of business sales in this country. Moreover, in their book The Money of Invention: How Venture Capital Creates New Wealth, economists Paul Gompers and Josh Lerner report that in 2000, the 2,180 public companies that received venture-capital backing between 1972 and 2000 comprised 20 percent of all public companies in the United States, 11 percent of their sales, 13 percent of their profits, 6 percent of their employees, and one-third of their market value, a figure in excess of $2.7 trillion dollars.

Instead of just believing naively that all entrepreneurship is good, policymakers need to recognize that only a select few entrepreneurs will create the businesses that will take people out of poverty, encourage innovation, create jobs, reduce unemployment, make markets more competitive, and enhance economic growth. Therefore, as unfair as it might sound, policymakers need to "stop spreading the peanut butter so thin." They need to recognize that all entrepreneurs are not created equal. They need to think like venture capitalists and concentrate time and money on extraordinary entrepreneurs, and to worry less about the typical ones.

How? First, we need to reduce the transfer payments, loans, subsidies, regulatory exemptions, and tax benefits that encourage marginal entrepreneurs to start businesses. Since the average existing firm is more productive than the average new firm, we would be better off economically if we got rid of policies that encourage a lot of people to start businesses instead of taking jobs working for others.

Take, for example, the home office tax deduction. Half of all new businesses are home-based businesses. So people who start businesses that they operate out of their homes can deduct the costs of using part of their homes for their businesses—a deduction not available to them if they work for someone else—which gives people an incentive to start companies that do little to enhance economic growth or to create new jobs.

Alternatively, consider the state Self-Employment Assistance Programs in place in Delaware, Maine, Maryland, New Jersey, New York, Oregon, and Pennsylvania. According to the Department of Labor's website, "The program is designed to encourage and enable unemployed workers to create their own jobs by starting their own small businesses. Under these programs, states can pay a self-employed allowance, instead of regular unemployment insurance benefits, to help unemployed workers while they are establishing businesses and becoming self-employed. Participants receive weekly allowances while they are getting their businesses off the ground." But unemployed people tend to start marginal businesses that create few jobs and have high failure rates, so is this program a good use of resources?

We would be better off economically if we got rid of policies that encourage a lot of people to start businesses instead of taking jobs working for others.

A third program that doesn't make efficient use of our resources is the Small Business Development Center Program, which is hosted by universities, colleges, and state economic development agencies, and funded in part through a partnership with the Small Business Administration. Its mission, according to the website of America's Small Business Center Network, "is to help new entrepreneurs realize their dream of business ownership." By making the process of starting a business easier, the SBDC program is encouraging the formation of more of the typical start-ups that are not enhancing economic growth or spurring job creation.

We need to reallocate resources to programs that support high-growth companies. For instance, we could shift money into the Small Business Innovation Research Program, which requires federal government agencies to set aside a portion of their budgets to support commercially viable R&D projects at small companies. The recipients of these funds are much more likely than the typical start-up to contribute to economic growth and to create jobs.

Alternatively, we could make the research and development tax credit permanent. This policy provides a 20 percent tax credit for U.S.-based R&D expenditures. Research and development tax credits offer an incentive for entrepreneurs to conduct R&D that they otherwise would not undertake. Those new companies that conduct R&D, and which would benefit from this credit, are more likely than the typical start-up to contribute to economic growth and job creation.

Some might argue that we can't just focus on the small number of highly successful startups because we don't know which start-ups will become high-growth businesses and which won't. As a result, we must throw mud against the wall and see what sticks.

This view may be politically appealing, but it is naive. It assumes that we can't identify the things that make new businesses more likely to survive, generate profits, increase sales, and hire people. Unless the beliefs of venture capitalists and sophisticated business angels are completely wrong, we know what criteria to focus on. The human capital of the founder and his motivations, the industries in which companies are founded, their business ideas and strategies, their legal forms and capital structure—all of this information helps us to identify likely winners and likely losers.

In fact, most people know how to select the companies to bet on. Take, for example, the following two businesses:

• A personal cleaning business that is started by an unemployed high school dropout, is pursuing the customers of another personal cleaning business, is capitalized with $10,000 of the founder's savings, and is set up as a sole proprietorship.

• An Internet company that is started by a former Microsoft employee with 15 years of experience in the software industry, an MBA, and a master's degree in computer science, who is pursuing the next generation of Internet search, and is capitalized with $250,000 in money from the founder and the Band of Angels in San Francisco, and is set up as a corporation.

Which one would you put your resources behind? It's obvious that the second business's chances to contribute to economic growth and create jobs are far better than the first's and that, on average, we would be better off putting our resources into businesses like it.

The fix for our failing public policies on entrepreneurship will take political will. The greater benefits from the better policies are diffuse and down the road because they come from having more high-growth, job-creating companies. Policymakers need to choose to pursue either good policies or good politics.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University and the author of "The Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors and Policy Makers Live By" (Yale University Press), from which this article is excerpted.

Illustration by Dave Plunkert.


Wednesday, January 14, 2009

WSJ: Citigroup Ready to Shrink Itself by a Third

JANUARY 14, 2009

Citigroup Ready to Shrink Itself by a Third

Financial Giant to Shed Units, Curtail Trading to Return to Size Before Its Merger Spree; Deal to Split Off Smith Barney Sealed

Citigroup Inc. will soon announce a drastic plan to shed a host of businesses and shrink itself by one-third, say people familiar with the bank, which its executives say will essentially dismantle the financial colossus built by legendary deal maker Sanford Weill.

The bank announced Tuesday, as expected, that it will split off its Smith Barney retail brokerage into a joint venture with Morgan Stanley. Citigroup will also announce steps to shed two consumer-finance units and the company's private-label credit-card business, and scale back on the trading the company does on its own behalf.

Citigroup declined to comment.

The moves, which the company intends to unveil along with its fourth-quarter earnings next week, would represent the final abandonment of the acquisition-fueled growth strategy that built Citigroup from a small consumer-finance business into one of the world's largest financial institutions, with more than 300,000 employees in more than 100 countries. The company would essentially strip itself of large pieces of the company formed in a landmark 1998 merger of Citicorp and Travelers Group by then-CEO Mr. Weill. The slimmed-down company would look much like the pre-merger Citicorp.

Citigroup now plans to narrow its focus to large corporations and rich individuals. Executives hope to dump or shrink businesses that cater to less-affluent customers.

The company has attempted to sell some of these units over the past year, even as Chief Executive Vikram Pandit has said he remains committed to providing a one-stop financial supermarket. But Mr. Pandit is now expected to say for the first time that this fundamental strategy needs an overhaul. It would be an important acknowledgment that Citigroup's push to shed unprofitable businesses has entered a more serious phase, as investors and regulators alike press it to downsize in the face of its fifth straight quarter of losses.

As part of the new push, Citigroup's enormous balance sheet would shrink by about one-third from its current size of roughly $2 trillion, according to a person familiar with the company's plans.

Terms of the Smith Barney deal call for Morgan Stanley to pay Citigroup $2.7 billion in cash for its share of the joint venture in the retail brokerage. Citigroup will also reap roughly $10 billion in pretax gains associated with the deal. That will help put Citigroup on track to profitability when the deal closes.

Sense of Urgency

In recent weeks, Mr. Pandit and his team have been gripped by a renewed sense of urgency as they brace for a fourth-quarter operating loss of at least $10 billion, according to people familiar with the matter. Citigroup's stock has again skidded below $6 a share as investors fret about the mounting losses. Citigroup has received U.S. government infusions totaling about $45 billion, making the government the company's largest shareholder.


By publicly embracing the idea of splitting up the company now, Mr. Pandit could remove some of the pressure on his team. "This isn't massively different from what we said in May" when Mr. Pandit first unveiled his overall strategy for the company, said a person who's been briefed on the company's plans. "It's a little bit different and a lot faster."

But Citigroup faces an uphill battle at persuading investors and government officials that the company is on solid footing and can seal deals to sell unwanted units.

By changing course as it is hobbled by losses and a dwindling stock price, Citigroup will be negotiating with would-be buyers from a position of weakness. The company is assigning management teams to handle the gradual disposal of units and other assets, but a person familiar with the matter emphasized that Citigroup doesn't plan to engage in a "fire sale."

"The investor attitude is, 'Show me, don't tell me,'" said Jeff Harte, a banking analyst with Sandler O'Neill & Partners. "Let's see if there's another transaction announced after" the Smith Barney deal.

If successful, the new Citigroup will feature an all-purpose corporate and investment bank that provides businesses worldwide with loans, advice on mergers and acquisitions, capital-markets services, and trading and payments services, say people familiar with the bank.

Another part of the company would serve wealthy individuals through a private bank and provide retail-banking and credit-card services in places such as the U.S., Latin America, Central Europe and Asia.

[Citibank] Reuters

The entrance to a Citibank branch is seen in Port Washington, New York

A long list of additional Citigroup businesses is likely to eventually end up on the block, according to people familiar with the plans. They include two consumer-finance units, Primerica Financial Services and CitiFinancial. The company's private-label credit-card businesses also are marked for disposal.

Citigroup also plans to substantially scale back its so-called proprietary trading, essentially the investing that Wall Street firms do on their own behalf. Such proprietary trading tends to eat up significant amounts of capital, and has fallen out of favor as financial institutions world-wide try to rein in risk-taking.

Executives also are considering creating what is known as a "good bank-bad bank" structure, these people said. Under that structure, Citigroup would create a new corporate entity to house what it regards as its core, profitable businesses. It would segregate the unwanted businesses, including the consumer-finance units, in a separate entity.

Citigroup hasn't settled on how to create such a structure, people familiar with the discussions said. Such changes would be largely cosmetic until Citigroup finds buyers for the company's unwanted parts.

[Pandit, Vikram]

Vikram Pandit

'Good' Portion

People familiar with the matter say that, on its own, the "good" portion of the company will appear profitable, while the rest of the company bears responsibility for Citigroup's tens of billions of dollars in losses over the past year. Executives hope the new structure will make it easier for them to showcase the company's strengths to Wall Street, but the new structure won't necessarily make it any easier for Citigroup to absorb huge losses.

Citigroup's plans represent an about-face for Mr. Pandit, who took over the company in December 2007 and as recently as late November rejected calls to abandon its financial-supermarket approach.

That model never seemed to pan out. Mr. Weill started building what would become Citigroup with his 1986 purchase of Commercial Credit, a struggling consumer-finance company based in Baltimore. Over the next 12 years, he acquired ever-larger financial institutions. The 1998 deal that formed Citigroup, at the time one of the largest in history, was initially trumpeted as precedent-setting.

Sprawling Company

But it turned out that consumers weren't terribly interested in one-stop shopping for financial products. A string of Citigroup executives failed to get their arms around the sprawling global company.

[Citi] Newscom

Citigroup President Sanford Weill, center, with Banamex President Roberto Hernandez Ramirez, in May 2001 in Mexico City, as Citigroup announced it was acquiring Grupo Financiero Banamaex-Accival.

People familiar with the matter said Mr. Pandit has realized in the past month that the longstanding game-plan needed an overhaul. In late November, the U.S. government agreed to a rescue of the financial giant that left the government with a 7.8% stake.

Since then, officials with the Federal Reserve and Office of the Comptroller of the Currency have urged the company to take steps to drastically shrink.

In contrast, other financial giants cobbled together over the past decade have performed much better, including Bank of America Corp., J.P. Morgan Chase & Co. and Wells Fargo & Co. Many analysts say superior returns at those banks are proof that one-stop shopping can deliver on its promise.

"This is the end of an era," said Robert Lamb, a New York University finance professor who is a former adviser to Mr. Weill. "It's a testament to how a conglomerate has difficulties when the management fails to oversee all of the pieces, people and systems professionally."

Some people who know Mr. Weill say that in the wake of news that Citigroup is splitting off Smith Barney, his mood has ranged from despondent to irate. Mr. Weill didn't respond to requests for comment.

Write to David Enrich at

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