tax | Paul Wallbank - Communications Professional

Gen X and the big economic shift

The costs of the 1970s economic shift are beginning to be recognised.

The single economic event that defines Generation X was the 1973 Oil Shock, the OPEC embargo on the west bought the post World War II era of economic growth to an end.

With stagflation gripping the western world, new solutions were sought and by the end of the decade governments touting ‘business friendly’ economic policies – more accurately ‘corporation friendly’ – were seen as the solution.

As Robert Reich described in the New York Times, these policies were not only a disaster for workers but also for the middle classes and business productivity.

A notable aspect missing in the above graph is US productivity growth has since stalled as corporations have focused on stock buy backs rather than investment. The problem has been compounded by the use of tax shelters that have resulted in huge amounts of American corporate profits being locked away in offshore bank accounts.

While those stock buy backs and arbitraging tax regimes have benefitted executives and a small cabal of fund managers, the diversion of capital from productive investment has weakened the US and global economy.

For the baby boomers, even those of the Lucky Generation who preceded GenX, that lack of investment now threatens their retirement lifestyles as incomes and government spending stagnates.

The ‘big business friendly’ ideologies of Thatcher and Reagan defined the late Twentieth Century and continue to dominate government thinking in much of the western world, it may be though that we a reaching the end of that era as the costs to the broader economy are beginning to be recognised.

For GenX and their kids, the costs are being borne now but their parents may be about to feel the costs too.

Does venture capital really matter?

Venture capital investments are concentrated in a handful of cities, but does it matter?

Around the world governments are trying to replicate the Silicon Valley startup model. But does that model really matter?

On the Citylab website, Richard Florida looks at which cities are the leading centres for startup investment.

Unsurprisingly eight of the top ten cities are in the United States with San Francisco and San Jose leading the pack. While London and Beijing make up the other two, the gap between the regions are striking with the Bay Area being home to over quarter of the world Venture Capital investment while the Chinese and London capitals com in at around two percent.

While these proportions are impressive, the numbers are not. The total VC investment identified by Florida in 2012 is $45 billion, according to the Boston Consulting Group there was $74 Trillion of funds under management in 2014.

That makes the tech venture capital sector .06% of the global funds management industry.

In the US alone over 2013 small businesses raised $518 billion in bank loans, more than ten times the global VC industry.

What this scale shows is how small the tech startup sector really is compared to the broader economy and, more importantly, how the Venture Capital model perfected in the suburbs of Silicon Valley is only one of many ways to fund new businesses.

Even in the current centre of the startup world, it’s estimated less than eight percent of San Francisco’s workforce are employed by the tech industry although that goes up to nearly a quarter in San Jose.

None of this is to say the startups are not a good investment – Thomas Edison’s first company raised $300,000 in 1878, $12 million in today’s dollars, from New York investors including JP Morgan. The Edison Electric Light Company, while relatively modest went on to being one of the best investments of the 19th Century.

That twelve million dollar investment looks like a bargain today and it’s highly likely we’ll see some of today’s startups having a similar impact on society to what Edison did 140 years ago.

Edison’s success created jobs and wealth for New Jersey and New York which helped make the region one of the richest parts of the planet during the Twentieth Century and that opportunity today is what focuses governments when looking at encouraging today’s startups.

So it’s understandable governments would want to encourage today’s Thomas Edisons (and Nikola Teslas) to set up in their cities. The trick is to find the funding models that work for tomorrow’s businesses, not what works for one select group today.

While the Silicon Valley venture capital model receives the publicity today, it isn’t the model for funding most businesses. Founders, investors and governments have plenty of other options to explore.

Creating a false divide between startups and small businesses

Tech startups shouldn’t be treated differently from other businesses

“We aren’t small businesses” cries Tank Stream Ventures’ Managing Partner Rui Rodrigues in Business Spectator yesterday.

Rodrigues’ point was tech startups have a very different set of needs to the local small business. “Bob down at the corner shops has been there for 10 years, and he’ll be there for another, he might sell milk, or office chairs, or even fix your watch,” he writes.

Technology startups on the other hand “have ambitions to become big companies, global empires. They are high-growth technology businesses and they are working on goods and services that you might not yet know you need.”

Silicon Valley’s greater fool model

Rodrigues’ comments come from the Silicon Valley Greater Fool mindset where the end game for investors is to flip the business to a bigger company or make out like bandits in a stock market listing. Under that model profitability doesn’t matter, “too early is considered a deterrent for investors looking at a business.”

Not making a profit is fine for a company promising unlimited future growth to the market or a flipper based on finding a greater fool but for most startups those lack of returns see all but a few spectacularly successful ones shrivel away as the company’s funds exhaust before the founders achieve their objective. For Bob the locksmith who doesn’t have a fall back option of returning to a management consulting job, he needs the income.

What’s more fallacious in Rodrigues’ piece is the idea today’s tech startups themselves will be great employers themselves. Even the successful ones haven’t proved to be job generators in the way traditional business have been.

For the traditional small business sector the risks aren’t insubstantial either as the majority of proprietors will barely make a living while risking their assets, time and often health – something understated by the motivational writers urging people to quit their jobs and prove themselves.

A lack of capital

For both the startup community and the small business sector the real challenges lie in being undercapitalised. Most startups will fail because of insufficient capital while the majority of small businesses never quite reach their potential because they lack the funds required to invest in the proper tools.

Much of this comes down to banks retreating from small business lending thanks to the ill thought out Basel rules that treat home mortgages as almost risk free which has discouraged any form of finance not backed by residential property.

In fact many of the challenges facing traditional small businesses such as high rents, unnecessary regulation and high labour costs are as much a problem for the thirty something renting a desk in a tech incubator as they are for 55 year old Bob who’s been running the local locksmiths for the last twenty years.

Misdirected government

Silly schemes like the Australian government’s depreciation scheme aren’t addressing this problem, indeed the Abbott administration’s intention is to provide a brief sugar hit to the nation’s GDP as small business owners buy new laptop computers and toolboxes. It does nothing to address the uncompetitiveness of Australian business or its attractiveness to local investors.

That Rodrigues wants to create a schism between the tech startup community and the small business sector is regrettable, it only confirms in many people’s minds that technology is for geeks and not ‘ordinary people’.

In truth a nation’s business community needs a level playing field, one that doesn’t give preferential treatment to one form of activity over others – be it property speculation, tech startups or dog walking franchises.

While there are genuine differences between the startup sector and the small businesses community – in the same way there are differences between Bob’s locksmiths, Jane’s cafe or Sarah’s dog walking franchise – there is need for businesses divided in asking for equal and fair treatment from government, banks and large corporations.

Having a united voice for all entrepreneurs, however modest their ambitions, is far more important than single groups pleading for special treatment.

Tech and tax write offs

Last week’s expansion of depreciation allowances for Aussie businesses is an opportunity to refresh your company’s tech

In last week’s Federal budget the biggest news for business was the expansion of the accelerated depreciation limits where items up to $20,000 can be immediately claimed as a tax deduction.

While this was a reversal of the previous budget that slashed the previous allowance, it was welcome news for businesses looking at replacing older tools and equipment or investing in new technology.

One of the notable things about business technology is companies have a habit of holding onto older equipment long beyond what should have been its use by date.

The consequences of using old technology are real, the older equipment is often not as fast as the newer kit which affects productivity and unpatched software is often the way malware finds its way into a business.

Point of sale risks

Earlier this week computer security vendor Trend Micro held their Cybercrime 2015 breakfast in Sydney where the director of the company’s TrendLabs Research division, Myla Pilao, described some of the threats facing businesses.
One of the top risks were Point Of Sale systems (POS) where Trend Micro’s research had found over a third of US retailers had malware on their cash registers, in Australia it was six percent.

Most of those infected POS terminals would be older units with many of them being software running on out of date versions of Windows that haven’t been patched or upgraded since they were bought a decade ago.

Similar problems exist with older workstations, internet routers and even photocopiers where the technology has moved on and security holes discovered. Basically old equipment holds businesses back and exposes them to risks.
Now the carrot of an immediate tax deduction gives Australian businesses an opportunity to refresh their technology. So what is the technology, smart company managers and owners should be spending their money on?

Kick out your desktops

“If it ain’t broke, don’t fix it” is the mantra for most business IT and desktop computers are the best example of this. In most companies as long as the word processing software or accounting package works the PCs continue to be used.

With the withdrawal of support for the decade old Windows XP operating system last year, many older computers started being a liability in a business so now is the time to replace them.

Consider tablets

It may not be necessary to replace the old desktop computer with new ones, for many job roles a tablet computer is often a better choice. With cloud technologies increasingly being adopted there’s less of a need for a grunty PC sitting on each staff member’s desk.

Upgrade the router

One of the areas where businesses often compromise is with their internet access. Having an old, cheap router designed for home use is just not good enough for companies who rely upon being connected.

A new business grade router will improve office internet access along with resolving most of the security issues older equipment is notorious for.

Going mobile

If you’re struggling on old mobile phones, now might be the time to upgrade to the latest smartphone. Amongst other things this will improve your office productivity, particularly if you combine the investment with some of the cloud services that make working on the road a lot easier.

Cloud services are not part of the depreciation rules as they are usually subscription models and this shows the weakness in the Federal government’s thinking.

Indeed for those vulnerable Point of Sale systems, a cloud based service running on tablet computers is probably a better solution than most server and PC based packages.

A lack of vision

The ‘ladies and tradies’ theme of the budget shows the Federal government is stuck in with the vision that Australian businesses are mainly mom and pop service operations in the traditional trades and professions.

While the depreciation changes are welcome they do little to help startups or companies in emerging industries and for the economy in general will provide not much more than a GDP ‘sugar hit’ for retailers’ cash registers as we buy imported equipment for our businesses.

For the Australian economy in general, the move really only benefits Gerry Harvey who can buy a few more racehorses from his stores’ and his rich mates who can afford some more expensive wine fuelled brawls in Sydney waterside restaurants.

Australian businesses owners need to be demanding better thought out policies from a government that claims to be friendly to industry. The economy is changing and 1970s style tax benefit is not the way to prepare for a changing world.

In the meantime, enjoy your tax write offs.

The taxing business of options

The Australian attempt to reform the tax system is an interesting exercise in international comparisons.

I’m burning the midnight oil tonight pulling together a story for Business Spectator on reforming Australia’s tax treatment of employee option schemes.

This is a fraught subject as Australia bucked the global trend in 2009 after it became obvious the corporate sector was abusing the existing tax rules that were largely in line with most OECD nations.

In a clumsy, poorly thought out reaction – which is sadly the mark of modern Australian governments of all shades – the then Rudd Labor government radically changed the rules governing employee schemes that made it difficult for any business to offer stock to their staff.

Last week I spoke to Sydney business intelligence company Encompass and after the video the founders told me about the importance of their share scheme, it illustrated exactly the problem facing Australian startups.

Five years on and it’s apparent the strict rules are working against Australian business and various industry associations, accounting groups and startups are lobbying for reform.

One of the lobbying initiatives is Deloitte’s Retaining Talent project that has some fairly modest proposals in bringing fairer rules back for smaller and younger startups.

The story’s particularly interesting for me in that I’m bringing together a number of previous posts citing how other countries and cities like San Francisco and the United Kingdom have changed their rules on option schemes.

For Australia, the closure of the country’s car manufacturing industry and the struggles of the agricultural sector are bringing home to voters and the government just how seriously the country squandered the massive mining boom of the last decade.

While reforming startup option schemes is a useful start, it’s hard not to think it’s way too little and way too late for the country to begin planning for the post mining boom economy.

A tale of three cities and three different government programs

The stories of how governments have helped Chobani yoghurt, ESPN and Pfizer are an interesting contrast on how government support can help business.

Three different business; Chobani yoghurt, ESPN and Phizer are an interesting contrast on how government support can help business and get a real return for taxpayers.

When Kraft Foods decided to shut down its South Edmeston yoghurt plant losing the 55 remaining jobs was a blow to the hamlet of 2,000 in upstate New York.

Eight years later the plant is in new hands, employs 600 people and is the centre of the United States’ thriving Greek yoghurt industry.

In 2006, Hamdi Ulukaya bought the dilapidated factory from Kraft to produce yoghurt similar to what he was used to in his native Turkey and today Chobani is one of the fastest growing food brands in the United States.

Ulukaya tells the story of Chobani in the Harvard Business Review and how the company has grown without any external investment, instead relying on bank finance and government supported guarantees.

Key to Chobani’s founding were the US Small Business Administration loan guarantee program that enable the entrepreneur to buy the mothballed Kraft plant.

While Chobani is a success of the Federal government’s program, just over a hundred miles away the Connecticut state government is pouring money into the maw of ESPN to keep the company’s head office in the town of Bristol, the New York Times reports the company has received nearly quarter of a billion dollars in subsidies in just over a decade.

ESPN has received about $260 million in state tax breaks and credits over the past 12 years, according to a New York Times analysis of public records. That includes $84.7 million in development tax credits because of a film and digital media program, as well as savings of about $15 million a year since the network successfully lobbied the state for a tax code change in 2000.

Notable amongst ESPN’s benefits are the credits under the state’s film and digital media program. As we’ve discussed on this blog in the past, the movie industry plays a cynical game or playing off governments and its no surprise that cable networks would do the same thing.

Connecticut has a bad track record in industry incentives, the destruction of much of the town of New London is a poster child of what governments shouldn’t do when trying to build new industries or attract large corporation.

New London’s demolition of an entire suburban district for the never built head office of pharmaceutical Pfizer is testament to what can go wrong when government officials are dazzled by big promises from large corporations.

Unless support is appliedstrategically and sensibly, competing against other communities to attract big corporations, sporting events or major projects is a zero-sum game that ultimately sees the taxpayer a lose.

While Chobani created 600 jobs in South Edmeston at no net cost to the taxpayer it’s likely Kraft would have demanded tens of millions of dollars in NY State taxpayer support for retain fraction of the jobs that the new business created.

Invariably modest small business programs prove to be a better bet for taxpayers than dumb corporate welfare, unfortunately governments around the world prefer to throw money at big business as they are the ones that write the campaign cheques and employ retired politicians.

Sadly in an era where corporate welfare is the norm rather than the exception, we can expect to see more ESPN type deals and fewer Chobanis with the taxpayer being the poorer for it.

When a politician proudly announces the number of jobs being created through their subsidies to a large corporation, it’s worthwhile for local taxpayers to take the spending of their money with a large grain of salt as history is not on their side.

Image courtesy of jprole through sxc.hu

Are small business owners whingers?

Too many businesses are blaming others for their problems.

People of the same trade seldom meet together, even for merriment and diversion, but the conversation sends in a conspiracy against the public, or in some contrivance to raise prices.” Adam Smith – The Wealth of Nations.

At a meeting with the state’s Small Business Commission I was once again reminded of Adam Smith’s words – that business owners will try to seek whatever opportunity they can to raise prices and whinge when they can’t.

Over the last few months I’ve heard business owners complain the government doesn’t do enough to protect the quality of their imports, give them more onstreet dining permits, stop their neighbours from having onstreet dining permits and, my favourite of all, regulating discounts offered on group buying websites.

Restauranteurs are complaining their customers don’t appreciate the cost of running a business – which is true, but it isn’t the customers problem.

A spectacular example is the anti-carbon tax propaganda where local businesses are displaying letters from a political party claiming their prices will go up and one franchise chain was dumb enough to even write down their plans to blame price rises on the new tax.

We also have the ongoing narrative that local councils – particularly those controlled by Green or Independent groups – are “anti-business” and killing commerce through unfairly enforcing parking rules and building bicycle lanes. Something that nicely fits the talking points of the Corporatist political parties that anyone who isn’t endorsed by a major party is “a dangerous radical”.

The best of all though is the ongoing campaign to eliminate the GST and import duties threshold for overseas purchases, which claims all the problems of the nation’s retailers would be solved if customers were forced to wait a week a pay a couple of hundred dollars in administrative fees.

Some of these gripes are fair – some councils are unreasonable (interestingly usually in areas where local government is seen as a stronghold a big party), the current tax rules are unfair and there are truly stupid people deeply discounting on group buying sites – but most of them are just excuses.

Business is always tough, if it wasn’t everybody would be doing it and taking it easy.

If all you can do is whinge about prices, your council, the government, your competitors, staff or your customers then maybe you should think about getting a job or at least taking a holiday.