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The Next Entrepreneurial Revolution

The pandemic’s economic destruction has also created new winners

by
Joel Kotkin
June 08, 2021
Tablet Magazine
Tablet Magazine
Tablet Magazine
Tablet Magazine

The coronavirus pandemic has altered the future of American business. The virus-driven disruption has proved more profound than anything imagined by Silicon Valley, costing more jobs than in any year since the Great Depression. But there’s also good news, as Americans’ instinctive entrepreneurial spirit is driving growth and innovation: 4.4 million new business applications were recorded by census data in 2020, compared with roughly 3.5 million in 2019. Self-employment, pummeled at first, has recovered more rapidly than conventional salaried jobs, as more Americans reinvent themselves as entrepreneurs.

To be sure, the initial impact of the pandemic favored big chains and accelerated the already dangerous corporate concentration in technology—Amazon tripled its profits in the third quarter of 2020 and the top seven tech firms added $3.4 trillion in value last year. This in turn has made all business, as well as ordinary Americans, subject to manipulation by the handful of “platforms” that control the primary means of communication. Meanwhile, lockdowns drove an estimated 160,000 small businesses out of existence and left those that survived to face “an existential threat,” according to the Harvard Business Review.

Like pandemics of the past, the current one, according to Berkeley economists Laura Tyson and Jan Mischke, has already driven new investments in technology that could reverse the long-term decline in U.S. productivity. Low real estate prices could spark a return to street-level enterprise, even in places like Manhattan that have long been ultra-costly.

But the focus of opportunity is more likely to be found in the suburbs and exurbs, as well as in the middle of the country. The movement of populations away from the big urban centers started before COVID, but a recent study in CityLab notes that it has since accelerated in places like California’s Inland Empire, the Hudson Valley, and the New Jersey suburbs. Overall, according to demographer Wendell Cox, offices on the fringe have recovered far faster than those in the largest urban cores like Manhattan, San Francisco, Chicago, and Houston.

The geography of work has changed as well. Upward of 30% of those who plan to work remotely after the pandemic, notes a recent Upwork survey, plan to do so outside the house: in coffee houses, coworking spaces, or other office environments closer to home. This has created a new market for suburban office spaces, real estate investor Andrew Segal told me. He sees remote offices filling with workers who may be tired of working at home but do not want to go back to their long commutes. Segal has recently purchased properties in the suburban commuter sheds around Chicago, New York, Phoenix, and Colorado Springs. “The problem is called COVID, but it’s really about commuting,” suggested Segal, who is based in Houston. “People now know they can get their work done from somewhere else that’s easier to get to than Manhattan, downtown Houston, Chicago, or Los Angeles.”

Businesses are following the trend. Between September 2019 and September 2020, according to the firm American Communities and based on federal data, inner cities experienced nearly a 10% loss in jobs, while outer suburbs, exurbs, and rural areas fared far better. According to Jay Garner, president of Site Selectors Guild, companies are looking increasingly at smaller cities and even rural locations rather than in the big core cities. Indeed, seven of the top 10 midsize cities preferred for new investments include not just sunbelt boomtowns but heartland cities like Columbus, Des Moines, Indianapolis, and Kansas City.

Analysis by Zen Business this year found that the best places for small businesses in terms of taxes, survivability, and regulation were overwhelmingly in the South, parts of the Great Plains, Utah, and across the Midwest. Places like the Bay Area, New York, and Southern California crowded the bottom of the list. In some cities like San Francisco, even opening an ice cream shop has become subject to unendurable, endless regulatory reviews. Many heartland cities are exploiting this opportunity, with some offering generous bonuses to telecommuters from the coasts.

For fast-growing companies like Chow Now, which produces branded online ordering systems for over 20,000 local restaurants across the United States and Canada, shifting to the interior has become integral to their growth strategy. Chow Now started in west Los Angeles a decade ago, and moved much of its key operations two years ago to Kansas City, where the company now houses a third of its employees. Much of the rest are now scattered and working from home.

“We moved operations to Kansas City but didn’t intend for it to be permanent,” said the company’s 43-year-old chief operating officer and co-founder, Eric Jaffe, now comfortably ensconced in suburban Johnson County on the Kansas side of the state line. “But the employees and I fell in love and decided to stay. This is a better place for us to grow and expand. There’s a lot of talent here, lower taxes, and just a better lifestyle for a lot of our people.”

Perhaps no industry, Jaffe noted, has been hit harder than restaurants. Over 110,000 restaurants have shut down during the past year-plus of lockdowns, and some 200,000 businesses overall disappeared compared with the usual erosion. Among the dearly departed are such icons as City Tavern in Philadelphia, Louis in San Francisco, LA’s Pacific Dining Car, and New York’s trendy Momofuku Nishi. Even some larger chains are threatened with extinction, as lockdowns have driven away much of their business.

Martin Kulldorff, a professor at Harvard Medical School, summarized the impact: “Lockdowns have protected the laptop class of young, low-risk journalists, scientists, teachers, politicians, and lawyers, while throwing children, the working class, and high-risk older people under the bus.”

Out of the wreckage, some restaurant entrepreneurs are finding new ways to survive—and even thrive—by using the kinds of technology Jaffe sells. But what’s mattered most, suggested Chris Williams, owner of Houston’s famed Lucille’s soul food house, has been finding ways to stay in touch with customers through the pandemic. Faced with closures, Williams, unlike many of his counterparts, decided to keep all his staff. Instead of cutting personnel costs, he innovated, changing the menu to make it friendlier to online delivery, instituting a delivered Easter brunch, making extensive use of the yard adjacent to the restaurant, and having his employees make the deliveries, rather than rely on expensive services like Uber Eats. He also made a very public effort to feed thousands of hungry people in Houston, which was also hit hard by a cratering in oil prices.

“The lesson of 2020,” Williams said, “is you do best to invest in your employees and your company. The community is your business. People see what we are doing and order from us. The community work turned out to be a dual-purpose dollar.”

Williams, who is riding the wave of reopening as he works to open additional restaurants in the area, said he did what “it takes to survive,” but he at least had a reputation on which to build. Brian Kim only had the skills he’d developed working in the culinary field since age 15 and as a sous chef at the Nobu branch in Newport Beach, California. But when that restaurant closed, he took the opportunity to start something new—a high-quality online sushi delivery service called Chef Han.

He started in a tiny kitchen along Santa Ana’s downtown, a gritty, largely immigrant area within the popular and eclectic Fourth Street Market. The situation was desperate: His wife was pregnant, and he needed to do something to bring in some money. By June 2020 he was delivering sushi across Orange County and cornered part of the market, allowing him to hire eight employees, many formerly of Nobu.

“We all came together with experience, so I didn’t have to train anyone,” recalled Kim, whose late father was a sushi chef in South Korea. Now that restaurants are approaching full reopens in long locked-down California, business continues to be brisk, with many preferring to order their sushi for parties and at home. “I feel blessed,” he said. “We made our reputation at a time when lots of restaurants were going out. But we figured out how to go with the flow and we survived.”

The most significant changes may be occurring in the industrial sector, which is rebounding faster than at any time in the past two decades. The pandemic clarified for many entrepreneurs that far-flung supply chains expose companies to potentially catastrophic risks. This was painfully clear early in the COVID outbreak when China decided to block health care exports amid the worst days of the pandemic.

For years, “smart” consultancies like McKinsey were confident that it was good for firms to shift all their production to China. The events of 2019-20 shook up producers, and according to March 2020’s Thomas Industrial Survey, up to 70% of firms surveyed said they were “likely” or “extremely likely” to reshore in the coming years. Camille Farhat, CEO of RTI Surgical in Marquette, Michigan, suggested the pandemic has convinced many business leaders to stop “destroying the supply ecosystem” that makes production possible. “To stay safe, you have to do contingency planning. You have to restore the network and maintain surplus production capacity. Hopefully, we are learning that lesson.”

Some of the biggest opportunities are in health care. Even as the pandemic shut some sectors down, growth in medical products and personal protective equipment (PPE) like gowns, gloves, masks, and materials for protective barriers like plexiglass helped pace manufacturing growth by 700,000 jobs over the first six months of the pandemic, after hitting a decadelong low earlier in the crisis. Much of this activity is concentrated in places like Ohio. “Critical to the process is rebuilding the supply chain to not be dependent on Chinese inputs,” suggested JR Turner, general manager of the Troy, Ohio, facility of Lainiere Health and Wellness. “We used to have to source these materials from China, but now we are producing it here. You can make it happen.”

The Heartland Health group, based in Fairfield outside Cincinnati, is developing a PPE strategy that includes small, highly automated plants scattered around the country. Heartland Health already has eight such plants making masks, gowns, needles, and other products, but current plans are to boost the number to over 30. Amanda Engel, company co-founder and vice president of sales and marketing, said the China challenge can be met with highly automated production—including a machine that makes 500 masks per minute—using the skilled labor concentrated in the country’s heartland. “COVID forced us to change,” she said. “You have to change the supply chain world and that’s a big opportunity we see across the board. The key is to reinvent yourself, innovate, and use the skills in the labor force.”

The orneriness and individualism of Americans may not be popular with the country’s governing clerisy, but ambitious restlessness stands at the core of our civilization.

Such disruptive innovators represent what could become the cutting edge of America’s next economic resurgence. In more managed societies like Germany, Japan, or France, the leading companies tend to remain the same over time. Even those firms with historical connections to fascism like Mercedes, Krupp, and Mitsubishi survived their ignominy and remain dominant in their home countries.

The United States has been different. Only 53 of the current Fortune 500 companies were around in 1955. Throughout American history, hard times have created new winners. Great American companies like King Cullen, the Yellow Pages, and Disney emerged in the Depression. Microsoft, Hewlett Packard, Trader Joe’s, and a host of others arose during deep recessions.

Today even aerospace—an industry that Morgan Stanley projects to have annual global revenues of $1.2 trillion by 2040—is being led by private entrepreneurs. It’s not just marquee names like Elon Musk and Jeff Bezos innovating in space travel and rocketry, but scores of smaller companies, too, many of them developing new forms of propulsion and even seeking to build rockets using 3-D printers.

The orneriness and individualism of Americans may not be popular with the country’s governing clerisy, but ambitious restlessness stands at the core of our civilization. The real heroes and heroines in post-pandemic America won’t be the oligarchs who have taken advantage of the crisis, or the elite bureaucrats who have lorded over the nation for over a year. It will be the people who occupied deserted storefronts on Main Street, developed businesses from home, or built new production facilities in the heartland. Most will never be celebrated in the press, but collectively they represent the hidden power that can rescue the struggling middle class and preserve the essence of what it means to be an American.

Joel Kotkin is the Presidential Fellow in Urban Futures at Chapman University and executive director of the Urban Reform Institute. His new book, The Coming of Neo-Feudalism, is now out from Encounter. You can follow him on Twitter @joelkotkin.

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