America’s digital divide: Startups fly, storefronts struggle

America’s digital divide: Startups fly, storefronts struggle

This article was written by Satta Sarmah and featured in Fast Company on September 26, 2014.  When 30-year-old Chicago native Sheyla Jarocz talks about how a brick and mortar storefront survives in the city’s North Center neighborhood, it sounds like a lonely mission. “I’ve tried to do promotions with nearby businesses,” said Jarocz, who opened Maash Boutique two years...

This article was written by Satta Sarmah and featured in Fast Company on September 26, 2014. 

When 30-year-old Chicago native Sheyla Jarocz talks about how a brick and mortar storefront survives in the city’s North Center neighborhood, it sounds like a lonely mission. “I’ve tried to do promotions with nearby businesses,” said Jarocz, who opened Maash Boutique two years ago. “They’ve said, ‘You have to figure it out on your own.’”

Meanwhile Anton German, a Russian-born tech entrepreneur, describes a Chicago that’s warm and collaborative. “What helps is the number of incubators and co-working spaces that allow entrepreneurs to flourish.” Seven years ago, a 22-year-old German started BayRu, an eBay-like platform for Russian customers, and he had to bootstrap his company before getting angel investors. “Getting any funding was impossible,” German said. “Right now, I’d say it’s the reverse. Some would say it’s a bubble.”

The divide you see in Chicago exists nationwide: At a time where the stories of startups surround us, American entrepreneurialism is actually on a decades-old downward trajectory. Fewer start up and more fall down: The failure rate for new businesses has increased in the last 20 years and more people are working for established firms, according to a recent Brookings Institution report. A recent Fed study shows that business ownership rates among American families are at a 25-year low. The U.S. Census bureau is reporting that for the first time in three decades,business deaths outnumber business births.

It’s an especially worrying trend following a recession, since many economists say new businesses are critical to economic growth because they create the most new jobs. (Apple and Microsoft, to name the most obvious examples, were created just after the recession of the mid-’70s.) Tech startups continue to flourish today, even if they can’t escape the overall downward trend, the best ones–nurtured in incubators and then blessed with investors–go on to employee thousands of people.

Businesses with under 50 employees make up the majority of American firms. And most of those are small local operations that political candidates evoke as “the backbone of our economy” and VCs ignore. (“In Silicon Valley, when we say ‘small business’ we say it with a kind of sneer,” says Steve Blank, founder of eight different tech companies.)

The differences are in particularly stark relief in Chicago, which had the lowest rate of entrepreneurial activity of the country’s 15 largest metro areas in 2011–tying Detroit. In 2013, it ranked second to last. Illinois, for example, ranks 42nd in post-recession job growth. Though researchers haven’t yet found one overarching reason for the entrepreneurship decline across the country, Chicago storefront owners cite a list of challenges–onerous regulations, high costs, and sharp-elbowed competition–weighing them down.

The city and state have made concerted efforts to improve their small business woes–alongside splashier successes for their tech startups, and the hope is that if we can fix small business here, we can fix it anywhere.

“Chicago’s technology economy is thriving, creating thousands of jobs and generating interest from around the world,” Mayor Rahm Emanuel said in a speech last November. “Now is the time for us to double down and ensure that Chicago’s tech economy is a strong, lasting pillar of our overall economy.”

The city’s entrepreneurs have created over 830 startups in the last three years andraised over $1 billion in funding in 2013, according to Built in Chicago, an online community for the city’s startups. Illinois is among many states, including Arizona,LouisianaNew Jersey, and New York, that have launched incentive programs to give angel investors significant tax credits.

Chicago also has developed tech incubators like the non-profit organization 1871–accepting only “digital pioneers” and now claiming nearly 500 members. The city is creating a tech hub that will house a $320 million research lab and manufacturing facility, which Mayor Emanuel says has “the potential to be the Silicon Valley of new digital manufacturing and advanced manufacturing.”

World Business Chicago (WBC), a private organization that has worked with the mayor’s office to attract new companies, says Chicago’s diverse mix of businesses–the city is home to 31 Fortune 500 companies–will only help its emerging tech industry.

“One of the most prominent reasons to start a business in Chicago is the corporate ecosystem here,” said Phil Nevels, the executive director of WBC’s Chicago Next Initiative, which is focused on job growth and economic development. “Many of these large corporations are also developing venture arms, so that becomes another avenue to attract capital.”

Brick and mortar business owners watch with envy. “I believe that the mayor wants to make the city small business-friendly, but it isn’t run very efficiently. There are a lot of bureaucratic processes,” said Christie Hwang Jordan, who runs an acupuncture business in Chicago’s River North neighborhood. Hwang Jordan has been trying for months to get the city to approve a banner for her storefront (After getting approval she will have to pay a $1,500 fee to hang it.)

According to the U.S. Chamber of CommerceChicago has the highest fees for entrepreneurs among nine major American cities, including New York and San Francisco. The city also has the longest approval process for new businesses–an average of 32 days compared to five days in Boston. Illinois charges $500 to register a basic limited liability company, while the fee is only $50 in neighboring Michigan. The state fee is on top of local ones–which range from $250 to more than $4,000 depending on the type of business–most entrepreneurs have to pay if they set up shop in Chicago (Internet entrepreneurs typically only need to get a limited business license, which officials say can be applied for and issued within the same day).

“It’s almost a tale of two cities,” says Michael Lucci, director of Jobs and Growth at theIllinois Policy Institute. “There’s a healthy tech community that’s growing. Then there’s the rest of the entrepreneurial world in Chicago and Illinois that are really suffering.” Lucci said the fees and taxes make it difficult for people to start a new business, especially those who aren’t already wealthy.

And then there’s the problem Sheyla Jarocz pointed to: small businesses working against one another. Consider Chicago’s ongoing food truck fight: Since 2012, foodtruck vendors have fought the city on a rule that requires them to be parked at least 200 feet from any established restaurant. They say the law makes it nearly impossible to do business in restaurant-packed downtown Chicago. Established restaurants have successfully lobbied the city to maintain the 200-foot rule and two food truck vendors, Cupcakes for Courage and the Schnitzel King, have sued the city to overturn it.

“We’ve seen it throughout the country where existing businesses will try to stifle their competitors,” Robert Frommer, the attorney for the food trucks vendors, said. Suchfood truck proximity rules also exist in cities like Seattle, St. Louis, and Boston. In Chicago, there’s even a proximity rule for how close someone can open a new barbershop next to an existing one, Frommer says. “As these examples add up, the net effect is that people simply stop trying,” he says.

The cultural problems are bigger than any regulations. Being a successful local business is a point of local pride, but communities don’t have local pride like they used to. Each generation seems to be less civically engaged than the one before. There’s an increasing sense in the zeitgeist that you’re either getting rich or getting screwed. So if you’re going to take the chance on a small business, why would you risk everything for a business that, best case, still leaves you in the latter category?

Chicago points to some of the reasons to resist that cynicism. Experts point to the need to attract highly-skilled immigrants like Anton German. Mika Stambaugh, a spokesperson for Chicago’s Department of Business Affairs and Consumer Protection, said the city has made changes to encourage more entrepreneurship since Mayor Emanuel was elected. Stambaugh points to expedited service for business owners with simple license transactions and a decrease in the number of business licenses from 117 to 49.

Nationally, the Affordable Care Act health exchanges are offering small businessescheaper health coverage as well as tax credits. There’s evidence to suggest that stronger safety nets can act as trampolines rather than hammocks. And as the tech companies increasingly invest in local operations–Google Fiber, employing Uber drivers–the line between two cities can, in some ways, disappear. But if the U.S. wants to stem its entrepreneurial decline, its cities have to make it less cumbersome for entrepreneurs of all stripes–traditional small businesses, especially–to start up and thrive.

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