The Chicken or the Job CREATORS – which came first ?
I assure you the lenders, investors and venture capitalists are not the first people that pop up in my mind because they always come after the first job – employee #1 the original business person – has already been created.
It is the individual business person , the job creator, that comes first. It is the hard working, independent risk taker that we should celebrate because long before they received their first loan or made their first sale, these folks dreamed and put themselves out there – with the help of many – so they could make a difference.
Why are jobs created?
Perhaps we can all agree on this definition:
“Jobs are created as a result of the creation and execution of an idea, product, or concept that can either create a new demand and satisfy it or satisfy a demand that already exists.”
Who creates jobs?
Private-sector business , (aka small businesses, large businesses, small businesses that become large businesses) – and the Public-sector (aka Government).
America is a free-market economy. Almost anyone in this country can take an idea from conception to implementation and start a business. As long as they abide by the laws and regulations governing their business and can find a customer, they have the opportunity to become successful.
In many cases, being successful means satisfying demands at a profitable level. There are good businesses and bad businesses in America. Many succeed and many fail.
There are many businesses in America that can satisfy demand without creating more than one job. We call these businesses sole-proprietors and they can always add staff but do not need to add staff unless there is a specific demand that requires the addition of another person. However, the added staff can be a temp worker, business collaborator or joint-venture that may not even be on the payroll of the sole-proprietor. I have seen venture capitalists, real estate brokers, lawyers, plumbers, authors, mechanics and many more that have a business with only one employee and they do just fine.
There are other businesses that require small numbers of highly specialized staff to successfully satisfy customer demand. Berkshire-Hathaway might be an example of this – a business needing fewer than 50 employees to manage a multi-billion dollar corporation that satisfies specific customer demands. Microsoft on the other hand is an example of multi-billion corporation that started with a few employees yet now employs 200,000 full-time employees of every skill – from math geniuses to highly organized administrative assistants – in order to create, as well as satisfy demand.
There is also a large public-sector that was created by our Constitution which creates demand for goods and services as well as satisfying a considerable amount of demand from Americas as well. What we refer to as “The Government” seems to almost exclusively require individual employees because its primary mission is so focused on providing a plethora of mandated services without profit to every-single American in the country – in most cases – regardless of their ability to pay. The 3 branches of government, our national security apparatus, the entire justice system, state and local infrastructure are just a few examples of jobs required to be created by our government.
As a private-sector capitalist myself, I am happy to have the public-sector working side-by-side with the private-sector. The private-sector can focus on profitable ventures while the public sector can focus on the socially required needs of our citizens. As long as we are not competing against each other and I am free to build and operate a business, I’m a happy camper. Thank goodness no one is asking me to provide goods and services to every single American regardless of their ability to pay and without a profit incentive. The public-sector therefore as part of its constitutional mandate, creates a large number of direct/indirect jobs and also creates demand that private-sector businesses can therefore compete to satisfy at a profit.
In all cases, businesses not only satisfy demand in the most reasonable, lawful and competitive manner possible, they themselves also create demand for other businesses to satisfy. It is a closed-looped, 360 degree world of free-market capitalism and it has worked very well on and off in America. It only stops working well when demand contracts so abruptly, there will be nothing for business people to satisfy. This reality will stifle investment in innovation, technology, upgrades, maintenance, new product launches, and worse yet for a nation that prides itself on job creation … no significant employment.
If there is no demand to satisfy, there will be no employees required. No workers, no broad tax collection. No consumer spending. No investment in infrastructure. No investment in our country.
Yet debt will increase because spending actually increases demand for public services when employment contracts. Without revenue, borrowing as a percentage of revenue collection, increases and the debt to GDP/revenue explodes.
So we need businesses to thrive and survive so our country has the revenue to operate and provide the necessary service Americans require. So how do we create a culture that encourages businesses start? Demand and Credit.
Demand and Credit
Make sure demand exists and that credit is available and accessible.
The key to small business survival continues to be access to credit. Well over 90% of all businesses start-up without receiving any direct credit from any formal lending institution. Often, the business owner uses savings or if they are fortunate enough to have been born into money, they borrow money from a rich uncle.
However, eventually almost every business needs credit in order to evolve, adapt, expand or contract. The well-being and growth of small businesses depends on how depository lending institutions (commercial banks, savings banks, and savings and loan associations) are meeting the needs of small firms. Knowing which lenders provide small business financing helps small firms save valuable time in shopping efficiently for credit. Such information also helps lending institutions learn about the demand for and supply of small business credit, about the competition in the markets they serve, and about new investment opportunities.
Other forms of investment also help larger businesses like private-equity, venture-capital, bond financing and a vast array of interesting financial instruments. In all cases, if capital is not available to businesses, it is much harder for businesses to expand.
Yet according to data collected by the Fed, lending to small businesses actually fell by 8 percentage-points in 2010. How do you recover as an economy when even the lenders refuse to lend to the job creators?
I want to talk about the risk takers.
Who is actually taking on the real risk?
SBA lending Quiz. When a bank agrees to give a business person an SBA loan, what percentage of default risk do you believe the bank is taking? In other words, if the borrower defaults and goes under, what percentage of the debt will the bank have to absorb?
The answer? Close to zero. As we know, the borrower is of course responsible for 100% of the default risk and normally has to put down 10% of the loan value. The bank is responsible for 100% of the default risk but already has the borrowers 10% and most importantly, the bank has the borrowers collateral. Yet in the case of an SBA loan, the federal government has guaranteed the bank it will absorb 90% of the default risk should the borrower default. Yes, the bank will have to deal with the hassle of liquidating the borrowers collateral and might even lose some money on the transaction, however the borrower definitely loses everything. The lender actually has the lowest amount of risk in the entire transaction.
How then can banks be proud of the fact that SBA lending has actually shrunken over the last 12 months? According to Source: Federal Deposit Insurance Corporation, Statistics on Depository Institutions, June 2005 through June 2010 and Bureau of Economic Analysis; SBA lending fell from $652 billion to $601 billion. This means there were $43 billion fewer dollars circulated into the economy by the very financial institutions businesses rely on for credit to expand their operations. How can we power economic growth when the lenders cut lending to small businesses by 8 percentage-points in 2010 alone? Especially when those lenders participate in a government backed lending program that basically eliminates the lending risk for the banks?
It is hard enough to have a business in the first place. Yes, many business may never need loans or investors yet when they do, it would be nice for the capital to be readily available. Businesses are not asking for charity – business people know they have to pay a good portion of their profits to the financiers just to get the opportunity to give them money. Businesses need access to credit to manage their cyclical capital peaks and valleys. Credit is especially needed when a business attempts to grow – especially if demand is the growth driver. Imagine how frustrating it was last year for a business to have demand which would create more revenue and profit but be told by the lenders they would not extend them credit – even though the lenders were almost completely shielded from significant downside risk?
Who are the real risk takers?
Who are the real risk takers in our economy? It is not the banks. It is not the money managers. It is not the traders on wall street. It is not the venture capitalists. It is not the merger and acquisition specialists. It is not the bond underwriters. It is not the IPO underwriters. It is not the private-equity companies. These folks only risk money and frankly most of them are not even risking their own money. Too often they are risking your pension fund or 401k accounts that are stuck in buy-and-hold purgatory.
No, the real risk takers are the same people they have always been – the person with the real skin in the game who had the original idea and put themselves at specific personal financial risk to live the American dream. The person with the original drive and determination to make it work. The person investing their own sweat equity. The person that opens the front door on the first day of business and the person that locks that door at night. The person that leaves the job that paid them every two week to start a job that may never pay them a dime. The person that deals with hiring the first employee and firing the last one. The people that are smart enough to know they need help to be successful and hire competent loyal employees. The person that takes a personal interest in his employees and cares about their health, safety and dreams of upward mobility. The person that gets dragged into the labor hearing or stands on the witness stand defending his or her company. These are the real risk takers. These are the real job creators. These are the people that deserve credit for helping to sustain our American economy … not the lenders, venture capitalists, private-equity firms or wall street investors.
Let’s see if I can put this another way so i don’t offend all of my friends in the financial service markets. Yes, any successful financial services company does create their own jobs and they do hire their own employees. They deserve total credit for the jobs they create in own their businesses credit and should be celebrated along with the all of the other job creators.
Are banks taking credit for your success?
For any banker, private-equity firm or venture capitalist to lay claim to creating jobs in my business just because they loaned me money is crazy talk. They never took a risk above and beyond loaning money for which I would be paying them back with interest. They always required more collateral from me than the amount of money i would be borrowing. The bank had a pretty good situation while I retained the absolute risk.
Let’s use an old stereotype involving a loan-shark. A restaurant owner wants to start a business. They go to a neighborhood loan-shark for financing (in some neighborhoods these are the financial services providers – they just do not have television commercials). The restaurant owner pays the original principal and then pays the interest-fees as well so the loan-shark can earn a profit on the original loan. The loa-shark gets paid back with interest and the restaurant owner never needs another loan for the next decade as the business is run well and is profitable.
Now I ask you this: Who do we celebrate as the job creator? I say we celebrate the restaurant owner. This person had the vision, commitment and took the original risk. This person persevered through the ups-and-downs of daily business challenges. To be successful this person paid their taxes, abided by various regulatory rules, marketed the business and earn customer loyalty. this person built a staff and constantly remained flexible enough to deal with industry and market challenges. The business grew not by chance but by extremely hard work.
All the loan shark did was float the capital for which they were paid back in full and with interest. All they were was one of many vendors the restaurant owner used. As a matter of fact, the loan-shark only made the loan because they convinced themselves that there was very-very little risk the loan would default. The reason the loan shark gave the loan is because they loan shark made sure there was a good profit opportunity with as little risk of default as possible. The underwriting process at loan-sharks is a bit different than that of some modern finance institutions because the loan shark used the restaurant owners life and health as the security for the loan. Yet even with that threat, they loan shark still rooted for the restaurant owner to be successful. The loan shark became one of the restaurant owners biggest cheerleaders with a nice security interest.
You are the real job creator.
If I hear another lender or investor claiming credit for the job creation of others I am going to scream! Let’s say it all together, it is the person or persons with the idea, fortitude, commitment and creative juices necessary to decide to own and operate the business that gets the credit for creating jobs. They left the security of a paycheck as a hardworking employee working for someone else. They run the business, they hire the dedicated staff, their staff pours their sweat equity into the company, they take the real risks and they should be the primary beneficiaries of the success of the business. They are also as the ones experiencing the greatest pain when the business has negative outcomes. They are the ones that appreciate and honor their customers because they know that without customers and consumer demand, they themselves would be out of a job.
Let’s pretend you are a dry-cleaning business and you are in a room with all of your vendors , financial service providers, lawyers and utility providers. Everyone in the room is taking credit for your business being successful. Some have said that without them, you would have no business at all. Some have even claimed that they are responsible for the job creation you have taken credit for.
Now, of course you are willing to agree that it takes a village to be successful, however you know who the actual Village Chief should be and it is not these folks. However, these folks speak with such confidence and authority that even you are beginning to think they might actually be correct. Fortunately you have devised a way to clear up the nonsense by asking this question: Who in this room is the primary job creator and who will lose their job and life-savings if my dry-cleaning business were to close tomorrow? The answer is … you, my friend, only you and it has always always been only you.
Without needing to disparage anyone, I need to take some time and speak for the small business person. We are often on our own to create a life for our business. We can thank all of the other creative people that are taking risks and creating market demand for our goods, products and services. Yet we know above all that we will still have to scratch and scrape to survive for one simple reason: if we fail, we could personally lose everything and no one else shares that level of risk with us. It’s a sobering thought.
Who do the job creators thank for their success?
Yet good business people understand the other side of the story which is: It truly takes a village to be successful. Although we are ultimately on the hook for our failure, many have helped us on our journey to success. We need to cherish all of those that we rely on to be successful, understanding that in the world of chicken and the job creator, we definitely had to come first.
I want to be very clear that we have many to thank. We can first thank our God for life itself and for giving our parents life so they could give us life. We can thank our family for nurturing us while teaching us to love, honor, dream and share. We can thank our family for providing us with values that would guide us for our lifetime.
We can thank all those strangers, (our military, public safety, health officials), we never met, who without us even asking for their assistance, helped keep us safe so we could sleep at night and therefore allowed us to use our days to learn and grow. We can thank the countless teachers that invested their time in us so we could learn how to become successful. We can thank our constitution that enshrined a baseline and a system of government that is committed to protecting our unalienable rights. We can thank those that built the roads, dams, bridges, transportation infrastructure that we rely on for the very existence of our business.
We can thank the first person who had enough confidence in our ability to give us our first job. We can thank our first customer who took a chance that we could fulfill our promise and satisfy their demand. We can thank so many people including our vendors that allow us to conduct our business in the most effective manner possible. For those of us that have employees, we can thank them constantly for without their professionalism , expertise, and commitment to excellence. Without great employees, no business could reach its true potential.
You did not build it by yourself.
Yes my friends, we did build our businesses. We took great risks. However, I have never met a successful business person that believed they built their business without receiving help from a lot of people. Most business people humbly acknowledge that they did not build it by themselves and they are very happy to have a great team on their side. Frankly, we are all pleased to have a great country by our side!
Which came first, the chicken or the job creator? Yes, credit , venture-capital and external-financing is important however without the original catalytic energy and commitment of the entrepreneur, there would be no business. No business, no job creation.
So, I say the job creator comes first. We can serve the chicken for dinner later.