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Meyer: Focus Economic Development Less on Big Factories, More on Small Local Start-ups

Brookings entrepreneur Scott Meyer is somewhat concerned about the brewing scandal involving the Governor's Office of Economic Development, SDRC Inc., the EB-5 visa investor program, former GOED director Richard Benda, and former Governor Marion Michael Rounds. But Meyer is more concerned about the big-picture problem of South Dakota's focus on promoting big projects rather than truly small local start-ups.

Scott and his brother John are beneficiaries of GOED largesse: in 2009, they used a $15,000 state economic development grant to start 9 Clouds Inc. Here's the return Meyer says we got on that investment:

...In 9 Clouds’ case, we started almost five years ago with a $15,000 grant from the state. That startup money multiplied us in to two companies with a total staff of 15.

At that rate, a $400,000 investment would create 400 jobs in the state. Even with a small investment of $4 million from the state, one out of ten gazelle startups could fail and still create the same amount of jobs as one large company [Scott Meyer, "Powering the Economy with Local Gazelles,", 2013.11.10].

Meyer compares South Dakota's return on investment on 9 Clouds to the state's ROI on Bel Brands, the giant French cheese factory coming to Brookings. Bel Brands will create 400+ jobs in Brookings. The state is committing $21.6 million to assist Bel Brands; the city of Brookings is contributing another $11.8 million.

Let's put the ROI in terms of the EB-5 program. Each EB-5 visa applicant invests $500,000 in a new American business. That EB-5 applicant gets to stay in America if that investment creates ten jobs. It took 160 of those investors ($80 million in EB-5 money) to get Northern Beef Packers going in Aberdeen. That slaughterhouse employed around 400 workers for less than a year.

Suppose just one of those EB-5 investors had instead provided seed money to startups like 9 Clouds. $500K would parcel out to 33 $15K grants. If half of those start-ups failed, and if the other half averaged the Meyers' success, that one investor would be responsible for creating 240 jobs, well over the EB-5 job creation requirement. Two such EB-5 investors, one million dollars, could create 480 jobs, putting more people to work and launching far more independent business owners than Bel Brands or Northern Beef Packers.

At that rate, all 160 EB-5 investors in NBP could have created over 38,000 jobs... although our EB-5 investors would have had to bring some friends to fill those jobs, since South Dakota currently only has about 17,000 people looking for work.

We have much more to learn about who did what, knew what, and broke what in South Dakota's GOED/EB-5 scandal. But as we can learn from the Meyers' 9 Clouds example, South Dakota's economic development model is wasting resources on chasing big, expensive elephants when it should be favoring the more economically nimble and profitable small local start-ups.


  1. Kathy Tyler 2013.11.11

    I agree. Another aspect of the small business world is support of people who want to buy an existing small business. (Personal example) There is no support from the state for this type of business growth. We don't take care of the 'little people.'

  2. Lanny V Stricherz 2013.11.11

    Following on that same train of thought, had the state invested the money that it invested in the 8 CAFO dairy operations, two of which we know went bankrupt, (I am not sure about any of the other 6) it could have assisted probably at least 100 families interested in a dairy operation, to get started, rather than recruit people from outside the United States to do the same thing, and despoil the land by the largeness of their operations.

  3. Douglas Wiken 2013.11.11

    Maybe a loan system like that for education could be set up for healthcare. Couple that with a few other restrictions. See Dakota Today for more. Not sure if such a system would generate many jobs if it were efficient however.

  4. Scott 2013.11.11

    Thanks for sharing. Love the ideas and energy behind the idea. Let's not pretend we're a huge state brining in multi-billion dollar firms. Let's build our own. They'll be more likely to stay and more likely to help our state.

  5. Deb Geelsdottir 2013.11.11

    The build-your-own, small-startup businesses is an excellent model which has been effective all across the nation. Take a look at the Fortune 500 and see how many of them started as a large business.

    Good thoughts on a good topic.

  6. Deb Geelsdottir 2013.11.11

    Oh, what's a "gazelle startup?"

  7. Winston 2013.11.11

    As long as you could keep a EB-5 start-up business or a current business, which took advantage of the EB-5 program, out of bankruptcy, their re-investment opportunities with foreign investors had endless opportunities thanks to the EB-5 program .... What a cash cow!....

  8. caheidelberger Post author | 2013.11.11

    Good question, Deb! Scott uses the term to refer to small, fast-growing companies. Apparently it's a common business term: Scott points to this definition on Investopedeia:

    A high-growth company that is increasing its revenues by at least 20% annually for four years or more, starting from a revenue base of at least $1 million. This growth pace means that the company has effectively doubled its revenues over a four-year period. As gazelle companies are characterized by their rapid growth pace, rather than their absolute size, they can range in size from small companies to very large enterprises.

    Economist David Birch apparently coined the term in 1994, comparing gazelles to "the elephants (like Wal-Mart) and the mice (corner barbershops)."

  9. Deb Geelsdottir 2013.11.11

    Thanks Cory. Lots of great companies began life as mice.

  10. Joan Brown 2013.11.11

    One of the biggest problems in SD is that when our politicians recruit businesses to come to the state, they don't worry about getting businesses that pay a living wage, all they are concerned about is getting the business into the state.

  11. caheidelberger Post author | 2013.11.12

    David Montgomery reasonably points out that there could be limits to the number of small Internet startups that the state could fund and see grow. I suppose one could argue that larger agricultural and manufacturing plants that produce hundreds of jobs in one shot have their place in a robustly diverse economic development portfolio. And maybe it would wear Pat Costello (current commissioner of the Governor's Office of Economic Development) out to vet 2000 gazelles and supervise grants to 400 worthy ones, compared to reviewing, say, 20 big industrial proposals and approving and overseeing two.

    But you know, if I were Governor, I might have more fun with all the press and photo ops I'd get driving around the state every day shaking hands and throwing fresh dirt with my golden shovel for one or two new small businesses a day than I would rubbing elbows twice- or thrice-yearly with the corporate honchos who bring us the latest "Toyota lottery" project.

  12. gail 2013.11.12

    How many of the big projects bring in jobs that keep the wages in SD, and I don't mean the little bit of money that goes to the local big box store.....real spending in local stores that would help economy? Even the supplies and feeds needed in some of these projects are bought out of state - - and like the pig factory farms, how much of the cash is spent around in the community? Or the dairy factories? How much does it cost us for the laborers that are brought in to work for these mega companies? I see a lot of our money going out to keep these factories going. There is not any local economic development coming from these mega farms.

  13. Douglas Wiken 2013.11.12

    And some existing local businesses fight tooth and nail to keep labor pay down even if new business wants to raise wages.

  14. caheidelberger Post author | 2013.11.12

    Good point, Douglas: and when we have one big employer beholden to the powers above him, it's easier to pressure him to keep wages down... and he can keep wages down for lots more workers.

    Gail, compare the Veblen dairies, which benefited from several foreign EB-5 investors, to some of the earlier dairies that are run by folks who came here on EB-5 visas themselves. They live on the dairy. They milk the cows themselves. Their ability to stay in the country comes from their direct business decisions and hard work. Those dairies seem to provide a better basis for economic development. I wonder: do those investor-owned and -operated dairies produce more revenue and other benefits for the local community?

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