Editor’s note: Tom Snyder, Executive Director of RIoT, delivered his annual “State of the Region” address at Raleigh Founded’s monthly happy hour. Eembracing the State of the Union theme, Tom analyzed the economy and  jobs, domestic and foreign affairs and North Carolina’s opportunities and threats.
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RALEIGH – 2021 was a pivotal year

We are living in a time that is equal parts historical challenge and historical opportunity.  Society has largely reached the end of its patience with the pandemic and – virus be damned – individuals, governments and businesses are all moving quickly towards “life as usual”. But this is not a “usual” time.

Workers are quitting their jobs at a record pace, creating advantages for labor in negotiations and unprecedented challenges for businesses large and small.  Emerging technologies and AI are completely transforming industries as the world becomes “smart” and automated.  To further complicate things, inflation is escalating rapidly, supply chains continue to struggle and the world is on high alert as Russia invades Ukraine.

How does all this reflect back on entrepreneurship in North Carolina?  Let’s take a closer look at global trends and local impacts.

Labor and Jobs

According to the NC Secretary of State’s office, North Carolina saw a record number of new businesses launched in 2021.  More than 178,000 new businesses were incorporated, which represents a 40% increase from 2020 and is more than double the rate in 2017.  To put this in perspective, 2.9% of all adults in North Carolina started a new business in 2021.

RIoT’s mission – as stated at its website

Historically, hardship has always been a driving force for entrepreneurship. The pandemic, and related recession, create the typical conditions that motivate people to try something new.  But globalization and concentration of wealth to a small number of mega-businesses further amplified the trend this year.

The “Great Resignation” has been widely covered by the media, reporting on an unprecedented number of people quitting their jobs.  Reasons for the trend range from worker apathy to minimum wage frustration to salary competition and retaliation against employers who treated them poorly during the height of the pandemic.

But the biggest lesson learned from the pandemic is the public reminder of the difference between income and wealth.  Employees have struggled in major sectors of the economy while business owners have become more wealthy at a record pace.  People who are choosing to leave their job, to instead pursue an entrepreneurial venture are choosing to pursue a path that is more than income, but also the opportunity for wealth generation through business ownership.

Image by Foto-Rabe from Pixabay

Inflation

The cost of almost everything is increasing at a rapid rate.  Supply chain challenges continue to be the primary explanation for rising prices.  Semiconductor shortages have limited supply for automobiles and consumer electronics.  Labor shortages have slowed goods processing at major ports, slowing delivery of electronics, appliances and building supplies.

I would argue that a more significant reason for the supply chain shortages is the globalization that has limited competition in nearly every industry.  Consider that 74% of all meat packing and distribution is controlled by just four companies.  Sixty-two percent of cloud services are provided by just two companies.  Nearly 51% of all supermarket sales in the US go through just three grocers.  Amazon all by itself represents ~1.5% of the US GDP, a similar figure to the whole utility sector and nearly twice the contribution of agriculture to the US GDP.

It is notable that big industry has been particularly challenged by the pandemic as low income, frontline workers got sick in high percentages and fled low income jobs in droves.  But with little competition, powerful companies have simply adjusted production to compensate for labor shortages, raised prices and delivered record returns to shareholders. With little concern about competition, these mega-companies can reduce supply and raise prices with little concern for loss of market share to competition.

This trend opens a door for entrepreneurs.  Startups, using new technology, have the opportunity to disrupt the world order as we have seen time and again over the years.

Source: Pixabay

Entrepreneurship

Throughout history, hardship has energized change.  When times are good, change is hard.  But when adversity rears its ugly head, trying something new becomes easier.  Starting a business is hard work.  A massive life change compared to simply working for someone else.  Yet we see record numbers of new businesses launched this year.  People are recognizing that they can take control of their own destiny through entrepreneurship.

Consider that over the past 50 years, wages have increased by 6% per year on average.  Value in the stock market has increased by 10% annually in that same span.  Over the last 10 years it has been closer to 14% annual growth.  Think about that.  Passive income through owning stock, consistently outperforms hard work.  On top of this, capital gains are generally taxed at a significantly lower rate than simple income.  The sheer amount by which wealth dominates the economy has never been better understood by the general public.

Huge swaths of the population are not participating in the opportunities that wealth provides.  But the rise in entrepreneurship demonstrates a desire for change.

Source: Pixabay

Source: Pixabay

Technology and Timing

The internet is 41 years old this year.  In the early years, it was novel, but by the mid 1990’s it was becoming a major economic force, fueled in part by an entrepreneurship boom resultant from a mild recession in 1990-92. This momentum built to the dot com boom of 1995 less than 30 years ago.

Startups using new technology sought to disrupt the established businesses of the time.  A little company called Amazon launched in 1995 with a crazy premise to sell books online.  The national bookstore chains failed to see how technology would change their industry and nearly all were out of business within 15 years.

Every single industry was completely transformed by the internet.  More than half of the companies on the Fortune 500 over the last 20 years have gone bankrupt or been acquired by companies with stronger technology adoption.

We are in the early stages of the Data Economy, driven by advances in Artificial Intelligence, Virtual and Augmented Reality, NFT’s, 5G, Blockchain and the Metaverse.  There exists a massive opportunity for entrepreneurs who can move more quickly than established companies.  It provides an opportunity to create new wealth, outside the current corporate power structure.

All the ingredients for the next wave of the economy are in place.  A recession has motivated people to jump into entrepreneurship.  Lack of competition has allowed established multinational companies shift their attention to shareholder value instead of serving customers.  Real time data technologies are accessible at such low cost that pre-revenue startups can build solutions with them, create value and begin to peel customers away from the establishment.

The question is, how well positioned is North Carolina to share in the Data Economy, compared to other regions?

Source: Pixabay

Source: Pixabay

North Carolina

In short, there are numerous positive indicators, but not everyone is yet on board.

Entrepreneurial support resources are leveling up, and access to capital continues to improve.  For two years running, NC IDEA has deployed record amounts of grant capital across the state, including $3.75M in this year alone, up from $600k just six years ago.  We see new funds supporting early stage entrepreneurs like Scot Wingo’s Triangle Tweener Fund.  CED reports that 222 companies raised $4.6B in capital last year.  That is 600% more than 2016.

Programs like RIoT’s own startup accelerator are expanding across the state and into Virginia, providing resources in both urban and rural communities.  Major exits like the IBM acquisition of Red Hat in 2019 freed a new generation of mentors and advisors to join angel groups and work with first-time founders.

One of the most exciting current trends to watch is in local government.  Municipalities and counties have a once in a lifetime opportunity to deploy federal stimulus funds for transformational projects.  Wake Forest has proven to be a local leader, as the first community in NC to deploy American Rescue Plan (ARP) funds for digital literacy upskilling of their residents at the W.E.B. DuBois school.  The goal is to move people from low wage hourly jobs to high-wage tech positions and to spark technology-fueled entrepreneurship. [Full disclosure – WRC, RIoT’s parent company is involved in that project].

Wilmington is actively considering digital workforce development projects on an even larger scale.

Raleigh has just restructured to add a new Office of Strategy and Innovation.

Lenoir county just announced $29M to bring critical last-mile broadband infrastructure to more than 15,000 rural households.

This follows the example of Wilson, NC whose investment in broadband fiber a dozen years ago sparked new business growth that reversed population decline and attracted significant private investment into the community. Rural regions can fully participate in the Data Economy when they have gigabit broadband.

While some communities are investing in the future, many, many more are simply using ARP funds to catch up on maintenance projects, like bridge and road repair. This puts a needed band-aid on aging infrastructure, but lacks the vision of the future economy and thus risks being only a temporary solution. It is the equivalent of the book sellers of the 1990’s investing in a fresh coat of paint rather than the internet.  Repairing assets is not enough.  We need to reconsider the infrastructure itself.  The federal government recognizes that digital education and entrepreneurship training is economic development infrastructure.

ARP provides a rare opportunity to make forward-looking technology, training and entrepreneurial support investment that leads to the next wave of income and wealth creation. That investment  grows a higher margin tax base that enables continued maintenance and upgrade of the infrastructure into the future.  Don’t pave a pothole once now.  Instead build the economy to fund road maintenance into the future.

Communities that are not investing in data economy technology adoption will find themselves left behind in a “digital rust belt” similar to an era ago when communities invested in sustaining a legacy manufacturing industry rather than in advanced internet infrastructure and business.

North Carolina is well positioned, with significant assets to capture this new economy.  The university system is strong and provides a pipeline of talent.  NC State just announced an increase in engineering and computer science enrollment of 4,000 graduates per year over the next 5 years.  There is a healthy diversity of industry in the state and a huge immigration of talent from other regions.

SAS and IBM remain among the most important data analytics tool providers in the world.  Next generation Data Economy companies like Pryon and EDJX are growing rapidly in Raleigh.  Established heavyweights like Apple and Google have chosen our region for their growth.

History proves that the emerging technologies of today will dominate the economy of the next 20-30 years.  It remains to be seen if the major companies in RTP will successfully transform from internet companies to data companies.

I predict that the regions that best invest American Rescue Plan funds into data technology education, broadband and entrepreneurship support will have the healthiest economies in the coming years.

Smart money says that startups will lead the way.

(C) RIoT