A blog about business and economics.

Aug. 28 2014 12:17 PM

Forget the Rent: Why New York and San Francisco Are Actually Amazing Bargains

New York and San Francisco are synonymous with out-of-control rents. But they're more of a bargain than most of us realize. The New York Citizens Budget Commission, a nonprofit devoted to state and city government issues, recently ranked 21 large U.S. cities and found that New York, San Francisco, and Washington, D.C., (also thought of as an expensive place to live) were actually among the most affordable. How is that possible? First, families in these cities tend to earn more. Second, they spend less money commuting. The typical New York household, for instance, pays a ludicrous amount of rent, but most don't own a car, since they can use the subway or a bus to get to work instead.  

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Like all rankings, this one should be taken with a grain of salt. The Budget Commission based its work on the Department of Housing and Urban Development's Location Affordability Index. Play around on the government's website for a while (it's fun, I swear) and you'll find that for some households, Atlanta or Dallas might indeed be more affordable than New York. In the end, I think the graph stands in for one big point. Americans tend to move in the direction of cheap housing. But my guess is that many families who go off to the Sun Belt in search of a moderately priced home with a yard end up underestimating the impact of commuting costs on their finances, since they're simply more difficult to predict. (Do you know where the price of gas will be in two years? Neither do I.) And while housing is the single biggest piece of most family budgets, transportation comes in second, eating up about 17 percent of all expenditures. As the New York's budget commission puts it: "The rent is too damn high! But the Metrocard is a pretty good deal."

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(Via Vox)

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Aug. 28 2014 10:46 AM

Why You Should Look for Strategic Investors in Unlikely Places

This article originally appeared in Inc.

Since my time in the United Kingdom watching Dragon's Den, and now in the U.S. watching Shark Tank, I have loved seeing entrepreneurs battle with a complex question: Whose money should I take now that I have multiple suitors? And why? Is it better to own a large stake in a smaller company, or a smaller stake in a much larger one?

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With so much money flowing into venture capital and private equity funds, it seems like a greater proportion of investors these days are purely financial. They offer no real operating or distribution know-how; they simply ask budding entrepreneurs to supersize their business more quickly. VC and PE clearly have a critical role in supporting the growth of many small companies, but where do you turn once that utility is maxed out?

Two companies I follow closely have recently pursued strategic investors to help them accelerate. Both have ended up with unlikely, yet what appear to be excellent, strategic investors.

Camp Bow Wow

Before there was DogVacay or Rover.com, there was Camp Bow Wow, a franchised business offering pet-sitting, walking, and ancillary services. More than 10 years into the current business model, the company now boasts more than 120 locations, more than $70 million in sales, and an average client spend of around $1,500 per year.

Owner and founder Heidi Ganahl is aware of the need to grow more rapidly to keep up with the upstarts in the space and has a goal of operating from 1,000 locations as soon as possible.

With this backdrop, she recently sold the business. Not to a VC-backed new entrant. Not to a PE shop. Not to a competitor. No, Ganahl has done something quite different by selling out to VCA, a $3 billion Los Angeles–based company that operates more than 600 animal hospitals. Ganahl will still be involved, but VCA's deeper pockets should allow an acceleration of Camp Bow Wow's proven business model. Who knows how much additional impact the cross-marketing will bring to both companies, but I am sure all the existing franchisers are licking their lips, and another 800 entrepreneurs seem to be needed too.

Design LED Products

Scotland-based Design LED Products is another company that's about 10 years old and at its own tipping point. The company designs LEDs for use in innovative and energy-efficient commercial and consumer lighting products. Their bulbless lamps are a particular favorite of mine, with their promise of no more time balanced precariously on a stepladder replacing worn-out bulbs.

Founded by scientist James Gourlay and led by Stuart Bain, the company has historically tapped angel and VC sources for funding. Now with a clear product suite to monetize, the company just announced a major funding round. It would sound like just another VC round if it were not for the source of the capital infusion: Ikea's GreenTech fund is the new name on the share register, investing alongside existing funders who are clearly excited by this development, given Ikea's goal of only selling LED-based lighting products by September 2015.

The lesson here seems pretty clear. Smart management teams should be considering investment money from a broad range of strategic investors and thinking about where there just might be operating or marketing synergies that are not immediately apparent. I look forward to seeing how these companies grow from here.

Aug. 27 2014 5:02 PM

The Biggest Peer-to-Peer Lending Site Just Filed for an IPO

Online financing site Lending Club filed for an IPO on Wednesday, and according to DealBook, the debut could be one of the 10 biggest for an Internet company.

Lending Club is the biggest marketplace in the peer-to-peer lending space, which helps investors connect with borrowers seeking funds online. To qualify for a loan on Lending Club, borrowers need FICO scores of 640 or higher and clean credit histories. Interest rates average 14 percent. To date, Lending Club says it has financed more than $5 billion worth of loans (of which $1 billion were started last quarter) and paid nearly $500 million in interest to investors on the site.

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Lending Club is one of several companies that are trying to overhaul how we get a line of credit. One of the main selling points these firms have with their clients is that they avoid traditional banks and all the headaches and red tape that can come with them. Cutting banks out of the process is also supposed to help borrowers pay lower interest rates than they would otherwise, while investors see higher returns than if they put their funds into a savings account or something relatively low-risk.

Of course, a model like this has plenty of risks. In its prospectus, Lending Club details pages upon pages of risk factors for its business, such as flaws in its own algorithm for assessing the credit-worthiness of borrowers, errors in data on borrowers from third-party providers, and, of course, any sort of fraudulent activity or security vulnerabilities. One fear among investors is that in an effort to bring in more borrowers and increase transaction volume, Lending Club might consider lowering its standards for who qualifies.

If it doesn't already have answers to assuage those concerns, Lending Club will be coming up with them as it pursues its IPO. Because in this particular endeavor, Lending Club—and not the borrowers on its platform—is the one looking to raise some funds.

Aug. 27 2014 4:38 PM

The U.S. Sells Green Cards, and It Should Charge More for Them

When demand for a product swamps supply, there are two rational responses: either you make more of it or you hike the price. So perhaps it’s time for the U.S. to charge rich foreigners more for green cards.

Since 1990, the federal government has set aside 10,000 visas for overseas investors willing to plunk a minimum of $500,000 into a U.S. development project—could be a dairy farm, or a hotel, or a water plant—that, theoretically, creates at least 10 jobs. For a long time, the so-called EB-5 program was a barely noticed footnote in the vast tome of U.S. immigration law. But thanks to wealthy Chinese families desperate to gain permanent residency, its popularity has surged. For the first time ever, the Wall Street Journal reports, applicants have maxed out this year’s allotment of visas.

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“These investors aren’t coming for the investment,” New York lawyer Yi Song told the WSJ. “They are coming here for their children to obtain a better education and to get residence as an insurance policy.” Already, there is a backlog of more than 10,000 investor petitions.

This is a good problem to have. People want to live in the U.S. and are willing to pay a half-million dollars or more to do it. One might be tempted to open the floodgates.

But the EB-5 program has problems, and simply expanding it would probably exacerbate those problems. Last December, the Department of Homeland Security’s Office of the Inspector General issued a scathing report that suggested the government immigration bureaucracy didn’t have the necessary legal power or wherewithal to properly police the program for fraud or track its impact. For example, it’s extremely difficult to tell how often the investments actually result in work for Americans. United States Citizenship and Immigration Services at one point claimed that EB-5 had attracted $6.8 billion worth of foreign cash, creating at least 49,000 jobs. Asked to verify those numbers, however, it said they were basically a guess that “assumed the minimum requirements of the program had been met.” That assumption seems shaky, considering the OIG found instances where investments were made in developments that had already been completed; the money was essentially used to pay back loans.

As the OIG put it, “USCIS was only able to speculate about how foreign investments are affecting the U.S. economy and whether the program is creating U.S. jobs as intended.” Not good.

There are reasons to doubt the economic logic of a visas-for-cash program like EB-5. If foreigners are funneling their money into the U.S. mostly for the sake of a green card, rather than to make a return, there’s a good chance they won’t be particularly careful with their investments. And as the Los Angeles Times reported in 2011, there are at least a few tales of investments gone horribly wrong. Eager foreigners sometimes get sucked into frauds, as in a massive case involving a Chicago hotel and convention center in which the SEC had to intervene.

That said, many cities have used the money attracted by the EB-5 program to good effect—building airports, for instance. The funding has been especially important to recession-racked regions where banks have been hesitant to lend. And on the whole, a program that attracts more foreign investment to the U.S. seems like a net plus.

So here’s a potential solution: Since so many foreigners—too many, in fact—are willing to pay good money for the right to live here, Washington should up the charge and use some of the extra profit to fund better oversight. Right now, applicants have to invest $500,000 in a high-unemployment area, or $1 million elsewhere, to qualify for the program. By the standards of today’s global rich, that’s nothing. Why not double it, or even triple it? Let supply-and-demand work its magic.

Aug. 27 2014 12:36 PM

IMF Chief Investigated in France

In a statement on Wednesday, Christine Lagarde, head of the International Monetary Fund, revealed through her lawyer that France’s High Court of Justice of the Republic—responsible for investigating French high government officials—is investigating her for “simple negligence.” In France, formal investigation is a prosecutorial suggestion that there is enough evidence to bring someone to trial.

The charges are not for her work as head of the IMF, but as finance minister for then-President Nicolas Sarkozy. Prosecutors are investigating Lagarde’s role in a 2007 arbitration between the former president and Bernard Tapie, “a onetime cabinet minister and the former owner of the Adidas sportswear empire.” Tapie was awarded more than 400 million euros in a dispute with state-owned Crédit Lyonnais; then, despite his socialist loyalties, backed Sarkozy’s center-right political party, leading some to question the authenticity of the arbitration.

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Lagarde stated that the fact that she is being investigated for “simple negligence” means that the committee does not believe that she had been “guilty of any infraction,” but rather suspects she was “insufficiently vigilant during the arbitration.” Lagarde, whose current contract with requires her to “strive to avoid even the appearance of impropriety,” took over at the IMF in 2011 from Dominique Strauss-Kahn, who stepped down amid accusations of sexual assault. At the time, she was lauded for her “hard-working professionalism”—and, indeed, having made her statement, she will return to work in Washington this Wednesday afternoon.

Aug. 27 2014 12:16 PM

Impulse Buying Is Easier Than Ever on Instagram

Target and Nordstrom have rolled out a new service that makes impulse purchases terrifyingly simple. It's called Like2Buy and it's basically Instagram made to Instashop. On Like2Buy, retailers display their merchandise in square Instagram-style photos; click on one and you're taken directly to the item's page on the retailer's own website. See. Like. Click. Buy.

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Screenshot from Like2Buy

Curalate, the marketing and analytics firm behind Like2Buy, pitches it as the "missing link" that will turn user engagement on Instagram into traffic and revenue for companies. Instagram claims to have 200 million regular users who have shared more than 20 billion photos to date. That audience is thought to be four times as large as that of Pinterest, another visually oriented social media site. In April, a study from technology and research firm Forrester declared Instagram the "king of social engagement" and said brands using it had 58 times more success in getting followers to interact with their posts than they did on Facebook.

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Both Target and Nordstrom have posted links to their Like2Buy pages on their Instagrams. Bryan Galipeau, director of social media at Nordstrom, told Businessweek that having Like2Buy will address questions frequently posted in the company's Instagram comments such as "How much does this cost?" and "Where can I buy this?"

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Screenshot from Like2Buy

Turning active users on social media into active spenders for a brand is something that no one has quite cracked the code on yet. Pinterest has been testing "Promoted Pins" that advertisers can buy to raise their visibility. Twitter has sponsored tweets, and Facebook is constantly experimenting with ads. But the company that turns a social network into a virtual aisle of impulse items has a good shot at being crowned "king of social engagement."

Aug. 27 2014 12:02 PM

How Many Americans Live on Less Than $2 Per Day?

This month, Stanford University’s Pathways magazine gave new meaning to the phrase “third-world America” when it published an article reporting that, in any given month of 2011, 1.65 million U.S. households with children were living on less than $2 per person, per day—the sort of extreme poverty threshold usually associated with developing nations. According to H. Luke Shaefer of the University of Michigan and Kathryn Edin of Johns Hopkins, the number of families living under that low, low line has grown 159 percent since 1996. This, they argued, may have partly been the result of Bill Clinton’s welfare reforms, which made it harder for many families to receive cash assistance.

“The prevalence of extreme poverty in the United States may shock many,” the pair wrote. But is it really as prevalent as they suggest? A new report from the Brookings Institution argues: maybe not.

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Part of the reason Shaefer and Edin’s headline number was so startlingly high—they calculated that the extreme poverty rate among households with children was a chilling 4.3 percent—could be attributed to a very narrow definition of income that ignored all noncash safety net benefits. Today, most of the government’s poverty-fighting efforts don’t involve straightforward cash. Food stamps? Housing vouchers? Tax credits? None were included. Once they accounted for those programs, only 613,000 families were living below the $2-a-day mark in 2011—still up by about half since the Clinton years.

At a bare minimum, then, hundreds of thousands of American households are living in true destitution. (For a family of three, the federal poverty line works out to about $17 per day, per person.)

According to the new Brookings report, however, even Shaefer and Edin’s most conservative estimates of extreme poverty might have been too high. If you look at data on income, the pair’s estimates essentially hold up. But Brookings fellow Laurence Chandy and MIT Ph.D. student Cory Smith found that if you examine U.S. consumption statistics, then the number of families surviving on less than $2 each per day falls close to zero.1

The Brookings chart below shows how estimates of extreme poverty can change, depending on your definitions and data source. Estimates based exclusively on cash income are on the far left; estimates including cash income and noncash government benefits are in the middle; and consumption-based estimates are on the far right.

Different Estimates of the $2 a Day Poverty Rate

America’s consumption data, which generally comes from the Department of Labor’s Survey of Consumer Expenditures, is notoriously shoddy. But critics generally complain about its failure to capture spending by wealthier households, which tend to underreport their personal budgets. Generally speaking, it’s thought to be a decent gauge of how middle-class and poorer families use their money.

So why does using consumption statistics lead to such drastically lower estimates of extreme poverty? It might be a data problem. It’s possible that the consumer surveys simply miss America’s poorest households, or that low-income families fail to report some of their income when asked. But even if the true extent of extreme poverty is ambiguous, the possibility that it exists at all should trouble us. “While the estimates we obtain vary,” Chandry and Smith write, “the fact that even some have millions of Americans living under $2 a day is alarming.”

1 Footnote: Interestingly, they also find that if you use the exact same methods researchers use to estimate developing world poverty, then the number of Americans living on $2 per day also falls to zero. 

Aug. 27 2014 11:14 AM

Zara Is Sorry for Making a Shirt That Looked Like a Nazi Concentration Camp Uniform

Zara says it is very, very sorry for selling the children’s T-shirt you see up above, which looks awfully similar to the uniforms Jews wore in Nazi concentration camps. The gold star says “Sheriff,” because the tee was apparently meant to invoke old westerns. (Were Texas law men ever into blue sailor stripes?) Anyway, here are some Jews dressed up at Buchenwald, as a frame of reference. Their stars have a big N on them, which stands for Niederländer.

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Dutch Jews at Buchenwald concentration camp.

Courtesy of Wikimedia Commons

Suffice to say, Twitter was outraged, and Zara is pulling the garment.

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This seems like a tidy demonstration of why diversity is useful in the workplace. I’m just spitballing here, but it feels pretty unlikely that any Jews got a look at this shirt before it went into production. Had they, maybe one of them would have said: “Hey, this looks like something that might trigger my grandmother’s PTSD."

Aug. 26 2014 6:03 PM

Operation SLOG Is Uber’s Aggressive Plan to Take Out Its Competition

Uber and Lyft are engaged in an all-out war for dominance in the emerging ride-sharing market. And Uber is dealing some pretty low blows to stay ahead. Two weeks ago, Lyft accused Uber employees of ordering and canceling thousands of rides on its service in a deliberate sabotage attempt. Uber denied these allegations. So Casey Newton at the Verge did some more digging into Uber's alleged tactics for destroying its competitors. From the Verge:

[O]ne Uber contractor The Verge spoke with said Lyft’s complaint had merit. "What’s simply untrue is that not only does Uber know about this, they’re actively encouraging these actions day-to-day and, in doing so, are flat-out lying both to their customers, the media, and their investors," the contractor said. Until now, the canceled Lyft rides have been understood as a kind of prank call designed to keep competitors’ drivers off the road. But interviews and internal documents suggest another reason: Uber’s recruitment program has vastly increased in size and sophistication, and recruiters cancel rides in part to avoid detection by Lyft.
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Uber has a name for this recruitment program: Operation SLOG. It hit the ground in New York just as Lyft was preparing to launch in the city:

With Lyft’s arrival in New York imminent, Uber said it was creating a "street team" charged with gathering intelligence about Lyft’s launch plans and recruiting their drivers to Uber. Contractors were then handed two Uber-branded iPhones and a series of valid credit card numbers to be used for creating dummy Lyft accounts. Uber assumed every contractor would be caught by Lyft eventually; the second phone, according to a contractor interviewed by The Verge, was issued so "you would have a backup phone if and when that happened so you wouldn’t have to go back."

The Verge reports that contractors could earn $750 for each driver they recruited to Uber. The so-called street team used a private GroupMe forum to keep each other appraised of which Lyft drivers had already been pitched and had an online form they gave Lyft drivers interested in switching platforms to fill out. In one email obtained by The Verge, an Uber marketing manager ends a message to contractors with the hashtag #shavethestache. (Lyft drivers place a furry pink mustache on their cars.)

In a brilliant PR move that we cannot confirm but might assume was executed by Uber's newest hire, David Plouffe, the company did not respond to The Verge for comment until it had pre-empted the forthcoming story with a post on its blog that introduced Operation SLOG ("Supplying Long-term Operations Growth") as an aggressive but legitimate recruiting program. "We never use marketing tactics that prevent a driver from making their living—and that includes never intentionally canceling rides," Uber wrote.

Perhaps. But the way the stories are shaking out, it will probably take a lot more than a hastily compiled blog post for Uber to dispel that claim.

Aug. 26 2014 3:15 PM

A Fight Over Legroom Forced a Plane to Divert. Airlines Should Have Seen This Coming.

On Sunday, United Airlines Flight 1462 from Newark to Denver was forced to divert to Chicago. When the plane landed at O'Hare International Airport, city police and TSA officers escorted from the aircraft two passengers who had caused an in-flight kerfuffle. The cause of their fight? Legroom.

The fight began after the first offending passenger (the Transportation Security Administration declined to give names) deployed the Knee Defender. This pocket-sized travel device locks in place the fold-out tray on the back of airline seats, preventing the person in front of you from reclining. It retails for $21.95, which seems a small price to pay for uninfringed legspace during an otherwise crammed flight. From the AP:

The fight started when the male passenger, seated in a middle seat of row 12, used the Knee Defender to stop the woman in front of him from reclining while he was on his laptop, according to a law enforcement official with knowledge of the situation who spoke on condition of anonymity because they are not authorized to speak.
A flight attendant asked him to remove the device and he refused. The woman then stood up, turned around and threw a cup of water at him, the official says. That's when United decided to land in Chicago. The two passengers were not allowed to continue to Denver.
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The Knee Defender, as it turns out, is not strictly prohibited by the Federal Aviation Administration but is banned by most major U.S. airlines, including United.* Still, you can't really blame the passenger for trying, especially since airlines seem in the business of cramming ever-more passengers into ever-smaller seats. Seats that spanned 18.5 inches throughout the 1990s and early 2000s today have dwindled to just 16.5 inches in width. The space between rows has dropped by about 10 percent, from 34 inches to just 32 or 30 or even a measly 28 inches. At the same time, the typical passenger has grown taller and packed on extra pounds. 

Shrinking and shortening seats, as Matthew Klein wrote earlier this year, are a sort of hidden inflation. Even if ticket prices themselves don't go up, paying the same amount for a worse customer experience makes the flight effectively more expensive. The trend shows no signs of reversing. A new "seating device" idea from Airbus replaces traditional seat cushions with bicycle-like ones and eliminates the tray table and headrest altogether. Late last month, Businessweek appended a story on airline legroom in Boeing aircrafts with this advisory: "The next version of Boeing's 737, the world's most popular jetliner, will have 200 seats. It was introduced in 1967 with 100."

Reclining seats, of course, compound the shrinking-seat problem by allowing the most egregious recliners to steal the last few inches of legroom from the reclined-upon. The Knee Defender is one attempt to pre-empt this. You can also politely ask the recliner to retract his chair, but that often doesn't go over well. Slate's Dan Kois has suggested a more comprehensive fix: ban airplanes from installing reclining seats at all. The cheap and much-hated Spirit Airlines does this—packing more passengers onto its flights than carriers like JetBlue and United but keeping its seats rigidly upright. Boeing is toying with seats that recline less.

Taking away legroom and squishing people into planes like sardines makes great economic sense for airlines, but sooner or later someone was bound to crack. That happened on Sunday with United Airlines Flight 1462. The irony in this case was that the quibbling passengers were seated in the Economy Plus section—where there was already an extra four inches of space.

*Correction, Aug. 26, 2014: This post originally misidentified the Federal Aviation Administration as the Federal Aviation Authority.

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