Hard Times for Start-ups: The market meltdown has made investors skittish about new ventures

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Five minutes. All he has is five minutes to pitch his product. “I’m Dr. Michael Wells and I am the CEO of Protevia Incorporated,” he begins. Standing in a spotlight’s glare on the Second City Theatre stage in Toronto, Wells is at a boot camp for start-up companies. His audience is made up of 100 hungry entrepreneurs and, hidden deep in the shadows of the stage, four people with buckets of money. Known as angel investors, these four are listening to the doctor’s pitch and will judge him on his presentation.

Words tumble out of Wells as he tries to explain two different technologies he believes will revolutionize the world of medicine. He talks about biotechnology and cardiovascular disease. The angels look confused and impressed in equal measure. “Diagnostic candidate,” intones Wells. “Inhibit biochemical pathways . . . oral delivery system.” Four minutes. Wells is losing them. He hasn’t said how much money he needs. The moneymen, however, perk up at his closing: “If you are patient, if you want to make money and if you want to help people, consider my company. Who knows? It may someday save your life.”


Later, in their assessment, the angels are to the point: Wells’s expertise has convinced them to make him winner of the contest — but they didn’t understand a word. This is part of why Wells — even with a PhD in blood physiology, an MBA and experience in the pharmaceutical industry — shelled out $495 to attend a two-day workshop on finding funding for new ventures. And learning the perfect pitch is a reality for entrepreneurs looking for money in this new world of diving markets and cautious investors. Yes, there is money out there. But only by romancing angels or venture capital firms — and armed with a rock- solid business plan — can one pry open the investor’s wallet. “People thought they could think of something on Sunday night and get $10 million by Wednesday,” explains Brian MacDonald, executive vice- president of VentureDrive Inc., the Toronto venture capital network company hosting the boot camp. “Now we have to say to entrepreneurs, you are not worth that kind of money.”

Little more than a year ago, it was still silly season in the start-up world. A dot-com idea scribbled on a napkin would net millions from eager investors hoping for sky-high profits when the idea-as-a-company went public. “What we saw last year was a philosophy to go big or go home, and go big fast,” says Michael Corcoran, founder of CanadaStartups.com, a Toronto-based online resource for entrepreneurs. And Canada certainly went big. Despite market turmoil and soured investors, venture capital investment in Canada grew 133 per cent last year, to $6.3 billion in 2000 from $2.7 billion in 1999. According to the Canadian Venture Capital Association’s (CVCA) survey of 132 venture capital companies, money invested in Canadian companies increased by 50 per cent in the last quarter of 2000, while decreasing in the United States by 30 per cent.

But investors have sobered up. There is still no shortage of attractive new companies being created in Canada. “The unfortunate thing,” says Corcoran, “is nobody wants to hear about them right now.” Even though Canadians threw less money at the dot-com craze than their neighbours, they are taking heed of American disaster stories. Angel investors, who help shepherd start-ups through the early stages, and venture capital firms, which pick them up when bigger money is needed, are now extremely wary of new investments. Not only are they cool to high-tech ideas, but with less money fluttering about to finance the various stages, investors are focusing on nurturing their current portfolios. As a result, start-ups in all industries are suffering.

Two and a half years ago, Ang?le Beausoleil created an interactive computer character for what she says is an untapped market: preschoolers. With “love money” — a term used for initial funds from the pockets of Mom, Dad, friends and family — and two matching loans from institutions, Beausoleil founded ITP Entertainment Inc. in Vancouver to market her trademark, Ideas That Play. Unusually, she raised $400,000 in love money alone from 27 friends and family members. But while her product is now in 14 countries, has won 10 awards and made $110,000 for ITP in its second year, Beausoleil’s company doesn’t fall neatly into any funding category. She needs $2 million to take it to the next stage, and after two years spent looking for angels or venture capitalists, Beausoleil is resigned to finding a parent company to swallow up her brainchild.

Beausoleil believes the problem is that she is breaking new ground. “We don’t fit under the flavour of the day even though we are a warm and fuzzy investment,” says the 36-year-old Beausoleil. “We need the leap- of-faith-takers.” It is a sentiment echoed by entrepreneurs across the country. Philippe Laflamme, a 23-year-old computer engineer, co-founded Konova Solutions Inc. in Montreal last May to produce a sophisticated database searching system. “The thing that is frustrating is that we just need money,” he says. “It is harder and harder to get and it is the only thing stopping us. We’re spending 110 per cent of our time trying to find money.”

So what about it, venture capitalists? “Yes, it is harder to raise money,” answers John Eckert, managing partner at McLean Watson Capital Inc. and head of the CVCA. “But it is not that they are being punished.” In fact, industry players agree that this period of slowdown can only be good in the long run. True, the process takes longer, deal sizes are smaller and the amount of equity that new companies have to give up is greater. But, explains Stace Wills, founding partner of Calgary-based eMedici Capital Inc., “it takes a superior project to be able to attract money these days because there is a flight to quality.” In short, it is a buyer’s market. “But take heart,” adds Eckert. “If the business is good and you have got the right management team, keep plugging away. You’ll find the money.”

Not that start-ups are disappearing. University and college courses for entrepreneurs are brimming with new talent, while boot camps and networking companies are gaining in popularity. Peter Day, who manages the Canadian Science and Technology Growth Fund Inc., says that by noon on a given day he will have spoken to five start-up companies. “Entrepreneurs are a pretty hardy lot,” he chuckles. “You have to hit them over the head many times before they don’t get up off the mat.”

Working out of his home in Guelph, Ont., Dr. Michael Wells is trying to drum up $2.5 million for Protevia. His partner, who developed the technology, doesn’t want to leave the security of his university research job, so Wells knew he had to risk it. “As time went by, I became more and more unhappy,” he says of his previous work in pharmaceuticals. And though he still needs to polish his pitch, Wells adds, in true entrepreneurial form, “I’m not disillusioned yet.”



Veteran investors’ advice for start-ups:

– Go back to basics. A detailed, well-reasoned business plan is crucial. Think profitability and a competitive advantage that can last, not just market share.

– Work with the best. Investors want to see a strong management team, with creativity, tenacity, flexibility and a deep understanding of your market.

– Get real. Operate as a regular business with real clients and an actual product, not a fairy-tale Internet start-up.

– Perfect your pitch. When you meet investors, make sure you are thorough, thoughtful and articulate. Speak clearly and be straightforward. Don’t forget to ask for a specific amount of money.

– Stick close to home. Angel investors generally look to the same industry and region that they live in.

– Tighten your belt. Stretch what money you have as far as you can.

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Software Group Aims to Help Ed. Tech. Startups Grow

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New York — Software developer Bob Runyan thinks he invented a pretty good educational game, judging by the 200,000 copies of Real Lives that have been downloaded from his Web site.

But the Californian was a bit discouraged when he met with some Wall Street investors recently to drum up money for improving the game and marketing it nationally, to build on the limited following it now has in schools.

“There is more work to do on my end following up on leads,” Mr. Runyan said in an e-mail later.

His visit here late last month was part of an “innovation incubator” project by the Washington-based Software & Information Industry Association that is aimed at helping small developers of educational technology products and services find potential backers.

Proprietors of 16 such innovations attended a business forum here Nov. 26-27 to showcase, among other creations: a digital collection of animated scientific illustrations of the human body; a Web-based service that enables school district to hold online meetings; a four-button keyboard for children with disabilities; and an information search tool with features of online social networks and the collaborative software tools known as wikis.

The forum gave the owners, who in most cases were the inventors, opportunities to give demonstrations and make pitches to representatives of private-equity firms, venture-capital firms, and large education companies that might be looking for an investment, an acquisition, or a partnership.


Beyond the Idea Stage

The SIIA innovation-incubator project–a first for the Washington-based trade group–is hoping to spur those kinds of relationships to bring to market innovations produced at universities or nonprofit organizations, or by companies in the “pre-revenue startup stages,” said Karen Billings, the project leader and the vice president of SIIA’s education division.

The innovations were more than simply good ideas, she added.

“We chose to find those innovative products and services that were ready for commercialization,” she said. In fact, some had been developed with research grants from the federal government, and several already have hundreds or thousands of users in U.S. schools.

All the incubator participants were individuals or small organizations that lack some component–such as cash, technical skill, or a distribution network–for success in the education marketplace.

Over the past few months, Ms. Billings and a working group of SIIA members have been helping the innovators hone their presentations to potential investors and business partners.

The annual forum, held at the city’s historic Union League Club, featured sessions on the business outlook for the education marketplace, as well as advice on the ins and outs of mergers, acquisitions, and partnerships in the education sector.

The incubation innovators were the featured guests at an evening cocktail reception, at which they demonstrated their products and services. At another event, the innovators each took the floor for 90 seconds to deliver rapid-fire spiels beneath PowerPoint slides to a roomful of attendees.

A third opportunity involved prearranged, 20-minute “one-to-one business connection” meetings, which the SIIA’s Ms. Billings described as “speed dates,” with potential investors and partners.

The other conference sessions, though, left no doubt about the hurdles for small innovators in the education market.

Panels of investors and executives of large education companies said they require potential partners or investment “targets” to have compatible structures, proven economic prospects, and demonstrated market share, for example.

Potential targets must impress investors with performance that lives up to, or exceeds, their business plans. And even then, an investment company may look closely at only a handful of the partnership proposals that they receive.

A panelist at one session, Kurt Gerdenich, a vice president in charge of media-development efforts for Stamford, Conn.-based Cengage Learning, formerly Thomson Learning, observed that to many tiny, innovative companies, “the concept of a business plan, a marketing plan, is foreign.”

“A rugged challenge for pre-revenue companies is, it’s virtually impossible to evaluate them with no cash flow,” he added. “At the end of the day, most deals are financially driven.”

But perhaps the greatest obstacle for the small innovators is size.

On a panel about acquisitions, Rita Ferrandino, a Sarasota, Fla.-based principal officer at Arc Capital Development, a private-equity and advisory firm, said she was looking for education companies that already have annual revenues of $3 million to $15 million that are “looking to grow” to a range of $20 million to $30 million.

In a keynote speech, John H. Martinson, the managing partner of the Edison Venture Fund, based in Lawrenceville, N.J., said his company has made investments in the K-12 sector in companies that average $8 million to $10 million in annual revenue.

He said other investors are looking for education companies worth $10 million to $25 million that they can hope to sell later for $50 million to $200 million.

“There’s a great shortage of angel money for $250,000 to $2 million” companies, he said, adding that small innovators may be best served by tapping family and friends or persuading successful entrepreneurs to be “angels” who could invest in chunks of $50,000 to $100,000. Such “early-stage funders aren’t necessarily knowledgeable about education,” Mr. Martinson advised. “You need to bring to them a very solid business plan.”

At the forum, “there weren’t any angels floating around,” said Glen McCandless, the president of Focus Marketing Inc., in Asheville, N.C. He was there representing one of the incubator companies, EDRoom.com, which offers Web-based meeting facilities that schools can use to conduct business and public outreach. Still, Mr. McCandless said he was looking for contacts, not capital: “My interest was in showing this off to Houghton Mifflin and Pearson, doing more fishing for client opportunities and, frankly, feedback.”

Disconnect Detected

Mr. Runyan, on the other hand, needs to upgrade his digital game, which he dreamed up a decade ago while “lying awake one night thinking about the Game of Life.” He saw the venerable board game as unrealistically based on a middle-class vision of educational and career choices.

In Real Lives, students are “born” at a random spot on the globe, where they can encounter challenges and opportunities typically faced by people who live there, based on demographics and other statistics.

Mr. Runyan, who operates Educational Simulations, in Loma Rica, Calif., said he was seeking a partner company that could help him add some sophisticated features, such as images of the characters’ appearance that would age as the characters aged.

In an e-mail, he said the business forum was a learning experience, but not a partnership bonanza. “There might be a bit of a disconnect between the products and services that were shown by some of the innovators and what the large publishers and investors were looking for,” Mr. Runyan added.

The developer of a keyboard for students with disabilities also said she was discouraged by the lack of interest she found at the forum.

Corinna E. Lathan, board chair and chief executive officer of AT KidSystems Inc., based in Silver Spring, Md., wrote in an e-mail that she did glean some leads, but found little investor interest in special education and “very little recognition of special ed. as a growth market.”


Valuable Exposure

But Michelle S. Wornow, the vice president of sales and marketing for ArchieMD, in Miami, said the company received “great exposure” for its library of thousands of 3-D animations and interactive modules of the human body, currently used by some medical schools and universities.

She and Robert Levine, the physician who founded the company, were shopping for partnerships, “hoping to break into high school, and eventually K-6,” with versions of their images that are “a little more simplistic, brighter, more engaging for younger students in the K-12 market,” Ms. Wornow said.

Meanwhile, Jody Clarke, a Harvard University education researcher, was showing off the River City Project, a digital multiplayer game that teaches about science and history.

Ms. Clarke and the game’s inventor, Harvard education professor Christopher J. Dede, who was not at the forum, wanted a company to take over the game, which was developed from years of research with grants from the National Science Foundation.

The grant money is about to run out, Ms. Clarke said. She and Mr. Dede are researchers, she added, not business operators.

Ms. Billings said the project would continue “incubating” the current batch of innovators as well as additional ones and feature them at its “ed-tech industry summit” in a San Francisco in May: “SIIA plans to find angel investors, not just in New York but on the West Coast, so we can make some connections.”

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United Air’s unions offer plan to save billion a year

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Hoping to steer United Airlines away from a bankruptcy protection filing, the company’s five unions presented executives last night with a long-awaited proposal to save $1 billion a year in labor costs for five years.

The proposal was hammered out late yesterday afternoon by the leaders of the unions at a meeting in Chicago, the home city of UAL, the parent company of United. Executives had been waiting for the proposal for several weeks, ever since Glenn F. Tilton took over as chief executive of the airline.

The unions said they hoped that the savings would help United receive a $1.8 billion loan guarantee from the Air Transportation Stabilization Board, a federal agency, or get financing from capital markets. The carrier has said it desperately needs the financing to avoid filing for bankruptcy protection.


”The coalition framework is without precedent for this or any other airline, and United has the most committed employees and strongest airline franchise in the world,” the unions’ leaders wrote yesterday in a letter to Mr. Tilton. ”We will not let it fail.”

”We look forward,” the letter continued, ”to working with you to implement the coalition framework, to secure financing for the company” through the federal loan guarantee program or a third party.

United Airlines did not immediately address the amount of labor savings proposed by the unions.

”We will study the framework very carefully, and we are committed to responding to the coalition and its members in the days ahead to finalize an updated business plan,” the company said last night. ”At the same time, we are focused on ensuring that United remains a highly competitive business for the long term.”

UAL’s board discussed the proposal at a meeting last night and will examine it further this morning.

The concessions offered by the unions is significantly less than what John W. Creighton Jr., Mr. Tilton’s predecessor, had said was needed for United, the nation’s second-largest airline, to get the loan guarantee.

Last month, Mr. Creighton announced that the unions would have to give up $1.5 billion a year over six years.

The unions scoffed at that figure and immediately formed the coalition to come up with their own plan.

In the letter, the unions said that the labor cost cuts, together with other cutbacks and initiatives, would increase the company’s annual profits by $2 to $3 billion. The unions reached the $1 billion-a-year figure after consulting with their financial advisers, and after having several meetings with United’s own advisers.

The company had hoped that a proposal would be presented last Friday, but the unions said they would have to work through the weekend.

The unions said they had not determined exactly how the cuts would be divided among the labor groups.

”Our discussions with United Airlines will include several cost savings proposals, including tapping United’s best asset for ideas on how to save money — our members,” said Randy Canale, president of district 141 of the International Association of Machinists and Aerospace Workers, which represents 35,000 United employees.

”Any discussion,” Mr. Canale said, ”must also include recognition for the substantial sacrifices machinists union members have already made to United’s recovery efforts.”

In a written statement, Mr. Canale pointed out that the machinists agreed recently to defer $500 million in retroactive pay owed to them as part of the latest contract agreement.

The first payment of that amount becomes due in December. The machinists have repeatedly said this is a significant loan they have made to the airline.

Greg Davidowitch, the president of the United chapter of the Association of Flight Attendants, said in a written statement: ”Being a part of the solution that assists United in surviving its near-term financial crisis is central to our goal of ensuring that the flight attendants’ long-term interests are represented.”

Mr. Davidowitch added that he hoped that ”United can successfully amend its application for a loan guarantee from the Air Transportation Stabilization Board, get access to near-term financing, avoid bankruptcy and rebuild.”

The transportation board has been reviewing the loan guarantee application from United, which is intended to help the airline get $2 billion in private loans. But federal officials had told United that it needed to get deeper concessions from its employees and suppliers to bolster the application’s chances of success.


Soon afterward, Mr. Creighton said United would need to get $2.5 billion in annual cost savings, with $1.5 billion of that coming from labor.

After Mr. Tilton was named as chief executive early this month, he did not indicate exactly what amount he hoped to get from the unions, but he did not reject Mr. Creighton’s number. He has personally met with union leaders in the last week to talk about the concessions.

United lost a record $2.1 billion last year, and $341 million last quarter, leading many industry experts to say that it might have to declare bankruptcy.

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Built for success: a first-year survival guide for small businesses

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Launching your own business can be an exciting prospect. But the road to success is filled with many roadblocks. According to Statistics Canada, 20% of small businesses fail within their first year, and only 72% of all new launches are still operating after two years. Here’s how not to become an ugly statistic.

Sober second thought

Before you invest too much time and effort in launching a new business, you should get some feedback on how viable the idea is.

“Once you have your great idea, you need to a do a bit of vetting with some trusted advisors for sober second thought,” says Shelley Swanlund, vice-president, Business Banking and head of Small Business Banking with CIBC. These could include your accountant or financial advisor, and other small business owners. There are also a number of government and non-profit agencies that provide advice to new business owners who can connect you with mentors and advisors. The Business Development Bank of Canada (BDC) is a great starting point (bdc.ca).


Plan for the future

In order to survive your first year in business, one of the most important things you need to do is to develop a thorough business plan. This is a multi-page document where you analyze every aspect of your business, including:

* A description of what the business is

* Who your customers and suppliers will be

* A market analysis of the competition and opportunities for growth

* Details on any competitive advantage you have

* A marketing plan

* Where the business will be located and any equipment you’ll require

* How you will find–and retain–staff

There are shelves full of books at your library and bookstores on how to create a business plan, and you should read at least a couple of them. You can also find numerous sample plans and templates online, including ones on the BDC’s website.

Money matters

Cash flow, or lack thereof, is one of the biggest challenges facing small businesses. As a new business, your suppliers will want to be paid as early as possible (and penalize you for delayed payments), while there will likely be a lag in revenue coming in. Having access to money is extremely important.

For many, that means using their personal savings. Next on the list is asking friends and family for start-up loans. But, ultimately, you’ll likely need to tap into a larger pool, either in the form of a business loan or line of credit.

Your financial institution will take a close look at your business plan for all lending, whether it be for operating purposes such as cash flow or for investing in real assets for your business. You’ll likely need to have some collateral to back up any loans. According to Industry Canada, in 2011, about 65% of small businesses were required to provide collateral, either business or personal assets, to secure loans.


Stay on track

“Set milestones for your first month, first quarter, etc., and track and measure them,” says Swanlund. “If you’re not tracking your milestones, you could go along thinking things are going fine when they’re not.”

Of course, not every business will turn a profit in its first year in operation. But if that’s going to be the case for you, you need to know that in advance. The type of business you’re running will be a big factor. Retail operations often face large upfront costs buying a franchise, and it can take time to build up a loyal client base. But if your low capital, online-only business is facing a negative cash flow month after month, there may be a fundamental flaw with the operation.

If you aren’t hitting your goals, Swanlund suggests circling back to your pool of advisors for suggestions on where the problems may lie, and how to overcome them.

“It takes a lot of courage and ability to commit to starting a business,” says Swanlund. “The first year is very much about adjustment.” If you’re able to deal with the unexpected, by planning ahead for it, you’ll be well poised to survive your first year and many successful ones beyond that.

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Empowering government


Pres Clinton’s plan to help business development through Empowerment Zones will begin with $3.5 billion in funding for nine of them. The problem is that his plan is nothing more than another government subsidized spending package that will not help these communities develop economic independence.

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WHEN Congress recently passed, and President Clinton signed, the budget-reconciliation bill, it was little noted that they also enacted the nation’s first enterprise-zone legislation. The bill allocated $3.5 billion to fund nine “Empowerment Zones” (six urban and three rural) and another hundred “Enterprise Communities” with lesser benefits. But most leading enterprisezone advocates weren’t celebrating.

Barry Sanders, co-chairman of RLA (Rebuild Los Angeles), called the Clinton plan “thin gruel for our poorest areas.” No one, Sanders said, “establishes a new business . . . [in] a U.S. inner city to take advantage of ‘inducements’ like these.” Senator Joseph Lieberman (D., Conn.), one of Clinton’s earliest political supporters, complained that the President’s program “guarantees that the vast majority of distressed areas in this nation will have no chance of being designated an enterprise zone.” Former HUD Secretary Jack Kemp actually lobbied against the plan, calling it “a weak imitation of the enterprise-zone concept… [which] reveals an Administration with the most anti-capitalist mentality in this century…”


The enterprise-zone saga illustrates a consistent pattern in the Clinton Administration: the President has rhetorically embraced a wide range of empowerment proposals, including homeownership for residents of public housing, enterprise zones, and welfare reform. But the programs he has thus far proposed reveal not a bold, “new Democrat” agenda to help poor Americans, but what Kemp describes as “a throwback to the top-down, paternalistic policies which have dominated liberals’ thinking on poverty since the Great Society.”

Clinton named his zones “empowerment zones,” while removing all the empowerment provisions from them. He touted his plan as the first real federal effort to help the inner cities since the Los Angeles riots. But the legislation he signed creates just nine zones that will receive any measurable benefits, only six of which are in urban areas. The one hundred “enterprise communities” are not enterprise zones at all; what they get is some $280 million in federal spending. “There are too few real zones and too many quasi zones,” Senator Lieberman argued; he pointed out that with the same funding the Administration could have created “real zones” in 50 to 75 desperate communities.

Further, the tax incentives in the nine “super zones” will do nothing at all to help them attract scarce capital. Instead of eliminating the capital-gains tax on anyone who works, saves, or invests in the zones, the Clinton plan provides $2.5 billion in wage credits to employers operating there to encourage the hiring of local workers, and $720 million in social-service grants. But the wage credits will benefit only existing businesses–they do nothing to attract new investment in order to create new businesses in the impoverished areas and to help young businesses grow. As John Boyd, owner of a furniture-manufacturing company in South Los Angeles, recently told the L.A. Times, inner-city businesses have little use for the Clinton wage credits. “Right now, I can’t grow and bring in a new product line because I can’t afford it … businesses [here] do not have the capital to work with.”

Far from empowering local communities, the Clinton plan dramatically expands Washington’s role in the inner cities by creating a federal “Enterprise Board” to micro-manage the zones. To get benefits, local officials will be forced to present comprehensive community-development proposals to the board in Washington (made up of Cabinet secretaries and relevant agency heads). This flies in the face of the basic philosophy behind enterprise zones: empowering individuals and local communities by getting bureaucrats out of their way.

In addition to creating zones devoid of job-creating incentives, the Administration now seems to be turning to another old-style liberal jobs policy: increasing the minimum wage. Labor Secretary Robert B. Reich is leading the charge here. In a July 22 memo to the White House, which was leaked to the media, Reich argued that the minimum wage should be increased from $4.25 to $4.50 an hour and recommended that it be indexed to inflation. This is apparently being taken quite seriously in the West Wing.

In housing as well, Clinton has promised empowerment and delivered more government. In his campaign manifesto, Putting People First, he promised to “make homeownership possible for more Americans through federal support for low-income long-term housing buyout programs.” But his HUD Secretary, Henry Cisneros, has begun to dismantle programs which encourage homeownership for the poor, in favor of increased spending on new construction of low- and moderate-income housing and subsidies for low-income renters.

Cisneros has proposed dramatically increasing funding for HOME, a blockgrant program which funds the construction and rehabilitation of public housing, to $1.6 billion–an increase of one-third. How is he paying for this? By gutting project HOPE (Homeownership and Opportunity for People Everywhere), the empowerment program championed by Jack Kemp. In the Bush Administration’s last budget, HOPE’s 1993 appropriation was $351 million. The Clinton Administration has cut this to $300 million. For 1994, the Administration has requested a paltry $109.9 million. Essentially, the Clinton Administration is phasing out HOPE, barely funding existing commitments, and cutting off all new homeownership programs.

And now, as the President prepares to unveil his welfare-reform plan, it looks as if the same cycle could repeat itself. During the campaign, Clinton promised to “end welfare as we know it.” Since taking office he has repeated his support for a two-year time limit on welfare recipients. His HHS Secretary, Donna Shalala, recently stated that “the tragedy of our welfare system is that it penalizes work, stigmatizes recipients, and often locks families into vicious cycles of dependency. The President and I are committed to reversing this inequity and helping people live productive lives.” Those are encouraging words.


To his credit, the President recently backed them up by persuading Congress to pass an expansion of the Earned Income Tax Credit–a credit that supplements the wages of working families with children, rewarding personal initiative. But Secretary Shalala has recently tempered her support for limiting welfare benefits by stating that limits will come only after the Administration has put into place a plethora of new programs such as “job training, child care, and other support to help poor women.” Miss Shalala has also talked of creating a “work support agency” to oversee these new programs, thus expanding the already massive welfare bureaucracy. And Administration officials have stressed that no reform will be possible until Congress passes the President’s health-care plan, arguing that universal access to health care is an essential element of his welfare-reform program.

Secretary Shalala is right in one sense–placing time limits on welfare in a vacuum will do little to help move people off the welfare rolls. But instead of lifting the barriers to opportunity that face poor Americans, the Clinton Administration seems to be filling that vacuum with more and more government programs. President Clinton continues to speak of empowerment–but so far the only thing he is empowering is government.

Mr. Weber, the former congressman from Minnesota, is co-founder of the new conservative group Empower America.

>>> View more: Universities generate ideas, support for K-12 startup companies; Minnesota program launches company for early learning

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Universities generate ideas, support for K-12 startup companies; Minnesota program launches company for early learning

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For 15 years, the University of Minnesota College of Education and Human Development researched the essential skills needed for preschool children to be ready for kindergarten. That research eventually became the framework for IGDIs, a university-funded set of early-literacy assessment materials.

Teachers could order free flashcards that measure students’ literacy skills and log in to a university website to manage the results. The university says 180,000 students have used IGDIs, which stands for Individual Growth and Development Indicators.

Now, this research project has a new identity: as a startup company, Early Learning Labs, launched this month.

Innovations in areas like science, engineering, and medicine commonly make the transition from academia to the market, benefiting from financial and intellectual resources and university patent offices. As technology increasingly brings venture capital and a startup culture into K-12 education, some universities are seeing a similar opportunity in that sector.

At the University of Minnesota, Twin Cities, the office for technology commercialization identified IGDIs a few years ago as a potentially marketable commodity, not just a free tool, if given the proper investment and business development.

As one of the university’s “internal business units,” or IBUs, Early Learning Labs received a $100,000 investment from the university, and underwent a 20-month internal business-development program. Once that period ended, the company became independent of the university. It is free to raise outside investment and develop new products.

“The problem became that teachers were downloading these tools, but [the tools] weren’t providing a full solution,” said Steve Johnson, the 26-year-old president of Early Learning Labs and a former intern in the office for technology commercialization. “The only way to provide a full solution is to increase the resources behind it.”


Research to Product

The IBU program at the University of Minnesota isn’t exclusive to education ventures, but its structure lends itself to the field, university officials said.

The amount of funding to take an idea from the research level to the product phase is fairly modest in education, compared with other areas, said Rick Huebsch, an associate director of the university’s office for technology commercialization.

Because of those relatively low costs, education startups like Early Learning Labs can become self-sustaining quickly and focus more on product development. Other areas, like science or medicine, require lengthy and costly approvals and tests to reach the same stage of development, Mr. Huebsch said.

Through various other arrangements, universities have become active in fostering education entrepreneurship.

The University of Pennsylvania, along with the Milken Family Foundation in Santa Monica, Calif., sponsors a business-plan competition for education with a cash prize. Stanford University’s StartX “incubator” program for its students has included education companies. But in both cases the universities do not get a stake in the companies.

A new doctor of education program at Johns Hopkins University will offer courses in entrepreneurship and include a program for startup companies and for small, established companies looking for acceleration. The school and its partner on the program, the Education Industry Association, are now raising funds for the incubator, and terms have not been determined, said Steven Pines, the executive director of the EIA, a Vienna, Va.-based trade group.

For years, research in education has found its way to the marketplace, but not necessarily through a formal business-development program. In 1998, for instance, Carnegie Mellon University founded Carnegie Learning, a publisher of middle school, high school, and postsecondary math curricula, based on 20 years of research at the university.

Other universities foster new companies by teaming with corporate sponsors that become investors or owners of technology developed at the schools. The MIT Media Lab, at the Massachusetts Institute of Technology, is one such program that spun off education companies and nonprofit ventures.

Last year, the University of Wisconsin-Madison launched the Center for Education Products and Services to license and market intellectual property created by faculty members, according to its website. But those products are not independent of the university.

CaseNEX, an online professional-development tool, was founded at the University of Virginia’s Curry School of Education.


Planting Seeds

Stanford is known for backing technology created at the university; many faculty members invest in student-driven products, most notably Google.

But Stanford’s support of education technology companies consists mostly of advising students who have market-ready ideas on how to build a business, and putting them in touch with potential investors, faculty members said.

“We like to think of what we do in this program as planting a lot of seeds and seeing what grows, rather than, ‘We are going to start a company,’ ” said Karin Forssell, the director of the learning, design, and technology program in Stanford’s graduate school of education.

Master’s projects from the school have gone on to become notable education companies, most recently Motion Math and Toontastic, both popular educational mobile applications for young students. But those companies operate independently of the university.

That’s why the University of Minnesota-Twin Cities initiative is unusual: It spins off independent companies with direct investment dollars from the university.

Proceeds the university earns from its stake in a company will go first to covering its costs and then be split among the inventors, related departments, and university funds, Mr. Huebsch said.

Scott McConnell, who led the IGDIs research along with two other professors and two research associates, is also a shareholder in Early Learning Labs and will serve as a senior adviser. University alumni also invest in the company and are shareholders, Mr. Johnson said.

With or without actual investment from a university, there are pros and cons to starting a company under the umbrella of higher education.

To start, there is far more credibility for a product that is backed by lengthy, intensive research, like Early Learning Labs, Mr. Huebsch said. And such a product already has thousands of users.

“Sometimes you have to actually produce a customer base, and sometimes doing that while part of a university is easier than starting up a company in a garage,” Mr. Huebsch said.

And as Mr. Pines, of the EIA, pointed out, universities are great environments for research and development.

“You already have faculty researchers in that environment that are doing the heavy lifting of product development,” he said.

Early Learning Labs’ first goal is to repackage the print materials into a more organized assessment tool and to beef up the reporting and tracking software. Eventually, the company will offer mobile applications, Mr. Johnson said.

Building those products with the intellectual capital of a university available, and with the patience that a university environment affords, is invaluable, Mr. Johnson said. Conversely, $100,000 isn’t a large amount of actual capital.

“There’s a lot of help you don’t have to pay for, but there’s not a lot of cash,” Mr. Huebsch said.

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Rejean Lepage

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Rejean Lepage was doing 3D computer graphics for a Saskatoon-based manufacturer of steel-frame buildings when he started to worry that he was turning into a couch potato. So he got out of his chair, quit his job and is now living his dream as the owner-operator of Wrench Fitness in nearby Martensville.

Lepage, who has several diplomas in computer animation, spent four years as a computer programmer and general factotum with now-defunct Coverall Building Systems before quitting in August 2008 to return to school.

“I got bored sitting at a desk all day and I was tired of working hard for someone else and only getting a paycheque in return,” says Lepage, 27. “At the same time I got serious about fitness, competed in two bodybuilding competitions, and started thinking about opening a gym.”

He took a stab at writing a business plan but ran into trouble with it. That’s when he decided to enroll in the Entrepreneurship and Small Business certificate program at SIAST (Saskatchewan Institute of Applied Science and Technology).


The 32-week program prepares students to start and operate new business ventures or work as small business managers. In addition to developing their own business plans, students learn bookkeeping, communications, marketing and human resources.

Lepage moved to Prince Albert, where he studied full-time at SIAST’s Woodland campus while tending bar on weekends. Because the program is partially available online, he was able to catch up on anything he missed via computer.

“It was exactly what I wanted,” he says. “The classes were very focused so no time was wasted. And because they were small, we had plenty of access to our instructors.”

The fact that several instructors ran their own businesses made their advice particularly valuable, he adds. “They were quite demanding–one teacher told me to re-write part of my business plan several times. They expected a lot and they pushed me to do my best.”

Just how good Lepage’s best turned out to be became apparent when his business plan for Wrench Fitness won the platinum award in the 2009 Venture Forward Business Plan Competition. The province-wide entrepreneurship competition is hosted by Global Infobrokers Inc. and RSVP Event Design.

In addition to the $25,000 grand prize from Cameco, Lepage won a wide range of professional services, including access to legal, financial, marketing and mentoring support.


“The judges said mine was the best business plan they’d seen in five years,” he recalls.

In September 2009, Lepage opened his 5,000-sq-ft facility, which features free weights, cardio equipment, and services such as personal training and fitness classes.

The timing was right, he says. “We’re the only game in town right now and Martensville is a growing area with a lot of potential.”

His plans for the future include having his own building and a larger facility where he can continue to offer people the opportunity to get into better shape to live longer and happier lives. “Fitness is just a matter of being consistent and having patience,” he says. “Nothing in life comes easy, but with the right mindset and attitude you can accomplish anything.”

Sounds a lot like Lepage’s own formula for success.

>>> View more: Gossip sells the goods: celebrities and the paparazzi are now in the business plan

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Gossip sells the goods: celebrities and the paparazzi are now in the business plan

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Before last Wednesday, few people had heard of plainmary.com, a website selling posh baby gear. By week’s end, the site had more than two million hits and had received orders from as far away as Dubai. Credit a tiny item in Rush & Molloy, a gossip column in the New York Daily News, that reported Brad Pitt and Angelina Jolie had, six weeks earlier, ordered two of its US$190 monogrammed mats for their then-unborn twins. What made the story buzz-worthy was the news one of the mats had been ordered for “Rex Leon,” not “Knox Leon,” as their latest little boy is named, suggesting a last-minute change of mind.

The source of this breaking news? That would be Andy Behrman, plainmary.com’s publicist, who learned gossip fundamentals writing for New York magazine. “It’s critical for a company like plain mary to have celebrity associations” he says. “I mean who gives a s–t about a plain mary baby mat? But, all of a sudden, if the tush of a sainted Jolie-Pitt is peeing on this $190 microfibre mat, that’s a $10,000 mat that we’ll see on eBay shortly.”

Behrman comes to the job having sharpened his tabloid incisors repping Petit Tresor, the celebrity-gossip-fuelled Los Angeles purveyor of baby paraphernalia recently hyped in People’s gushing coverage of Jennifer Lopez’s Versailles-style nursery. Its two stores have become go-to destinations for paparazzi seeking “baby bumps,” and the celebrities vying for their attention. “When Tori Spelling goes into Petit Tresor, she knows there will be 10 photographers there because I’m going to call,” he says. Even negative publicity has burnished the store’s celebrity cred. In May, Tom Cruise and Katie Holmes thrust the company into headlines with a cease-and-desist letter that complained bogus information had been leaked that they had dropped between US$350,000 and US$400,000 at Petit Tresor in the two years since their daughter had been born, in an “off the record” quote to Life & Style magazine “for the purpose of enhancing [the store’s] image and obtaining a commercial advantage.” (Behrman says the number was an estimate of what they’d spent in total, not only at the store.)


Such is the power of strategically placed celebrity gossip, next to which product placement in movies seems downright quaint. Today’s smuthound may think she’s catching up on the latest chapter in the Kate Hudson-Lance Armstrong romance as the pair are paparazzi-ed playing tennis. But the fact they’re outfitted in gear from Nike, a company Armstrong represents, suggests another agenda may be at work, one in which the gossip consumer is in fact the one being consumed. Paparazzi and celebrities routinely work together, says Mario Lavandeira, a.k.a. Perez Hilton, whose blog PerezHilton.com has made him a bona fide celebrity. It’s not uncommon for paparazzi to pay a celebrity for exclusive shots, he says. “They all work differently. Some will get cash upfront–$10,000, $15,000. Or they’ll get a cut of the profit.” Product placement happens a lot, he says, noting Lindsay Lohan was paid to carry a nicotine replacement a while back. “Spencer and Heidi were photographed last week holding up some Nintendo game,” he says, referring to the much-gossiped-about stars of The Hills. “It’s like a free ad.”

Bonnie Fuller, the former editor of Star who has just formed Bonnie Fuller Media, views the current scandal involving Madorma’s alleged affair with New York Yankee Alex Rodriguez as a classic example of gossip being marshalled into marketing buzz. Her sources tell her the two have known each other for months. Yet Madonna chose to make their association public–appearing ha Rodriguez’s box at Yankee Stadium–just as reports that sales for her upcoming world tour and latest CD were flagging, Fuller notes. “She’s very sophisticated and aware of how publicity plays into celebrity. She has courted controversy throughout her career to boost her profile.” Madonna is un touched by negative press, says Fuller. Being named an alleged home wrecker able to lure a much younger athlete only reinstates her bad girl, man-eater rep, a shrewd move for the 49-year-old, she says.


“There are no coincidences in Hollywood,” says Elaine Lui, the Vancouver-based blogger behind Laineygossip.com, the popular site that avidly chronicles the photo ops and smut eruptions that occur just before a tour or movie release. “I think certain celebrities and publicists are savvy to the fact that they can no longer control the message the way they did before, so this is their attempt to control the message and use it to their advantage,” says Lui, who’s currently trying to track down whether Naomi Watts, who recently appeared at a Donald Trump-sponsored event, is angling for an apartment in one of his buildings. “She’s not like Nicole Kidman, she’s not a fame whore, so I’m thinking, what’s going on here? And real estate is at such a premium in New York. Even rich people can’t get the home that they want. So I’m like what can Donald Trump offer? Real estate.”

Jennifer Aniston is a masterful player of the game, says Lui, referring to news of her relationship with singer John Mayer breaking a month before his North American tour. “I do think it’s a real thing,” she says of the relationship. “But it doesn’t mean people don’t exploit what’s real to further their careers.” Aniston is also known to exploit “candid” paparazzi imagery: last year, the British model Paul Sculfor was photographed leaving her house carrying a bottle of Smart-Water, the brand she endorses.

Quantifying the value of gossip as marketing currency is difficult, but it’s increasingly being done. In 2006, Fraser Ross, the Toronto native who operates Kitson, the Los Angeles store beloved by celebutards like the Hilton sisters, took a stab at it during a legal skirmish with Us Weekly, not long after the magazine gushed that Kitson was “L.A.’s hippest hot spot.” Ross opened the store in 2000 on a strip of Robertson Boulevard frequently staked out by paparazzi covering the nearby celebrity hangout The Ivy. Shunning traditional advertising, he forged a symbiotic relationship with photographers and publications who displayed the Kitson name and products prominently. Halle Berry was captured by paparazzi leaving the store in 2002 just after her Oscar win with an initialled “H” handbag, which became a million-dollar seller, says Ross. Nicole Richie held her book-signing party there. Matthew McConaughey’s girlfriend will be launching her new jewellery line there next month.

The formula has garnered Ross a US$25-million-a-year business, a place on the Los Angeles Times’ “100 most powerful” in southern California for controlling the “celebrity fashion machine,” and he’s turned the store into a tourist destination. In a legal action that exposed the quid pro quo underlying the machine, Ross sued a Us Weekly editor for not paying the bill for a private party held at the store. He claimed he had been guaranteed a two-page spread that didn’t materialize. He also alleged the magazine had suppressed the Kitson logo in credits, captions or photographs, a snub that cost him an estimated US$10,000 a week in lost publicity. All’s been patched over, says Ross. Indeed, in January of this year, Us Weekly featured photographs of pop singer Britney Spears during her highly public breakdown during a 2 a.m. shopping spree at the store, which opened specially for her.

The Canadian outfitter Roots has also long parlayed celebrity associations with both athletes and performers-from Wayne Gretzky to Jessica Biel and Justin Timberlake. Recently, Paris Hilton was photographed in a Roots “Stop Global Warming” leather bracelet, and Catherine Zeta-Jones was shot carrying a Roots Midtown Slide bag on the New York set of an upcoming movie, Rebound. “We like celebrated people wearing our product” says Roots’ co-founder Michael Budman. “We encourage them. We’re not throwing crazy money at people. But we definitely give people product when it’s appropriate and when we feel it’s appreciated.” Hilton, who’s said to collect six figures to show up at Las Vegas clubs, wasn’t paid a dime for shopping at the store, he says. “She loves Roots and sweats. Look, that really helps the brand. Paris Hilton is probably one of the most popular figures in pop culture.” Celebrity endorsement of a specific product does register in a spike in sales, he says. “And if you get a great item in Us Weekly or People on a celebrity, that’s the formula for success. It can take it into the stratosphere.”


Debra Goldblatt, a publicist with Toronto’s rock-it promotions whose clients included the Drake Hotel, Lobby Restaurant, and Hazelton Hotel, says celebrity association is crucial. “We strategically invite certain people to visit stores, hotels, restaurants and then tell [the press],” she says.

The ever-increasing clout of gossip columnists and bloggers reflects a bovine public eager to imitate celebrities who have become products themselves, able to earn more money for endorsement than performance. “The stigma that used to accompany making commercials has disappeared,” says Joanna Molloy of Rush & Molloy. “Just five years ago, any serious actor would be ashamed to do a commercial in the U.S.; they used to sneak off to Japan. But with the Internet, there’s nowhere to hide.”

Given the obsession with what stars purchase, it seems only reasonable some are paid to shop. “I’d say about 20 people are being paid to shop and those people are tabloid fodder who are tabloid friendly,” says Lavandeira of PerezHilton.com. “Her career isn’t hot, but Lindsay Lohan gets paid to shop.”

Ross blames the managers and publicists who get a cut: “They’re pimping these people out far too much,” he says. Lavandeira, whose own fame has resulted in a clothing line and record imprint at Warner Records, sees it as smart business. “Look at Las Vegas” he says. “There’s so much competition you have to do whatever it takes to stand out, get noticed, and get people into your venue. Even if they’re paying someone like Kevin Federline 10K to 15K to show up somewhere, he may not draw a big crowd but he’ll draw a lot of media.”

He believes the concept of “selling out” is outdated, noting that even indie musicians do it. “Feist, one of my favourite Canadians, sold out big-time with iTunes, but it didn’t seem like she sold out because it really helped boost her career. People make music because they want people to hear it.”

“Celebrities have become part of the business plan and the business model,” observes Sam Frier, a New York City publicist and cofounder of The Hall Company, whose clients include high-profile restaurants Bouley and Dos Caminos. Bold face mention in the New York Post’s Page Six, the Mount Sinai of gossip, can have definite financial consequences, he says, as can mention on certain high-profile blogs. “If a restaurateur is looking to open in Vegas, he wants Page Six name recognition; that will cinch the deal. Or if you want a better rent or better lease terms, you want it because it will guarantee to the landlord you’ll be around.” Julian Niccolini, a partner in New York’s Four Seasons restaurant, has said a one-line mention in Page Six is of more value to him than a full-page advertisement in the paper, which costs US$30,000. “Anybody can place an ad,” says Frier. “And you don’t want to be in their company.”

“Getting your name into Page Six is gossip’s equivalent of getting one’s company listed on the New York Stock Exchange” says Shinan Giovani, the society columnist for the National Post, whose scoops have been picked up by the column and who’s considered Canada’s closest equivalent. The smallness of the Canadian gossip universe distresses publicists. “In my dream world, I’d love to see 10 columns like that,” says Goldblatt of Giovani. The impact of a reference in his column can be measured two ways, she says: “From a marketing point of view, we quantify it through an ad value in a circulation rate: we calculate what it would cost to purchase that kind of ad mention in the National Post on a specific day, and how many people we are hitting. The second measure is response, both in website hits and mentions. So it does works; his mentions do push people to buy things and go places.”

For publicists, the upcoming Toronto Film Festival, which brings an influx of boldface names, is like Christmas, says Candice Best of Best PR Boutique. “Every day is like 10.” Cinema is secondary as newspaper writers are assigned to cover who was where, who ate where and who bought what. Goldblatt says she’s regularly contacted by People and Us Weekly to serve up dish on who was where with whom. Getting product in gift bags that might end up in celebrities’ hands is key, says Best. “That alignment with celebrity and gossip is instant validity.”

Given the mass-market appropriation of celebrity gossip, a new measure of exclusivity has emerged: no gossip mentions. “I have several clients who want no kind of gossip press at all,” says Frier. “They want to keep celebrities coming in. We tell no one, the staff is trained to tell no one, we obviously can’t help it if somebody spots someone, but we don’t force it and we don’t sell it.”

Meanwhile, Behrman is plotting how to publicize plainmary.com. “You want mention in anything with a nice-sized readership–New York Times, the New York Post, the New York Daily News. You want People, you want People.com, you want MSNBC, anything that’s going to drive traffic to an e-commerce site. You’d love to see it get to Canada, Australia, the U.K.–anywhere English-speaking,” he says. In a baby-obsessed culture in which pregnancy is viewed as a good career move, he holds the ultimate bait. “You’re talking to someone who has five pregnancies nobody knows about” he says. “I can tell you Uma Thurman is pregnant.” What she’s ordering, however, he’s saving for Page Six.

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The zen of ignoring the stock market

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At the very height of the dot-com boom, in the summer of 2000, I was working for a business wire service, and one of the most important jobs in the office was the daily stock market story. Two reporters and an editor were responsible for following the daily gyrations in equities markets.

Each morning the reporters would check out the stock futures, and then hit the phones to ask fund managers, traders and analysts why the market was heading up or down. After many calls, they’d connect with somebody willing to float a theory, and a few minutes later you’d get a headline like “Stocks poised to fall over interest rate worries.” That would become the conventional wisdom of the day, and you’d hear that same thesis repeated over and over on radio, TV and the Web.

In the years since then, little has changed. If anything, the noise has only increased. When the market is up you’ll find dozens of websites and broadcasters reporting Wall Street is “optimistic the credit crisis is passing and that the worst effects of the U.S. recession have already been felt.” If stocks are down, it’s because of “ongoing credit woes and fears the recession will be deeper than expected.” If the market recovers tomorrow, revert to thesis one.

This horse-race style of markets coverage is a mainstay of all major media outlets, but there is one central flaw, widely understood but rarely acknowledged in public: nobody has any earthly idea what they’re talking about at any given moment.


One of my favourite memories of working at that wire service was the time I was enlisted to help find a plausible reason for a midday downturn on the TSX. I called a fund manager and asked my earnest question: “Why did the market turn around?” His answer: “Who the f–k knows? Markets go up and down. People decided to sell some stock.”

His quote never made it into the story, and that’s a shame because it spoke to an important reality that is completely lost in our hour-by-hour vigil over the Dow Jones Industrial Average. Stock markets are the distillation of billions of individual decisions, judgments, bets and guesses happening every single minute of every trading day all over the world. There are literally thousands of variables at work, and trying to determine one or two causal influences at any given moment is the very definition of a mug’s game–like weather reports consisting entirely of minute-by-minute updates on the speed and direction of the wind.

For a long time, I thought daily stock market reports were merely useless, but there is increasing evidence to suggest they are really much more problematic, and the consequences are getting worse.

A few months ago, Arthur Lupia, a professor at the University of Michigan, published a study demonstrating how these daily stock bulletins distort reality and misinform millions of people about their financial health. Lupia described a phenomenon that he calls “point blindness.” We’ve all heard hundreds of reports saying that “the Dow was up 100 points today,” but what most people don’t know is that the value of a “point” on the Dow Jones Industrial Average changes significantly over time. A 100-point gain today is not the same as a l00-point gain lo years ago, and even percentage changes are misleading because they don’t reflect the changing value of the American dollar. All U.S. stocks are priced in greenbacks, so if the stock market is rising while the value of the dollar is falling, investors aren’t any better off.

Lupia demonstrates this point by comparing stock market returns between 2001 and 2006, with the appreciation of the Canadian dollar. He gave study participants an imaginary US$10,000 and a choice of what to do with it. Option one: they could have invested it in the Dow Jones Industrial Average at the beginning of 2001 and cashed out five years later. Alternatively, they could have taken the money, converted it into loonies and left it under their bed for the same period of time.

Most Americans, naturally, opted for the stock. From listening to the news, they knew the Dow was coming off a major bull market and was up more than 17 per cent since 2001. What they didn’t realize is that the greenback had plunged against the loonie, meaning they’d be substantially better off if they’d just taken the Canadian cash and stashed it.

That alone is a serious indictment of the way we speak about stock market movements. All this talk about “record highs” on the Dow was sheer nonsense. But point blindness is just one of many problems with our stock market obsession. Contrary to popular belief, the Dow is a lousy indicator of economic health. The market crashed in 1987, but the economy didn’t run into trouble until three years later. By the same token, one of the longest and deepest stock market crashes in history started in 2000, but was followed by only a very mild recession. On the other hand, today economists worry about a deep grinding recession and mass layoffs, but stocks are rising.


It’s for all these reasons and more that monetary authorities like the U.S. Federal Reserve used to pretty much ignore the stock market. Paul Volcker and other central bankers knew their job was to fight inflation and protect the currency. But Alan Greenspan and his successor Ben Bernanke are as stock market obsessed as any day trader, slashing interest rates at the first sign of weakness and offering Wall Street multi-billion-dollar bailouts, based on the wafer-thin justification of shoring up confidence in the financial system. It’s madness. As Lupia’s study demonstrates, your stocks may be rising but it doesn’t much matter when the value of your dollars has cratered and the cost of living is through the roof.

The only useful advice is as boring as it is timeless: diversify your savings as much as you can–stocks, bonds, GICs, real estate etc. And next time you hear a stock market report, change the channel. It’s just the blind leading the blind anyway.


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A civil rights bill for workers

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With forty-seven sponsors in the Senate, including seven Republicans, and an apparently solid majority of House supporters, the Civil Rights Act of 1990 now seems likely to clear the House Judiciary Committee easily and survive floor fights during the summer. The threat of a presidential veto of this employment-discrimination bill has not dimmed the optimism of most civil rights leaders. I think the bill will be passed by Congress and approved by the President,’ says Julius Chambers, director of the NAACP Legal Defense and Educational Fund.

Propelled by the symbolic power of a crusade to stamp out bigotry, the legislation has encountered relatively smooth sailing thus far. But parts of it are hard for American business and its champions in Congress and in the Bush league to swallow; it is still too early to tell what kind of pressure they might apply as the Congressional session comes to a close. As Earl Weaver might have noted, the fat lady hasn’t sung yet; she’s only warming up in the wings.

The bill is generally touted by its proponents as remedial, repairing the damage done to equality in employment by a handful of Supreme Court cases decided last year. The United States, the world’s leader in civil rights, cannot regress at home,’ says American Bar Association president-elect John Curtin Jr. The Civil Rights Act of 1990 preserves victories won long ago’ and will ‘shore up the foundation of civil rights in our country.’ Most of those 1989 decisions made it more difficult for minorities and women to get legal redress for bias in hiring and promotion or for harassment in the workplace. One case allowed white male workers claiming reverse discrimination to file suit long after court-approved settlements of bias claims had been entered into, even though the workers had not availed themselves of the opportunity for such a challenge at the time of the settlement. While the business community and conservatives hailed the Court’s trend as a welcome change from social activism on the bench or downplayed it as finetuning’ that continues to protect equal opportunity (the characterization of Utah Senator Orrin Hatch), civil rights groups saw it as a disastrous setback, what N.A.A.C.P. executive director Benjamin Hooks called the legal lynching of black America’s hope.”


The law that would restore that hope touches many bases. It would amend Title VII of the Civil Rights Act of 1964 by providing a jury trial for plaintiffs claiming racial or sexual discrimination or harassment, as well as money damages for successful complainants (and punitive damages in cases of malicious abuse). It would effectively reinstate Griggs v. Duke Power, a unanimous 1971 Supreme Court decision that imposed on employers the burden of showing why a personnel practice that has the effect-whether intended or not – of excluding minorities or women is required by business necessity.’ The new law would invalidate seniority systems adopted with intent to discriminate and employment practices adopted with mixed motives which include bias. To the federal statute that bars discrimination in making and enforcing private contracts, it would add a prohibition against discriminatory conduct that occurs during the period when the agreement is in force. Finally, the bill sets forth provisions for the finality of court settlements in discrimination suits, disallowing challenges by people who could have made a timely protest but didn’t.

A parade of witnesses at House and Senate hearings in February presented a disheartening picture of an American workplace rife with racial and gender-based tension and bias. Representatives of such groups as the American Way Legal Defense Fund and the National Women’s Law Center summoned up case after case of demeaning assigments and demotions based on race, racist and sexist epithets hurled at defenseless employees, contracts terminated because of religious bigotry, and skills tests and educational requirements upgraded just as women and minorities began to apply for jobs. In most of those cases the Supreme Court decisions of 1989 had thwarted legal redress.

In, arguing that justice had been denied, the witnesses had a model in Patterson v. McLean Credit Union, the most widely publicized of last year’s Supreme Court rulings on civil rights. In that case the plaintiff, a black credit-union teller and file coordinator, had been repeatedly passed over for promotion and opportunities offered to whites and had been subjected to racial slurs; she testified that the head of her company had told her several times that blacks are known to work slower than whites’ by nature. She had been denied recovery on the ground that the federal statute that covers private contracts did not protect her against acts of bias that occurred after the contract was entered into and that didn’t interfere with its performance.

Opponents of the bill have rarely addressed the human impact of the Supreme Court’s retreat on civil rights. Instead they have groused about costs and railed against quotas. Business representatives know as well as anyone else that equality doesn’t come cheap. They decry the added inconvenience and cost of defending lawsuits that might be directed against them if the bill passes; one witness submitted to the House Labor and Education Committee a table purporting to show that the costs of litigation under Title VII – attorneys’ fees, settlements and monetary awards – would jump from $775 million to $2 billion. A lawyer for the National Association of Manufacturers reminded the Representatives that the bill would impose “crushing costs” on public-sector employers, saddling the taxpayers with protracted litigation in a federal system which is already overburdened.’ The most common target, however, is the section of the bill that deals with lawsuits attacking employment practices that are, as the Supreme Court said in Griggs, fair in form but discriminatory in operation.’ Griggs bit the dust with last year’s decision in Wards Cove Packing Co. v. Atonio, which forces plaintiffs to prove a negative: that the employer has no business justification for a discriminatory practice. Now that the Civil Rights Act proposes to shift the burden of proof back to the employer, those opposed to the bin are quota rattling. This provision threatens great harm,” said Charles Fried, Solicitor General under President Reagan and now a professor of jurisprudence at Harvard Law School, in Senate testimony in February. It would force employers to use quotas in hiring or else expose themselves to lawsuits they cannot win.’ The argument here is that employers faced with charges of bias because of a discrepancy between the demographics of the local labor market and the corporate work force are so lacking in imagination that they will be unable to think of anything to do but hire unqualified minorities and women.

The quota issue is also the sticking point for the Bush Administration. In a letter to Senator Edward Kennedy written the day before the Senate Committee on Labor and Human Resources markup, Attorney General Dick Thornburgh expressed concern that the legislation would encourage quota systems’ and warned, If S. 2104 were presented to the President in its current form, I and other senior advisers would recommend that it be vetoed.’ The veto threat has not been repeated, and President Bush has made it difficult for observers to read his lips, telling reporters on May 17, ‘I want to sign a civil rights bill, but I will not sign a quota bill.’ At a meeting with civil rights groups a few days earlier he was similarly noncommittal, making only general and platitudinous reassurances and allowing chief of staff John Sununu (undoubtedly one of the most important of the ‘senior advisers’ referred to in Thomburgh’s letter) to warn of “ghosts” in the legislation – presumably the specter of quotas – that would have to be banished before the Administration gives its blessing.

The Bush people may be in a real jam on this one. If they go along with the legislation they are open to the charge from business groups and conservatives that they are agreeing to quotas. To oppose it would seem politically dangerous in an election year, especially when the civil rights community has made clear that Bush’s reputation with blacks may stand or fall on his support of or opposition to the bill. Kennedy has now brought along several new supporters, including two Republicans, by a”% to modify the definition of the business necessity that employers must prove in defending an employment practice that results in the exclusion of minorities and women. The new language allows employers to justify an employment test or educational requirement that has a discriminatory effect if it can be shown that it “bears a substantial and demonstrable relationship to effective job performance.’ This is nearly identical with the Griggs standard there the permissible practice had to have a manifest relationship to the employment”) that prevailed for nineteen years, and it is less onerous than the standard originally written into the bill-that a discriminatory practice is defensible only if it is ‘essential to job performance.” if the Bush Administration can’t agree to the new formulation, it is rejecting the message of the old law: that employers mustn’t screen out, even unintentionally, minorities and women without a very good reason. Surely this is a message that most American voters, if they knew they had the choice of accepting or rejecting it, would endorse.


But the contest over the Civil Rights Act is not about providing voters with that kind of information. The opposition is playing bogyman politics, throwing up a symbolic smoke screen to protect what one Senate witness candidly referred to as the national ideology’ of an employees right to hire and fire at wil. The bill’s critics bemoan the loss of the merit system’ in employment policy, but they have not presented a single piece of evidence that competence in job performance was threatened or that quotas were in fact adopted when companies were doing business under the Griggs standard. When public visibility is low, opponents of the legislation may abandon recourse to the buzzwords and simply make bizarre proposals to protect bosses’ right to hire workers they are comfortable with. One of the twelve amendments that Hatch brought with him when he came to the Senate committee markup was a masterfully circular proposal essentially allowing anyone to sue at any time to throw out a court-approved affirmative action plan as long as the allegation charged a violation of equal protection. (What else would the plaintiff charge?)

Throughout the legislative process conservatives have been saying that this bill is not intended merely to correct a few Supreme Court errors but that it goes beyond preserving the pre-1989 status quo in employment discrimination law. They have a point. The law synthesizes the pre-1989 judge made rules into a thoroughgoing legislative commitment to end employment bias and to enlist employers in achieving equality in the job market, not just demographic balance in individual workplaces. Its larger aims surface in its use of the word “eliminate’ when describing what federal civil rights laws are supposed to do about discrimination, and in its stipulation that all such laws shall be broadly construed.’ While affirmative action is not directly addressed by the bill, its spirit is still at issue – not the legitimacy of formal plans with goals and timetables for achieving racial and gender representation but the informal extra mile employers must go to conform hiring standards to the likely backgrounds of the minorities and women who will be coming to them for jobs. Employers will also have to recruit more imaginatively and aggressively. Most important, in order to insure that educational and training requirements for workers don’t shut out minorities and women, they may have to do the training themselves and support general and vocational education that prepares a broader range of people for the jobs of the twenty-first century.

One of the troubling aspects of affirmative action has been that it often pits poor African-Americans and Latinos against working-class whites, whose choices in jobs and education are also very limited. Anything that contributes to better job preparation in the larger society will benefit whites and males as well as racial minorities and women. A continuing tension is the competition between the needy and the less needy for scarce resources, including jobs. The Civil Rights Act of 1990, contrary to the charge that it will rigidify the labor market, has the potential for stimulating some universal entitlements.

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