VC and ED

Why can't DoorDash, GrubHub, UberEats, etc, ever seem to make a profit? Or even play nicely with their restaurant partners and drivers? In this episode, we argue that a big reason is the distortionary effects of venture capital. In exchange for rapid growth, VC has subsidized both the product and some very poor business decisions by removing something all functioning markets need: price signals. Could the same be true for our efforts in economic development? Are we subsidizing quick, short-term growth at the expense of long-term fiscal health? How would we focus our ED efforts if we couldn't provide rebates, grants, or incentives? 

Transcript

0:10 Patrick
Hey, guys. Welcome to another episode of ZacCast. I'm Patrick, here with my buddy Chad.
0:15 Chad
Patrick, how you doing?
0:17 Patrick
I am very good. Uh, locked up for another week of COVID, you know, so just, just hanging out at the house office. And, uh-
0:25 Chad
Kids are back in school though, yeah?
0:27 Patrick
Yeah, the kids are back in school, so it's a little bit more productive this week than it is otherwise. But yeah, kids are back in school. Things are getting back to a little bit of normal. Uh, I'd say the new normal, but, uh, things are, things are looking, looking good right now.
0:39 Chad
So-
0:39 Patrick
How are things going with you?
0:40 Chad
Uh, pretty good. I, I actually ran to Target yesterday morning, and, uh, it was like right before all of the other stores in that center started to open, and the line to get into the Ross Dress For Less, I swear there were like 50 people just like waiting outside. It looked like an iPhone release. It was crazy.
1:01 Patrick
Well, I would prefer if my wife may do a little bit more shopping at the discount retailers, uh, rather than the brown box retailer that comes to my house five times a day. So, you know, it'd be a little cheaper for me. But, uh, yeah. I mean, look, I think everybody's trying to get a new sense of normality at this point and, you know, get out there. Like, we're trying to play baseball with our kids and, um, you know, really, really try to get our kids back into normal routine of life 'cause it's just been such a, such a difference of, of routine for us as a family. So, you know, looking forward to it.
1:33 Chad
So talking about like changes to routines, um, one thing we talked about last time is, uh, how many people are using like the delivery services like Instacart, DoorDash, Grubhub, uh, during the quarantines. And sort of as a result, kinda like, you know, how we, we started to shut down and everyone started using Zoom, and then all these news stories came out about how Zoom is, uh, problematic, right? Well, the same thing has, has happened, uh, about these, these service apps, um, DoorDash, Grubhub, things like that. Um, but a lot of these news articles are kinda crazy. These businesses, you're probably quite aware, Patrick, are basically like terrible in terms of their actual business models. Um, I, I, I wanna say that DoorDash last year, they lost $450 million on like $900 million in revenue. It's insane.
2:26 Patrick
Yeah, they are, they are bootstrapping nothing.
2:28 Chad
And-
2:28 Patrick
I mean, it's... Yeah, it's crazy.
2:31 Chad
And it's not just that they lose a bunch of money. It's like they, they don't really... Like, there are basically no real winners in the food delivery gig economy. You got DoorDash, you got Grubhub, you got Uber Eats. They're all losing a ton of money. They're all, uh, problematic for the restaurants that are participating. And, uh, and I mean, it's nice not to have to go pick up, uh, food at every single restaurant during this time. But I mean, truthfully, usually the food's kinda cold. The drivers don't have equipment to keep the food warm, especially if you get like pizzas or things like that where you, you know, you have specialty equipment to keep those warm, and the actual pizza restaurants where they have their in-house delivery, you know, they have all that equipment. But usually you just get your DoorDash in a plastic sack and it's cold by the time it gets to your house, especially like me, I live further, further out, you know, from all of the civilization, so by the time it gets to me, it's all cold. Um, but there are a lot of things that are going on with this, not just that they're losing a bunch of money. There's also some really like shady tactics that are, that they're doing. Like, for example, um, Grubhub. So when you sign up for Grubhub... First of all, part of the value proposition for these businesses is that they will surface new customers to these restaurants. And, uh, so part of what these restaurants are paying for is theoretically new customers. There's a problem though, because people like Grubhub, whenever you sign a, a restaurant, they will actually like create a, uh, a local phone number that just routes to their centralized order bank. But then, you know, they have all this technological savvy. They have these huge ad budgets. They basically manipulate and like hijack your search results. So they get their phone number placed into your Google listings or to your Yelp listings. So even if you're googling for a specific restaurant, and you find the phone number on the search results and you call it, you're not actually calling the restaurant, you're calling Grubhub, and Grubhub is then taking a cut of that order even though it's not, uh, you know, it's not actually sourced by Grubhub. And in some cases you've got... The way that they had that whole setup, I mean, you have coffee shops that are paying like six bucks for a, a Grubhub order that actually came in because the person googled for the business's phone number. It's, it's really shady. I, I don't understand necessarily why there has to be, uh, basically no winners, like wh- why there can't be a symbiotic relationship between these services. But the bigger problem with them is that they don't, they don't really operate in a normal market environment. Have we ever talked about VC on this podcast, Patrick? I know we've talked about it a lot-
5:20 Patrick
I, I don't think... Yeah
5:20 Chad
... over the internet.
5:20 Patrick
Correct. No, I, I don't, I don't think we have, and, uh, it's, this is a really good topic to talk about VC. Uh, uh, and, and go ahead. I mean, jump. I'm gonna let you keep going and jump into this because I think you're, you're doing a good job explaining it.
5:32 Chad
Okay. So venture capital is one option that a business has to sort of, uh, expedite its growth, right? There's a lot of different ways that you can start a business. We bootstrapped. We basically just built our, our company in our spare time. You know, we, we each put in like 200 bucks when we started, right? And it's just kinda grown from there. You could also just take on investors, like silent partners, people who are willing to make a long play. Um, or if you wanna grow really quickly, you could take venture capital. So venture capital is based on, um, basically making lots of bets on lots of companies that have the potential for exponential growth.And you hope some of them pay off, and you can quickly exit maybe with an IPO, um, and you can make a large return on in your investment but what this ends up doing is really distorting sort of the business model for the underlying business because they're not so much concerned about profits. I mean, you look at these businesses, these, these tech companies in particular that get VC funding and none of them make money because they're not trying to make money right now. They'll figure out that whole profit thing later, that whole sustainable business model later. All they're trying to do right now is just grow as quickly as possible, just show that they have user growth, that they have engagement, that they have, ah, you know, market share increases and w- if you can show that exponential growth, then you can get other people to invest and then the initial VC people can get out and make their profit and move on to something else and then everyone else will kind of have to figure the rest of it out later. Um, so that's how you get DoorDashes losing half a b- half a billion dollars on a billion dollars of revenue, spending nearly one and a half billion dollars to make a billion. It's insane.
7:16 Patrick
Mm-hmm.
7:17 Chad
But it also leads to some really weird, ah, business decisions because it... when you understand that the normal incentives of a business, which are to make more than you spend and, ah, you know, and in that way achieve financial sustainability, um, then it's, it's a lot easier to un- a lot more easy to understand why some of these decisions take place. But have you, have you heard of the story of the pizza arbitrage?
7:41 Patrick
Yes, I have, where the guy literally found out that, ah, in order to, um, that, that GrubHub was selling his pizza for five dollars less, right, than he was actually charging for it?
7:52 Chad
Yeah. Okay, so, so it was DoorDash and-
7:56 Patrick
Ah, DoorDash. Okay, okay
7:57 Chad
... uh, it, it's not clear if this was just a s- like a web scraping error, like they scraped his website incorrectly or if they were just using this as a loss leader, but this, this particular pizzeria was not a DoorDash participant. They were... They did not use DoorDash. They didn't wanna have delivery. They didn't wanna compete with Domino's or Pizza Hut. They, they, they preferred their, their dine-in experience, so they did not use, ah, DoorDash. Well, DoorDash just decided to go ahead and list them anyway, and they were charging 16 bucks for a pizza that the restaurant was charging $24 for and, ah, so they... the restaurant found this out because they were getting calls from customers complaining about how their pizza was cold and, you know, it was the wrong order and all this stuff, and they didn't have delivery so they were, you know, they didn't have any idea what was happening. And they finally figured out that DoorDash was basically, um, kinda going around them probably trying to demonstrate that DoorDash could source new business for them. Um, so, ah, whether that's true, you know, is kind of up for debate, but at the end of the day, DoorDash was charging $16 for a pizza that the restaurant was charging $24 for. So they actually they tried to use this as an opportunity for arbitrage and the restaurant would actually, ah, just as a test, they would try to... They would order, like, 10 pizzas. They would pay DoorDash 16 bucks a pizza. DoorDash would then pay them $24 a pizza, so there's, like, there's this margin here. Now, of course, um, when you're actually making the pizzas and you're the one ordering and making, that margin is extremely n- I think it was, like, 50 cents a pizza.
9:36 Patrick
Mm-hmm.
9:37 Chad
So the second time they did this, they just put raw dough in the, in the box because at that point, ah, the dough was basically zero cost to them at that scale.
9:47 Patrick
Mm-hmm.
9:48 Chad
So, so the second round, they order these 10 pizzas, and they give them boxes with dough, and instead of making 50 cents a pizza, they're making, like, seven bucks a pizza, right? But at the end of the day, the, the question is, like, why do these businesses even exist if they're not making money and they're not headed towards profitability? Um, I mean, you look at Uber. Uber's been around for, what, 10 years, and they've never made a profit. Their most profitable division is Uber Eats, which loses, like, half a billion dollars a quar- or some absurd amount of money a year.
10:21 Patrick
Well, and, and, and I think it's a... I- it is important to say, though, there have been... It, it's hard to say successful. Ah, and, and I'm not a fan of VC. I wanna be very clear. We've made some decisions with Zach that, you know, we wanted to bootstrap it, do it the right way, make money, make sure that Chad and I could afford our mortgage payments, those type of things. But at the end of the day, there are some companies that are out there that have successfully, um, you know, gone this route. I mean, you know, the... one of the biggest ones, Chad, would be Amazon, correct? But ironically, Amazon didn't really turn a profit through, like, what people consider Amazon to be today, which is the, I go to Amazon, I buy something, and it comes to my door. Amazon made a profit because of Amazon Web Services, their, their major hosting services site. That's when they started-
11:09 Chad
Well, part of that-
11:09 Patrick
... making a profit.
11:10 Chad
Yeah, part of that's because Bezos just kept pouring money into it to build up the infrastructure so that they could do the two-day delivery or the, you know, the Prime Now, the same-day two-hour delivery basically across the whole country, really across the whole world. So-
11:25 Patrick
But isn't that the same thing that DoorDash and GrubHub are doing at this point? Aren't... And, and, and aren't they trying to basically monopolize the delivery business by, by any means necessary by just pouring cash at it, and once they have that monopoly, they'll then cut what they, they pay drivers, take a bigger cut from the restaurants, and get themselves to profitability? Isn't that ultimately what they're, w- what they're trying to do?
11:53 Chad
Yeah. I don't know that... I, I think there's a difference in scale because Amazon was a- there was always a path to profitability while they were growing. You could see that if they, if they were to basically just kinda stop with the infrastructure, that they would be profitable, whereas your DoorDashes, your GrubHubs-If they were to stop losing money on every transaction they're still not close enough to profitable and and they're already kind of bilking they're already bilking the restaurants. So in a low margin industry it's kind of tough to see how they're gonna start charging the restaurants even more, um, without like just massively making them increase prices. Part of the problem with this whole system though is I'm not gonna get partisan, but, uh, it's, it's tough to, to not be somewhat political is this is, this is viewed as like a, a failure of capitalism. But the... what you need in capitalism, and really in any market economy, is you need price signals to determine resource allocation, and there are no price signals in the market for, uh, y- you know, service, uh, or gig economy delivery. There's no market, uh, there's no price signal because you have this subsidy from venture capital, and it distorts so much the actual price that's being paid that there's no reason why a, a third party delivery service couldn't exist that doesn't cause the restaurants to, uh, to lose all of their tiny margins and still allows for efficient delivery, uh, to the home and add value to the transaction. But in order for that to happen, the consumer actually has to bear the price, and right now they're not. I mean, what do you pay? Like, four dollars for delivery, and then maybe you tip, and then basically your tip is the only thing that the driver makes. I think as, as consumers we've gotten used to this idea of, uh, of subsidized prices, especially with things like Facebook and Google and Twitter, and all of these services are free, especially up front before there's ads. They're free because of venture capital is, is allowing these businesses to scale and grow and build the network effects and build the market share without you having to pay for it.
14:15 Patrick
Mm.
14:15 Chad
But, uh, because the consumers aren't the ones that are actually bearing the true added value cost that allows the businesses to make, uh, strategic and efficient resource allocation decisions, you just end up with this huge mess. I feel like this, the, the biggest problem with these types of businesses is that there is a lack of price signaling. And I've been try- I've been thinking about this and, and as it relates to, to how cities operate, particularly from an economic development standpoint, and I mean, this is not, this is not, like, a novel idea, um, but there's a, there's a big similarity between that type of business model, the, the exponential growth VC subsidize the, the consumer side model and what we do in economic development, um, in terms of... I mean, if you think about economic development, uh, there are lots of aspects to it. You know, you, you wanna make it easy for a business to get started in your city, so maybe you try to streamline the development process, uh, you try to limit the regulations of how they can operate, how they can, how they can build their actual buildings, all those kinds of things, but at the end of the day economic development is largely about what is it gonna take us, how much are we gonna have to give away to get that business to come to my city, right?
15:44 Patrick
Correct. Yeah. It's, it's a math, it's a math problem. It's an equation.
15:47 Chad
And a lot of times, uh, I, I think there's a truism that we, uh, we probably don't recognize or admit frequently enough in city government, which is that there's no amount of subsidy that can turn an unsustainable business into a sustainable business. If a, if a, if a retailer is gonna come to your city or if, if they're thinking about coming to your city but it's not gonna be sustainable, there's no amount of money you can give them that's gonna turn that into a profitable business long term. And we dealt with this a lot, you know, when we were in the field. Um, we had-
16:21 Patrick
Correct. Yeah
16:21 Chad
... all kinds of requests for, uh, incentives and, and sales tax rebates, and of course we didn't have property tax in the city that we worked in together, but, you know, when you look at those developments and you try to score them as a city manager, um, y- you have to... there has to be a winner on both sides, right?
16:41 Patrick
Of course. My, my, my favorite-
16:43 Chad
The business needs to get what they need to get. The city also has to be financially sustainable after the deal is done.
16:48 Patrick
Yeah. My, my favorite type of economic development deals, and, and I'm being sarcastic, is when a developer walks up to you and asks, you know, "Can I get an incentive for this, this new restaurant that I'm putting in?" And then you ask them, "Well, what's the restaurant?" And they basically tell you the name of the restaurant, and they're relocating a restaurant from a, from your city in their development, and they want you to incentivize money that you've already got, or they're bringing in a user that is a direct competitor to another existing user that you have and watching in cities do those incentive packages. So you're, you're basically incentivizing something new that is a direct competitor to something you already have, and most cities don't even take that math into account, what that existing sales tax dollar is from that existing user. A prime example is Michaels and, and Hobby Lobby. I've seen that a couple of times. You've got an existing Michaels store, and then you got a Hobby Lobby comes in and you incentivize a Hobby Lobby. Um, I've seen that happen in two or three cities, um, and-
17:47 Chad
Yeah, not taking into a- to account the cannibalization of-
17:50 Patrick
Of Michaels
17:51 Chad
... what you're going to be losing at the other store.
17:54 Patrick
Correct. And, you know, uh, I, I think, yeah, I, I think sometimes economic development does start to act like VC capital, right? We just need to, we just need to get the scale on the ground, and it's gonna be there, and that's extremely dangerous because at some point you've got to provide services to that user, and you have to be able to justify the amount of services that you have to provide with some type of revenue source, and a lot of cities are just, um-You know, a lot of communities, what happens in ED, when you don't have the finance department involved specifically, when you don't have a, a good, fair, uh, development scoring process that includes multiple different parties and not just the economic development department, um, you know, you, you tend to lean towards getting a deal done rather than making a good deal.
18:42 Chad
So, uh, I love what you'd said earlier about the, uh, the developments where you, you have an existing user that you, you may or may not have incentivized, but particularly when you did incentivize the original development, and now that incentive has run out, and they wanna relocate, and they want a new incentive.
18:59 Patrick
Yes.
19:00 Chad
So, like-
19:00 Patrick
Yeah
19:00 Chad
... as soon as the city is gonna start making money on it, they're gonna, they're gonna start back at square one. And this-- I think this really ties into the, uh, wh- uh, what does Strong Towns call it? The, the growth Ponzi scheme?
19:14 Patrick
Yes. Yeah.
19:15 Chad
Yeah. So, like, we need new development to basically pay for the stuff that we already have. And because we give away so much to get that new development, we, we need even more. So you have this need for exponential growth, right? It's, it's very much like, like venture capital. And what it does is it creates an environment where there's no, there's no functioning marketplace. There's no, there's no valid price signals, um, there's no concern about financial stability in the, in the sh- in the near term, uh, and you just kinda hope that it works out with volume. So, like, you're literally y- you're losing money on each transaction, and you're trying to make it up in volume.
19:58 Patrick
Well, I, it, I mean, that happens, and then you see in, in the development world, I mean, not just talking about the cities, but you look at a development world, and everybody jumps off the same cliff together. So if one major brand or flagship jumps off a cliff and says, "Well, we're gonna go locate in this market," whether they're actually profitable or not in that market, you may have four or five other brands that co-locate at the same time, right? And then after you have four or five brands that jump on the ground, and they're all still not, you know, high-performing stores, you may have another five or six that do that. So that's why a lot of times you see these new power center developments where you have, um, you know, you had all these tenants go in, you had 100%, you know, 90 to 100% occupancy. It gets sold off to a real estate investment trust. The developers are super happy. The city's happy up until you start to see the decline at years five, six, and seven as the first round of leases have their out options. And so then you start to see the decline in these centers, and so the outparcel little retail centers that are, that are out there from, from your, like, junior anchors, those outparcel centers are the first ones to see it, and you start to see the empty outparcels. And then you start to see the empty pad users, right? And then eventually, what we're seeing now in today's market after COVID, you're gonna see the empty JCPenney store, and you're gonna see the empty eventual Belks and Bealls and those players. So, you know, that Ponzi scheme that is, is happening in the development side on the city side is, is really gonna come back now where you, you've artificially inflated through development incentives and, um, you know, TIRS districts and PIDs and those type of things. Some of that is, is too artificial. I'm not saying they're not used. Chad and I used them aggressively when we worked in city government, that, you know, we just... We took a more incremental approach to it. Um, and at the end of the day, what was most important is that our pro forma from the city perspective was that we made money, that the city made money on this development after taking into account the cost of infrastructure, after taking into account the cost of the incentives, we were still going to be positive. Uh, now it helped that, you know, we had city council members that were bank presidents, and they tend to like pro formas. But the, the reality of the situation is, is that there are a lot of cities out there that are gonna have some empty outparcels, and I think that's now gonna filter in and kind of infect the actual ju- junior anchor spots. We're gonna start to see that over the next couple of months.
22:31 Chad
Is there-- Is it possible that we are thinking about economic development, like we're focusing on the wrong things? Like, in other words, we're trying to make up for the fact that a development just straight up on its own, uh, may not be financially viable, right? The pro forma. Pro forma doesn't work because maybe the property's too expensive or the, the demographics aren't quite right, but if you give me a little bit of, uh, like reduce my cost a little bit, we can make it work. But it almost always revolves around how much money can-- is the city giving back to the development.
23:06 Patrick
Mm-hmm.
23:07 Chad
Is there a different way, and I don't have an answer to this, but is there a different way, way where economic development is not treated so much as, as what does it take to-- what do we have to give up to bring something, but instead, how can we build a community that actually offers a sustainable development environment without incentives or perhaps with, with a smaller incentive, you know, package?
23:35 Patrick
I think it's entirely possible, but I think that conversation starts, uh, first at the political level. Uh, I think your politicians have to get away from immediate gratification in order to have that conversation seriously. I mean, I, I just, uh, you have to start at that point. You can't... Y- we don't get there from a city perspective because, you know, the managers and the economic development directors, in order to keep their jobs a lot of times, are being told by their city council members, you know, or their commissioners that, you know, "We need it now." It-- There's a, there's a keeping up with the Joneses mentality that happens in-
24:09 Chad
It's an arms race
24:10 Patrick
... it's an arms race in city government. And, um, I think we have to have a brave few who stand up and say, you know, "Hey, we don't have to do that," or, "We have toBetter educate our politicians that they're not actually making money on those deals, and sometimes saying no is, is better than saying yes. Um, so it, it's just, it's really tough. I mean, and, and look, I, I-- you know, Chad, you can put a dollar on the, in, in the jar when I say this, but I say this from the standpoint of my dad's a developer. I grew up in development. My family is dependent on development. Um, and you know, it is, it is a different mentality from the development side than it is from the city side. But I, I'm just saying generally developers are gonna push because capitalism tells them to push to make their deal as profitable as possible, and if that can get them an injection of additional city funds, I, I think it would be tremendous. And I think if a region would learn with specific types of development, 'cause there are... You know, it's, it's, it's super broad, and it's, it's hard to... I, I don't wanna paint it with just one big brush, uh, because I think industrial manufacturing, employment, um, corporate relocations, things like that, that's a whole different ball of wax. Uh, and, and it's, it's something just... It, it, it really has its own, uh, math equation separate from, like, retail and power center development. Um, and, and, and so I, I wanna be very careful that I'm not, I'm not trying to paint everything at the same time. But it would be nice to see, like, regionally if some cities would step up and say, "You know what? We're gonna be more conservative and a lot tighter in incentivizing retail." And I would go even further to say where we should be doing it is retail that may not be there by the time the incentive runs out, right? In, in soft goods retail, things that are sold on Amazon, things that have gone online. I mean, I, I, I have this funny conversation with my wife about once a month where she talks about all of the-- And I'm talking about my wife and shopping twice on the same podcast. But, um, where she talks about all of her favorite stores that have gone out of business that month, right? Um, and I, I just, I think at the end of the day, we've gotta be smarter as cities, and it's hard to do that individually. We actually have to do that a little bit more corporately, uh, and, and maybe through, like, associations and organizations, we have to have those conversations and, and push that education, uh, point of view, uh, to council members. The Strong Towns movement has done that, don't get me wrong, but there are still, there are still some political things with the Strong Towns movement that folks are not gonna agree with. The one thing I will say, though, is that we've gotta be a little bit more incremental in our approach. I mean, I, I would 100% agree with that. We need to be smarter in the overall equation of where we put our city funds and where we don't put our city funds. Um, and we've gotta get away from, from the glory side of development. It's really great to get the glory, don't get me wrong. My name's been in the paper. I've cut the ribbons. I understand what it feels like. But ultimately, if you're cutting a ribbon on something that's going to be detrimental to the finances of your city 10 years down the road, why? Let's just, let's just be a little better and a little smarter at what we're doing.
27:35 Chad
So you mentioned earlier, um, the political aspect of this, right? You said we need to, uh, uh, to get the politicians on board with changing the way that we do this. This is a really stupid question, but I'm gonna throw it out there. What would it look like if just overnight, or maybe even if the state legislature just decided cities cannot do, uh, revenue rebates? Like, they can't, they can't give money back to development. Like, what would we do then to recruit and compete for developments?
28:13 Patrick
You would signif- uh, ooh, that's a really good question.
28:17 Chad
Like, ignore, ignore the local control issues. I'm just asking if that was not an option, what would we do?
28:24 Patrick
I think, uh, many cities would get much better in their actual development processes, like permitting, plan review. I, I think some cities would, would get more aggressive in reducing their overall demands for, um, you know, buffering and landscaping. I think it would change the development environment a little bit 'cause that, that would be the... You can't take away the competition. There's still going to be competition.
28:55 Chad
Do you think that cities would focus more on the actual, like, community building and place building and making, making their environment more attractive as just a place to be? Like, sure, it's one thing to make it easier to build something, but I'm just talking about, like, I, I hate to say this, but, like, amenities, right? And you know, just, like, things that would make the city more attractive as a place to locate.
29:23 Patrick
I mean, you, you would... I, I understand that you would hate to say that, but you would- ... you would admit that, like, landscape beautification of a boulevard, specifically like a retail boulevard, does actually help enhance development. Would you say just, like, anecdotally that those two things will correlate?
29:43 Chad
Oh, yeah. Like, I, I, I say that I hate to say that, but that's mostly just sort of a, an exaggeration. Um, I, I, I think it's, it's obvious that if you as a city take the effort to make things look nice, then y- you're gonna create a virtuous cycle of re- reinvestment.
30:01 Patrick
Because people-
30:02 Chad
I mean, you have to show that the s- that the community as a, as a, as an entity is willing to put money back into itself, right? And to, to make it look nicer and to clean it up and to, to make it just more, like, give it, to give it some curb appeal, right? I- if you let your house go to crap, the market for your house when you try to sell it is going to be a lot lower than if you have taken the time to keep your lawn up, to make it, you know, keep the flower beds nice and blooming and make it look beautiful from the streetI mean, that's-- like, that's your first impression, right? Someone's looking on Zillow or Realtor.com and they see a picture of the front of the house and it looks like you haven't taken care of it that's gonna send a signal that, that maybe that's not something that they're interested in. This-- I mean, I think the same applies for cities. If you haven't taken the time to keep your right of ways, rights of way you know, mowed and cleaned and trimmed, um, if, if your sidewalks are all cracked and disheveled, I mean, it, it, it shows a certain willingness or lack of willingness to just maintain what you have. Why am I going to expect that you're gonna spend new money now w- now that my business comes into town, why is that gonna change your MO?
31:16 Patrick
Ye- yeah, no, I, I don't... I mean, it's hard because I've had an entire career that's been focused on the actual financial incentive side. I, I will say, though, that I, I believe a city's brand, both externally to a population or to residents, and a city's brand more internally to the development community make a substantial difference on what and, and what quality of development that you're able to, to, to bring in to, uh, to your city. And a city maintaining... You know, we always joked around in city government that you don't-- you gotta be careful with parks 'cause you got a bunch of maintaining that's happening there. You gotta be careful with boulevards and, you know, all the grass you have to cut and things like that. But the reality is, is that cities that have well-maintained boulevards and way- well-maintained retail corridors, those retail corridors, you know, typically last longer, and they're sustainable, and they encourage redevelopment within those corridors. When a city allows for concrete, you know, basically concrete jungles and, you know, they don't have any type of beautification requirements, uh, either in the city right of ways or on the private property side for those retailers, things can get real ugly real fast, and it, it, it becomes a, a very quick drop-off in a community where, uh, if one business is ugly, the, the next business, you know, the, the old broken glass theory, that it, it starts to run down really fast. So I, I think incrementally, we've gotta be investing in that, and I think we've gotta invest in that from a city's perspective with those businesses to maintain, um, the look and feel of those corridors. But ultimately, at the end of the day, you just have to compete in different ways, and those different ways are, are really left to brand visibility and appeal of a- as a city when it comes to the regulatory environment, which plays a huge role today. I mean, I, I can't tell you how many deals are won and lost between cities based on meetings with just a single staff member of a city that went poorly. Um, you know, I, I-- and honestly, I think a lot of city managers are not aware that they may have a staff member or two that can be cancerous in the development process. Uh, we... I mean, you and I have seen that a lot, Chad.
33:42 Chad
Mm-hmm.
33:43 Patrick
Where we, where we talk to a developer and, you know, they, "Oh, we're trying to make a deal in a city. This is what we're trying to bring in." City doesn't really know what we're trying to bring in, but we're dealing with this one staff member who wants, you know, um, who wants me to put in a, a million dollar fire block wall and, and fire door that's not in the code. It wouldn't be a requirement, but ultimately, I'm not gonna go sue a city over this, and so I just pulled out. And we see that type of stuff all the time. And, and the reality is, is if it got to the C-suite and that conversation was had, I think somebody would ask the question like, "Where's the logic? What-- why, why are we having that conversation?" Um, and, and a lot of times in larger organizations, it just doesn't get to that level. You don't ever get to the person that's, that's logically thinking about it because everybody's in their little segments and sections, and a planner is only thinking about what their job is, which is to maintain the regulatory environment. They're not thinking about the impact of that business long term, so they are, they are black and white, right angled. Nothing is allowed to change, and there's no negotiation, which is why I like cities that have set up a, um, set up a process where the development community, especially the small mom and pop businesses that are trying to start, um, they, they have set up a process where there's actually a city employee that works on behalf of the, of, of the person submitting for permit. Um, and their job is to take it through the city process and be the advocate for the, the permittee, right? So, um, yeah, it, it... I, I think there are different things, but I, I think it would substantially change how we operate as communities.
35:24 Chad
I mean, I think it's interesting as a thought experiment. Obviously, you know, we live in the world that exists, not, not one that we might wish. And so whatever my personal, uh, struggles with the incentive culture, um, I mean, you have to play the game to some extent. And, and there's no way that we're just gonna all decide that, uh, we're just not gonna do that anymore. And we certainly don't want the legislature to say that you can't do it anymore. Um, it, it should really be up to the local community as t- as far as how they, um, how they wanna recruit and, and build their community. Yeah, I think it's, uh, interesting to think about what would we do differently if that wasn't an option.
36:06 Patrick
Yeah, I mean, obviously, it would be very different. Uh, I, I think you would w- I guess the question I would have for you is do you think the market would be more natural?
36:17 Chad
Well, I think you'd have, uh, you'd have better price signaling because you're act- the, the developer's actually bearing more of the true cost. It's not, there's not a subsidy that is potentially distorting those decision making, tho- those decisions or that resource allocation.
36:33 Patrick
And it would take away the incentive of a developer to, to basically fill and dump, right? So-
36:39 Chad
Especially for the redevelopment cycle.
36:41 Patrick
That's correct. I mean, it would-
36:42 Chad
I mean-
36:43 Patrick
... it would significantly enhance the re- redevelopment cycle.
36:44 Chad
Let's, let's talk about, let's talk about a larger city in the DFW metroplex that has just spent a ton of money to move, uh, a sporting venue across the street. Right? I mean, w- was that necessary? No, probably not. Is it gonna be beautiful? Absolutely. I'm really excited about it, but I mean-
37:11 Patrick
I'm really excited about it 'cause I don't have to sweat in my seat anymore.
37:14 Chad
But it's still a lot of money to redevelop something that's 25 years old and probably could have gone for another 25 years or more. Um, but yeah, it's, that, that redevelopment cycle, esp- especially when you have smaller, uh, entities that are, you know, if their ins- incentive has run out and they wanna kind of go back to the well, and they're just gonna move down the street. Maybe, maybe the community has changed, and, uh, you know, there's a, a better neighborhood, you know, five blocks down the road. Um, that's the situation where it just doesn't make any sense for us to be acting in the way that we're, we are.
37:51 Patrick
So my, my question for you about, about that is do you bring up this, this sporting venue or baseball field, uh, do you bring this up because you're one of these fans that is upset that you're leaving the old venue?
38:06 Chad
No, I'm actually super excited because it is, uh, it's impossible to go see games during the summer. And, um-
38:14 Patrick
Oh, it's... Yeah, absolutely
38:15 Chad
... I, I went with my father-in-law last, last summer on a Sunday afternoon 2:00 game, I wanna say, like, August, and it wa- we were in the shade, but you still couldn't sit down on the seats because they were like 150 degrees.
38:29 Patrick
Oh.
38:30 Chad
It, it's just unbearable. So I, I'm excited about having some air conditioning in, in the, the hot summer months. Uh, I think it'll be good for our pitching rotation. Um, I mean, this particular team has always, or has frequently started off strong, and then just that summer heat wears down on the pitching staff in particular. Um, so I, I, I'm looking forward to that. I don't, I mean, I don't have a problem with the decision. I understand it. I wish that they probably would've put a roof on it 25 years ago, but, um, you know, ultimately that's for the community to decide what they wanna do, and, um-
39:08 Patrick
I mean, and to be honest-
39:08 Chad
... I'm not gonna begrudge them for making that decision. But, uh, just from a theoretical standpoint, that's w- that's basically what happened, is an incentivizing a lo- a business to relocate literally across the street, um, when what they had could have lasted, uh, for, for much longer.
39:31 Patrick
So just to wrap all this up based on, you know, wrap everything that we've talked about on the unnatural use of venture capital or the unnatural use of, uh, incentives in recruiting businesses, I just wanna make one final important point. This new stadium is not going to allow this team to win the boot. I just wanna point that out. They will still get beat this year for the boot by the greatest baseball team in the state of Texas, the Houston Astros.
40:04 Chad
Well, if we have a baseball season, and I, I do know for a fact that all trash cans have been banned in the new stadium, so.
40:11 Patrick
Yeah, they, they don't allow them at all. Yeah, it's true. They, uh, they did keep the camera in center field though, um, and, and that, that's a whole nother podcast topic. I can't believe we hadn't even talked that through on the cast yet. So, uh, we'll, we'll have to jump on that next time. But, uh, guys, I wanna thank y'all for tuning in, uh, to us today and, uh, taking the time to listen to us about VC. I hope you learned some stuff about VC and, uh, w- what, what that does, and also how we kinda intertwine that into, uh, the development cycle that we have here as local governments as well. But we hope you join us next time. Chad, thanks a lot.
40:44 Chad
Hey, uh, yeah, before we leave, um, later today we're recording, uh, uh, an episode of the Go Cultivate podcast with the folks at Verdunity. So, uh, I don't know when this will be released or when that will be released, um, but go check that out. Uh, and then next time, Patrick, be thinking about this because I have a really interesting question for you with regard to self-governance and shopping cart corrals. So stay tuned for that one-
41:11 Patrick
Yeah
41:11 Chad
... 'cause that's gonna be a fun conversation.
41:13 Patrick
Stay tuned for that one.