On the way to building her state-of-the-art business incubator, June Lavelle has learned what it takes to keep a company alive and healthy
A nonprofit, partially government-funded, relatively small enterprise sounds like it would be a snap to run. But that isn't necessarily the case. Over the past decade June Lavelle has had to use her street smarts and ingenuity to overcome more business problems than many fast-growing, for-profit companies face -- including the 77 in her Fulton-Carroll Center for Industry incubator. -- R.A.M.
On a frosty October day in 1980, at the age of 29, without having purchased so much as a new automobile in her life, June Lavelle found herself the proud owner of a city block in Chicago. No Trump or Helmsley, Lavelle had just shelled out $320,000, a sum whose paltriness suggests that her acquisition couldn't be called prime property.
Maybe it wasn't a tower or a palace, but at least she could take heart that what sat on her block was big: a 350,000-square-foot, three-story factory. In an odd way she could even boast that the empty, century-old brick structure had "location, location, location" -- between Fulton and Carroll was one of the meanest blocks in the city. So mean, in fact, that when Lavelle secured the building with an electronic alarm system, the apparatus got ripped off overnight without a sound.
Some start as a landlord. But the money wasn't really hers. It came from a $1.7-million federal grant through which it fell to Lavelle, as executive director of the Industrial Council of Northwest Chicago, to purchase and rehabilitate a property within the inner city and establish a self-funding small-business incubator in it. The idea was that, given deeply discounted floor space and communal office services in the soon-to-be-shored-up edifice, potential proprietors would be coaxed from the middle and lower classes to cash in their life savings, set up shop on far less capital than a start-up would require elsewhere, hire the local unemployed, and hope for the best. This, the Department of Commerce presumed, would upgrade the locale, sort of by osmosis.
It's not Lavelle's fault that after nearly a decade the northwest sector of Chicago still is not a place where most entrepreneurs would elect to found their businesses. Desolate lots remain heaped fence high with detritus that even the destitute can't devise uses for. The neighborhood's mostly black and Hispanic residents are captives of the Chicago Housing Authority school of architecture -- high-rise, broken-windowed shambles. On-street parking consists mainly of burned-out wrecks. Consumer amenities remain scarce and certainly don't include much conventional banking; the lion's share of exchange takes place in storefront shops, whose check-cashing operatives scoop a hefty percentage off the top for the favor of converting financial instruments such as welfare stipends to coin of the realm.
Virtually shanghaied into administrative duty from the professional stage of The Lyric Opera of Chicago, Lavelle doesn't have an M.B.A.; indeed, until assuming the directorship of the council by agreeing to give it a try when no one else wanted it, she'd never been in business or even come close. Yet standing practically alone in the tactile swath of poverty that family-owned, all-white businesses had long ago left behind, the Fulton-Carroll Center for Industry has been outstandingly adept at encouraging enterprise. This year the 77 start-ups that fill the center are expected to gross about $41 million -- an average of $532,000 each. Even though it's a record high for the nine-year span, "they're not going to be $100-million businesses with thousands of employees," Lavelle concedes. "When you think about what somebody starting with $10,000 and leveraging it into $1 million in sales means in economic terms, that ain't chopped liver, either."
As one of the government's most successful economic-development projects, the shell of the not-for-profit business incubator may be duplicatable. But at its core, where more than six dozen racially mixed, individualistic merchants in search of separate profit must be convinced to exist in sink-or-swim-together harmony, not much can be taught. "No outsider can truly tell what goes on in here, it's so mushed together," says Lavelle, who manipulates the process almost wholly on instinct.
Keeping the wolf from closing the door has been a constant and single-handed battle against longer odds than the chanciest of her tenants faces. One constraint, for example, is the federal grant's stipulation that real estate cannot be used to collateralize a loan. Another is that the government's money could not be used as working capital; it had to go only into purchasing hard assets and/or making hard capital improvements.
"In order to survive," Lavelle exults (now that, with nearly $1 million in rentals and other fees pouring in for the year, she's reasonably convinced she has), "I've beaten every tenant in the building at managing money. Cash Flow is my middle name." The appellation, however, doesn't come close to describing the person behind it. Neither does the person herself: "My biggest problem is explaining to people what it is I am." The answer she gives comes straight from Popeye, another tough-talking, never-say-die personality: "I yam what I yam, and that's all that I yam."
A farmer's daughter from central Illinois, Lavelle conceived of her incubator as a means of revitalizing fallow land, not unlike the challenge of raising corn and alfalfa for a living. "A farm is a testing business, a hard way to make a living," she recalls of her youth. "All I did was transfer the rural networking experience -- when you're out in the middle of nowhere, you have to have a certain respect and concern for your neighbors -- to an urban environment." As independent as the American farmer is reputed to be, to Lavelle he also represents interdependency: "There's a lot of farmer-to-farmer cooperation: lending money, sharing equipment and labor." A similar relationship ought to obtain among entrepreneurs, she assumed.
First, though, the new landlady had to make it through to next spring. "Slam-bam on October 22, 1980," Lavelle recalls in still-vivid horror, "here I am going into winter, and I had to repair the roof, fix the windows, get rid of the rats and pigeons, build the spaces. I had no tenants, I had no income, and I couldn't borrow. I couldn't even meet payroll [including her own salary of $15,000 a year], yet I had to pay for heating a whole city block simply so the sprinklers wouldn't freeze!" For all practical purposes, it was like starting up a million-dollar company with zero money.
"It turned out to be a valuable experience," she admits. "Now, I've become an artist at supplier financing." Within a few months, Lavelle had run up a $165,000 trade payable -- the type of expense the federal grant wouldn't cover -- mostly for utilities. The incubator would have died aborning had not Lavelle cajoled someone at Peoples Gas Light & Coke Co.: "I know I can pay it back. I'm going to have more tenants. Let me do it in installments." Unwillingly, the gas company became an unsecured lender, cinching Lavelle's first lesson in the critical connection of money to time: spend the money, then argue for the time. "Everything is negotiable," Lavelle insists. "Never simply tell them, 'I can't pay.' Always have a plan, a workout, a strategy."
Undercapitalized by a good 40%, what made her think she had a chance? "I had little to lose," Lavelle asserts. "A 60% chance is a 60% chance. Besides, the way this area was in 1980, a 30% chance would have been worth going for, because to do nothing would have been to let it keep slipping backward."
In 1986 the incubator itself nearly slipped backward when its first-floor anchor tenant, whom Lavelle had welcomed as a large-square-footage rock on which her co-op of tiny start-ups could be built, suddenly went bankrupt, strewing unpaid obligations in its wake. Lavelle hoped to recover the $100,000 owed to her in back rent, but the Chapter 11 produced $0. To attract more fledgling businesses, she had to subdivide the unexpectedly vacant and discouragingly huge space, and pronto. By that time, however, she had run out of rehab money and, per the Department of Commerce, was forbidden to borrow. So she arranged for one (and possibly the only) creditworthy tenant to go to a commercial bank and get a $100,000 line of credit, turn some of it over to her on an unsecured note, and thus become her bank, once removed. "There's no doubt," Lavelle says of her "compulsive Presbyterian Calvinist" penchant for dogging through such hopeless hours, "that it's strictly by the grace of God we survived."
Now that the incubator's own cash flow is on the positive side, it no longer requires pure grace. "It's amazing how much money these things can make!" Lavelle confides. She has seized the opportunity to make even more money and at the same time ensure full occupancy by financing working capital for cash-starved tenants. The modest demand notes she has been issuing are backed up not by a borrower's receivables -- which is as far as the most cavalier asset-based lender would carry the risk -- but, as Lavelle describes her collateral requirements, "by anything." Security largely consists of purchase orders for goods yet to be shipped, and she doesn't even ask for the reassurance of a financial statement, because "all the documentation in the world wouldn't mean a thing, since it's created by the documenter. Good God, they can't afford audits." Essentially, the aim in making virtually lienless loans is to get the fledglings self-bankable faster and then let some bona fide loan officer take on the ongoing risks.
Lavelle, whose support staff consists of five maintenance workers, a bookkeeper, and two clerks, figures she can afford the gamble, since little goes on in the building -- businesswise or otherwise -- that she doesn't immediately know or soon find out about. "There are more than 600 employees here right now. Toribio Ortiz -- our chief maintenance person -- is an important source of information. Ortiz talks to all the workers, I talk to all the owners, so between the two of us we can glean an enormous amount of information about a particular enterprise." No demand note has yet been defaulted.
Indeed, talking is how the ex-singer, whose voice can carry across Cook County without amplification, spends most of her day. "I sell them faxes and copies, I get them suppliers, I answer the telephone, I lend them money, I try to keep the place from crashing in on top of them, but what do I do the majority of the day? I talk. I spend lots of time getting people to listen to other people about potential opportunities for mutual benefits. Basically," she sums it up, "I'm an accelerator of relationships. Isn't that a weird way to make a living?" Perhaps not weird, but certainly effective. "This incubator has gotten strong and taken on its own life," Lavelle recognizes with an overtone of nostalgia. "As integral as I was to it, I also know there's a point beyond which it won't die without me. I've managed to get it beyond its vulnerability stage!"
Lavelle has persuaded high-priced consultants to come in and charge her tenants on the basis of whether their advice proves meaningful to the bottom line; if it doesn't, the consultant swallows the difference. The problem is, Lavelle concedes, that most tenants "think lawyers and accountants are like God. When they seek advice, they follow it blindly." The thing not to do, Lavelle keeps telling them, is to get others to make decisions for you. That that sermon has proved particularly hard to grasp doesn't surprise her. "There isn't a human on the face of the earth who doesn't wish a white knight would show up and make the decision, and you just lie back and say, I'll do whatever you tell me to, I'm so exhausted and beaten down." As a start in overcoming that attitude, recently she convinced the CFO of one of her better-capitalized companies to tutor finance-ignorant founders on an hourly basis in his spare time.
Over the past five years Lavelle has become known for stirring up brews within the incubator, blending entrepreneurs together like eyes of newt for the greater benefit of each. With her encouragement, affiliations have sprung up among aspirants such as, of all the unlikely industries, manufacturers of trade-show exhibits. The first such to arrive at Fulton-Carroll was Bill Murphy, to whom, five years ago, Lavelle had promised not to let any competition into the building. "Then," as Lavelle describes the rest of the ingredients, "John McConnell shows up. The trade-show company he had been working for was liquidated after its owner's death, and he was out of a job." McConnell hoped to use his savings to start his own business in the incubator.
Lavelle was inclined to let McConnell in. "To anyone else, the companies would have looked absolutely identical, but I thought John shouldn't necessarily be a threat to Bill, because Bill didn't specialize in building exhibits; he specialized in design and marketing and service. So I went down the hall and said, 'Bill, I think you ought to talk to this guy. Perhaps he could be useful to you.' 'Yeah,' Bill said, 'I really don't want to have my men building those things. It's conceivable we could exist together.' Then," Lavelle continues, "Pat Spatz came along, and I saw he was no competition to Bill and John because he was in a different market niche -- manufacturing modular trade-show exhibits. So I said, 'Pat, meet Bill and John.' "
Still housed at the center, the trio remain interrelated today. Beyond that, they helped spawn a fourth company, a marketer who represents each of the three. And beyond even that, their needs encouraged the joining of yet a fifth, a silk screener who purchased part of a failing company out of Chapter 11 and now supplies the three exhibitors. Lavelle encouraged his entry even though to do so would violate one of her strictest tenant tenets -- that taking a risk on an out-and-out start-up is better than trying to nurse a marginally extant operation back to life.
At Fulton-Carroll, there isn't even one posted sign, save that on the men's room door requesting that cigarette butts be kept out of the urinals. Very little of the data is computerized. The salient details -- which individuals among the companies are skilled at what; which founder needs what; who needs more working capital; who owes what; who's making a profit; who's about to go under, who isn't; who's having production problems; who needs more space, who less; whose key employee got mugged on his way home last night -- are filed inside Lavelle's brain, which they must enter and leave through a ubiquitous screen of cigarette smoke.
Visitors who snake around the gerrymandered interior, where old elevator shafts and too-wide corridors are being patched together to make more productive floor space, invariably ask Lavelle if she requires her would-be entrepreneurs to submit a business plan. "Well, of course not!" she snaps. "What's it going to tell me? I have a tenant who makes microwave plasma detectors. I don't know what a microwave plasma detector does, and even if I did, I wouldn't know if anyone would want to buy it. But this guy thought someone would be willing to buy microwave plasma detectors, and he was willing to bet his whole life on it. That was good enough for me. If you sit down and talk to people about what their business concept is, you can get a good idea about what they know about the industry they're going into. You can get a good idea about how much they have thought about it, and you can get a very good sense of their personal commitment to it."
All this she usually determines in an interview of two hours; some last only half an hour and some not even that long. Screening the dreamers from the doers boils down to a matter of faith, inasmuch as any business plan at that pre-everything stage is bound to come no closer to real life than the Wizard of Oz. "I can tell those who are basically crazy," Lavelle says, thus dismissing a significant percentage of hopefuls. "But I'm somewhat crazy, too, so who knows? There has to be a certain degree of madness to all of this.
"The lack of capital is relative," Lavelle continues, in confirmation of her own conclusion. "I could say to somebody like Keith Kendall, who created a line of fashion clothing, 'Are you crazy, you idiot? You're going to start in this cutthroat clothing business with a thousand dollars?' " Admitted to the incubator, Kendall borrowed Lavelle's home sewing machine for eight months and stitched $10,000 worth of product by himself. "If that poor SOB is willing to sit there day and night sewing, what do you say to someone like that? 'No, I'm not going to let you try'?" Kendall now employs 13 people, owns his own industrial sewing machines, and has his volume up to $400,000 a year.
In view of Lavelle's informal entrance exam, calculated to allow her to exercise favoritism "in order to attract businesses that contribute to the better good," rotten apples inevitably slip through. She gets rid of them, however, simply by not renewing their leases -- kept ultrashort especially to provide for the weeding-out process. "In this situation," she explains, "people must share the freight elevator, the loading dock, the bathrooms, the hallways. Sharing is not natural; it requires giving up convenience. There are those who can share well and those who don't, and there's no way to forecast from a personality standpoint who's going to be a decent neighbor and who's not." She relies on the community to exact the penalties. "This place has all the attributes of a very small town, a thousand-population community," says Lavelle, "and there's a special manner by which people relate. Part of it is an understanding that there are rules, even if they're unwritten. Those who hog the elevator or who don't watch over their employees or who leave garbage everywhere will be isolated by the rest and won't be offered help. Of the 77, we're going to have 3 or 4 like that at any given time."
Other kinds of contributors to the "common good" are also sought. After the experience with the vanishing alarm system, for example, Lavelle enticed a start-up security company to locate in her building by bartering free rent for a few months. Its shiny armed-camp-looking cars parked out front, she reasoned (so far correctly), would discourage would-be plunderers.
One consequence of getting to know one another so intimately is that over the past two years some of the companies in the Fulton-Carroll Center have been investing risk capital in one another. "This little community is starting to get richer," Lavelle beams in justified self-admiration. Now that the center's bursting to the rafters, which could still use some repair, space jockeying has become as complex as a game of three-dimensional chess.
This summer, for example, Lavelle was besieged by no fewer than eight growing tenants who demanded more space. The considerations went something like this: "Joe Agati, the furniture maker, was suited for us, but all of a sudden he's gotten bigger than I thought he was going to get. It's a delicate dilemma, because the cost of a move out of here could kill him. Ron Damper, the tea guy, is putting raw tea in the computer guy's space, because he's out of space. Anne Bergl over in Modulus has to leave all her shit in the hall. Hopefully, no one will steal it. At SRAM, the company that makes bicycle gearshifts, there are 23 employees, and they can't hear each other now that the company has gone into that high-pitched sonic welding. The office portion isn't separated from production, and they can't wear earplugs because they have to talk on the telephone. Nand Kumar's machine shop needs 12,000 square feet more. I'm not renewing CMAP's lease, so Ron Damper can take that space, and Buhai is going, too; that's where the 12,000 will come from on the third floor. Now, Murphy wants a portion of that. So does Agati, so does Ameriscan, so does JBM Design, so does Alex Atevich, and they're traipsing through here daily complaining that they can't expand any more because they don't have any space. And Agati can't expand next to the tea company because the furniture spray would spoil the tea. None of them can afford another building around here, and all their labor is local. We need another building badly!"
Lavelle has been offered "pretty hefty salaries" to join the corporate world, but has rejected them in the realization that "I wouldn't have the temperament for it." Instead, she has established her own profit-making incubatorlike enterprise nearby, not for personal gain, she insists, but to raise enough capital to do economic development the way it really should be done. "I've been disabused of the fantasy that some foundation is going to give this not-for-profit corporation any money. Why they won't, I've never been able to figure out." A case in point: when she tried to get $12,500 in requisite local funding to match Commerce's commitment of $37,000 to establish an independent purchase-order financing project -- a tiny sum she considered "a no brainer" -- she came up empty-handed. "At that point, I said, 'Damn it, the only way I'm going to do this is to have the money myself!' "
Another experiment Lavelle hopes to accomplish with her own money -- having also been turned down by foundations for it -- is to develop specialized uses for a given facility. A woodworker's building, for example, designed exclusively for that particular industry, wrapping companies around centrally owned machinery. If she further had her way, she'd invest in a few not-for-profit check-cashing services and liquor stores as well, because she hates the notion of their gains leaving the area and buying their owners Lincolns and houses in the suburbs.
"In the inner city," she has consistently argued to apparently deaf ears, "you must talk about the creation of wealth and the reinvestment of that wealth -- that to me is economic development."
It's seldom worth it
Over the years June Lavelle has seen enough success and failure pass through her portals that the mere retelling of the stories is a course in entrepreneurship. Here's a lecture from Start-ups 101: "A company comes in and decides it wants absolutely first-class space: furniture and carpets and air-conditioning and potted plants and every other leasehold improvement. I watch the money go. Those companies fail without exception. Their priorities are out of whack. In a building like ours, nobody else wastes money, none of the rest of us have anything, so there are lots of role models of how to do without. When the next business starts spending like that, I tell them, I wouldn't do it if I were you." Lavelle endorses foyers with a spartan aspect. "Even big buyers flying in on corporate jets expect to get value for their dollar. They don't want to be paying for leather couches and hanging plants. They see the stuff for what it is: expensive overhead."
PROFIT AS A MOTIVE
It beats all others
"Job creation is a by-product of business development, it's not the product," lectures June Lavelle, a debunker of the grant givers' main measure of success: number of employees. "Anybody ought to understand that no one goes into business primarily to hire people."
Here are some of the accomplishments of Lavelle's main criterion, strength of the profit motive:
* Forty-two healthy start-ups have already outgrown their limited incubator space and of necessity moved out to bigger square footage.
* Of the 143 companies, as of mid-August, that have been launched there, only 23 -- a mere 16% -- have failed.
* Lavelle's bad-debt rate has averaged 4%.
* Full capacity was reached within two years of acquisition.
* Today 77 companies are housed in the facilities; about 30 of them are minority- or women-owned.
* A total of 1,171 jobs have been involved; the cost to taxpayers has been a paltry $1,452 for each new job created. Most employees are low-or semi-skilled; most come from the immediate neighborhood.
* Since the Fulton-Carroll Center for Industry opened in 1980, surrounding industrial property has quintupled in market value.
ASKING FOR HELP
Too bad more companies don't
"Communities behave differently when times are bad from when times are good," reflects June Lavelle on her farm-youth background. "Relationships are stronger when people need them to be. They rise to the occasion when resources are less. In business, though, that isn't the case: the assumption is that if you're having trouble in your business, you deserve it. Business-people feel they have to show the outside world how strong and independent and competent they are; they can't reveal weakness or fallibility. What that does," she observes, "is deprive them of the necessary resources that others would be willing to contribute."
In the elbow-to-elbow community of an incubator, however, signs of struggle are accepted as calls for help. "They perceive that having trouble and admitting it is OK, because they look around and everybody else is in the same mess they're in. The facade of independence breaks away, and they get at the real issues, they rise up and support each other. They acquire a sense that a business is built on relationships."