Business

Taxes and housing prices drive some Chicagoans out

By Yingcong (June) Fu

The third largest city in the U.S., Chicago has been seeing a slow population growth due to high tax rates and living expenses.

According to the census data by the U.S. Census Bureau, the population of Chicago grew 0.9 percent to 2.7 million in the five years from 2010 to 2015, much slower than the growth rate of 2.2 percent in New York and 4.7 percent in Los Angeles.

It is even likely to be surpassed by Houston, the fourth largest city, where the population in the same period grew 8.9 percent to 2.3 million, just 400,000 behind Chicago.

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Japanese startups face hurdles in exit opportunities

By Katherine Hyunjung Lee

Entrepreneurship is becoming a more accepted career path in Japan, but certain persistent traits of Japan’s economy and culture are adding a color of their own and altering the trajectory of growth.

In the U.S., the term “serial entrepreneur” is used to describe those who start multiple new businesses, grow them quickly, make them valuable acquisition targets for bigger companies and become rich in the process.

Between being acquired and going public with an initial public offering, 77 percent of startups said they would likely be acquired, according to Silicon Valley Bank’s 2017 U.S. Startup Outlook Survey. 50 percent of entrepreneurs also said they expected stronger mergers and acquisitions activity in 2017.

In contrast, approximately 80 percent of startup exits in Japan are IPOs, according to James Riney, a partner at the Tokyo office of global early-stage venture fund 500 Startups. Only 20 percent exit through mergers and acquisitions.

Many characteristics of Japanese society contribute to this difference, said Masako Ueda, a professor of economics at Northwestern University.

Japanese people believe in dedicating their entire careers to one workplace, according to Ueda. The belief influences all aspects of work culture in Japan, from people’s preference for large, stable companies as workplaces to relatively low executive compensation.

If starting your own company instead of joining a stable organization was once unimaginable, having your leaders ousted by the management of another company is still abhorrent to many. The risk of cultural clashes keeps many startups from choosing the same path.

Even at startup incubators, where promising startups are introduced to opportunities to work with big investors and corporate venture capital, most entrepreneurs are not looking to attract an acquirer.

“They don’t believe in handing over the businesses they founded to others,” said Eunkyung Heo, a corporate planning unit manager at Tokyo-based startup incubator and venture capital firm Samurai Incubate Inc. “They start out with the intent of going public.”

Photo Gallery: A Day in the Life of a Startup Incubator

Samurai Startup Island, a startup incubator and co-working space in Tokyo, offers various networking and funding opportunities for entrepreneurs in Japan.

Heo said entrepreneurs treat their startups with the traditional Japanese small business mentality: they would found their own businesses, and they would stick with them and take care of them.

The lack of M&A activity is representative of the whole Japanese business environment and is not exclusive to the startup community, according to Ueda.

“For mergers and acquisitions to become common, they must reach a critical mass,” Ueda said. The current Japanese business environment does not have a diversity of merger models and professionals to take on the different transactions that various companies would need.

James Schrager, an economics professor at the University of Chicago, said Japanese businesses have a negative perception of M&A.

“Companies, once they are established, are fiercely independent,” Schrager said. “Those that are already large companies, like Sony, have had very bad luck during acquisitions. The longer term view is taken that this is not a good way to build a business.”

Still, corporations show keen interest in investing in startups through corporate venture capital funds.

“They might just be trying to keep an eye on new ideas,” Ueda said. “As investors, they can watch what happens in those startups. If they wanted to develop similar functions, they may want to grow internally within their own companies.”

The younger generation in Japan is increasingly open to the idea of startups as a potential career. Prestigious academic institutions like the University of Tokyo have entrepreneurship classes and incubators on their campuses that allow students to seek mentorship and advice from business school professors and experienced entrepreneurs.

Riney writes on the “500 Startups” blog that because the Tokyo Stock Exchange has a lower market capitalization requirement for IPOs, Japan might provide a better environment for people who want to build startups.

But reaching a threshold market capitalization is just one hurdle.

“IPOs in Japan generally require the company to be much further along than the U.S.,” Schrager said. “You must be profitable, you must be growing, you must be able to make a projection one year ahead that you can make a net profit.”

With M&A an unattractive option for many Japanese, and IPOs requiring greater proof of success, startups are in a Catch 22.

“The youngest generation is more open to founding startups,” Schrager acknowledged. “But it’s much harder to do it. They don’t have an M&A as a way out, and an IPO can only happen much later.”

Photo at top: Samurai Startup Island, located on a small island in Tokyo Bay, Japan, is run by early stage venture capital and seed accelerator Samurai Incubate Inc. (Photo by Katherine Lee/MEDILL)

Chicago coding bootcamp trains veterans for IT

By Wenjing Yang

Conlin McManus, 23, heard about Code Platoon, a coding school in Chicago geared for veterans, two weeks before the end of his active duty as a Marine. He thought it could be “a fighting chance” for him to develop a successful civilian career.

Code Platoon, a Chicago nonprofit that puts military veterans through an immersive 14-week coding boot camp, is aimed at turning them into quality programmers.

“When coming out of the military, you don’t really know what you can do,” McManus said.

Four months before getting out, McManus applied for a job as a data center engineer, but was rejected which he demonstrated a lack of technical skills. With a dream to be a software developer, he decided to go back to school at Code Platoon this January. He is one of 12 in the class.

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Natural gas threatens future of nuclear energy

By Urvashi Verma

Nuclear power, the glamorous, high-tech power of the future, may be losing the energy race to humble natural gas, as abundant U.S. shale gas production causes natural gas prices to hit record low levels.

So far this year, natural gas has performed the worst among commodities, posting declines in both January and February. Prices have dropped 20 percent to $2.90 per million British thermal units from $3.65 in January. In the past three years, natural gas prices have steadily declined more than 50 percent, according to data from the Energy Administration Institute.

At the same time, withdrawals from U.S. shale drills have increased more than 700 percent. Last year, 1.3 trillion cubic tons were withdrawn compared with 170 billion cubic tons in 2008, according to the EIA.
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Discover Financial seen advancing with industry tailwind

By Katherine Hyunjung Lee

Analysts are optimistic about growth prospects for Discover Financial Services in 2017 as the company continues to post stronger than expected loan growth. The banking and payment services company based in Riverwoods, Ill., continues to expand its national footprint while riding on the growth tailwind of the credit card business.

Discover Financial’s stock price has been on the rise. When markets closed Thursday, shares were $70.99, up 45.4 percent from a year ago.

Of the 28 analysts surveyed by Bloomberg, seven give Discover Financial a “hold” or “neutral” rating and 20 give it a “buy” or “outperform” rating, with one “underweight” rating. The 12-month consensus target stock price is $79.88.

“It’s a very concentrated franchise,” Henry Coffey, Jr., an analyst at Wedbush Securities, said in an interview. “They’ve had one basic core mission for 20 years, which is to build out a credit card brand around prime, high quality borrowers that actually use the cards, that borrow money.”

Coffey has an “outperform” rating on Discover Financial and a target price of $80.

Increasingly, Discover’s competitors are turning to near-prime and subprime customers to ramp up loan growth.

“Issuance of credit cards in aggregate to near-prime and subprime customers has been increasing. There are a lot of people who are looking downscale,” Coffey said. “The real question is not loss ratios, but risk.”

“Discover Financial has begun to accelerate loan growth and maintain lending and operating margins,” Richard Shane, Jr., an analyst at J.P. Morgan, wrote in a note to investors Jan. 25, shortly after the company’s fourth quarter earnings announcement. “We see this as incrementally positive versus our prior expectations.

Shane gave Discover Financial a “neutral” rating following the earnings announcement. Discover beat J.P. Morgan’s estimate of $1.36 earnings per share at $1.40.

“Loan growth at [Discover Financial] remains notably below that of the peers we are recommending,” Shane wrote. “Further, we think tailwinds from the benign credit environment are likely to benefit all card issuers in the near term, not just [Discover Financial].”

Discover Financial’s stock price was $70.99 at market close Thursday, up 45.4 percent from a year ago. (Graph by Katherine Lee/MEDILL)

The credit card companies may be growing their business, but the industry remains a fiercely competitive one. Acquiring new customers is expensive, and companies must balance growth with reserve requirements and customer acquisition costs, as well as the interchange fees that are paid out to customers through rewards points.

Discover managed to reap benefits and save costs by turning its deposit gathering function into a full-service bank. Discover’s net interest income has been growing for eight consecutive quarters.

“They’re a branchless bank, with very profitable credit card products and other loan products,” Coffey said. “They’re not inhibited or held back by the heavy anchor or costs of the branch system.”

The company also promotes its own electronic payment network, which had once been viewed in the past as a valuable addition to the company’s business.

“It’s an important part of the business,” Coffey said. “But it’s a very small net contribution. It hasn’t changed how people are valuing the shares.”

According to the company’s filings, the number of transactions processed on the Discover Financial’s network have been rising year-over-year since fiscal year 2014, while network spending volumes have been fluctuating after reaching a peak in 2013.

Photo at top: Discover Financial Services provides credit card customers with its own payment network. (Photo by Katherine Lee/MEDILL)

Controlling Asian carp remains a challenge

By Jiefei Liu

Current barriers against Asian carp temporarily protect the Great Lakes, but fighting the invasive fish remains a challenge.

Michigan Gov. Rick Snyder announced Jan.17 a $1 million challenge for innovative solutions to the voracious carp. The challenge will be launched officially in mid-summer 2017, said Joanne Foreman, coordinator of Invasive Species Program communications at the Michigan Department of Natural Resources.

Currently, the U.S. Army Corps of Engineers operates three measures to deter fish in the Chicago Area Waterway System. According to the 2017 Asian Carp Action Plan of the Asian Carp Regional Coordinating Committee, electric barriers in the Chicago Sanitary and Ship Canal give off electrical stimuli to deter the carp. A Bypass Barrier physically blocks known bypasses around the electric barriers caused by flooding. The third barrier is bar screens on sluice gates at a key lock and dam in the Calumet Sag Channel south of Chicago.

Foreman said that in a recent test non-carp species were introduced near an electric barrier, and it was found that some small fish were able to make their way through the barrier.

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Designer toy shop adjusts to changing market

By Jiefei Liu

“Things come in and out of style,” said Whitney Kerr, president of Rotofugi Inc., a designer toy shop in Lincoln Park.

The store features imported artsy toys from around the globe, ranging from $500 vinyl toys by Otto Bjornik to $4 Pokemon figure strap capsules. A gallery space is now occupied by a pop-up shop of Yummy World by Kidrobot, an art toy retailer.

It will have been 13 years this summer since Whitney Kerr and her husband Kirby Kerr opened the store, and will be the ninth year since they have struggled to recover from the 2008 financial crisis.

The revenue of the shop steadied around $1 million, but costs have gone up, Whitney Kerr said. Gross margin went down to 38 percent in 2016, compared with 44 percent in 2015, she added.

The Kerrs started the store as a super collectors’ business where these collectors would spend several hundred dollars on collectables, such as limited toys by various artists from California, New York or Hong Kong, Kerr said, but there are fewer and fewer of them.

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Palette & Chisel serves art community for 120 years

by Jingnan Huo

Palette & Chisel Academy of Fine Arts was started in 1895 by a group of Art Institute night students who needed a place to paint during the day. Each Sunday, the students would hire a model they could draw or paint in natural daylight.

In 1921, the artists bought a run-down Italian mansion on Chicago’s Gold Coast and named it their home. The Academy remains in the mansion, thanks to the non-profit property tax exemption granted by Cook County.
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Logan Square toy store thrives despite retail headwinds

By Katherine Hyunjung Lee

In a gentrifying neighborhood increasingly attractive to families and children, boutique toy store Play is thriving in an otherwise struggling toy retail industry. The store, owned by toy business consultant Ann Kienzle, has been growing its reputation as a specialty store since first opening on West Logan Boulevard seven years ago.

The store, which sells toys for children ranging from newborns to age 10, occupies a 1,000-square-foot space packed with books, puzzles, games and stuffed animals, among other playthings.

Photo gallery: Explore Play, the boutique toy store Ann Kienzle opened seven years ago.

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Jobless claims dip in latest sign of job market improvement

By Karen Lentz

Initial unemployment insurance claims for the week ended March 11 trickled down to an advance figure of 241,000, a decrease of 2,000 from the previous week’s seasonally adjusted unrevised level of 243,000, the U.S. Department of Labor reported Thursday. The numbers remain below pre-recession levels, pointing to continued gains for the economy.

New unemployment claims are compiled weekly based on the number of workers who filed for unemployment insurance for the first time.

“These are very good numbers indicating tight labor market conditions,” Daniel Sanabria of Comerica Bank wrote in a note.

Decreases in new claims are typically an indication of an improving labor market as fewer individuals are losing jobs.

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