From The Archive
Owen Davis
No. 28  July 2015

Motown Shakedown

  

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A few months after he graduated from Wesleyan University in 2012, Max Nussenbaum landed a job at a tech startup in Detroit. Within a year, he and some friends had bought a run-down house. By the spring of 2014, he had a startup under his belt: Castle, an app for landlords.

“It grew very organically out of owning our house,” Nussenbaum says. “We were thinking, alright, we’re landlords now—how are we going to do this?”

Despite this offhand characterization of how his startup took root, Nussenbaum hadn’t randomly happened on the notion. He was among the forty-strong inaugural class of Venture for America, a nonprofit group that aims to “revitalize American cities and communities through entrepreneurship,” as its mission statement explains. Nussenbaum, an ebullient English major who wrote a musical in college and once competed on Who Wants to Be a Millionaire?, joined VFA mostly for the novelty. “It felt like a left turn at the time,” he tells me.

Modeled on Teach for America, the quixotic national organization that recruits elite college grads to teach in cash-strapped public schools, VFA sends aspiring Zuckerbergs to work at scrappy startups for two years in places like New Orleans and Cleveland—what the group diplomatically calls “lower-cost cities.” VFA’s first graduating class completed the program in the spring of 2014 and is now fanning out into the startup market, along with a crop of new businesses.

Castle’s impact on Detroit remains to be seen. The company, which Nussenbaum bills as a sort of Airbnb for landlords, is still in the beta phase of development. Rebirth Realty, an outfit Nussenbaum and his colleagues founded to flip and rent their house, is further along, but also just finding its way on Detroit’s postindustrial frontier.

There’s more than a little arrogance to the suggestion, implicit in Rebirth’s name, that opportunistic flipping of property will unleash a civic renaissance—or to the idea that landlords are castle-keepers. But questionable branding aside, Nussenbaum’s ventures are savvy enough business moves. According to RealtyTrac, Detroit is the hottest market for property speculation in the country. Investors there can see 30 percent annual returns from rents, triple the national average.

But would startup success benefit all of Motor City, or just the owners? “Successful entrepreneurship,” Babson College business professor Daniel Isenberg has argued, “always exacerbates local inequality.” Though new firms can create jobs and pay into the public coffers, writes Isenberg, “entrepreneurship can also make housing unaffordable, increase taxes, and elevate the cost of personal services.” A rising startup economy doesn’t lift all ships, or even all the passengers on a given ship. But it does elevate the captains, mightily.

No one will mourn if fewer Ivy Leaguers fill desks at Goldman Sachs and McKinsey. The question is whether social entrepreneurship—that is, entrepreneurship rooted in the idea that profit-seeking pursuits can better the commonweal—will heal or deepen the severest inequities in American life.

Makers on the Make

Andrew Yang chews contemplatively on a strip of CowSciutto, a cured meat product formulated by VFA fellows. Swag from other fledgling ventures litters VFA’s Manhattan offices. “It’s like a filet-mignon beef jerky,” Yang says. “Pretty exciting.”

Yang, who founded VFA in 2011, talks like a business-school prof who just spent a night at an Occupy encampment. “Our smart people are doing the wrong things,” he writes in his book Smart People Should Build Things, referring to the “prestige pathways” of banking, finance, consulting, and law. “If we can get them to do the right things, it will transform the country.”

Yang fancies himself something of a subversive figure, busting down the walls that hem top-tier students into cushy, predictable career paths—like the ones he initially pursued. He grew up in suburban New York, attended Phillips Exeter, went to Brown for an English major, and left with an economics degree. Next was Columbia Law School, which plopped him into a $125,000 corporate law gig. He was twenty-four. As Yang writes in his book, “There’s not much to indicate anything unconventional up to this point.”

But he soon found corporate law dreary. He quit his job, and to keep himself occupied, he became a serial entrepreneur, eventually cashing in with a GMAT prep service he sold to Kaplan. Though he’d ascended the meritocracy by selling droves of MBA prospects on hopes of doing the same, tutoring exposed him to the drudgery of careerist striving. “I saw that these forces were driving people in very specific directions,” Yang says now, rattling off the huge sums Wall Street spends on college campuses to woo elite talent. “If you wanted to build a better economy and society, the market forces weren’t going to be helpful.”

Thus Venture for America. By diverting “top college grads” into entrepreneurship, VFA hopes to reengineer the traditional prestige pathways of the upper middle class. In three years, 212 fellows have taken VFA’s summer crash course in entrepreneurialism and entered startups in a dozen cities. They’ve founded five companies to date. One makes artisanal tea; another, pasta made from chickpeas. The organization will add 140 fellows next year.

Recruits hail from all over. On one end there’s Haley Shoaf, an incoming fellow who runs a prison outreach program at Georgetown. She found few career opportunities after she graduated that would advance her dream of teaching entrepreneurship to incarcerated people. “There are these neon flashing lights, these paths you’re supposed to follow,” she says. “I really wanted to be doing something different.” In lieu of the nonprofit or consulting tracks—both of which she’d tentatively sampled—Shoaf seized on entrepreneurship. “The best way to have an impact,” she says, “is to give people a chance to be employed.”

Among the VFA fellows professing a more traditional American gospel of success is Sean Wen, who was slogging through his rookie year at Goldman Sachs when he received an out-of-the-blue LinkedIn message from VFA. “It was kind of jarring,” he says.

“I felt like I was checking off a box of what society wants of you,” he says of working at the largely reviled investment bank. But VFA filled him with purpose. “You can really do something yourself. You can build your own brand.” Wen joined the 2014 corps in Baltimore.

With this kind of high-level poaching, VFA is apparently siphoning talent from the rentier industries that are its chief patrons. “We walk a fine line,” says Nussenbaum, who received venture funding from finance giant UBS. “Big banks are huge financial supporters of VFA.”

Yang sees it differently. A few hours before I visited him he’d been bumping elbows at Barclays. “If you’re Barclays and you think there are more entrepreneurs, that’s good for your business,” Yang explains. “There will be more companies to go public twelve years from now.” For firms like Barclays, that means more IPOs to ink and more mergers to midwife.

Unsurprisingly, VFA’s unwieldy, 133-member board is chock full of venture capitalists and investment bankers. “It’s like a long-term investment in their future business,” Yang explains. “It’s all very much part of the same system.”

Those Who Invest Also Serve

Today’s elite college grads supposedly face two diametrically opposed career options: join the Peace Corps or join J. P. Morgan; do good or do well. “There’s a massive gulf in between the two,” Yang says. “Within that gulf is a majority of the economy.” So what’s the virtuous option?

A rising startup economy doesn’t lift all ships. But it does elevate the captains, mightily.

Yang argues that “service” shouldn’t mean only “working with children” and “teaching the poor.” Instead, as he wrote in a Quartz essay last year, we should “broaden the notion of service to include ‘helping organizations succeed,’ ‘creating value,’ and ‘generating new opportunities for yourself and others.’”

Like virtually every self-styled economic prophet in America, Yang touts job creation as the telos of social policy. According to its mission statement, VFA aims to create a hundred thousand new jobs by 2025. Yang nods to research that suggests new firms spur more job growth than do established behemoths. One study found that startups account for just 3 percent of employment but 20 percent of net job creation. Indeed, the pace of new business creation is at a historic low. “It’s really hard to imagine a world where you have too many startups,” he says.

The idea is ascendant, from the Tom Friedmans of the world lowing for “More (Steve) Jobs, Jobs, Jobs, Jobs” to the White House, which aims “to celebrate, inspire, and accelerate high-growth entrepreneurship” with its multi-billion-dollar Startup America program.

Nussenbaum, though, has a more tempered outlook. “I really hesitate to espouse the ‘just build a lot of startups and you’ll save a city’ stuff,” he says. His own contribution to Detroit, he says, lies more in fattening its ailing tax base. “Detroit craves people,” he wrote, months after relocating, in a Huffington Post piece titled “Move Where You Can Matter.” These sentiments, at least, echo those of Yang, who was awestruck during his first visit to Detroit in 2011. “Detroit was like the new American frontier, with unsettled and abundant cheap land,” Yang writes in his book.

But in any case, saving Detroit wasn’t what first brought Nussenbaum into real estate—he and his friends just wanted a party pad. “We thought, maybe we buy a house,” Nussenbaum recalls. “Not fix it up at all, just throw parties there and basically treat it like a house we can trash.” The four friends scouted a place in an “up-and-coming” neighborhood, broke in under the cover of darkness to cop a peek inside, and then landed it at auction for $8,000. Soon the new homeowners found themselves sitting on a business opportunity. “We had guaranteed access to a stream of high-quality tenants,” says Nussenbaum. And where were the headwaters of this stream? Right there on their own résumés: they’d lease out properties to other VFA fellows.

They entered a VFA crowdfunding challenge on a lark and won. “Shit, people just handed us $16,000,” Nussenbaum recalls thinking. “We better fucking do this or we’ll be total dirtbags.” It took a year and nearly $200,000 in venture funding to flip the place, but Rebirth Realty now has its first tenants: the four principals and three paying lodgers.

Though Nussenbaum admits that “it’s impossible to imagine how a regular family in Detroit would ever be able to do this,” his company Castle aims to make landlording feasible for ordinary folks. “They’re what I call quote-unquote regular person investors,” he says. “The upper-middle-class person who owns one, two, maybe four or five properties on the side.”

Like other companies VFA has spawned, Castle’s target demographic is decidedly upmarket. It may seem paradoxical for firms hatched in economic sacrifice zones to aim at the upper crust, but it follows a certain logic. “Most of those investors don’t live in the area, so they need to hire a company to manage it,” Nussenbaum says. “It’s actually a perfect market for us.”

Still, Castle’s initial launch fizzled. A PayPal for landlords wouldn’t cut it. So last fall Castle pivoted from a standalone app into a full-fledged property management service for real estate owners. For a monthly $79 per unit, Castle now makes repairs, screens tenants, balances the books—even handles evictions. “We already have a deal worked out with an eviction lawyer for a preferential rate,” Nussenbaum tells me.

That pivot also meant a change in the kinds of jobs Castle promised to create. “We’re sort of at the tail end of huge businesses built on pure software,” Nussenbaum says. “The opportunities now are businesses that connect software and the real world—Airbnb, Uber, whatever.”

Indeed, the controversial ride-sharing company—which has been undercutting established taxi fleets in scores of American cities—furnishes the template for how startups like Nussenbaum’s are approaching the labor market. “The majority of our labor force will be this on-demand workforce, not directly employed by Castle,” he says. These contingent laborers will join the great twenty-first-century gig economy: a surging tide of unsalaried, non-unionized Mechanical Turks and TaskRabbits depressing labor costs and helping their sometime employers secure valuations in the tens of billions of dollars.

In an economy in which thriving startups feed on disempowered workers, pumping out true-believing entrepreneurs eager to make an impact may be worse for the working class than producing financiers and lawyers. Since the 1970s, incomes have become increasingly precarious for American workers, a trend that only accelerated through the Great Recession and its jobs-starved recovery. Today, more than 30 percent of Americans experience income volatility, the fruit of an economy rooted more and more in the disruptive force of a just-in-time service-economy precariat.

Yet in Nussenbaum’s view, a contingent workforce is one of Castle’s major selling points. When I spoke to him in December, Nussembaum was visiting New York to meet venture capitalists and investors keen on VFA-founded companies. He hopes to convince them that Castle’s on-demand property management model will “transform an already-existing industry that’s stagnant and old-fashioned.”

Do Not Go, Gentry,
into That Good Night

Aside from potential job creation, VFA advertises one other benefit: bringing fresh young professionals into slumping economies. But is gentrification the requisite trade-off for cities struggling to revive their tax bases?

Nussenbaum is conflicted on the point. “It’s easy to be a younger white person who says, ‘I don’t think this is a problem!’” he says, before adding, “The thing is, Detroit has so far to go before that’s a real problem.” His house had been boarded up for five years before he bought it. And it’s true that, thanks to Detroit’s staggering vacancy rates, the prospect of educated white professionals overtaking a neighborhood there is very different than it is in, say, Brooklyn. The way Nussenbaum sees it, other homeowners on his block “are actually rooting for gentrification.”

Still, VFA’s exuberant booster chatter takes on a more measured tone when the specter of gentrification is raised. “We want our fellows to become integral parts of the community,” Yang says. “When it comes to these new companies, everyone wants to see them succeed.”

But success doesn’t necessarily spread evenly. As more members of the “creative class” stream into urban city centers, they’re creating not burgeoning integrated communities, but increasingly atomized class enclaves. As a recent report from The Atlantic’s CityLab documents, when arrivistes cluster in segregated urban cores, it creates “growing class divisions that threaten [cities’] development.” Often, new money just deepens preexisting economic disparities.

Take Silicon Valley, the epicenter of the startup economy. According to University of California–Davis economist Chris Benner, Silicon Valley’s net job creation since 1998 is essentially nil. Though the average tech worker’s salary tops $100,000, nearly a third of the Valley’s working population subsists on less than $16 an hour. Gini inequality measures put the region on par with Rwanda.

In fact, a growing body of research contends that “entrepreneurial activity”—as one study of more than fifty countries found—“is associated with greater income inequality.” The study of the relationship between freshly launched startups and wealth inequality is still in its early phase, and it remains unclear which side of the equation drives the correlation. Nevertheless, the overall trend raises doubts about the benefits of a business model predicated on the churning out of entrepreneurs for its own sake.

For Case Western entrepreneurial studies professor Scott Shane—who delivered a presentation at the 2008 World Entrepreneurship Forum titled “Why Encouraging More People to Become Entrepreneurs Is Bad Public Policy”—the link is matter-of-fact. “Entrepreneurship contributes to income inequality,” Shane wrote in an email, “because variance in outcomes is much higher than with wage employment.” In other words, when entrepreneurs strike gold, it accrues mostly to themselves.

For his part, Yang sees successful entrepreneurs as the tent poles that prop up the social fabric. “One tech job generates five service jobs,” he points out. In Silicon Valley, however, these latter jobs are filled by a growing underclass of mostly black and brown service workers eking out an increasingly tenuous living: downwardly mobile Lyft drivers and Googleplex custodians who commute from moldering suburbs to serve the glittering fiefdom’s new gentry.

At the heart of VFA is a hope that social entrepreneurship can nudge capitalism into solving the very problems it created. But can a mere variation on the free market, even one that’s slightly more conscientious than the bottom-feeding model of global investment that sacked Detroit originally, really save the Motor City?

Yang sits on this question for a beat. “Detroit’s been partly to blame,” he says, haltingly, of a city from which private industry yanked fully half its industrial investments in the sixties and seventies. He also speaks warmly of the dead billionaires whose hefty bequests are now trickling into Detroit: “Are these foundations the free market?”

“The forces that have hit Detroit apply to some extent to cities throughout the country,” Yang says. On this point I’m inclined to believe him. “Detroit,” he says “is the future.” He may be right there, as well—just not in the way he hopes.

Owen Davis writes about education, money, and the seamy confluence of the two. He lives in Brooklyn.

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