I Should Have Raised Wages (and Prices) Sooner

In recent months, Charlie Braun says, Custom Rubber’s profit margins have doubled.

Good morning!

Here are today’s highlights:

  • Americans are now starting companies at the fastest pace on record.

  • With the help of a slew of startups, Angel investing is going mainstream.

  • “Business is unbelievable,” says the founder of a Chicago staffing firm.

CASE STUDY

The pandemic gave Charlie Braun, owner of a rubber parts manufacturer in Cleveland, a chance to test paying higher wages: “Mr. Braun raised wages for some employees three times this year. Starting pay for machine operators, the toughest position to fill, jumped by $4.55 to $18.25 an hour, and to $19 for the night shift. The early signs appear favorable, if initially bumpy. Custom Rubber Corp.’s head count climbed to 124 in July from 91 at the end of January. Profit margins hovered between 5 percent and 6 percent in recent months, roughly double the 3 percent the company had come to expect in a good year. Labor costs, including taxes and benefits, now account for about 17 percent of sales, up from 12 percent  eight years ago. But the extra labor has helped CRC to fill more orders, and sales rose nearly 50 percent in the first seven months of 2021 versus a year earlier.”

  • “He blames himself, and the manufacturing industry, for not raising wages sooner and helping fuel the current labor shortage.”

  • “‘I milked the recession for all it was worth in terms of suppressing wages and not increasing wages,’ he said. ‘In hindsight, I probably leaned on that one or two years longer than I should have.’”

  • “Inflationary pressures made it easier for CRC to raise prices twice, in January and May, tucking some of the higher wage costs into increases driven by rising raw materials prices.” READ MORE

STARTUPS

What can we learn from the pandemic business boom? “As a general rule, business formation is cyclical: People are more apt to start companies when net worths are rising, confidence is soaring, and lenders are itching to lend. People are less apt to start companies when family finances are stressed, the business outlook is cratering, and credit conditions are tightening. It was no surprise, then, that the pandemic recession led to a huge drop in new business starts last spring. What was a surprise was that business formation surged strongly in the second half of 2020, when much of the country was still shut down, and the surge just kept going.”

  • “Entrepreneurs launched 500,000 more new businesses considered likely to hire employees from mid-2020 to mid-2021 than from mid-2018 to mid-2019, and today Americans are starting companies at the fastest-ever recorded pace.”

  • “The shift to working from home made setting up shop faster and cut certain costs. ‘I’ve sworn off [office] leases, which also means swearing off escalations,’ Landau of ParkMyFleet told me. ‘I was literally able to recruit C-level executives from around the world, super-talented people, and we got started without having to relocate a single person.’”

  • “Geography just stopped mattering. I talked to 200 people in the process of formulating my idea, and I never would have been able to do that if we were taking walks or doing in-person meetings in San Francisco or New York.” READ MORE

Angel investing is going mainstream, and a slew of startups want to help: “Founded in January, Angel Squad is one of several ways that people from outside Silicon Valley’s investing elite are now joining the ranks of angel investors. The influx — which includes art curators, dentists, influencers and retirees — is transforming the way that start-ups raise money, upending the pecking order in venture capital and pushing a niche corner of the investing world toward mass adoption. ... More than 3,000 new angel investors are projected to make their first deal this year, up from 2,725 last year, according to the research firm PitchBook. And the amount of money that angels are pouring into start-ups has swelled, reaching $2.1 billion in the first six months of this year, compared with $2.6 billion for all of 2020, according to the National Venture Capital Association and PitchBook.”

  • “Until recently, such investing was off-limits to most people. Securities rules restricted it to the wealthy because of the level of risk involved, since most start-ups fail.”

  • “‘Overnight, the entire world just woke up and went, Oh, wow, we want to go invest in technology,’ said Avlok Kohli, chief executive of AngelList Venture, a company that provides tools for start-up fund-raising.”

  • “Assure, another start-up, helps with the administrative work. Others, including Party Round and Sign and Wire, help angels with money transfers or work with start-ups to raise money from large groups of investors.” READ MORE

THE ECONOMY

For many, business boomed in July, but there is a caveat: “Employers added 943,000 jobs in July, the Labor Department reported Friday, with restaurants and bars leading the way. It was the best monthly performance in nearly a year, and it was accompanied by a sharp drop in the unemployment rate to 5.4 percent, the lowest since the pandemic began, from 5.9 percent. One cloud loomed over the buoyant numbers: The data was collected in the first half of last month, before the Delta variant of the coronavirus exploded in many parts of the country.”

  • “‘Business is unbelievable,’ said Tom Gimbel, chief executive of LaSalle Network, a recruiting and staffing firm in Chicago. ‘It shows me that companies are very optimistic.’”

  • “‘Companies are continuing to hire salespeople in numbers that I’ve never seen,’ said Mr. Gimbel of LaSalle Network. ‘The huge demand is entry to midlevel, with salaries ranging from $45,000 to $90,000. It’s the rebirth of the middle manager.’” READ MORE

FROM OUR SPONSOR: APPLIED ECONOMICS

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HUMAN RESOURCES

For the first time, average pay for restaurant and supermarket workers has topped $15: “As competition for workers heats up, large employers are taking notice and bumping up starting pay. CVS said it will increase starting pay from $11 to $15 by next summer, joining other large employers like Target, Best Buy, Costco and Disney. When major employers raise their wages, it pushes smaller competitors in the area to follow suit, Brandeis and Princeton researchers recently found. The overall effect has been one of the fastest periods of rising wages since the early 1980s for rank-and-file workers and a clear spike from pre-pandemic trends. This higher pay is likely to be permanent as wages rarely fall once they move up.”

  • “Overall, nearly 80 percent of U.S. workers now earn at least $15 an hour, up from 60 percent in 2014.”

  • “Economists caution that a higher average wage is not the same as a $15 minimum wage. Half of workers in these industries are still making below $15 an hour.” READ MORE

Detroit’s job market is as hot as Austin’s: “The Detroit metropolitan area unemployment rate—which can be seen as a gauge of available workers—has held below the nation’s rate since the start of the year, the first sustained period of below-average joblessness in the metro area in two decades.But while the region’s unemployment rate ranks it alongside hot job markets such as Austin, Texas, the picture isn’t entirely positive. The Detroit area has historically had a smaller share of adults seeking work, and the size of its available labor force shrank during the pandemic.”

  • “According to the Detroit Regional Chamber, 11 percent of Michigan’s workforce hasn’t returned after the pandemic, and half of those workers have decided to drop out entirely.”

  • “Meanwhile, without a stable of available workers, some Detroit businesses may be missing out on sales and expansion opportunities.”

  • “‘There’s an absolute war for talent going on in this town,’ said Ronald Hall, CEO of Bridgewater Interiors, an automotive seating manufacturer.” READ MORE

Gig companies want a Prop 22 for Massachusetts: A coalition of gig economy companies that includes Uber, Lyft, DoorDash and Instacart said on Wednesday that it had filed a ballot proposal in Massachusetts that could create a new class of workers in the commonwealth. If the coalition is successful, Massachusetts voters will decide next year whether gig workers should be considered independent contractors. The employment classification of gig workers has been the subject of legal battles in several states.”

  • “Labor activists argue that companies like Uber do not pay fair wages to their workers and shortchange them on expenses, health care and unemployment benefits.” READ MORE

BUSINESS TRAVEL

The expected spike in business trips is looking dicey again: “Even the experts who were most optimistic about the prospects for business travel a month or so ago have begun to temper their forecasts. The quick change was captured by a survey of 1,200 American travelers that Destination Analysts, a market research firm in San Francisco, conducted from July 21 to 23. Among business travelers, it found, nearly 25 percent expected the ‘coronavirus situation’ to worsen in the next month, a jump from under 14 percent two weeks earlier. Convention goers’ personal health concerns also rose, while their confidence in their ability to travel safely fell.”

  • “[The U.S. Travel Association] said it now expected that business travel would ‘only achieve 50 percent of 2019 levels in the fourth quarter of 2021.’”

  • Scott Graf, global president of BCD Meetings & Events, said that in light of the spread of the Delta variant, ‘we’ll likely see some cancellations or certainly meetings being pushed out by weeks or months.’” READ MORE

Ami Kassar, CEO of Multifunding, is questioning his own travel choices: “While I acknowledge the Delta variant, I am still going about my business as my ‘current usual.’ Tomorrow I will get on a plane and go to Oklahoma City for a presentation, and then I will wrap up the week in Dallas with two more talks. Am I too cavalier?  I remember being in Fort Lauderdale airport for my last trip before the Pandemic started and smirking at the passengers who were wearing masks. What were they doing? They should have been smirking at me. This time feels different, though. I have had Covid, and I have had the vaccine. I wear masks wherever it is required. So, I think it’s OK to go about my business. And I hope I am right.” READ MORE

THE 21 HATS PODCAST

Episode 71: I Had Two Great Candidates. They Both Blew Up: This week, we delve into some specific hiring situations, including Jay Goltz telling Diana Lee and Dana White that he thought he had two terrific candidates to replace his retiring chief financial officer. And then, after conversations with each of them, Jay had no candidates, which led us to some interesting questions: Has there been a more challenging time to hire for cultural fit? How risky is it for a smaller business to hire a candidate accustomed to working at larger businesses? And what does hiring intentionally for diversity mean when your staff is almost entirely African American? Plus: Dana gives us an update on her potential deal with the military, and Diana explains how she markets her marketing agency.

If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren