Category Archives: Entrepreneurialism

The Airbnb Dilemma: Regulate or Not?

Revenue growth in the rental of dwellings in Virginia through Airbnb has outstripped the rental of single rooms. Source: “2017 State of the Commonwealth Report”

Airbnb, the website that allows homeowners to rent rooms and houses for short periods, no longer occupies an obscure niche in the Virginia lodging marketplace. The company is capturing a disproportionate share of growth in lodging industry rooms and revenues, and it depresses the ability of hotels to raise rates during periods of peak demand, concludes the “2017 State of the Commonwealth Report.”

The number of Virginia listings has surged from just over 2,000 in October 2014 to 10,400 in October 2017. Total revenue has increased over the same period from $1.52 million to $17.4 million. Airbnb share of the lodging market rose from less than a half percent to nearly 4.7%.

“While the Airbnb rental sector may be smaller than the traditional lodging sector, Airbnb is a rising competitor,” write Robert M. McNabb and James V. Koch, the lead authors of the report.

The image most people have of Airbnb participants is of homeowners renting out a spare room for pin money. But the data suggest that it’s becoming an increasingly big business in which property owners are renting entire dwellings. While private room revenues increased sixfold over the three-year period studied, the rental of entire places increased thirteenfold, as seen in the chart above.

That reality has implications for how Airbnb should be regulated. Whole-house oceanfront rentals in Virginia Beach have generated numerous complaints regarding unruly behavior, illegal parking, and trash. The lodging industry has argued that Airbnb rentals should be taxed on the same basis and should meet the same regulatory standards as hotels and motels are.

McNabb and Koch are sympathetic to Airbnb to a degree.

It is not the job of government to protect existing firms and industries from new, more efficient or more attractive competitors that would serve consumers better and do so at lower prices. … Enabling citizen consumers to spend their dollars where they wish is a welfare-maximizing stance for government to adopt. … As a rule, challenging competing firms to meet “the market test” — that is offer goods and services at prices and levels of quality that are attractive consumers… — not only is an equitable approach that treats all citizens and firms the same, but also generates the best overall results for the citizenry.

However, they add an important caveat: Government should not intervene as long as the use of Airbnb “does not generate undesirable side effects such as pollution, noise, traffic congestion, crime, unsanitary conditions that impact the public health, and the like.”

While some Airbnb hosts have consciously evaded city regulations and taxes, it does not necessarily follow that localities should devote substantial resources to cracking down on them. Single-room hosts account for a small percentage of rooms, revenues and taxes, and they are rarely the source of behavioral problems. They go in and out of the market, and they’re difficult to identify and force to comply. The payoff for local governments is low.

Cities would do better to devote scarce enforcement sources going after Airbnb hosts offering their entire place for rent. “Plainly speaking, this is where the revenue is and evidence suggests that any behavioral problems that Airbnb generates are concentrated among these properties as well.”

Meanwhile, the authors advise hotels operators to re-evaluate their pricing and quality strategies. “Airbnb and similar rental hosting firms are not going to go away.”

Celebrating Creativity at the Makerfest

After watching too much cable TV news, I get really depressed about America. But I’ve found a tonic: Attend an art show, craft fair or a makerfest to connect with real people doing real things. The creativity, imagination and craftsmanship on display are a delight to behold. Yesterday I spent a half day at the RVA Makerfest 2017 at the Science Museum of Virginia. By the end of the day, I felt much better. Here are some of the people I met.

Andrew Sink shows a plastic replica of his brain made with a 3-D printer.

Andrew Sink and his business partner Chris Caswell met in Florida. Caswell moved to Boston where he purchased a 3-D printer, and they brainstormed the idea of retailing 3-D printers and supplies. Choosing to meet halfway, geographically speaking, they launched their business in Richmond two years ago. They believe 3D Central to be the first 3-D printing retailer in the country. While similar ventures have popped up in other cities, they think they’ve got the best business model.

A difficulty with hawking with 3-D printers is that they take considerable effort to learn to operate. Often, people give up and return the product to the retailer. Sink is proud that they’ve never had a return. The key to growing the market, he says, is education and training. 3D Central holds classes, provides individual training, and even teaches summer camps. “You can’t just sell printers,” he says. “You need a holistic solution. I feel that’s what we’ve accomplished.” The company now employs six, and the partners are looking for expanded office space.

As for what these printers can do… In the photo above, Sink shows a print-out of his brain. After taking an MRI to help diagnose his migraines, the hospital gave him a CD image. He fed the data from the CD into the 3-D printer. Voila, a pink plastic brain.

Heidi Rugg and her puppets

Fourteen-year-old Winter Peace says she has been making puppets since she was seven.

It takes a wide range of skills to become a puppeteer, says Heidi Rugg, lead puppeteer of the Barefoot Puppet Theater in Richmond and founder of Puppets off Broad Street, an alliance of four local puppet troupes. Typically, puppeteers make their own puppets. Animating puppets requires mastery over an array of springs, levers, pivots, fulcrums and wheels — in a word, machine mechanics and physics. And, of course, puppeteers must compose entertaining skits and perform them.

Jim Henson and his muppets catapulted puppeteering to national fame in the United States, but the art form is not widely practiced outside of a few big cities. Atlanta, Boston and New York are the big players on the East Coast, Rugg says, but Richmond has a respectable puppeteering community, which has grown to the point where it supports a “performance series” — RVA Winter Puppetfest.

Keith M. Ramsey with his steam-punk inspired art.

After studying at Virginia Commonwealth University (VCU), Keith M. Ramsey landed a job in a graphic design firm in Richmond. One day he passed a co-worker’s computer displaying some steam punk art. “It stopped me in my tracks,” he says. He immediately fell in love with the genre, and began fabricating things made from castaway metal materials, which he refers to as “found” materials. Adding welding to his repertoire of skills led to an explosion of artistic creativity and innovation.

As it turned out, it was a good thing that Ramsey developed a serious hobby. The design firm laid him off. After that, he plunged into his artwork full time and never looked back. Among the creations on display yesterday were steam punk-inspired lamps and pen holders. Trust me, you cannot buy these office supplies at Staples! See more of his artwork here.

Ballard “Viking” Midyette explains how he made a knife.

Ballard Midyette lovingly produces custom hand-made knives, spending many hours fashioning the blades and wood handles. Other artisans make custom knives, too. But Midyette goes two or three extra steps. He finds the personality in each knife and finds a name to fit. “The Wild Card,” “The Minimalist,” “The Cynewulf,” and the “Conjurer” were the names of some of the knives on display yesterday. He also photographs each step of the production process and writes a narrative, which he posts on the Web for his customers to see.

After studying music at VCU — he plays the trombone — he nearly went to law school. But he bailed at the last minute to pursue his craftsmanship, which he supports through a full-time job. Making a quality product can take hours of polishing blades and sanding wooden handles. Some might find the work tedious, but Midyette, whom his friends call “the Viking” for his mane of red hair, says there is zen to the process. “It’s like taking away the parts that don’t look like the knife.”

He and his partner James Bernard aren’t in it for the money — “I started this without any attachment to income,” Midyette says — but they have found that, if they do good work, it will sell.

Mike Harrell hammering an iron rod into a hook.

Mike Harrell discovered blacksmithing on the Internet. For a long time, he followed a number of blacksmith blogs. With a burly build, bushy beard, and gleaming pate, Harrell could have been called from central casting for the village smithy role. When he finally sought out the company of Richmond-area smithies through the Central Virginia Blacksmith Guild, he discovered other bearded men like himself. “I have found my people!” he says.

The guild has about 110 members. While many members are hirsute and hefty, says Harrell, there are female smithies, too. Working a day job at what he will describe only as a “Richmond-area credit card company” (wink, wink, nod, nod), he pursues smithing as a serious hobby. He works mainly on functional items — at the show he was forging a hook that could be used to hang a bird house — but relies upon others for artistic vision. There’s nothing wrong with being practical, he says. As he asks the kids who watch what he does, when the zombie apocalypse comes, would they rather be good at video games or iron-smithing?

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A Patch in Time Saves Nine

The WannaCry and Petya cyber-assaults on banks, airports and other businesses in Europe in May used a vulnerability in Microsoft software to infect machines and spread around the world. Microsoft had issued a patch to close the back door months earlier, but many users never installed the update. Ironically, when Microsoft creates a software patch, it tips off bad guys to a previously unrecognized vulnerability. Cyber-criminals can create a virus to exploit that vulnerability sure in the knowledge that many corporations will fail to update the all of the thousands of computers and devices in their system.

The single-most effective thing that any IT manager can do to maintain security is to promptly install software patches. The task sounds pretty basic. But it’s easier said than done.

Christiansburg-based FoxGuard Solutions helps clients keep software up to date on critical infrastructure such as power grids, wind turbines and nuclear power plants. Founded in 1981, the company has seen its cyber-security business expand at a compounded growth rate of 42% over the past five years.

As far as FoxGuard CEO Marty Muscatello is aware, none of its customers were affected by the WannaCry and Petya attacks, reports Jacob Demmit with the Roanoke Times, after accompanying U.S. Rep. Morgan Griffith, R-Salem, on a tour of the FoxGuard facility. The company’s software is used in 40 different states and 35 countries. Reports Demmit:

FoxGuard has been using a $4.3 million cooperative agreement from the U.S. Department of Energy since 2013 to develop tools to track software updates and patches for 128 companies in the critical infrastructure industry.

It’s pretty easy to keep a single home computer up to date, but that becomes increasingly difficult when an IT department is trying to protect a power plant that could have 100,000 different machines across a power grid. A company might not even be aware of some computers on its network that could let hackers in, like an air conditioning system.

FoxGuard, it would seem, has a bright future, for its market will expand exponentially. As the Internet of Things takes off, embedding microchips and wireless in billions of devices, corporations will be hard-pressed to keep track of them all. Patching them all will be almost impossible, for Original Equipment Manufacturers typically stop updating software for devices they no longer manufacture. The challenge is particularly acute for electric utilities, which have cobbled together multiple generations of technology to operate their systems. As they move increasingly toward flexible “smart grids” to accommodate solar and wind power, they will install thousands of sensors and actuators across their systems, potentially making them even more vulnerable to cyber-attacks.

For a monthly fee, says the Roanoke Times, FoxGuard tracks all those machines and makes sure the client knows of every update on a timely basis. The company can even download and test the update in its own lab to check for compatibility issues before installing it in the field.

Bacon’s bottom line: The news brings daily remembers of how vulnerable the global Internet-connected economy is, and how anyone with a good cyber-security technology or service can tap into a global market. Governor Terry McAuliffe is right about this: Cyber-security is one of the biggest economic-development opportunities to come along in Virginia in a long time.

Entrepreneurial Monks Peddle Natural Burials, Monastic Immersion

Monks at lunch. Photo credit; National Geographic

The order of Trappist monks living in Holy Cross Abbey in Clarke County has dwindled from 68 to 10, and those ten are aging — the youngest is 59 years old. The remaining monks know they must change to survive. And for a group that traces it origins back to 1098 France, committing themselves to cloistered lives of celibacy, poverty and obedience, they have been pretty darned adaptive.

In a new one-hour documentary and accompanying article, The National Geographic highlights the order’s moves to become environmental sustainability. Organic farming and low-flow toilets are all fine and good, but what impresses me most is the monks’ spirit of entrepreneurial innovation — making the best of what they’ve got in their 1,200-acre property located about an hour’s drive west of Washington, D.C.

The monks have set aside 80 acres set aside for a “natural cemetery.” People  can choose to be buried there in a shroud, as the monks are, or in a biodegradable coffin. Alternatively, they can choose cremation and have their ashes scattered in a separate section of the cemetery. Natural burial ranges from $4,000 to $8,000, depending on the spot. Since the cemetery opened in 2012, there have been 97 interments and 12 people who have had ashes scattered.

But this is the best:

In the last five years, Holy Cross has introduced “monastic immersion weekends” in addition to regular silent retreats, so that men and women can get a fuller taste of monastic life. Those weekends always sell out, says Kurt Aschermann, a companion to the abbey. Even the guests for the regular silent retreats are leaving larger donations than in years past, says Father James, which means that the retreats have become more profitable.

That’s what you call inventing a new business model!

Tech, Carilion Launch VTC Innovation Fund

The VTC Innovation Fund will build the innovation ecosystem centered on the Jefferson College of Health Science.

The VTC Innovation Fund will build the innovation ecosystem centered on the Jefferson College of Health Science.

Virginia Tech and Carilion Clinic have teamed up to form a $15 million venture capital fund in the hope of accelerating the growth of biotech companies taking root around Blacksburg and Roanoke, reports the Roanoke Times.

The VTC Innovation Fund aims to close seven to 10 deals over the next 10 years. By leveraging its money from other financial sources, managers hope the average startup will be able to raise between $2 million and $10 million. About 60% of the deals will be in life sciences. Although the main focus will be the Roanoke-Blacksburg area, the fund will consider investments elsewhere in Virginia or enterprises with strong ties to Tech or Carilion.

“When we looked at our grand vision going forward, we see that the innovation ecosystem has a few holes in it,” Virginia Tech President Timothy Sands said. “One is in the venture capital area. It’s not the only one, but it’s one we identified that we could do something about.”

Virginia Tech and Carilion are partnering to build a medical school and research institute in Roanoke, the Jefferson College of Medical Sciences, which stands at the center of what they hope will evolve into a biomedical industry cluster. Tech also is building a cutting-edge interdisciplinary program in neuroscience.

The Tech/Carilion duo is following a parallel path to Inova Health System in Northern Virginia, which is collaborating with George Mason University and the University of Virginia to build an biomedical cluster at the Center for Personalized Medicine. Inova has pledged to put $100 million in to venture capital in support of the innovation ecosystem there.

A third partner in the VTC Innovation Fund is Middleland Capital, a Washington, D.C.-based investment firm, which will manage the Roanoke fund and invest $500,000 to $1.5 million of its own capital, reports the Washington Business Journal. Connections with experienced Washington-area venture investors likely will provide a depth of expertise and access to outside capital that entrepreneurs in the Roanoke-Blacksburg area previously lacked.

“We want to focus on the absolute best and the absolute brightest and the shining stars of the region,” said Scott Horner, managing director of Middleland. “We want groups from outside the region to be able to look here and say, ‘Yes there is good stuff in the region.’”

Scary Thought of the Day: Our Landfills Are Mountains of Dog Poop

Jacob Paarlberg demonstrates how his flushable dog-waste bags dissolve in water. Photo credit: Southside Daily.

Here’s a clever business idea that, astonishingly, does not require downloading an app: Jacob Paarlberg spotted a pressing need in American society — how to clean up the poop of the nation’s 70 to 80 million dogs. Each day untold tons of doggie waste ends up in landfills — comprising an unbelievable 4% of total volume!

“We hear about the impact of diapers on the environment, and families often opt for reusable diapers to reduce their impact, but this is is something no one thinks about,” said Paarlberg in an entrepreneurial event hosted by One Million Cups as reported by the Southside Daily. “A child uses diapers for two to four years, but dog waste bags are used for a dog’s entire life.”

The solution? Flushable dog-poop bags made from the same water-soluble plastic used in dishwasher pods. Other entrepreneurs have devised similar solutions but they suffer from a common problem. Tying off the bag to seal in the smell creates an air pocket, and the air pocket can cause the bag to get stuck in pipes.

Paarlberg has patented a tear-away strip that allows the pet owner to release the air pocket so the bag flushes cleanly. Said he: “We’re the bag that won’t clog your pipes.”

A member of the U.S. Coast Guard stationed in Yorktown, Paarlberg has chosen Hampton Roads as one of two initial markets. The other is Boston where his business partner runs a private-patent law firm. The start-up is looking for a manufacturer and hopes to have BagIt Flushables available at pet stores this summer.

Bacon’s bottom line: I love a great entrepreneurial story as much as the next guy. But this is the 21st century, not the 19th. Paarlberg’s business model is so old-fashioned. A successful businessman doesn’t just come up with a better idea these days, he gets a law enacted to put his competitors out of business. Paarlberg should have no trouble getting a local legislator willing to submit a bill that bans flushable dog-poop bags with air pockets. If he owns the market, he can scoop up millions in profits. That’s the new American way.

Hmm, hmm. Oreo-Infused Hornswoggler Beer!

Hornswoggler's new Oreo-infused beer

Hornswoggler’s new Oreo-infused beer

Let me start by saying, I love the name of Hornswoggler. If there’s anything that could move me to drink craft beer, it’s a name like that. And let me also say that, regardless of what the nutrition scolds have to say, I love Oreo cookies. But Oreo-infused beer? That just doesn’t seem right to me, and I’m not even a beer purist.

Richmond-based Veil Brewing Company debuted its new offering, Hornswoggler Chocolate Milk Stout with Oreos a week ago. Stated the company on its Instagram page: “We took our 7% robust chocolate milk stout Hornswoggler and conditioned it on hundreds of pounds of Oreo cookies. If you like Oreo cookies, this is a must try.”

Veil is shooting for the sale of 55 to 80 cases. I wish these gustatory innovators the best of luck. But I can’t help but wonder if Oreo-infused beer is a sure sign that we’ve reached Peak Craft Beer. What’s left to try? Kelp-infused beer?

Really, truly, I just made that up. Then I Googled “kelp beer.” And it seems that a craft brewery in Maine has already done it. I feel like we’re living in the End of Times!

How to Roll Back Regulations in Virginia

Does the Commonwealth of Virginia really need regulations to govern who gets to blow dry hair for a living ?

Does the Commonwealth of Virginia really need regulations to govern who gets to blow dry hair for a living?

A case study in regulation run amok: To earn a living blow drying customers’ hair in Virginia, one must acquire a license from the Virginia Department of Professional and Occupational Regulation. To acquire such a license, one must attend an accredited cosmetology school, the average cost of which is $14,887 nationally, not counting the time value of 1,500 hours of training. Only after completing the school program and procuring a license can a budding blow drier embark upon a glorious career that pays an average of about $20,000 a year.

That is just one example of how excessive regulation hampers job seekers, restricts labor competition, protects entrenched special interests, and generally hobbles Virginia’s economy, according to Tyler Foote, Virginia state director of Americans for Prosperity, in a Richmond Times-Dispatch op-ed today.

A dynamic economy continually introduces new products and services that get entangled in regulatory red tape. Sometimes the General Assembly wades in and deals with the problem, as it did by removing restrictions on food trucks from operating on Virginia-owned streets and, again, by creating an exemption from liquor laws so bed & breakfast guests can consume alcoholic beverages in shared spaces like living rooms and porches. (Foote also could have cited recent controversies over ride-hailing services like Uber and Lyft, taxation of Air BnB rentals, and retail restrictions on electric-vehicle manufacturer Tesla.)

Changing the law requires time and money, commodities in short supply for many entrepreneurs trying to build a business. But there is a remedy, says Foote. The Red Tape Reduction Act, sponsored by Del. Michael Webert, R-Marshall, and Del. Nick Freitas, R-Culpeper, would require every new regulatory requirement be offset by eliminating two existing regulatory requirements until the regulatory baseline has been reduced 35%. Once that threshold has been met, new regulations would be offset by a one-for-one reduction.

Foote argues that the bill was inspired by a similar measure implemented by the Canadian province of British Columbia, which had labored under economic growth 1.9 percent lower than the Canadian average. Following implementation of the rule-cutting law, growth jumped to 1.1 percent above the average. (That barely sounds like it’s worth the trouble. Perhaps Foote means growth is now 1.1 percentage points higher, which indeed would be impressive.)

Bacon’s bottom line: I have railed for years how excessive regulation hurts entrepreneurship, small business formation and economic growth in Virginia. I like the idea of rolling back regulations, especially those that restrict competition. (I’m open to regulations protecting the public safety and health, as long as they are subject to a rigorous cost-benefit analysis.) However, I worry that the Webert-Freitas approach would be arbitrary and mechanistic.

I understand the logic that we need to create a meta-rule to govern the lesser rules and keep them in check. Without such a law, new regulations will proliferate without let-up. But how do we know the optimal number of regulations for Virginia? How do we know that the sweet spot is 35% fewer rules than what we have now? What if lawmakers encounter a situation that truly justifies new regulations but find themselves stymied by this new law?

The fact is, we live in a complex society that is becoming more complex. Technology creates new opportunities — and challenges — by the day. When the first mobile phones appeared, people thought of them as substitutes for telephones. Wow, you mean you can carry your phone around with you? Awesome! Who imagined that one day mobile phones would become packaged with software that allowed people to send text messages and, even more astonishingly, that many people actually would prefer that form of communication over talking to one another? Further, who imagined that one day “texting” while driving would cause so many accidents, injuries and fatalities that laws and regulations would have to be passed to curtail the behavior?

Texting was not a problem when good ol’ Ma Bell exercised a telephone monopoly. How’s that for irony. Breaking up ATT and freeing the telecommunications industry from suffocating regulations created one of the great surges of innovation in American history…. which in turn created the need to regulate previously unimaginable behavior.

I agree that many regulations are harmful, and I sympathize with Foote’s frustration. But I prefer the old-fashioned way of doing things: legislators rewriting laws one at time, giving careful consideration to each one.

The Self-Employed as a Political Constituency

Will 3-D printers swell the ranks of self-employed manufacturers?

Will 3-D printers swell the ranks of self-employed manufacturers? Image credit: CNN

The maker movement is transforming the American economic landscape. The number of people who make a self-employed living making stuff is still small — almost imperceptible in a U.S. labor market of 160 million — but it is growing.

In 2014 more than 350,000 manufacturing establishments in the U.S. had no employee other than the owner, up almost 17% over ten years, according to Commerce Department data reported by the Wall Street Journal. By comparison, the 293,000 establishments with employees had experienced a 12% decline in number over the same period. Overall, there are roughly 12 million manufacturing jobs in the U.S.

The boom in self-employed manufacturing is most pronounced in the “food” category, but also notable in chemicals (including soaps and perfumes), transportation, leather, and beverages & tobacco.

I expect the movement to gain momentum as the revolt against mass, industrial-era standardization gives way to mass customization. Technologies such as Computer Aided Design and 3-D printers continue to gain in capability and come down in price, making them available to almost anyone. Many colleges have 3-D printers on campuses, and students are learning how to use them. Meanwhile, just as the Miller-Budweiser beer duopoly has given way to the craft beer revolution — the biggest advertising budgets in the country could not halt that consumer trend — we are seeing the revival of artisinal foods, beverages, and craft products.

The proliferation of self-employed, small-scale manufacturers is part of a larger trend toward the so-called “gig” economy. So far, the needs and aspirations of makers, hackers, craftsmen and free-lancers have gone mostly unrecognized by the political establishment. These self-employed workers are even more politically invisible than small business. They are unorganized politically. They don’t have trade associations, they don’t hire lobbyists, and they don’t donate money to politicians. Indeed, the only politician I can think of who takes them seriously is Sen. Mark Warner, D-Virginia. While the senator has performed a valuable service in highlighting the group and its unique needs, his interest in the topic does not appear to be widely shared, and he can cite few tangible accomplishments yet.

Making a living as a free-lance writer and blog publisher for the past 14 years, I feel a strong affinity for this group. In Virginia, there are hundreds of thousands of us. And as consumer tastes continue to shift from standardized products and services to personalized products and services — our numbers will grow.

We are the petite bourgeoisie. We are noted for our stubborn independence and our ornery attitude toward our “betters” who would tell us what to do. In my view (which, I concede, may not be universally shared), we don’t seek special treatment. We don’t want subsidies, tax breaks or special privileges. We just want a level playing field.

The most important legislative priority for self-employed workers is to gain more control over our health care insurance and retirement plans. Our health insurance should enjoy the same tax status as health plans provided by corporations and other major employers. Our pension vehicles should be portable as we move back and forth between conventional employment and self employment. Oh, and it wouldn’t hurt to keep a lid on taxes.

As I scan the political economy of Virginia, I don’t see anyone (other than Warner) representing the interests of the self-employed. Neither Democrats nor Republicans, beholden as they are to established corporate and bureaucratic interests, provide a natural home for us.

The Libertarian Party could become that home if it moved beyond articulating abstract principles to applying those principles to real-world problems. Indeed, if the Libertarian Party has a natural constituency, it would be the free-lancers and small businesses whose interests are routinely subordinated to those of better organized, more vocal groups who turn to the government for everything. As Libertarians run for office, they would do well to cultivate the large and growing ranks of the self-employed.

A Free Market Alternative to Payday Lenders

sasha_orloffby James A. Bacon

Most everyone recognizes that payday lenders create a poverty trap for poor and working class Virginians. While the lenders do provide a valuable service by extending short-term loans for emergency situations, the annualized interest rates are extremely high, and borrowers often find themselves rolling over their loans from month to month at considerable expense. On the other hand, half the U.S. population has a FICO score below 680, meaning they can’t be approved for credit by most banks. Say what you will about payday lenders, they aren’t as bad as Vito the Loan Shark. Even payday lenders don’t break borrowers’ kneecaps when they fall behind on their payments.

That’s why I have always opposed legislated restrictions on the lending of payday lenders. Taking away poor peoples’ only credit alternative, as unpalatable as it may be, may satiate the outrage felt by crusading social reformers, but it doesn’t actually do the poor people any favors. If the social reformers want to help, I have long suggested, perhaps they should get into the business themselves and provide a better deal.

Well, it appears that someone is doing just that.  LendUp, a lending institution backed by Silicon Valley money, has introduced a new approach to extending credit to the poor. The company came to my attention because it is opening an East Coast office in Chesterfield County to serve Eastern and Central time zones. The description provided by the Richmond Times-Dispatch article and the company website shows how the combination of innovation and competition is the best social reform one could ask for.

“We started LendUp because the traditional banking system wasn’t working for more than half of Americans and the payday market was fraught with abusive practices,” LendUp CEO and co-founder Sasha Orloff said in a statement. The RTD explains how the company works:

The company provides short-term loans to consumers with low credit scores through its LendUp Ladder product….

The process is handled entirely online — not at a store like most payday lenders operate — and decisions are usually made within five minutes, the company said on its website. If approved, consumers could have money in their account in about 15 minutes.

The company offers a single payment loan of between $100 and $250 that has to be repaid in seven to 30 days. It also offers an installment loan of between $260 and $500 that requires two payments and a credit check.

Annualized interest rates still can amount to 250%. LendUp offers the same justification as payday lenders: “Some customers do not pay us back and, like insurance, the interest covers what we lose.”

The difference is that LendUp allows borrowers to earn points to get larger loans at lower interest rates over time by making on-time payments, taking free financial education courses and referring friends to LendUp. The business model is built upon improving borrowers’ financial literacy, helping them build their credit scores, and ultimately charging them lower rates.

Ironically, although LendUp is locating its East Coast office in Virginia, the Old Dominion is not one of the states listed on the company’s website where the service is offered. The RTD article offered no explanation why that would be. Perhaps the company has more regulatory hoops to jump through here. If the social reformers want to accomplish some good, perhaps they could lend LendUp a hand.