Tackling The Crises In Entrepreneurship

As we enter the last few months of the year, there’s an overwhelming ethos of “innovating” to solve the world’s biggest problems. As a venture professional specializing in cross-border expansion, I’ve been fortunate enough to have a front-row seat in these developments. Our culture of creating has fostered a remarkable generation of entrepreneurs and reinforces the idea that capturing opportunities through building tech-enabled companies is the single best way to improve the world. However, even with this problem-solving mindset guiding not just our focus, but our capital and resources, we have yet to make significant strides in solving the most pressing issues at hand.

Veering Off Course – Two Forms Of Alarming Instability

The largest problems of recent generations are direct results of increasing instability – both in the physical world through human-driven climate change, and in society, through a failure to properly address social inequalities. The former is one that most of us have accepted. Environmentalists have been warning us about the effects of global warming for decades. Confronted by this epidemic, world leaders have set ambitious goals of curbing carbon emissions by over 50% in the next 10 years. Ordinary citizens and businesses are joining the global movement to combat climate change as well. Thus, we see change on an international level, in the formation of new trade and economic policies tied to environmental commitments, on a local level, in the rise of recycling and changing meat consumption behavior, and on the venture level, where there has been a tremendous entrepreneurial effort to build a sustainable future. Abundant funding has found its way into companies tackling environmental issues – from direct air capture of carbon emissions to electric vehicles, from plant-based meat substitutes to zero-carbon emission steel. Hence, while it is an uphill battle to solve one of the most daunting problems we’ve ever faced, it is a battle we are fighting. In this piece, I’d like to talk about the other major issue we’re facing today – social inequality.

Overlooking Inequality

Social inequality does not receive the same kind of support climate change does. Its consequences do not affect all of us negatively – and if you’re well-off, chances are you don’t need to engage with poverty or disenfranchised groups. Whether on a smaller scale if you’re wealthy, or on a larger scale if you’re not, climate change limits the human experience and expedites the end date of our species drastically. Diversified life on our planet is dying. Every coming year is the hottest year on record. Deforestation and ocean acidification are happening on a global scale. There is widespread acceptance of climate change potentially being catastrophic. Social inequality, on the other hand, is more nuanced, and its damaging effects are not felt by the entire population. Unlike the novelty of climate change, it’s a struggle we’ve faced recurrently since the beginning of civilization. Just a century ago, weren’t the Bolsheviks overthrowing the Russian Tzars? Just a few years ago, didn’t Mohamed Bouazizi’s self-immolation act incite the Arab Spring? The problem is as relevant today as it was a decade ago, a century ago, or even a millennium ago. And unfortunately, it also stems from often very productive systems in generating wealth, and that many people find effective for the “common good”, especially those at the very top.

One to N > Zero to One

Peter Thiel, of PayPal and Facebook fame, and perhaps one of the most renowned venture investors today, has famously stated in his entrepreneurship bible, “Zero To One”, that getting from 0 to 1 is far more interesting and important than getting from 1 to “n”. He makes the argument that we should be investing resources to develop new inventions in order to create an improved, sustainable world. If everyone lived the way people of the largest economy, the US, lived, we would need the resources of 4+ planet Earths. It is a valid argument, and one that prioritizes the admirable goal of propelling innovation forward. What Thiel does not explicitly state, but is clearly implied, is that capitalism moves the needle. The system ensures that the best companies and products win, and those who don’t “innovate” will naturally, and deservedly so, get left behind. As such, many subscribe to this school of thought and see the current system as a functioning form of capitalism with spots of necessary evils. These people fall into the former of two camps – those who believe in the power of capitalism in creating overall economic growth and well-being, and those who view capitalism as the cause of widespread suffering. As a fact, many at the top get there through hard work and immense sacrifices. According to them, one simply needs to educate and invest in oneself, come up with great ideas, and work relentlessly to execute on them, in order to attain success. There is no fundamental problem with how things are. Aspects of the system need fixing, but global GDP is at all-time highs in this era of post-WW2 prosperity, led by countries that have adopted capitalism as their mantra. And this is why the problem of social inequality is divisive.

GDP is undoubtedly a great measure of society’s productivity but sheds no light on the economic reality of most individuals. In fact, inequality has been on the rise across the globe for several decades, and it’s even accelerating. In 2018, 26 people own the same wealth as the poorer half of the world population, down from 43 in the year before. At the same time, billionaire fortunes rose by 12% year-over-year, compared to a 11% decline for the poorer half. Now, if we were to ask how societal progress should be defined, we would come up with something along the lines of eradicating poverty, elevating everyone’s standard of living. One would rarely ever hear a response of, “it’d be great if we invented an elixir to elongate life by 100 years, but only offer it to 0.0001% of the population”. A situation where we can afford everyone an extra 5 or 10 years of life is often considered much preferable. To respond to Peter Thiel, it is rather egotistical of people to focus so many resources on elongating their life when there are others still dying of malaria and tuberculosis.

Ultimately, we should all strive to live our lives in a way that maximizes our happiness and contentment, but not at the expense of others under the guile of entrepreneurial innovation. Breaking it down into simple economics, when there’s an issue of scarcity, resources should be allocated accordingly. And while it is important to invent the next revolutionary life-saving drug, provide quantum computing for individual use, or find a way to travel across solar systems, it doesn’t matter if these products and services exist if the vast majority of people don’t actually have access to them. If we all agree that human lives are of equal value, why do we accept the fact that a tiny, ultra-rich minority continues to pour resources into elongating their lives while others die of simple, preventable diseases?

Building Investing In Companies The Milton Friedman Way Doesn’t Work

Venture capitalists claim to be backing companies that transform the lives of everyday people, but in reality, the bottom line rules all decision-making. That’s not necessarily a bad thing – returns are critical in identifying investors who have effected the largest degree of change on the side of the business, and are a result of supporting extremely successful, influential companies. However, it does mean the de-prioritization of social responsibility. If we look at two groups of people by class, even if some innovation increases both groups’ wealth by 10%, the inequality gap in the absolute amount will also widen by 10%. To illustrate, a 10% increment gained by someone who earns $1 million a year is $100,000, whereas a 10% increment gained by someone who makes $100,000 a year is $10,000. The initial difference of $900,000 ($1,000,000 – $100,000) is now $990,000 ($1,100,000 – $110,000), representing a 10% increase in the wealth gap between these two people. Hence, early-stage investors should be shifting away from a pure shareholder value-oriented way of thinking to one that incorporates how they can truly build a better future for everyday people, whether that’s by backing companies with stronger ethics, ones founded by minorities, or even those that simply treat its staff and other stakeholders better.

We’ve seen this latest wave of corporate social responsibility take place in recent Business Roundtable events. While skeptics have labeled it as marketing fluff, there’s a reason why these CEOs are committing to changing business practices. Ultimately, a company’s worth is what the general public assigns it, and the public is becoming increasingly aware. If there’s a general negative sentiment towards a company through malfeasance, consumers will find alternatives, and profits will naturally fall. The brand agency Amplify has found that approximately 50% of young people (ages 16-28) would refrain from buying products from a company that had an ethos they disagreed with. They see themselves as accountable, as a formidable force in the market, and they’re not wrong. That is why, in the mission to fight climate change, 250 of the world’s largest brands have pledged to cut all plastic waste from their operations by 2025. In the same vein, it is integral for both VCs and entrepreneurs to consider the social ramifications of their new products and services. If they don’t actually improve the lives of the vast majority of stakeholders, then these companies will face obstacles that severely inhibit their long-term success. We see this through the recent backlash against companies like Facebook and Uber. While they offered valuable services in their early years, as peoples’ and regulators’ sentiments towards these companies sour, so do their growth prospects. The moment Uber refused to take responsibility for the negative structural changes it has caused, worsening the lives of the “freelancers” (contractors) who have placed trust in the company, users have left for seemingly more ethical alternatives. As of this writing, its share price has dropped approximately 33% since its IPO in May, compared to the S&P 500 Index’s 4% gain over the same period. Great companies are born of rule-breaking, but breaking the wrong rules can quickly lead to the demise of any company as well.

Venture Capital’s Reputation Risk

Venture capital is all about reputation, and there’s a reputation risk with backing companies that do not contribute to a better future (whose ethos clashes with the general public). For example, one of the most dominant consumer trends today is the rise of the fashion sneaker. Companies producing more durable shoes or reimagining the distribution and transactional models in the industry are doing admirable work, but do we really need more fast fashion? It’s one thing to found and support a sustainably-sourced, ethically-produced shoe company giving unparalleled access to great long-lasting products, but another to back one that sells poorly built shoes for cheap, meant to be replaced every few months, purely because of strong unit economics, revenue, and market potential. If a cheap shoe brand, however, has built a strong distribution network to provide affordable shoes for demographics who have historically been underserved, and can also generate substantial profits from economies of scale, then it is a different story entirely. We have to be conscious of the reasons as to why we’re investing and building certain companies. If it’s not adding net positive value to society, then it’s not a business that should exist. Time, along with the global democratic community, will make sure of it.

As we near the brink of a new decade, we must re-evaluate our KPIs and figure out what exactly we should truly be guided by in order to achieve sustainable growth and stability. Every one of us is a stakeholder in the world, and if we choose to turn a blind eye to those suffering from plights distant from us, it will ultimately come to affect us adversely. It’s time to alter our modus operandi to ensure a better future for each and every one of us.

 

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