We are on the verge of an American Entrepreneurial Renaissance.

Today I am taking a break from writing about micro issues and asking a big question. Why? Is it 6 months of confinement during a global pandemic? The upcoming US election? (Another) mid-life crisis? Yes.

I believe that structural changes in the political and economic systems, abetted by technological changes, are heralding a paradigm shift in the US economy. The End of History did not happen (sorry Francis Fukuyama), we’ve started a new cycle. Hang on.

A.   The Political System

1.    People have had enough of “Unresolved Problems.”  US manufacturing jobs have been outsourced, infrastructure is in disrepair, public education is failing, and environmental degradation is threatening citizens’ health and even life on the planet, while wealth inequality is destabilizing the social fabric and halting the upward mobility of working people of all races.  This has been true for decades and everyone knows it (and has known it for years) – the people who were directly affected knew it and grew frustrated, and the fortunate among us also knew but raised their hands (or shrugged) in resignation.

But the US government’s response to the COVID-19 Pandemic may have been the straw that broke people’s back.  It has shown the extent to which the Government, at all its levels (Federal, State and Local), was not up to a basic task that people had (naively) expected Government to perform.  (I am not sure that an Obama/Biden administration would have been better prepared for the COVID-19 Pandemic but it would have used its Bully Pulpit to tell people to shut up and wear a mask already and would have saved many, many lives.)  Ronald Reagan’s declaration that Government is the problem has unfortunately become a self-fulfilling prophecy with a systematic hollowing of government.

2.    The apparent disfunction of Government is the breach into which Donald Trump stepped. We New Yorkers recognize bosses who step in and say get out of my way, I’ll fix this.  Whatever Trump did with the power he was given by the Electoral College, his original core message was an indictment of the entire political class – you are a bunch of morons and I need to step in and clean up your mess. That was the point of the indelible American Carnage Inauguration Speech.  A large portion of the American public said, please go ahead.  If he does not get reelected by the people who voted for him it will be because he will have failed to deliver on his promise to them to deliver effective Government – in fact, Trump supporters forgive all his flaws when they see he has delivered results.

3.    Government dysfunction is also why Bernie Sanders’ old message started to resonate.  If you look behind the (meaningless) Socialist label, Sanders looked at the same problems that Trump looked at and also wanted to solve them.  He uses different tools but in the end, he too wants to Make American Great (he might not say Again).  Sanders has been screaming in the desert for many years.  Now a large portion of the public has come to believe that his critique of the economic system, primarily its failure to provide a decent life for enough people, was on point and that it was time to do something about it.  His failure to bend a little when the tide turned his way prevented him from winning the (nomination) prize.

4.    The Internet has dis-intermediated Representative Democracy.  The failure of Government to solve basic problems for too long is occurring at a time when, thanks to the Internet, the general population has unprecedented access to information and abilities to self-mobilize and organize outside of traditional power structures – political parties, unions, etc.  Concerned citizens are able to share information, crowdsource solutions, raise money and put boots/sandals in the streets faster than Governments can collect information, assimilate it, articulate solutions and start effectuating them.  Citizens can’t understand why it is taking so long for Government to act. 

"Government by crowdsourcing" is challenging one of humanity’s finest achievement – Representative Democracy.  Government, like so many other things, is being dis-intermediated by the Internet.  Representative Democracy is predicated on the populace electing smart people and giving them resources to solve problems.  But when citizens are better informed than elected officials and are able to articulate and demand policy responses efficiently, they are demanding a seat at the table.  Representative Democracy will likely recede in favor of Participative Democracy and perhaps even Direct Democracy.  These trends are already apparent in efforts by the Blockchain community to lay the foundation for large-scale fully self-governing institutions, starting with a monetary system beyond the reach of any government. Even Facebook was intent on issuing its own global currency, and that before it became the arbiter of freedom of political speech in the US and around the world...

B.   The Economic System.

1.    The Invisible Hand is not working for a lot of people.  The founding fathers of Liberal Capitalism were imbued with a notion of fair play, probably influenced by their religious and upperclassmen upbringing.  According to them, ethical and rational people will act in their self interest and the Invisible Hand would determine winners and losers, resulting in an efficient allocation of resources that would more or less be deemed “just” because it was the result of a process that no one controlled. (Does this sound similar to the Blockchain advocates of an autonomous self-governing system?)

Were they too na?ve to believe that people would cheat, bribe and kill to subvert the Invisible Hand? No -- they did anticipate that people would cheat -- but they believed that market forces would root out bad behavior.  The purists among them even claimed that any interference in the market would subvert its proper functioning and would prevent the self-repair that an autonomous system would generate – that’s called “laissez faire” Capitalism (French for Let It Be but not in the way Paul and John meant it).

The last 40 years were a period where this ideology – promoted by Reagan and economist Milton Friedman -- has reigned during Democratic and Republican administrations.  We have lived through a massive experiment to put this theory into practice.  Today, people are drawing conclusions on how it has worked and asking not whether the country is better than it was 4 years ago (a question at each election cycle) but whether we are better off than we were 40 years ago.  The core Trump and Sanders voters have declared the experiment an abject failure.  Liberal academics will provide ample support for this conclusion (Pinketty’s Capital is 793 pages long!). The Wall Street Journal’s opinion pages will provide ample evidence to the contrary.  But policy makers understand that the people can’t wait, they need solutions now – as Keynes said, in the long run we’re all dead.

2.    The guardians of the Capitalist system have decided that Capitalism needs to change.  In 2018, 180 CEOs members of the Business Roundtable issued a statement in favor of businesses adopting “Stakeholder Capitalism.” At its core, Stakeholder Capitalism is a recognition that when a company is only trying to maximize shareholder value, or always generate the highest profit, as admonished by Shareholder Capitalism, it can cause damage to its employees, the public and the environment.  So while the company makes a profit, hires more employees and/or pays more taxes and/or dividends, there are losers (often taxpayers) who are left to pay to clean up spoiled lands and dirty water and heal a sick population.  Economists have a name for these side effects – “externalities.”

The debate about what to do about externalities is an old one. Today the pendulum has swung towards those who believe that an elegant but simplistic idea -- Milton Friedman’s “Shareholder Capitalism” – has run its course and can’t address the complexities of the today’s economic reality.  The guardians of Capitalism understood that they had to restore some order and justice to the Capitalist world before another system emerged that would promise order and justice in a changing world. It’s as much a political move as a change in economic doctrine.

3.    Bean Counting for Stakeholder Capitalism is hard.  Because it is often hard to predict what the externalities will be and how much they will cost – did the fossil fuel people know 100 years ago that it would cause global warming and the flooding of cities – they are ignored.  Eventually, regulations are devised to moderate the impact of these externalities and class action lawsuits are brought to compensate for the damage done. But it’s always after the fact and there is a political price to pay: fixing the mistakes will cost jobs and tax revenues.

Stakeholder Capitalism requires that companies take into account the impact their actions will have on the welfare of the communities in which they operate and the environment – think about it upfront.  Elizabeth Warren, a big proponent of making private enterprise pay for externalities, has recently castigated the Business Roundtable for not putting much muscle behind its grand declaration.  But taking these “foreseeable circumstances” and quantifying them is easier said than done.  

It bears reminding that in the early 20th Century there was no clear definition of “profit” and companies cooked their books all the time – until Generally Accepted Accounting Principles were adopted to put all companies on the same financial reporting footing.  People are working today on developing a new chart of accounts to measure the cost of externalities in a consistent and transparent basis. (For example, Harvard Business School recently published a framework for “Impact-Weighted Accounts.”)  If institutional investors looked at Impact-Weighted EBITDA instead of at GAAP EBITDA in allocating capital then more capital might flow to “positive impact” companies.  This is not a far-fetched idea – investors are plowing billions in tech companies that have massive GAAP EBITDA losses but report positive (made up) Adjusted-EBITDA.  So, why not decide to consider Impact-Weighted EBITDA results when making investment decisions?

4.    Stakeholder Capitalism is in fact a systemic market response to changes in Society. Nowadays, more and more companies are competing on “values” and not merely on product features and price.  It is becoming a given that brands looking to attract Millennial and Gen Z consumers must have a values-laden mission statement, with values that customers can identify with.  In a hyper-competitive consumer economy where brands can connect with customers directly, making lasting connections is the difference between the winners and the losers. Having an authentic brand that resonates with a community of like-minded people is a key success factor in the new economy.

Values are also used to engage with the other key audience companies must contend with: employees. In the pre-Pandemic days of full employment, employees joined and remained loyal to companies with values with which they could identify. In the social media age, employees take to the platforms to call out companies not living up to their professed values. Disappointing the employees leads to customer defections and makes it harder to hire and retain employees.

It is therefore logical and healthy that companies have a consistent way to account for the efforts they make to adhere to values that make a positive impact.  They need this new language to talk to their investors, they customers and their employees, as well as to Government when tax incentives will be on the line.

Abandoning Shareholder Capitalism has risk too and many believe it is a fad.  While Shareholder Capitalism may seem deaf and blind, it has the advantage of staying out of the Values Wars in which Society regularly engages.  But is any humanly designed system ever value neutral? Should it ever be?

C.    Entrepreneurship

What does all this have to do with an Entrepreneurship Renaissance?

1.    Entrepreneurship requires People. According to the Federal Reserve, based on data from 5 years ago, not enough people were leaving jobs and taking new jobs – job mobility was historically low. Some of this was probably due to Millennials being reluctant to take risks after enduring long term unemployment after the 2008 Great Recession.  But labor statistician point to the rapid creation of new businesses during and immediately after recessions.  The COVID-19 Recession will likely be the same. There is no mystery why: during recessions people lose jobs and can’t find new ones. So, they create new businesses out of necessity and some of these become the big successes of tomorrow.

I believe that people opt for entrepreneurship when there is something in the air that propels them to do it.  As I happen to know, entrepreneurship is a disease, like a latent bug in your system that awakens when there is change in the air and makes you do something really crazy.  If I need to explain that there is something in the air today, then you haven’t been reading this blog carefully.  You need to believe me that there are people coming out of the woodwork today responding to that Call of the Wild.  My email box is full of new entrepreneurs or old friends at it again.

2.    Entrepreneurship requires Capital. You can’t start a business without smart people willing to dedicate their energy to an idea. But then you need capital to sustain them.  For the most part, the coffers of venture capital firms and private equity firms are full – 2018 and 2019 were record fundraising years at the height of a historical bull market.  High Net Worth investors, the funding source for the initial Friends and Family round have done exceptionally well in the stock market before and during COVID-19.  Corporate Venture firms have remained very active thanks to the realization by their corporate parents that this was the time to try to leapfrog weaker competitors and acquire an innovation edge though venture investments.  As I have heard from many of the capital sources we work with, unlike in 2008, there is a lot of liquidity in the market today looking for investments.

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I believe we are going to see a renaissance of entrepreneurship led by people seeking to make a positive impact as well as a lot of money and that the political, economic and financial climate is very propitious for this type of activity. Hope to see you on the field!