Two things are happening in the media right now that make this post extremely timely: French Economist Thomas Piketty's book 'Capital' has kicked up a storm of discussion on what's broken with Capitalism, and how to fix it; and, the Brookings Institute has just released data showing that U.S. businesses are being destroyed faster than they're being created.
This post is an excerpt from my book, The Other 99% (Entrepreneurs) - Fortune In The Middle Of The Pyramid.
Ever since the 2008 financial crisis, intellectuals have had to ask themselves, 'Does Capitalism Still Work?'
I have explored this question for several years now, beginning with a seminal column I wrote for Forbes: Capitalism's Fundamental Flaw. Two particular problems stand out. First, Capitalism has been hijacked by speculators. Second, the system enables amassing wealth at the tip of the pyramid, leaving most of society high and dry. Both problems have resulted in a highly unstable, volatile world order that jitters and shocks markets periodically, leaving financial carnage and mass scale human suffering.
So what is the solution? Can the ideals of democracy and capitalism be combined to establish a more robust, stable system?
I believe so. Here's how.
We need to use the fundamental principle of capitalism -- the creation of value that people are willing to pay for -- and apply it to the middle of the pyramid on a global scale. In other words, we need large numbers of entrepreneurs who are willing and able to build products and offer services that address demand from certain specific segments of customers. We need to teach them how to build businesses that can become sustainable -- profitable -- and create jobs. We need to also teach them to grow by applying the same kinds of methodology and discipline that, traditionally, a venture-funded company may use.
Everybody talks about the role small businesses play in growing economies and creating jobs. However, as it stands, in America alone, 600,000 businesses die in the vine every year. This colossal infant entrepreneur mortality is a product of colossal levels of ignorance about how to build and sustain businesses.
I have studied some of the reasons behind this mortality.
One reason is that entrepreneurs have been fed a myth that entrepreneurship equals venture capital. The media, business schools, incubators -- every part of the eco-system that is supposed to teach good business practices -- reinforces this myth.
The reality is that over 99% of entrepreneurs who go out to seek financing get rejected.
There are two primary reasons behind this phenomenon. One, most business opportunities seeking venture capital are too small, and too slow growth to fit the venture model. The second, entrepreneurs often go to VCs too soon, without doing adequate homework.
There is actually a method to the madness of entrepreneurship. And while the 'character traits' that support entrepreneurship -- courage, tolerance for risk, resilience, persistence --
cannot be taught, the method of building businesses can and should be taught.
In fact, it should be taught not just at elite institutions, but at every level of society, en masse.
If we can democratize the education and incubation of entrepreneurs on a global scale, I believe that it would not only check the infant entrepreneur mortality, it would create a much more stable economic system.
Why? Because this middle of the pyramid -- large numbers of small and medium businesses -- is outside the reach of the speculators. If they produce something of value that their customers want, they can build stable businesses. They may not grow 300% a year. They may never become billion dollar enterprises.
Too much energy in the business world today is being spent on high-growth businesses that go after very large business opportunities. All of the startup incubation eco-system of the world focuses on the venture-fundable businesses only. As a result, less than 1% of the world's entrepreneurs are able to access high caliber incubation support.
My thesis is that the other 99% entrepreneurs hold the key to Capitalism 2.0: a system of distributed, democratic capitalism. Still focused on creating value, generating wealth, creating jobs, but not so focused on speculation.
Mercantile capitalism has hit its limits. Democratic, distributed capitalism will allow the pendulum to swing back and hand power back to the value creators.
The good news is that in this era of high bandwidth connectivity, most parts of the world can access online learning, and use online channels to build businesses. Let's say, we digitally teach and incubate millions of online businesses over the next few decades.
We teach them fundamentals like Entrepreneurship = Customers + Revenues. Financing is optional. Exit is optional.
From Africa, to Indonesia, to Colombia to Maine, generations of entrepreneurs proliferate. They all are given the opportunity to access certain methodology and knowledge.
What do you think will happen?
Infant entrepreneur mortality will drop. Larger number of entrepreneurs will learn how to grow their businesses. An entrepreneur who would have otherwise done $1 million a year, with proper support, will perhaps do $5 million a year.
And quite possibly, larger numbers of entrepreneurs would qualify for venture capital because they would not go too soon to seek capital. They would go only when they are ready, when their ideas are validated, when investors are likely to invest in them.
A more robust pipeline of fundable businesses will develop. These, then, can attract capital and grow faster.