Capitalism and Inequality

Introduction

I just finished Fred Wilson’s post on capitalism and inequality. First, Fred & I agree on many points:

• The inequality that we allow in our current society is immoral. Something has to change.
• Allowing individuals to amass great wealth when they create tremendous value is not immoral.
• The government is massively inefficient and in need of innovation & change.

That said, I feel like Fred sidesteps a few core fundamental problems with the current capitalist system by pointing the finger at the government.

1/ A shaky foundation

Our VC/startup ecosystem started with a core problem. The people who wrote the initial investment checks? White men. Who did they invest in? White men. This drove more wealth to… white men.

It’s not immoral that Bill Gates accumulated billions creating tremendous value. What is immoral is the fact that there aren’t enough women and minorities who were given the opportunity to do the same.

It’s not because VCs are racist or sexist, but because the foundation the built upon had inherent flaws and biases. As they simply continued on an existing system they perpetuated existing problems, and as it’s a new “revolution”, it’s making it worse by further concentrating wealth in privileged groups.

Something needs to change and we need to rebalance the equality of opportunity. Yes, successful entrepreneurs deserve to be compensated for the risk they take the value they create. But, let’s make sure everyone gets a fair chance.

2/ An inequitable compensation model

I learned early in my career that startups are like professional sports. My first job at a startup was at Right Media, a company that sold to Yahoo for $850,000,000.

I had worked like a dog for two years for below-market pay. When the acquisition was announced I was pumped… I was going to make a million dollars! Guess how much my initial option grant was worth after two years of vesting? $12,000.

I was going to make $500/month in equity compensation while the CEO was going to take home several. hundred. million. The investors? Hundreds of millions as well.

It’s like professional sports. There are loads of people who play football. The vast majority try to make it, make no money and develop physical injuries that last a lifetime. A few make it into the NFL, make some good money. The people laughing all the way to the bank? The league and individual team owners.

Startups are the same. A very large number of entrepreneurs work for years for little pay trying to “make it”. Many develop problems with stress, depression and burnout. A few make it with big exists. The people laughing all their way to the bank? The VCs & LPs who draw big salaries and a nice IRR.

Again, I don’t think the individuals here are immoral… VCs find and negotiate the best deals they can get… founders recruit the best people and our society idolizes the “founders” which leads many idealistic young people to work for below-market wages. But … something feels wrong… when you step back, it’s millions of young people working for a chance to be rich, while simply fattening the pockets of those who already have capital.

3/ “Efficient” governments don’t seem to solve this problem.

Things are getting better. There are huge pushes to get more women and minorities into tech. There are women starting VC funds… but it’s an uphill battle… and I think it’s insincere to come out and say that the capitalist system is just fine and the government needs reinventing. As an example, let’s look at NYC.

Michael Bloomberg was mayor of New York for over a decade. He brought tremendous growth to New York City. Unable to pay enough to get the best staff, he paid his lieutenants out of his own pockets to get the best people running government. He hired top notch leaders, and tried to integrate technology into the government.

New York City thrived under his leadership — the economy grew, construction boomed. In general you’d say, NYC has done well.

Yet, New York maintains one of the most racially segregated school systems in the country.

Closing thoughts

I am hopeful. I think there is a huge spotlight shining on inequality and the problems it’s creating. Let’s not just point our finger at the government though… especially because for two years we still have an idiot in charge who isn’t going to do a thing to help change this problem.