Pivot is Now
Louisville, Kentucky needs more start-ups, more founders, and more mature companies that will create jobs. I don’t think anyone will argue with that.
Founders create companies, and when that company connects with the market and sells its goods for a profit (called ‘product-market fit’ in startup vocabulary), those founders are rewarded financially. That’s a big part of economic development, and when it happens in Louisville, it benefits Louisville. Those founders become high net worth individuals (people with over $1 million in investable income) who can contribute to the city through tax income, philanthropic activity, and investment. In a sense, we can look at our community’s ability to create millionaires through entrepreneurship as a key measure of Louisville’s success.
There are essentially two models of wealth creation: the ‘landlord’ model, and the ‘working rich’ model. The ‘landlord’ invests and grows wealth through a one-time investment, and possibly a one-time, limited work engagement. The ‘working rich’ grows wealth through wages; they are paid for their continuous service.
The first model of wealth creation leverages the assets of landlords to give them a greater income than they have individually earned. They grow wealthy without substantial continuous work. This model of wealth through ownership creates a life of leisure. Since wealth can be created by owning things (land, money, intellectual property, copyrights), those that own things only need to collect income — they need only wait for wealth to grow. This model is predominant in Louisville, and this life of leisure has permeated the culture. Louisville is seen in the local media, by leaders, and the community as a “lazy” town, or a “five-o’clock” town, where people don’t put effort in to create wealth. It is the reason we have our major cultural events: the Derby, a leisure day of decadence, is a prime example. This modality of wealth creation is what we know.
The other model of wealth creation is known as the ‘working rich’. Much of the wealth generated in this model is due to innovation, and it is more merit-based: the better the innovation, or more talented the individual, the more it is worth, especially in technology-based entrepreneurship. The creative class that generates new forms of business are often rewarded by inclusion into the high net worth individual class.
America’s wealth creators are shifting from ‘landowners’ to ‘working rich.’ A recent paper by Saez and Piketty (see http://eml.berkeley.edu/~saez/lecture_saez_arrow.pdf) indicated that
in 1916 the top 1 percent of wealth received 20 percent of their income from wages; by 2004 wages generated 60% of income. We all know that Louisville, Kentucky is behind the rest of the country, and I fear it is becoming more so as other cities continue to advance (see the recent loss to Nashville, Tennessee of a potential Warby Parker office, GE Appliances being sold, the Humana sale, and Beam leaving for Columbus, Ohio). I think that Louisville is playing by outdated rules. The culture here in Louisville is dependent on, and holding on to, a modality of wealth creation that is becoming outdated and stifling to the new economy. The “old-boys-network” is the extreme of the lack of employee mobility.
Those technology workers that are seeking innovation and wealth encounter more hardship in finding it here in Louisville than in other innovation-friendly, high-growth communities, and as such, the talented workers we need will not come here, stay here, or find valuable work here. Recently, a friend turned down a position here in Louisville based solely on the employment contract, citing that to expect him not to work on projects outside the company was unreasonable. That’s because the prospective employer wanted to ‘own’ the employee, and all his work, not “be part of the value creation.”
The optimum method of wealth creation and distribution would be for wealth to spread through Louisville, and grow, like a virus. Instead, many in the community protect it as if it is a limited resource, because to them it is. In the landlord model, income-generating assets are finite; in the innovation economy of the working rich, income-generating ideas can create exponential growth. That mindset shift is what we should be after. There’s the saying, “there’s only so much coal in that hill.”
Tony Schy of Velocity in Indiana has said we need to ‘activate’ capital, putting it to work to fund innovation and entrepreneurs. I contend that it’s not being activated because it’s looking for those investments of days past, where the investment can be a ‘leisure-friendly’ investment. Louisville investors know those type of investments, are familiar with them, and are more apt to invest in ‘landowner’ or ‘leisure-friendly’ investments. I’ve experienced it firsthand in several efforts to raise capital, both successful and not.
“People aren’t churning out nearly enough ideas. Jason Calacanis, a notable entrepreneur recently detailed in his sporadically run “Jason’s list” email newsletter that he only invests in 30 companies a year. That’s after meeting 500+ of them. And that’s only after his team vets that list down from 5000+!”
– Brian Wallace
To survive, let alone thrive, a startup needs a strong community. It needs employees, investors, advisors, and mentors.
The ability to build relationships is one of Louisville’s key differentiators, and I know that we have the brilliant minds that can solve this problem. Many of our brilliant & cool minds have moved to other communities in order to find the opportunities and relationships that they desperately crave. Louisville’s place in the new economy is being written into history with each person that migrates. Will Louisville be able to catch & create more wealth than it leaves behind? Our community’s time to pivot is now, or else we’ll become another “cute” southern town like Gatlinburg, Tennessee or Savannah, Georgia.