Wealth and venture capital
VC advances human capital wealth
- Total global wealth per person in 2014: $168,580
- Total global wealth per person in 1995: $128,929
- Global human capital wealth per person in 2014: $108,654
- Global human capital wealth per person in 1995: $88,874
The concept of human capital wealth differs from that of human development or human capabilities. The term “capital” denotes a resource that can be used for economic production.
Economic production is usually measured by GDP. The urge to count a nation’s produce and compare standards of living goes back to the 17th century. William Petty, the pioneer of “political arithmetick”, estimated the income of England and Wales at £40m in 1665.
Whereas the focus has historically been on produced and natural income, in the digital economy, the change in consumer surplus (compensating expenditure) provides a superior, and more direct, measure of the change in well-being, especially for digital goods. In practice, it has been difficult to measure.
Jorgensen and Fraumeni suggest that it’s more suitable to measure human capital wealth as the discounted value of future earnings for labor force. In other words, human capital wealth is considered to be an asset that generates a stream of future economic benefits (earnings).
Closing the human capital wealth gap
Inequality in human capital wealth as well as total wealth is high. In high-income OECD nations, total wealth per capita makes up 71% of total wealth. This is not far from 100 times more than the levels observed in low-income nations, where human capital wealth is an estimated $5,564 per person.
The outlier in the above table in terms of the ratio of human capital as share of total is the MENA region, 35% compared to global ratio of 64%. Human capital share has been taken up by natural capital, i.e. oil.
There’s renewed attention policy makers are paying to the demographic structure of populations under the concept of the demographic dividend. We previously looked at demographics as a major trend supporting rising entrepreneurship among Iranians. By focusing on the right metrics and investing in digital technologies and entrepreneurial startups, we can close this human capital wealth gap. The more large-scale job creating companies we build, the more the share of the human capital wealth in the total economy (top chart).
Banian and Human Capital
We gathered a group of Iranian investors and entrepreneurs to establish Banian last year. It’s purpose is to empower Iranian entrepreneurs through:
- Venture investing
- Mentorship/coaching
- Education
These are the inputs. As a non-profit organisation, it is important to measure the outputs to know how effective the organisation is in turning these inputs to widely beneficial outputs. Traditional fund economics such as company valuations on exit and MOIC (multiple on invested capital) can be limiting in reporting the true effect Banian can have.
The proposed measurement is “Human Capital Wealth”. The above article provides our initial thoughts on this subject.
If you’re interested to hear more about Banian or want to help us out on measuring entrepreneurship and human capital wealth, get in touch at tehran@banian.me.
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