Entrepreneurship Always Leads to Inequality
Originally published in Harvard Business Review on March 10, 2014
“Inequality is bad.” “Inequality is dangerous.” “Our system is at risk due to increasing inequality.”
Wealth inequality is on everyone’s minds these days: citizens, political leaders, economists, policymakers and yes, business leaders. Unfortunately, simpleminded thinking and insensitivity are often clouding the conversation. Deservedly vaunted venture capitalist Tom Perkins’ callous, arrogant and elitist recent comments should not serve as an expedient excuse to overlook an important “dirty little secret” about entrepreneurship, the acknowledged engine of economic growth:successful entrepreneurship always exacerbates local inequality, at least in the short run.
The $19 billion sale of WhatsApp’s to Facebook made Koum and Acton, overnight, vastly wealthier than their next door neighbors. The Boston Innovation District’s meteoric real estate prices are pushing the very entrepreneurs who made the district sexy towards neighboring districts where rents have not tripled since 2010. Tel Aviv’s “Cottage Cheese Protests” in 2011 stemmed in part from the entrance of newly-exited wealthy entrepreneurs into the city making it too expensive for “normal folk” to live in, with its nouvelle cuisine restaurants and ten million dollar Mediterranean penthouses blocking the views of the grandmothers whose parents settled the city a century before. The brand new Google Buses protest movement is fueled by similar fears. Seniors and the disabled worry they’ll be evicted to make room for well-paid and well-paying urbanizing tech workers cum stock-optionees with Tesla parking spaces worth more than a room in a public retirement home. In Seattle, home of Amazon and Microsoft, a protestor waved a sign, “Gentrification Stops Here.”
Inequality, in the broadest sense, is precisely, and perhaps paradoxically, what entrepreneurship is all about: entrepreneurs use their wit and grit to burst into new markets and generate extraordinary wealth, sometimes very quickly, more often over decades. Along the way, entrepreneurship rewards smart and risk-tolerant investors (who helped build the success) with wildly above-market (read: unequal) financial returns. The most successful entrepreneurship is disruptive — a term entrepreneurs these days have donned as a magic mantle: “We have a disruptive business model, a disruptive technology, and will disrupt the market” goes the startup pitch. Amazon has disrupted book stores and other retail chains, Zipcar disrupted car rentals, Netflix is disrupting cinemas and cable companies, Airbnb disrupts hotels, and Bitcoin may disrupt the payment industry. But the meaning of “disruptive” was never meant to be pure and all-positive: its synonyms include “troublemaking,” “disorderly,” “disturbing,” “unsettling,” and ”upsetting.” With all the buzz around disruptive innovation as a driver of business success in recent years, it’s important not to forget this original meaning.
Entrepreneurial success is intrinsically lopsided, a natural outcome of creating extraordinary value for customers. Entrepreneurship — if it succeeds — will always be, by definition, about the top one or two percent. It is about being the best of the best, about jumping over hurdle after hurdle on the way to the gold medal in the Olympics of enterprise, and leaving competitors in the dust.
Entrepreneurship, per se, can create many social goods. It can push innovation, can create dignified employment, can improve quality of life, can contribute to fiscal health through taxes, anddoes (at least in a few countries, including the US) dramatically boost philanthropy.
As I have argued in my book, successful entrepreneurship can also make housing unaffordable, increase taxes, and elevate the cost of personal services; it can deplete public goods such as education and health by giving the newly wealthy a simple and immediate work around public systems that don’t function well. Entrepreneurship can displace loyal legacy suppliers or products, along the way putting good people out of work, disorganizing and reorganizing supply chains and on the way down, depleting the wealth of the shareholders of deposed market leaders.
So is inequality, when it is directly created by entrepreneurs, good or bad?
For sure, without a system that ensures merit-based mobility, inequality can become a canker that infects and spreads. When the top 1% keep getting richer and the bottom 20% or so lose hope, inequality can become hardwired into a social structure and can keep people stuck, creating a vicious cycle of loss of ambition, loss of success, and loss of worth, both psychological and tangible.
But inequality can also be a great motivator, can fuel ambition, can bolster achievement, and can foster innovation. When my neighbor or friend or fellow citizen embarks on the entrepreneurial venture and is one of the fortunate few who succeed, this also may inspire, ignite my dreams, and shine a light on a new path to accomplishment and upward mobility that was previously obscured.
What should we do? I do not have all the answers, and I do not think there are panaceas. But I am sure that honest, clear-headed dialog will help. I am sure that whitewashing reality and sweeping entrepreneurship’s dirty little secrets under the rug will not help. Blindly ignoring the fact that entrepreneurship creates acute inequality will keep our society from benefiting from entrepreneurship’s positive spillovers and keep us from realistically mitigating its negative spillovers. I am also certain that measures which serve to dampen entrepreneurial ambition are not helpful. And I am equally certain that igniting aspiration — with appropriate education, support, role models, and encouragement — across the spectrum of society will improve our society and economy. If we want growth entrepreneurship, we will have to deal with its inequality as well.