22 January 2007

Capital Glut and the Popularization of Entrepreneurship

This intriguing graph indicates that the capital globally raised is about $400 billion more than capital invested. In simple language, there is more money available to fund ventures than there are credible ventures to pursue. We can create those ventures by transforming corporations and what it means to be an employee.

One of the biggest sources of potential innovation is from within corporations. In 1900, very few of those working were knowledge workers. It was an elite role. By 2000, many in developed countries were knowledge workers and we'd popularized education and information technology that drove unprecedented inreases in productivity. In 2000, very few of those working play the role of entrepreneurs. In order to raise the percentage of entrepreneurs by 2050 in a growth path similar to that for knowledge workers, we'll have to do a variety of things. One huge factor in the growth of knowledge workers traced back to the transformation of financial markets. (Knowledge workers need big capital investments to be productive. Russia and Eastern Europe have delightful education rates but are unable to put graduates into labs and corporations where their knowledge can be translated into valuable products and services.) In order to popularize entrepreneurship, we will need a transformation of the corporation that has echoes of the transformation of financial markets.

Imagine a corporation where employees could choose to pursue roles as traditional employees, as old-fashioned entrepreneurs, or some hybrid of the two. Employees who don't want to gamble the ability to put their children through college but are willing to gamble their ability to retire early or to buy a second home may take a role that is some kind of a hybrid, employee-entrepreneur, with some mix of shared profits with their employer, some mix of salary and loan or deferred compensation. This is more possible than ever because there is more capital than ever. As a global community, we have more money to finance more ventures.

There are a variety of benefits that would flow from this. Imagine that funding for, and even the team members provided to, new ventures was a function of employees’ perception of the value of that venture, or project. Internal markets would naturally indicate where the employees felt highest future returns lie. Imagine how much companies would learn about where to invest if they simply let employees vote on where to put their time and even a portion of their 401(k) funds in anticipation of shared returns? Imagine that employees would not just have investment opportunities (as they do now through stock markets) but have the ability to influence the success of those ventures (as entrepreneurs who take on start ups do).

The technology and practice within financial markets has been transformed since the days of JP Morgan a century past. As a result we have trillions of dollars sloshing around the globe in search of higher returns. Imagine transforming our corporations in a way that realizes this potential, popularizing entrepreneurship as we have previously popularized knowledge work. Such a move could easily stimulate an increase in demand for investment capital - an increase that could increase returns, levels of innovation, and the potential for the average employee within corporations.

Because of the transformation in financial markets during the last century, the average employee has become the most influential capitalist. Through mutual and retirement funds, typical households now control more of the equity market than do large investors. This popularization of financial markets is unique in human history. Now, financial markets and corporations have to collude to create mechanisms that give these new capitalists greater control over their equity, allow them to more directly influence corporate innovation and policy in a way that will most benefit these workers, in a way that gives them the most autonomy.

1 comment:

Vladimir Dzhuvinov said...

Last year the Economist had a good article on the recent raise of capital oversupply.

I don't think the lack of credible ventures to pursue is the fundamental reason for that. To me, there are two issues:

First, insufficient transparency of companies. This is a costly barrier to overcome for potential investors who want to understand what a business is doing and how well it performs. Would you invest in a obscure venture? I don't think so!

The second issue is insufficient decentralisation. Companies are gradually beginning to understand the benefits of giving greater responsibilities to individual departments, teams and employees. This also means decentralising (internal) corporate investing. Investments are best initiated and managed on the level where they are going to be utilised. Unfortunately, companies still lag in this regard.

To summarise, our capital is simply blocked by excessive central planning and by lacking transparency.