Entrepreneurship Is for the Rich. It Shouldn’t Be.
By: Gabe Zichermann
Tags: Entrepreneurship, Society, Inequality, Entrepreneur, Startup

Rich vs Poor Entrepreneurship. Image cc licensed

I didn’t grow up with much extra money.

My parents, both working-class refugees to Canada, struggled to make ends meet and to give us the best possible opportunities. Canada itself is an excellent place to be an immigrant, and we never wanted for much, really.

My mom was always a striver. Though she had decent-paying jobs with great stability (and some success) she always yearned to start her own thing. And she did, three times over, with a home business selling kitchenwares, and then market stalls and eventually stores selling all kinds of home goods.

This rubbed off on me — hardcore. I have spent the majority of my career (the last 21 years to be precise) starting companies. I get an extraordinary thrill from ideating and then materializing that idea into an actual company. This first phase is — far and away — my favorite, and a source of great excitement. It’s why I spend so much time mentoring startups even now, and producing programs like the SYOB (Start Your Own Business) project with Entrepreneur magazine and Gro. Being able to feed others’ optimism is powerful stuff.

One of the first startup lessons you learn however is to ensure that you have enough capital. Cash is companies’ oxygen, after all. I learned this the hard way with my first family startup when I was 16, where we expanded our printing company too quickly and eventually imploded. In retrospect we were naively underfunded, turning what had been a successful, growing, small-scale operation into nothing by trying to grow fast without money.

I internalized this lesson, and throughout the rest of my startups, I’ve endeavored to keep the cash and burn rates in sync so that the company has its best chance of survival. Yes, sometimes you have to bet big — put all the chips on your lucky number. But more often than not, the key to success seems to be to manage your expenses and cash carefully, and grow with your customer base.

But it doesn’t escape me that wealthy people — or those from wealthy families — are behind the majority of high-growth startups. Because so much wealth is created through entrepreneurship, it seems odd and painful that the bulk of the spoils go to people who already have a major leg up in life — and are able to take their capital further because of their safety net.

It doesn’t necessarily take much money to start your company — depending on what you’re doing. There are tons of “side hustles” that can be turned into viable businesses and lean startup practices you can use to make something from nothing. But if you need external capital to start your business, and you don’t have any, what do you do?

Well, if you’re trying to raise angel or Venture Capital money, one of the first questions you’ll be asked is “what’s your skin in the game?” Investors want to know that the principals are putting their own capital — or their family’s future — on the line to get a return. It’s a perfectly logical — albeit cynical — view of risk, reward and incentive alignment.

It’s especially cruel to those that lack even the basic funds to work on their initial idea. If their concept is grander than their immediate pocketbook will allow, and they can’t put any spare capital to work (e.g. because they don’t have any), how do they start something? How do you overcome the chicken and egg problem that it takes money to make money? What if you can’t borrow from family and friends because they don’t have any money either? And if your credit cards are already maxed out (or nonexistent) how do you startup “super lean”?

This is where I think we need to reset our model — particularly in light of the tectonic shifts our economies are undergoing. We can’t simply continue to keep entrepreneurship out of reach of anyone not already in the middle class, particularly as that group continues to shrink. This inevitable slide will only further enrich those at the top. Besides, we need all hands on deck right now to fix what ails the world, and we must be ruthless in uncovering all entrepreneurial potential — regardless of economic status.

We need no-strings venture funding for early stage companies that’s not tied to the founder’s personal financial stake, but rather to their skills, intuition, drive and grit — predictive indicators of their chances of success. We need to develop a model that can use machine learning and AI to determine the chances that someone can be successful with their startup, and a pathway to access capital even if you don’t have the means yourself.

There are a large number of programs — particularly in places like New York and California — that make short-term, low-interest loans to entrepreneurs from underrepresented communities. There are also incubator and accelerator programs that promise funding and aren’t explicitly tied to founder wealth.

These systems are themselves biased in their selection criteria, and the for-profit incentive of their service providers. The temptation in investing to constantly revert back to “pattern matching” (following past patterns of success in present decision-making) creates structural inequalities that further reinforce this bias.

Most of the professional investors I’ve met throughout my career have exhibited a low degree of anti-marginalized bias. But their decisions reflect a different story — favoring white, upper middle class founders over other groups by a wide margin.

I think we can do this at scale, and use technology to help better allocate capital to those that have a shot at succeeding and changing the game.

Yes, there will be problems with this approach as well. Algorithms often exhibit bias, and there’s no evidence this won’t be subject to the same issues. However, because those with capital will continue to fund their startups the traditional way, this would really only apply to those without the standard capital necessary to get started. It’s an underserved population with tons of potential and low current odds that could be improved with a different approach.

While I’d love to see governments and investors build the technology necessary to reduce bias in entrepreneurship, I won’t hold my breath. However, there are some models that have been used successfully to spur innovation, level the playing field, and generate returns. Perhaps these can be adapted to this purpose?

The Game

Use an XPrize model (grand games searching for the best ideas and approaches) to create a national game show that would feature entrepreneurs’ best ideas for solving problems of significance. A pitch deck would be sufficient.

The Voice

Use a blind pitching approach to ensure that entrepreneurs and their ideas are not discounted due to bias.

The Means Test

For those ideas that qualify, use the entrepreneur’s means to determine the right level of pre-seed funding that should be allocated.

The future depends on entrepreneurship. Innovation must drive society forward and help us overcome the major challenges and obstacles we face. But the best ideas — and the best founders — aren’t always the rich (or wealth-adjacent) ones.

It’s time we work to make the startup world more equitable.