I was listening to a TedX presentation yesterday by Chrystia Freeland, Author of Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else.  Ms. Freeland mentioned that we are currently in an age of the increasing concentration of wealth among the super rich.  Her research indicates that in 1970 approximately 10% of the US wealth was held by the top 1% and that today nearly that same percentage of wealth is held by the top 0.1%.  Furthermore, she explains how the current venture-backed technology-type businesses, such as Facebook, are operating much more efficiently and are employing a mere fraction of the number of employees as the largest companies of generations past (consider General Motors in the mid-20th century).

This makes me wonder whether “venture” companies are going to be a driving force for raising the standard of living for the so-called “bottom of the pyramid” in the developing world.  My venture capital colleagues regularly explain that there are two types of businesses.  Some businesses are poised for slow but regular growth.  Those businesses might not be rapidly scalable without increasing human capital investment, but often create great wealth and benefit for entrepreneurs and employees.

The other type of business is the type venture capitalists are seeking. Venture capitalists require a very high (sometimes 10x) return over a short period of time and a likely potential exit.  To achieve this level of growth, businesses must be able to scale rapidly with minimal human capital.  The result is that venture-type businesses are often technology businesses that don’t require large, well-trained workforces.  Venture investors and founders typically capture the vast majority of the financial upside, and job creation isn’t a focus of these types of businesses.

This leads me to question whether venture-type financing is the best way to support businesses that are intended to create “social change”.  My empirical experience indicates that many companies that are receiving “impact capital” are not poised for 10x growth or a large exit.  They are more like the first type of business, poised for solid but measured growth.  It is nearly universally accepted that the micro-finance industry has had an incredibly positive impact on business development, successful entrepreneurship and personal autonomy in the developing world.  However, this success cannot necessarily be scaled just by investing more capital.

I would posit that too much capital poses significant risks to the viability of businesses that aren’t prepared for rapid scaling, and that venture-type companies that can scale rapidly to an exit are not likely the types of companies that will create the jobs and dispersed wealth that will created lasting social change.  Ms. Freeland notes that Carlos Slim (a Mexican Mega-Billionaire) is now the wealthiest man who has ever lived (in real dollars).  Impact investors must be careful to not just fund a new generation of “wealthy few” in the developing world.

 


Comments

Courtney Boyle
11/14/2013 8:29am

I appreciate your view and have yet to watch the TedX presentation. However, I would also argue that it is the products and services provided by many of the venture-like backed "impact" investments that drive social change and improve lives. These investments may not necessarily provide a dramatic increase in the number of jobs, but they may, say, provide safer, cleaner, healthier and more accessible alternatives for the BoP.

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    Author
    Lucas Hartley

    I am an attorney, entrepreneur, educator, adventurer and father.  I have seen first hand the unintended consequences (positive and negative) of  non-profit, NGO and Foreign Aid in developing economies, and am curious as to how the new fad of so-called "impact" investing will play out. 

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