Occupied Ideas

If you were alive last year, you probably remeber the Occupy Wallstreet movement. Although the movement never had a clear set of demands, one thing was clear, people were (and still are) very angry about the distribution of wealth in the country.  Clearly this blog is not about debating social issues or political groups. People tend to have very strong opinions about Occupy, and I don’t really want to change anybody’s mind. I do however, want to bring up one aspect of the movement that I think has been completely overlooked and is well aligned with the blog’s purpose. The extremely uneven wealth distribution of the United States hampers technological development, especially disruptive development.

For reference, lets review how the system should work. In the VC dominated arrangement we currently have there are 3 players: the entrepreneurs, the venture capitalists, and the limited partners. In this system the limited partners bring the money, the entrepreneurs bring the ideas, and the venture capitalists bring the… talking. There is an inherent balance between the number of entrepreneurs and limited partners (and the VCs by which they communicate) as the system requires both ideas and capital which neither party is capable of providing on their own.

The current extreme inequality in our nations wealth has a direct impact here. Not because there are too many LPs or because the entrepreneurs are too poor, but because the entrepreneurs and their ideas are MIA. The inequality in the system forces would be entrepreneurs into jobs where there would be ideas are smothered by the status quo. There are many financial instruments in our society that are forcing this to occur and all are basically derivatives of our uneven wealth distribution. But I want to focus on one that especially influences disruptive technology development: student loans.

When you think about an entrepreneur with a disruptive idea, you probably imagine someone young and relatively poor working in his or her garage. This image is a stereotype, but is not too far from the truth. The fact is, most disruptive ideas come from young people with middle-income families.

It used to be that as a young person from a middle-income family you could work during the summer and pay for about 60% of a college education. Now however, working year round will only pay for about 25% of the same education. This is one of the main drivers of the herculean rise in student dept in our country. Now most students leave college with several thousand dollars of debt that is payed off over 10-30 years.

Lets use a more specific example. To get an engineering degree these days takes around 200k without any type of financial aide. Lets say that you go to a school with a good endowment and get 50% of the cost covered. Considering your family might be able to help out and you earn some money while there, you leave with 60k in debt. With those values looming over your head you get the first job you can working at a large firm with a lot of engineers where you get a fine paycheck and over the course of 10 years you pay off the debt. This is more or less the stand-in argument to justify why student debt is “OK”.

The problem is that the 10-20 year period after graduation is the period when you are most likely to have a disruptive idea. It’s the period when you are most likely to see the world from a different perspective than the status-quo and really create impactive change. During those years you were creatively held captive by your debt and your need to make payments. Continued employment by “the major players” in a technological area is easily the most effective way to dampen disruptive ideas.

So while the wealth distribution in our country is giving LPs and VCs more wealth to bring to the table it is, overall, still hurting disruptive innovation. It takes the people most likely to produce the best ideas and locks them away in traditional jobs until their once novel perspective has been re-aligned to the status quo. If nothing else, this is a reason to address the wealth distribution issues in our country. It should also be an argument VCs can use over drinks at cocktail parties for supporting the Occupy movement, because in the end, those hippies are going to be the ones to think up the iPhone.