11 ms·

Entrepreneurs are redesigning the basic building block of capitalism

66 points by linhmtran168 11y ago

tonomics 11y ago
Hm... no. These innovations are just a child of capitalism, not something unexpectedly changing it.
- azernik 11y ago
  I don't think the article was claiming that this is an innovation outside of the capitalist box - just that it's a form of capitalism that's different from the way it's been practiced in past decades.
  - notahacker 11y ago
    The article does relatively little to justify that though. It's not as if companies being privately owned before they go public (or private equity buyouts of public companies) is a new thing. The time-to-IPO is the only non-anecdotal difference in ownership structures it notes, and that's easily explained away by market conditions. Indeed the first example it cites - Uber - is arguably an example of the opposite to the trend it purports to spot... it's a market traditionally dominated by plucky privately held small companies that's becoming centralised under a large company or two that probably will go public. Even if Uber (and Lyft and a couple of others) doesn't IPO they still are and will be owned and managed in a way that resembles a public company more than your neighbourhood cab firm. I'd give the article more props for identifying interesting but not really connected phenomena in new companies if it didn't include lines like "whereas nobody is sure who owns public companies, startups go to great lengths to define who owns what". The idea that startup share options are more transparent than employee shareholdings in publicly held companies traded on liquid markets is dangerously misleading nonsense that looks really out of place in a publication aimed at the financially literate
chrismealy 11y ago
The exception was the post war managerial capitalism that Galbraith wrote about. This is really just a return to the older model.
azernik 11y ago
This article tries to refute two different types of arguments, and in the process confuses them. The empirical arguments ("this isn't happening!") it refutes quite well. The normative argument ("this is a bad thing!") it does less well at. Ownership in these companies is cut off from the rest of the economy, but the Economist seems to think that this trend is only worth reporting if the social issues can be brushed off. They cannot. SeedInvest is not a substantial source of capital on the same level as privately VC funds. Mutual funds, maybe.
malchow 11y ago
Not a great article, and I think it misses the one big thing that is genuinely revolutionary about the Silicon Valley form of entrepreneurship. And that's that venture-backed entrepreneurial companies are, by and large, the new Research & Development Departments. Acquihires can in fact be great deals for VCs, founders, employees, and acquirers. Many companies are curtailing their own research agendas and relying upon smart technology investments to position them for the 5-10-15 year time horizon. I suspect we will ultimately consider this a vastly more efficient form of capital allocation than the old-fashioned "R&D Department" at IBM, GE, DuPont, AT&T, etc.
- demian 11y ago
  By which metric would you measure this "efficiency"? The difference between VC-backed-startups vs traditional R&D departments is that the first one seems more short sighted, and with a tendency towards a narrow subset of IT problems with high scalability and disruptive potential, while the second one works on a wide array of industries and applications where the parent company already has the benefits of economies of scale.
  - malchow 11y ago
    "By which metric would you measure this "efficiency"?" Good question. A few ideas: -- ROIC -- Competitive advantage versus peers (hard to measure, but one attempt: http://web.mit.edu/is08/pdf/Parrish.pdf http://web.mit.edu/is08/pdf/Parrish.pdf) -- Share of market -- Enlargement of market -- Quality of hiring versus peers These are the things that can make a company last for centuries. The hunch I was stating -- though admittedly without a clear way to prove it yea or nay -- is that enterprises that invest in small nimble VC-backed technology companies will begin to outperform, on these measures, traditional in-house R&D departments.
- jsprogrammer 11y ago
  What is so genuinely revolutionary about that form? A large land owner could raise a small army and supporting farms, then join the local nobility. The land owner and his tenants could then enjoy the benefits of being part of the larger realm.
deleted 11y ago
[deleted]
dismal2 11y ago
Maybe the current set of unicorn startups are just very clever financial inventions to get returns in todays crazy financial world of ZIRP and never ending QE.
- TTPrograms 11y ago
  I'm more concerned that they're financial consequences rather than inventions...
deleted 11y ago
[deleted]
oluwie 11y ago
"All this has happened before and will happen again"
Animats 11y ago
But VCs are funds, not long term owners. Their goal is an exit, so they can pay off their investors in cash. Their goal is not to become conglomerates or zaibatsu or chaebol. YCombinator is not in the business of becoming the next Samsung.
roymurdock 11y ago
Someone commented this but deleted it because they were getting downvoted: Land ownership, intellectual property and limited liability ownership of companies by individuals are the basic building blocks of capitalism. I.e., property forms guaranteed by the government. Which one of these are being challenged by unicorn startups, again? I think this is spot on and deserves repeating. Unicorn startups are changing the way we utilize capital (Uber=cars and labor, Airbnb=property) but they are not changing the fundamental fabric of capitalism. Our legal framework forms the backbone of our society, and regulation/policy is the tool we use to adjust that foundation. Entrepreneurs and investors respond accordingly. Uber and AirBNB might hire some lobbyists to change a few minor rules in the hoteling/taxi industry, but the really important variables are the distribution of government spending, scope of and resources committed to regulatory oversight, and the tax code. The article lacks a comprehensive review of the data and its arguments come across as surface level speculation.
- demian 11y ago
  Some people argue that Uber and AirBNB are not actually changing the way we use capital on a fundamental economic level, but are instead using new channels in a way, and with a magnitude, never used before. IMHO I tend not to agree with the hole "Sharing Economy is The Next Capitalist Revolution" thesis.
  - _delirium 11y ago
    I'd be curious if it's really an unprecedented magnitude (not impossible that it is, but I haven't seen numbers). For lodging, for example, it'd be interesting if someone could estimate at least approximate numbers for what proportion of the paid travel-lodging market was served by formal hotels vs. informal lodging arrangements in various cities over the decades. From what I've read of New York City (but no numbers), there has been a pretty wide array of lodging besides "proper" hotels in various periods, ranging from families running a few spare rooms as a boarding-house business, to large-scale "flophouse" operations. And, like today, it has been a political issue and led to debate over regulations periodically.
  - loceng 11y ago

66 points by linhmtran168 11y ago

tonomics 11y ago

Hm... no. These innovations are just a child of capitalism, not something unexpectedly changing it.

azernik 11y ago
I don't think the article was claiming that this is an innovation outside of the capitalist box - just that it's a form of capitalism that's different from the way it's been practiced in past decades.
- notahacker 11y ago
  The article does relatively little to justify that though. It's not as if companies being privately owned before they go public (or private equity buyouts of public companies) is a new thing. The time-to-IPO is the only non-anecdotal difference in ownership structures it notes, and that's easily explained away by market conditions. Indeed the first example it cites - Uber - is arguably an example of the opposite to the trend it purports to spot... it's a market traditionally dominated by plucky privately held small companies that's becoming centralised under a large company or two that probably will go public. Even if Uber (and Lyft and a couple of others) doesn't IPO they still are and will be owned and managed in a way that resembles a public company more than your neighbourhood cab firm. I'd give the article more props for identifying interesting but not really connected phenomena in new companies if it didn't include lines like "whereas nobody is sure who owns public companies, startups go to great lengths to define who owns what". The idea that startup share options are more transparent than employee shareholdings in publicly held companies traded on liquid markets is dangerously misleading nonsense that looks really out of place in a publication aimed at the financially literate

chrismealy 11y ago

The exception was the post war managerial capitalism that Galbraith wrote about. This is really just a return to the older model.

azernik 11y ago

This article tries to refute two different types of arguments, and in the process confuses them. The empirical arguments ("this isn't happening!") it refutes quite well. The normative argument ("this is a bad thing!") it does less well at. Ownership in these companies is cut off from the rest of the economy, but the Economist seems to think that this trend is only worth reporting if the social issues can be brushed off. They cannot. SeedInvest is not a substantial source of capital on the same level as privately VC funds. Mutual funds, maybe.

malchow 11y ago

Not a great article, and I think it misses the one big thing that is genuinely revolutionary about the Silicon Valley form of entrepreneurship. And that's that venture-backed entrepreneurial companies are, by and large, the new Research & Development Departments. Acquihires can in fact be great deals for VCs, founders, employees, and acquirers. Many companies are curtailing their own research agendas and relying upon smart technology investments to position them for the 5-10-15 year time horizon. I suspect we will ultimately consider this a vastly more efficient form of capital allocation than the old-fashioned "R&D Department" at IBM, GE, DuPont, AT&T, etc.

demian 11y ago
By which metric would you measure this "efficiency"? The difference between VC-backed-startups vs traditional R&D departments is that the first one seems more short sighted, and with a tendency towards a narrow subset of IT problems with high scalability and disruptive potential, while the second one works on a wide array of industries and applications where the parent company already has the benefits of economies of scale.
- malchow 11y ago
  "By which metric would you measure this "efficiency"?" Good question. A few ideas: -- ROIC -- Competitive advantage versus peers (hard to measure, but one attempt: http://web.mit.edu/is08/pdf/Parrish.pdf http://web.mit.edu/is08/pdf/Parrish.pdf) -- Share of market -- Enlargement of market -- Quality of hiring versus peers These are the things that can make a company last for centuries. The hunch I was stating -- though admittedly without a clear way to prove it yea or nay -- is that enterprises that invest in small nimble VC-backed technology companies will begin to outperform, on these measures, traditional in-house R&D departments.
jsprogrammer 11y ago
What is so genuinely revolutionary about that form? A large land owner could raise a small army and supporting farms, then join the local nobility. The land owner and his tenants could then enjoy the benefits of being part of the larger realm.

deleted 11y ago

[deleted]

dismal2 11y ago

Maybe the current set of unicorn startups are just very clever financial inventions to get returns in todays crazy financial world of ZIRP and never ending QE.

TTPrograms 11y ago
I'm more concerned that they're financial consequences rather than inventions...

deleted 11y ago

[deleted]

oluwie 11y ago

"All this has happened before and will happen again"

Animats 11y ago

But VCs are funds, not long term owners. Their goal is an exit, so they can pay off their investors in cash. Their goal is not to become conglomerates or zaibatsu or chaebol. YCombinator is not in the business of becoming the next Samsung.

roymurdock 11y ago

Someone commented this but deleted it because they were getting downvoted: Land ownership, intellectual property and limited liability ownership of companies by individuals are the basic building blocks of capitalism. I.e., property forms guaranteed by the government. Which one of these are being challenged by unicorn startups, again? I think this is spot on and deserves repeating. Unicorn startups are changing the way we utilize capital (Uber=cars and labor, Airbnb=property) but they are not changing the fundamental fabric of capitalism. Our legal framework forms the backbone of our society, and regulation/policy is the tool we use to adjust that foundation. Entrepreneurs and investors respond accordingly. Uber and AirBNB might hire some lobbyists to change a few minor rules in the hoteling/taxi industry, but the really important variables are the distribution of government spending, scope of and resources committed to regulatory oversight, and the tax code. The article lacks a comprehensive review of the data and its arguments come across as surface level speculation.

demian 11y ago
Some people argue that Uber and AirBNB are not actually changing the way we use capital on a fundamental economic level, but are instead using new channels in a way, and with a magnitude, never used before. IMHO I tend not to agree with the hole "Sharing Economy is The Next Capitalist Revolution" thesis.
- _delirium 11y ago
  I'd be curious if it's really an unprecedented magnitude (not impossible that it is, but I haven't seen numbers). For lodging, for example, it'd be interesting if someone could estimate at least approximate numbers for what proportion of the paid travel-lodging market was served by formal hotels vs. informal lodging arrangements in various cities over the decades. From what I've read of New York City (but no numbers), there has been a pretty wide array of lodging besides "proper" hotels in various periods, ranging from families running a few spare rooms as a boarding-house business, to large-scale "flophouse" operations. And, like today, it has been a political issue and led to debate over regulations periodically.
- loceng 11y ago