"We expect increasing numbers of low-income persons in Western countries who previously would have depended upon transfer payments from the state to affiliate with wealthy households as retainers" - Davidson & Rees Mogg, The Sovereign Individual
This quote made me think a lot about the relationship of medieval serfdom, current employment and the possibly toxic dynamic between venture capitalist and entrepreneur. Let's take them one at a time.
Serfdom
First, serfdom. Serfs tilled the land in exchange for protection from their lords. By delivering a significant portion of the fruits and labour to the house of their lords, they were offered protection in return. The power dynamic was one of extreme inequality, but a necessary engagement for the serfs, who needed such a contract to protect against significant downside risks like drought or famine. The lord's granaries and walled fortress would be the only thing that stood between the serf and death from starvation or violence. There is no agency problem in this model. Lords are directly benefitting from serfs, but the Lord's wealth is directly responsible for the serfs' protection. There is direct mutual interest in the arrangement.
Employment
Second, employment. Employees exist to make companies profit, in exchange for a wage. By delivering a significant portion of the fruits and labour to their employer, they are offered a monthly salary in return. The power dynamic is often one of high inequality, but a necessary agreement for the employee, who needs such a contract to protect against downside risks like defaulting on mortgages, insurance and childcare expenses. The employer's salary and benefits would be the only thing that stood between the employee and poverty due to sickness or homelessness. There is a possible agency problem in employer/employee relations if the employer is not a significant shareholder. In the case of not being an owner of the business, the "employer" or "manager" or "executive" has priorities to shareholders first. There is only indirect mutual interest in employee relations, insofar as it makes shareholders money. This may not be the case where manager/executive/employer is also the owner of the business. In this case, there is some direct mutual interest.
Entrepreneurship and being a founder in the early 2020s
Third, entrepreneurship. The relationship between entrepreneur and venture capital is an interesting one. It relates more to that of serf and lord, or artist and patron. We've discussed serfdom. Briefly, the relationship between artist and patron was one where the patron offered pay, sustenance and an audience for the artist or musician to perform, and thrive where independence would not be viable. Now turning to entrepreneurs and venture capitalists. The sprouting of "solo GPs" and multiple venture capital funds is a sign of high inequality. When a wealthy minority are not gaining returns from traditional financial investments (e.g. due to 0% interest rates), venture capital grows like cancer. The risky investment shrouded in a sense of "greater good" seems like a morally viable lottery ticket for those who can afford it. Interestingly, the venture capitalists are more than happy to act as if it's their own money, and therefore suffer a significant agency problem. Unlike patronage, where the wealthy patron actually owned the wealth, this is not the case for the venture capitalist, who is in most instances, merely a steward for those with the real wealth.
This means that in actual fact, the relationship between entrepreneur and venture capitalist takes the extreme inequality of serf and lord (or artist and patron), and layers on an agency problem. Double whammy. This is what makes entrepreneurship highly fragile - and perhaps even toxic in the decade of free money and zero interest rates. It means that several mimetically driven "founders" or "serial entrepreneurs" who would have ordinarily been employees, have swapped employment for indirect patronage. Instead of being a one in a million winner on American Idol or the X Factor, “startup land” is now a game show where there is a one in a million chance of building a paper unicorn (until the paper evaporates). What is a venture capital fund if not a patron’s charity for "pioneering artists", when the majority of investments and the majority of VCs don't return a penny?
It's time to rethink the model of how money is allocated as investment. It's time to rethink the relationship between the person investing, and the person building. It's time for more skin in the game, on both sides of the relationship. There is a world where one can be an investor and a builder. There is a world where everyone can benefit from investing in positive tail events, not just those who can invest in the few VC funds that make money.
I hope that the quote I started with is wrong.
I hope that Sovereign Individuals will constitute the majority of people, and not the minority.
I hope that we can move away from highly unequal contracts, and high agency problems. Particularly when they coincide.
It will take a seismic shift in how our society functions to see the changes you mention. A fine piece of writing. Thanks for sharing.👏✍️