Tag Archives: wealth

Silicon Valley Shakeout: Yes, Many Startups Fail

The press is going crazy here in Silicon Valley with pieces about the coming shakeout in startups. The basic story is that over the past few years, the growth in angel investors led to a lot of mediocre ideas getting seed funding, and now that the froth is off the market, those mediocrities are finding it difficult to raise additional money from venture capitalists.

PandoDaily gives a good summary here. Dan Lyons, a well known tech journalist (and creator of Fake Steve Jobs), has a more savage take here. The following quote kind of summarizes his piece:

For the past few years we’ve had people calling themselves “investors,” who have no experience investing, swanning around the Valley, slinging money at people calling themselves “entrepreneurs” who have never held an actual job, let alone run a company.

My view is that this shouldn’t surprise anyone. The current social/mobile bubble has been obviously following the trajectory of the 1999-2000 dot.com bubble (see my prior posts on this topic here, here, here and here), and any rational observer could see how it was going to end. Just like a decade ago, the promise of quick riches drew hordes of young, aggressive tech wannabes who launched me-too companies, features posing as companies, or simply bad ideas. And just like a decade ago, huge amounts of capital desperate to be put to work meant that bad ideas got funded. But bad ideas become bad companies, and bad companies start to fail, and VCs don’t put more money into failing companies.

Ten years ago, the mantra was “let’s dot.com category X.” Now it’s “let’s take category X social. Or mobile. Or both.” But either way, good ideas with good execution get traction, and bad ideas don’t. PandoDaily looks at the travel space and explores it as a microcosm of everything that’s happening. Bad companies with bad names ( Dopplr, Tripl, Gtrot) are all going away, because they never should have existed.

This is really a standard Silicon Valley cycle; it’s just getting worse. There was once a time when VCs funded one hundred disk drive companies, which also ended poorly. Now it’s that the cycles are stronger and draw more wannabes from further away. More press and more billionaires mean more people coming to enter the lottery. I mean, now we have a reality TV show about good-looking young entrepreneurs (or perhaps I should say “entrepreneurs,” since the folks on that show are exactly the people Dan Lyons savaged). Back in the 1980’s nobody made a reality TV show about 45 year old engineers starting disk drive companies.

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Aside

First of all, how come nobody told me that Richard Posner and Gary Becker had their own blog? I have never referenced Becker in this blog, but he is a big hitter economist of the Chicago school. But I have … Continue reading

Luck Drives Pop Music AND Wealth?

Yesterday’s Baseline Scenario (one of my favorite blogs) had an entry describing an academic paper which modeled how income gets distributed in a society and why income inequality is so strong in some economies. Based on the abstract of the paper, and on Baseline’s summary of the rest of the paper (yes, I am admitting that I did not read the whole paper), the model shows that a set of homogenous homes will diverge in wealth, with wealth accumulating over time in fewer and fewer households, based purely on exposure to “idiosyncratic investments” which have higher returns. And in this model, exposure to these investments is random: based on luck.

Clearly this paper is not the be all and end all of explanations. Equally clearly, the assumption of homogeneity does not match reality. What I want to point out here is the connection to Duncan Watt‘s work on the development of hit pop songs, which he shows is also based on luck. Please see my posts here and here regarding Watts.

It’s interesting that two different approaches to modeling two different things come to such similar conclusions: the distribution of success is essentially driven by luck, not skill. Again, these are models, not complete explanations. I, for one, would certainly like to think that my skill will lead to success. However, judging by my reader counts, that may not be the case. Regardless, I think it’s important for us all to remember the role that luck plays in much of what we do.

The New Republic vs. Ayn Rand

Jonathan Chait of The New Republic recently took on Ayn Rand and her philosophy, and thus he took on the entire intellectual edifice of the right, which is built on Rand’s view that any restrictions on the activities of capitalism ubermen is a moral abomination.

Chait critiques Rand on moral and logical grounds, but he is strongest when he subjects Rand’s worldview to withering factual criticism (see page 3 of his article). Alan Greenspan, a famous Randian, recently admitted that his free-market ideology was wrong. Passages like the below, from Chait’s article, should convince more Randians of the error of their ways:

“In reality, as a study earlier this year by the Brookings Institution and Pew Charitable Trusts reported, the United States ranks near the bottom of advanced countries in its economic mobility. The study found that family background exerts a stronger influence on a person’s income than even his education level. And its most striking finding revealed that you are more likely to make your way into the highest-earning one-fifth of the population if you were born into the top fifth and did not attain a college degree than if you were born into the bottom fifth and did. In other words, if you regard a college degree as a rough proxy for intelligence or hard work, then you are economically better off to be born rich, dumb, and lazy than poor, smart, and industrious.”

Income Inequality

It isn’t often that I read two articles about income inquality in one day, let alone in publications as disparate as the Wall Street Journal and Harvard Magazine. But yesterday was just such a day, and it inspired me to write about these two articles.

First, the WSJ reported on some new IRS data . According to this data, the number of people with a net worth of $20 million or more was 47,000 in 2004, the most recent year for which data was available. This figure is up 62% from 1998. Other data showed that to be one of the country’s top 400 earners in 2005 you needed to earn at least $100.3 million, up from $74.5 million just a year earlier.

Then Harvard Magazine did a long survey of research by various Harvard professors on income equality and its impact on people and society. There was so much in this article that I don’t even need to comment. I am merely going to summarize some key findings and encourage you to read the entire article, which is available free online.

A) The share of total national income earned by the top 1 percent hit an all time high of 21.1 percent in 1928 — the heart of the Gilded Age. It dropped steadily to 10 percent in the 1960’s and 1970’s. In 2006 it reached 20.3 percent.

B) Americans at the 95th percentile of income or higher can expect to live nine more years than Americans at the 10th percentile or below.

C) On the Gini scale of inequality, which runs from 0 (totally equal) to 1 (Bill Gates owns it all), the US rating rose from .35 in 1965 to .44 today. Other countries around .4 include Russia and Mali.

D) The average CEO made 25 times what the average worker made in 1965. Today it’s 250 times.

E) States with the largest black populations have the least generous welfare systems.

F) In 1950 average public college tuition was 4 percent of median family income. In 2005 it was 11 percent.

There is both additional data and analysis in the full article. The article does not, however, show the methodology behind any of these studies. But I will note that all the studies were done by Harvard professors, who are generally pretty good at this stuff.

Convenience Consumption, Part 2

Just a few days after finishing my entry on convenience consumption I read in The Atlantic a great article by Virginia Postrel on what she termed “inconspicuous consumption.” She explores the works of several economists who show that spending on visible consumption goes up as neighborhood income goes down. In other words, people in poor neighborhoods are more likely to buy flashy cars and watches than people in wealthy neighborhoods.

Postrel notes that when Veblen was writing in 1899, America was a much poorer country than it is now, so the wealthy wanted to show off. But now, the wealthy have already established themselves, so it’s the better off among the poor who engage in the most conspicuous consumption. She quotes Euromonitor:

“Bling rules in emerging economies still eager to travel the status-through-product consumption road….[but] bling isn’t enough for growing numbers of consumers in developed economies.”

This plays right into my thesis of convenience consumption. The upper class no longer needs to display its wealth, so it displays its importance, as measured by convenience. Gaudy bling has been left to the hoi polloi while the upper class focuses on Fiji water and packaged meals from Whole Foods.