This article first appeared in Inc.
Capitalism has been good to me. After serving in the military during Vietnam, I came home and had a career in eight startups. I got to retire when I was 45. Over the last quarter century, in my third career, I helped create the methods entrepreneurs use to build new startups, while teaching 1,000’s of students how to start new ventures. It’s been rewarding to see tech entrepreneurship become an integral part of the economy and tech companies become some of the most valued companies in the world.
What has made this happen is the relentless cycle of innovation and creative destruction of old industries driven by new startups with new tech and new business models (network television replaced by streaming services, Nvidia GPUs versus Intel CPUs, electric cars versus the internal combustion engine, film cameras versus smartphones, programmers versus AI), all fueled by venture capital.
It makes me wonder – are startups still founded by people with a passion for creating something new? Or has the motivation changed to accruing the biggest pile of cash?
When I was an entrepreneur, what got me up in the morning was building something amazing that people wanted to grab out of my hands and use. The thought that I might make a $1 million or even $10 million on the way was always in the back of my head, but that wasn’t why I did it.
I wonder if it’s different for today’s entrepreneurs.
Here’s a thought experiment: What if we told every new entrepreneur that regardless of how successful they were, their total compensation would be capped at $100 million.
How many aspiring entrepreneurs would decide it wasn’t worth starting a company? Would Steve Jobs, Jeff Bezos, Elon Musk, et al have quit earlier? Have picked other careers?
How many would decide it wasn’t worth sticking around after their company was large and successful? (Would that be a bad thing?)
Would entrepreneurship suffer? Would we get less innovation? If so, why?
Would the best and brightest move to other countries?
Then let’s run the same thought experiment with Venture Capitalists. Would they pick other careers? Invest less?
At $100 million would capitalism crumble? Would we all be, heaven forbid, be “Socialists” or worse, to even have this conversation?
Questions
I’m curious what you think.
Should there be any limit?
If so, why?
Or why not.
What would be the consequences?
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Filed under: Family/Career/Culture, Venture Capital |
Everyone of us has a set of ambitions (financial, career, lifestyle, marriage and business), and this orientation allows us to design the future we want as it relates to these 5 categories. Some may be happy with $1m, while others a $100m payday is the ultimate purpose. A few would care less about the money and more about the existential purpose of creating something that benefits others. For them, a cap may not matter.
Then there is the folks who would push against a cap/limit of earnings and say it’s not worth it….
$100m is still a ton of money. Cap it at $10m and you’d see a big difference. Or put an 80% death tax on it. Japan has similar disincentives which is why startups are less common here.
Steve – great to see you pose this thought experiment! I was just having the discussion of what motivates entrepreneurs today in a class where I opened with the question “Why do we make new things?” I look forward to seeing the responses.
Dave Charron
No limits! That’s what capitalism is about. Did Elon stop? Is he stopping? It’s not the money. Capitalism is about self-determination. Let the freedom of choice, and the free market determine what happens. For an academic view, look to Hackman-Oldham theory of motivation. You described the theory in your post. I do feel like the younger generations have a misguided view of “working”. I hear a lot of words like “my whole self” etc when everyone that has been an entrepreneur knows that when you do a business, you are putting your whole self into it-otherwise it doesn’t succeed.
Hey Steve, it would be a horrible idea to limit companies to 100M. The primary reason is that you are taking away the vision of the company and only focusing on the mission. You might as well be a contractor versus a founder.
The *company* would not be capped at 100M. Under this hypothetical scenario, only the founder’s *compensation* would be capped.
Your answer implies one potential (and potentially undesirable?) outcome: no founder would grow a company past a certain limit. But this outcome is not inevitable. I would be very curious to know if it is even likely.
LOVE the question. My answer. The limit would have no material effect on founding teams or the flow of new startups. It believe it would have an effect on some larger VCs who need the occasional unicorn to get to the ROI expectations of investors. But that is just a question of magnitude, not the concept of a limit. If you made it $1B, even the larger VCs might be ok. But the limit itself is not the issue. Unfortunately, the mechanism of instituting and enforcing the limit is where it breaks down. But perhaps this is stating the obvious and you only mean the question as a hypothetical to force a conversation about motivation. But here is another problem with the limit as it relates to the VCs. There are some very challenging problems in the world that require so much capital that only the largest governments and private investors can afford to capitalize. I believe we need the private investor class to be engaged in this type of problem. For these mega problems, it would not be wise to set a cap on potential return because the required investment levels run into the tens of billions of dollars.
What motivates you and how you feel about money is a reflection of your values.
https://motivationalinterviewing.org/sites/default/files/valuescardsort_0.pdf
NO LIMIT… as any limit is perceived as a ceiling, and ceilings risk being lowered maybe to 10 million, or 1 million by some panel of experts who are appointed not elected
I believe there are start-ups that look like a scam today. I have no idea whether it is a cynical quest to get funding and then sell off to some big company that are late into the tech or just plainly a bad idea that really didn’t focus on customer desirability but seemed attractive to investors and a few early adopters. In commercial vehicles for example we have Nikola, Tesla truck, Volta and Einride that have an unclear future. Another area is autonomous vehicles where reality is catching up with the hype.
As I read your blog post this morning and reflected on what drives me today as I rapidly approach my 75th birthday it has little to do with money but rather the joy of moving the needle on the current negative narrative about aging.
Would putting a cap of $100 million in play dampen the outcomes? In my case no, but in the minds of driven entrepeneurs and the venture capital that funds them yes.
As the world sorts itself out on the dimensions of MAGA, and the rising tide of populism offset by the the moral sense of obligation to narrow the growing exponential gap between the haves and have nots it is hard to say where we will land.
Mary and I had the privilige of attending the first Lean Launchpad Educators program that you and Gerry delivered in August 2012 and then launching the Starting Lean inittiative at Dalhousie Univeristy culminating in Mary proposing and you accepting a nomination for an honorary doctorate from Dalhousie.
I like you am in the process of relecting on what comes next and why. End of the day my personality drives me to continue to live at the bleeding not leading edge of what comes next.
A place to study might be corporate innovators. Since there’s no monetary upside, the best corporate innovators (using Lean Innovation, i.e. actually focusing on customer needs) should resemble entrepreneurs who innovate to build things customers love, not just for the money.
You are intermingling wealth for consumption purposes and wealth deriving from business control. Nobody really needs more than $100M for consumption. However, there is immense value associated with highly skilled individuals maintaining control over businesses they created or in using their wealth to create even more businesses.
The evil is in inheritance. I would propose eliminating the inheritance tax and instead classify the receipt of inheritance in excess of $10M as ordinary income. Doing that addresses the argument that the estate tax is double taxation.
The benefit of generating excess capital is being able to expand and fund new ventures. A compensation cap would likely shift firms to a Japanese style compensation setup where most benefit expenses are covered by the company. A cap could encourage more capital to remain in the business vs distribution to compensation, perhaps encouraging greater spending on new ventures.
A rising tide should lift all yachts equally. The total compensation ratio between janitor and CEO should be no more than 10 to 1, stop practice of corporate loans to officers in lieu of taxes salary, officers and VCs can’t sell options, RSUs, or other grants for a minimum of 12 years of IPO (no quick exits leaving retail investors holding the bag and keeping institutional knowledge working for the company) and initial offering can be for no more than 100 million shares. Do all that and you are welcome to walk away a billionaire.
If business fails and takes VC money with it than pain should be felt in same ratio 10:1 so that employee salaries should be paid in stock to make the failure painful to them too.
This is a very interesting question. One answer would be that if Elon Musk simply retired after selling PayPal, he’d have about $100 million, but there would be no Tesla or SpaceX. He spent pretty much all of that money to launch both companies, and I think the world would be a worse place without them – especially SpaceX.
If you look at the number of billionaires in the world, I’d estimate that there are far less than 10,000 of them. Out of all the people in the world, I’d guess that 1,000,000 people are worth $100 million or more. That still leaves a lot of room for a lot of people to make money and get to the goal that you’re talking about.
The question is, for me, more spiritual than financial. If we talk about ‘need’, for most people to not worry about the day-to-day pressures of the USA, you can probably get by on $100,000/year as an individual. If you had a net worth of $2 million, you’d probably be able to live just fine. If you want to strive to make more than that, that impulse is what propels the world forward. From my reading bios of incredibly successful people, there is a level of personal imbalance that I’d find unacceptable. You pursue your passion to the exclusion of personal relationships, for instance, or you think that because you triumph in one area, it gives you the right to think that you have superior knowledge in all others. Of that subset of people, very few get that balance right. At some point, you don’t want to ‘gain the world, yet lose your soul.’ That point differs for everyone, of course.
I’d say, in sum, that it’s better to not have limits. People have naturally fallen into rough bell curve distributions of net worth, and putting an artificial limit on the upper bound of that won’t change that distribution at all.
Thanks a lot for your questioning of the status quo, Steve. This is the key for innovation. From my point of view it is not a matter of an amount of money, but how (humanistically) you make money and how (humanistically) you distribute it.
This post has a certain “get off my lawn” vibe.
May be instead of a max earning cap, set a salary multiple cap.
I’d say this is a much bigger driver and contributor to socioeconomic imbalance. CEO’s salaries keep growing exponentially while employees’ salaries aren’t even keeping up with inflation.
By setting a cap (and I’ll keep it low) of say 5X between the CEO and lowest pay employee, you start re-balancing the distribution of wealth. And this new distribution may cause the condition for others to get enough capital to start their own companies.
The way the system is setup today, is getting harder and harder to get an equal opportunity at starting a company because people can’t build enough of a safety cushion to take the necessary risks.
Capitalism is not longer, and hasn’t been for a few decades now, a working model for a modern society where wealth distribution has gone so out of wack.
It seems that your aversion for, or maybe intense dislike of, socialists and social systems (i.e., human and economic ecosystems) is in conflict with your idea that there should be a cap on economic rewards accruing to entrepreneurs and/or venture capitalists. Is that not heresy?
The right and fair way that balance and appropriateness can rule such situations is by ensuring the rewards of success are contextually appropriate and that businesses pay the fair and full price for both what they consume and what they use (i.e., employee and supplier labour and resources used), as well as for what damage they cause (i.e., pollution, waste, consequential damages, etc.).
It is important to remember we only exist in the context in which we live, and there needs to be a fair and equitable balance to that. Unbalanced situations cannot defy the laws of nature, economics, or social systems, for the greedy always comes to an ugly end in time.
Who will police such situations? Well, because businesses only exist to serve the needs of those who live in the jurisdiction they operate in, that role has to fall to the people’s government, which needs to be a just and fair referee and arbitrator, as opposed to an arbitrary, dictatorial authority.
It is sad that both the world we live in today, and the social system we exist in, are so unbalanced that people are either grabbing however unfairly for all they can get or begging for what they need to survive, with seemingly no one of note in the middle content with their part of the world they live in.
What we all need is more cooperation, respectful negotiation, and sensible and appropriate decision making. Otherwise, we and our societies are doomed to die increasingly ugly deaths.
I don’t capitalism would crumble but keep in mind that CEOs of very large firms can make more than $100M. With that said, it’s the vast majority of startups that take on risk so they might have the chance of bettering themselves like the fortune CEOs and make $100M. They understand how challenging it might be but they take the risk as the reward could be unlimited. There also seems to be a focus on monetary reward as it often takes money to create freedom. Even as an entrepreneur, you aren’t completely free as you might have board or VC to report to. You are free when you have enough money to do what you want to do and fund your next adventure yourself. I believe that is what most founders want and not sure if that is $100M or $10M but financial freedom seems to be a requirement to then be free to build something you want. If you have innovative idea, you don’t always get to pursue it unless you can convince VC to invest in you. They don’t want to invest in you if you have no experience in given area. I have ideas of how to transform heat recovery to improve response to climate change, but I pursue software apps as I have a background in one but not the other. Until I’m financially free, the world will have to wait for my next big idea!
Thanks for posing this intriguing question. As a hard core capitalist (competitionist), my knee jerk reaction is “no limits.” There is the real risk of government running with the idea and lowering the limit dramatically over time. The key question, however, is “for any individual, when is enough, enough?” For Americans, it seems that in today’s dollars, $100 million is a reasonable total individual compensation cap from the venture for the founder (not a cap on company profit/earnings). This idea becomes a little more complicated when considering control of the venture (stock value, voting stock).
The best entrepreneurs have never been driven by purely wealth; those with some knowledge of history and the current state of economic inequality–and its inescapable negative effects on community at all scales–also know that nobody needs more than $100 million. The best entrepreneurs take the long view, and the responsibility that comes along with it.
A lot of finance bros would not start companies, and TBH that’d be great for the tech scene.
How much do you value freedom? That answer is different for everyone.
I think a cap is a great idea. It would weed out the greedy douche flutes and that would be great for the tech scene.
As a physician entrepreneur maybe my WHY is very different, but I am definitely in the camp of the founders who do it because it makes things better for many people, and yes, there is a financial return as well – but in that order. Many of our investors fit that mold too. But too many don’t.
And thank you for all of your shares Steve – it helped us make sure that Careteam is built different from all the other digital health tech that is causing a massive burnout of the medical profession. Your stuff works!
Great question! So many additional questions arise. Is it $100M compensation per year? Is it determined by total package or just the cash part? If so, is the total package determined by current stock price or some discount for the future? Is it just entrepreneurs or is it all US workers or even people who own “passive” investments? What if the total annual compensation in the US capped at $10M and total wealth capped at $100M? Where does that remaining cash go? Do the companies retain it? Is the excess required to be distributed to lesser paid employees? Who enforces these rules? Does the government tax the excess to bring the person’s income down to the cap?
Please consider what the entrepreneurs are going to do when they hit the $100M cap. Most all of them will quit and move to another project. An analogy would be kicking a quarterback out of the NFL after they WIN a superbowl. Sure that spreads the wealth around, but does it result in the best possible football teams? Is it wise to boot the proven performer and replace them with an unknown quantity? Will the total performance of the NFL be better or worse if you keep kicking your top players out of the league?
This a really exciting idea. Sadly, there would always be alternate tax venues (and tax lawyers) lacking social conscience, so there would be lots of incentives for American entrepreneurs to renounce their citizenship and move all their affairs overseas.
I also think some billionaires (Bill Gates comes to mind) do an awful lot of good with their fortunes.
Maybe what we have to do is forget controlling income, but start identifying (and then penalize) anti-social behaviours by billionaires.
I think there should be limits but they must apply across all industries. Otherwise people would switch to where the money is. In the olden days the top tax bracket in the US was 70%. That’s a limiting function and neither industry nor innovation was curtailed.
A cap would make a tiny difference. My definition of an entrepreneur is someone would does not have a choice in life but to create the product that s/he imagined. The commercial success of the company, and the financial rewards for the founders, are a result of having invented, built and marketed an innovative product.
In my experience, entrepreneurs who are financially motivated rarely succeed, primarily because of the lack of creativity.
Growing is not a goal in and of itself – seeing more and more people enjoy your product is THE motivation.
I consider myself a “compassionate capitalist”. Steve, as I grew up in Silicon Valley, (not too dissimilar from your background) the focus was on innovation and leadership not domination. Great leaders were worried building the company, and in parallel doing it with integrity and the common good in mind. Today, I refuse to invest in entrepreneurs that are “doing it for the money”. That leads to all sorts of flawed decision making. i.e. Elon Musk. So many positive attributes regarding entrepreneurship. But then tramples on others in so many ways. And pontificates about things he knows little about, and for which he lacks empathy. I do not believe there should be a limit on the possible gain. If moral suasion and integrity cannot return, then regulations will old, and new will need to be enacted and enforced. Making entrepreneurship more bureaucratic and cumbersome. Limiting the ability of the Geese to lay Golden Eggs. Bad al the way around.
Who sets the limits?
The government? The market? Society?
The moment limits are set, achievements are gone.
There will be no progress if there are limits.
And please don’t say: “There are speed limits in order to avoid accidents”. That’s not the issue here.
Hi Steve, in the “old days” we used to say, that we do our job on a whim and wonder why we get paid a lot of money for something we would do even if we didn’t get paid 🙂
Greetings
Ralf
Believe with today’s younger generation having a genuine desire to help causes, better world work. They would sign-in to a cap amount (including a pledge to donate excess to social good).
Time O’Reilly is thinking the same way today:
https://www.theinformation.com/articles/ai-has-an-uber-problem?rc=indqze
Andrew Culver
Great question. I would like to see the successful entrepreneurs and VCs feel a very big need to contribute to some of the weaker parts of our society. We make an enormous effort as a society to help people succeed in primarily educational and research efforts. The people who make it big should be allowed to have great wealth of course. But society as a whole made it possible for every one of them to succeed, so they should be very happy to use their superior talents and some wealth to help build the lower income and opportunity portions of society. What if Bill Gates had been born in Timbuktu? Not a billionaire. Would own 5 camels. We can ask people to appreciate the opportunity that gave them great wealth and to use part of it to better society overall. These people have incredible creative problem solving talent and turning them on to solving society’s problems would result in tremendous progress.
I don’t think that capping or not is the question. Perhaps what is being assumed in your question is that the social system and institutions that are supposed to exist for the benefit of the people have not changed since you were in the game.
The major issue I see is not so much about individual incentives entrepreneurs have to make it big, but how society is being hollowed out by a combination of reduced funding for education and support services for regular people coupled with de-industrialization in key areas and an inconsistent tax policy that makes it almost impossible to want to pay taxes, so many people who could contribute for the benefit of society feel they need to minimize their exposure to ineffective government.
With this in mind, it is natural to think that if someone risks all to start a company, they would naturally want to maximize their outcome because no one will have their back if they fail. Innovating in switzerland is very different than in the USA, because there you have a logical transition infrastructure that supports you. in the USA you will end up living in your car, then on a bench. Obviously, this makes it harder to take risks and thus only those with a bold vision will attempt to do something.
The less safe is society for the majority of people, the more will try to move up the narrow path to oligarchy. The middle class squeeze is real and dangerous, because it skews towards the bottom.
You are very optimistic about startups yet ones founded in the last 20 years are much less profitable and have had much less impact on productivity than ones of the previous decades. One reason is that recent startups have not commercialized breakthrough technologies to the extent that startups in previous decades (transistor, LED, lasers, glass fiber, radar, polymers) did. My two American Affairs articles document these changes: 1) https://americanaffairsjournal.org/2022/11/web3-the-metaverse-and-the-lack-of-useful-innovation/; 2) https://americanaffairsjournal.org/2021/02/the-crisis-of-venture-capital-fixing-americas-broken-start-up-system/
It’s humbling to read about your life journey Steve. You have been such an advisor and inspiration for me, in either fast experiments or the joy of teaching. To me a cap will not stop the pursuit of creating something better or solving a problem, because there is a joy/fulfillment factor.
As a business executive, entrepreneur and academician for over 50 years, I can tell you that an entrepreneur’s view has most certainly changed in last 3 decades. This is largely due to the mentality of creating “unicorns” at any cost. It has gone from “passion” to “money”.
I’m at NTU in Singapore this week co-leading a workshop on deep tech venture creation, so I polled our 25 PhD and post doc students this morning. Overwhelmingly yes, we would still want to commit our energy, time, and funding on pursuing our startup dreams, even if capped at (a paltry?) $100M.
(A worthy question to explore Steve.)
Steve – I wonder whether you might get closer to the truth you are looking for with a different question – one that makes people make a more definitive decision between impact on the world vs personal financial gain.
I worry more about founders who seemingly have exit strategies before they have a developed market. I get that some will know in the back of their minds that if “it” takes off, the corporate growth process will suck the joy out of their nimble, audacious, disruptive outfit… but that should be a “future me problem.” Sure you may get there, but for now let’s focus on the journey.
Capping capitalism, it seems to me, is the solution to a different problem. In the US, the disparity between C-suite compensation and worker-bee salaries is and has been growing at an alarming rate. Almost all of this is in established companies, but I think it’s interesting to explore if entrepreneurs would entrepreneur if they knew that avenue was blocked. My gut tells me no.
As startups pursue reinvention waves, capping reward will limit scaling up effort, limiting how much wealth we can create from next wave of creative destruction.
As opposed to promoting startups as money making opportunity, we need to promote it as a powerful tool for recreating products for expanding wealth reservoir of the wealth.
Besides, instead of capping profit or reward, we need to cap how much subsidies could be legally permitted to sell primitive early version of reinvented products.
We should also restrict ‘buy and burry’ strategy for monopolising the market.
Further to it: https://www.the-waves.org/2022/02/15/startups-from-creative-outburst-to-mad-race-of-valuation/
Its not about the money only, is it?
100 million is more than enough, but if all your competitors received the same, it would be unsatisfactory, wouldnt it?