Restructuring Capitalism

The following was first published as an op-ed by Sramana Mitra for Xconomy:

In the fading months of 2011, we find ourselves in an uncertain world.

On the one hand, America is still reeling from the 2008 financial crisis, and the nation’s faith in free-market capitalism as its guiding principle has been shaken to the core.

On the other hand, Europe is reeling under the burdens of socialism and welfare economics, and the economies of entire countries no longer seem viable.

The emerging markets are growing, but the methods used are complex. China is practicing state-run centralized capitalism that is heavily controlled by policies and bolstered by subsidies, by no means a free market. India, a chaotic democracy, is caught somewhere in between.

The time has come for us to ask the question: Is capitalism still the right answer for the future of our world?

One of the fundamental flaws of capitalism that has collapsed the system is unbridled speculation. If you believe that capital is at the heart of capitalism, then speculators are at the heart of capitalism.

As it happens, the speculators have hijacked the system.

In the process, capitalism has degenerated into an unjust, unpalatable mess with speculators enjoying the lavish benefits of privatized profits and socialized losses while jeopardizing society at large with irresponsible risk-taking. These speculators add little value; move money from here to there; continue to garner multi-million dollar bonuses, unperturbed at the coming Armageddon; and are financed by government handouts. It is no wonder that Wall Street is facing the wrath of the people.

But for some of us, this was the system we believed in as the guiding principle of our lives. By “us” I mean entrepreneurs—the other constituency in the capitalistic pyramid, the one that actually creates value and reaps its rewards. This is the group that holds Steve Jobs, Jeff Bezos, Bill Gates, Reed Hastings, Larry Page, Sergei Brin, and Mark Zuckerberg, among others, as its role models. The group the speculators ride on. The group the people are not angry with, as shown by the outpouring of affection for Steve Jobs following his recent death.

The system needs to be re-engineered. In effect, the entrepreneurs need to hijack it back from the speculators and marginalize their ability to create destruction.

How do we do it? What is a reasonable framework for capitalism 2.0?

For me, the most logical next step would be to democratize capitalism in the same way that Henry Ford democratized the personal automobile and Steve Jobs and Bill Gates democratized personal computing. But we need to focus on democratizing entrepreneurship, not speculation. Speculation has already been democratized to disastrous ends, as we saw in the dotcom crash at the beginning of the millennium.

Another problem is that entrepreneurship remains the province of the elite. There is tremendously high “infant entrepreneur mortality” owing to a lack of education, guidance, and resources. Every year, 600,000 companies go out of business in America. Again and again, entrepreneurs make the same avoidable errors and end up in the dead pool.

One of these fundamental errors is chasing capital straight out of the gate. The media, business schools, and of course, the capitalists themselves have fostered a myth that entrepreneurship equals financing. This is why each young entrepreneur chases investors before doing any business validation.

In consequence, more than 99 percent of the entrepreneurs looking for financing are rejected—some because they are too early and unprepared and some because their markets are too small or the pace of growth is too slow. Nonetheless, the entire entrepreneurship ecosystem and its resources are focused on the 1 percent that is “fundable.” Incubators take pride in how exclusive they are and how many entrepreneurs they reject. Star angel investors like Mike Maples in Silicon Valley get more than 7,000 deals a year and invest in 10 to 12 at most.

In the process, these naïve entrepreneurs ignore the constituency of greatest significance: their customers. They fail to understand that customer money equals revenue, something that helps them become self-sustaining rather than dependent on investors.

The prevailing ecosystem fails to appreciate that entrepreneurship = (customer + revenue + profits); financing is optional.

In the next stage of capitalism’s evolution, we need to dispel this myth. We need to educate millions of entrepreneurs on how to become successful and understand what are the dynamics of “capital,” what is “fundable” and what is not. We need to help them understand that rejection from a venture capitalist does not equate to failure and that there are other ways of building successful, viable, self-sustaining businesses. We need to re-establish that the fundamental commercial transaction in capitalism should be between the producer of value (entrepreneur) and the consumer of value (customer).

We need to democratize entrepreneurship education and incubation in an inclusive manner so that much larger masses of entrepreneurs around the world can tap into the most powerful force of capitalism: how to create value and be compensated for it by customers.

Regardless of how large the opportunity that faces them, entrepreneurs need to be taught how to build profitable businesses. There are many more $5 million, $10 million, and $25 million ideas out there than there are $10 billion ideas. The latter is the domain of venture capital, but the former is still very much in the domain of capitalism and of entrepreneurship.

If we can teach millions of entrepreneurs to build sustainable businesses, the Western world’s current struggle with unemployment can be tackled, just as the emerging markets’ efforts at development can also be tackled.

With this premise in mind, I have started the One Million by One Million (1M/1M) initiative, a virtual incubator whose goal is to help a million entrepreneurs reach a million dollars in annual revenue and beyond, create a trillion dollars of global GDP, and create at least 10 million jobs by 2020. At scale, we believe this will establish the framework for capitalism 2.0: a distributed, democratic capitalism around the world.

A distributed, democratic capitalism as described above would solve the problem of rampant speculation in a simple, elegant fashion. Most of these companies will never go public or be acquired. They will continue to exist as small cash-generating businesses, supporting small but stable workforces in diverse and distributed communities far from the reach of the speculators.

This, coupled with policy changes, including regulation to check the speculators from taking undue risks, as well as tax policies that favor entrepreneurs and penalize excessive speculation, would help to marginalize the dark forces clouding capitalism. It would sharpen our focus on value creation and entrepreneurship, and, I believe, usher in an era of prosperity and stability throughout the world.