"I don't want a future in which politics is primarily a battle between cosmopolitan finance capitalism and ethno-nationalist backlash." - Commentator Chris Hayes
After the news that the UK has voted to leave the EU stunned the global economy, causing the pound to drop to its lowest level since 1985 and resulting in the stock market losing $2 trillion in value in one day, policymakers, investors, and entrepreneurs are asking, "How did this happen, and what's next?"
The Brexit--and political movements with mirroring sentiments like the Trump campaign here in the US--are happening because a large part of the population sees where the economy is going, and doesn't want what they see. And while the easy answer is to blame racism, nationalism, and ignorance, the truth is more complicated. Investors, business leaders, and policymakers need to recognize that the downside of a globalized, interconnected world is an obsession with short-termism and instant gratification that leaves out critical investment in many parts of the economy--and the people who don't feel a part of the conversation are fighting back the only way they know how.
Over the past thirty years, one of the key themes in globalization has been a decline, at least in the developed world, of what could be termed the "real-world economy"--the production and delivery of vital goods and services such as health care or manufacturing--and a growth in the "financial innovation" economy. We see this on a macro-level: financial services now make up 8% of the GDP of Britain, largely concentrated in the city of London. (And investors far more experienced than I am hold this opinion: Larry Fink, CEO of BlackRock, the world's largest investor, sent an alarm-bell letter to S&P 500 CEOs warning about short-termism in February.)
How does this affect the everyday person? Wall Street banks, in a drive for quarterly profits, will often push American and British corporations to move jobs from the US and the UK overseas, without recognizing the externalities that these moves will have on the communities they are invested in. Companies spend far more time figuring out how to avoid corporate tax than how to invest in the long term of the communities where they are based. And new businesses are highly concentrated in the wealthiest cities--78% of start-up investment in the US goes to three wealthy states, and 75% of new business investment in the UK goes to London itself--meaning that very often, start-ups are creating perks for the well-off (on-demand services, for example) versus solving deeper problems in society (such as health or education).
The ultimate result: from large-scale investment banking to startups, leaders in our economy have been promoting short-term profit capture over long-term value creation, with seemingly no negative consequences for those making the decisions. But leaders may have overplayed their hand: this week, a $2 trillion bill came due. Why?
While the answers are many, my area of expertise is startups. And given that 100% of the new jobs over the last 30 years have been created by new firms, it is fair to say that the way we invest in new companies today will have lasting implications for the global economy tomorrow - for good or for ill. In short, we're planting the seeds of future Brexit-like anger every time we direct our resources toward a startup that's "building to flip" rather than a business that is "building to last."
The factors that led to the Brexit are complex, and the path to a more integrated global economy will require coordinated action from countless actors. But if you are reading this article, you're probably in a position of influence in the economy--whether you're an investor, business leader, entrepreneur, or another decision-maker in the global economy. Starting today, you can make changes in how you invest that could play a part in preventing future catastrophic losses like the one of the past week.
If you're an investor (limited partner) in a venture capital firm, ask where, how, and why the firm is investing. Your investments should not be concentrated in a few cities. If the firm's response is "We invest in San Francisco because we like to have a hands-on role, sit on boards, and it's important that we are nearby the companies we invest in," I wouldn't buy that. Push them to travel to invest in a better economy: your money will go farther, and you will ultimately be more profitable, if you have a more diversified portfolio. And because of shortcuts in thinking, we're limiting who gets a shot at starting a business. For example, only 5% of venture funding goes to women, and in the US, less than 1% of venture funding goes to African-Americans and Latinos. In rural areas, where unemployment (and anger) is highest, entrepreneurs see a rounding error of investment. We're leaving most of society off the playing field, and investment won't change until investors are more demanding.
If you ask why this is and investors say "There are simply better companies in Silicon Valley," or "We're trying the best we can on diversity, but we have a 'pipeline problem'," you can write me at ross@vilcap.com and I'll send you a long list of great companies that you can invest in--at much better value for money--to disprove their case.
If you have any money with a bank, at all, be demanding when you meet with your financial representative about what your money is doing in the world. If you care about the sustainability of the planet, ask what stocks you're in. If you're worried about the next Brexit, ask about who is employed by the companies you're invested in and how their management team makes long-term economic decisions. The banks won't change their behavior until you start asking questions.
If you're invested in companies, make sure you have very high standards for what they're doing--while they are building the company. Earlier this year, former McKinsey partner Lenny Mendonca and I wrote an article, "Silicon Valley's Unchecked Arrogance," about the misguided Silicon Valley obsession with universal basic income (UBI). The core idea behind the UBI is that innovative ideas, such as self-driving cars, will create a future where most people don't have a job--and it's the responsibility of the people creating this wealth to provide for everyone else (through a basic paycheck). If the Brexit has taught us anything, it's that people don't want cash handouts--some of the highest recipients of EU aid in the UK voted to leave. People want dignity. And innovators often take their cues from where the money is. If Silicon Valley leaders stopped pushing for a UBI as an "inevitable outcome" of startup disruption, and started demanding that the companies they invest in solved deep, real-world problems, then many students at Harvard and Stanford would immediately stop working on their food delivery app and, say, try to innovate in food systems or advanced manufacturing.
Finally, if you're leading a company, think about how you can share the value of what you create with the people who create it. New Belgium Brewing, for example, is a 100% employee-owned company--how would we feel about Uber if we knew that drivers shared in the profits of the billions of dollars the company created?
The Brexit--and any kind of nationalist extremism--is a product of fear. From the Trump campaign to the UK Independence Party, we are seeing a response to decades of short-term thinking, driven by instant gratification, that has created an economy that a lot of people don't want to be a part of. You can start asking questions and making decisions today that will move society in a more positive and inclusive direction.