Entrepreneurship in the "Second Machine Age"

In his famous book "The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies" Erik Brynjolfsson gives his vision of the future of our economy and the impact of automation and robotization on the division of labor in society. 

Background

In an earlier stage (June 2013) David Rotman published an article in MIT's Technology Review, which is an interpretation of earlier work from Erik Brynjolfsson and Andrew McAfee on the destructive effects of technological innovation for middle-class job creation. The following illustration from this article shows the decoupling of the correlation between Productivity and Employment since 2000.

The central message of this illustration is that since 2000 the correlation between the rice of productivity and employment has been decoupled. Actually, the graph below shows that this trend was well on his way in the seventies of the last century.

We are creating more output with less people and the rise of employment in new technological industries is not compensating for this. Middle class jobs are hurt most by this trend. They are most vulnerable for replacement by advanced software and automation. The classical dependency of the middle class on an employer seems no longer sustainable.

Of course from a social stability perspective and from a macro economic perspective it is important to avoid polarization within society. A distribution of wealth which is acceptable to the majority is crucial for the sustainability of society. On top of that let's not forget that we need consumers as well in order to keep the economy alive. The following graph shows that contribution of middle class consumption is expected to shift rapidly. The new middle class is expected to live in the currently emerging markets.

The opportunity

From an entrepreneurial state of mind all these numbers trigger the question where the big opportunity for the middle class in the US and Western Europe is. This opportunity is in the mid sized companies.

There are 2 crucial developments which provide tremendous opportunities for entrepreneurs in the 'Old economies'. 

  1. Globalization as such provides unprecedented opportunities for scalability.
  2. New technologies enable an enormous market reach for small and large companies alike. Entry barriers for new markets have never been so low. The granularity of both marketing and physical distribution have never been so dense and transaction costs have never been so variable. 

The following graph shows that profitability is less and less depending on labor, or in other words, the leverage on labor is increasing rapidly.

Especially since 2000 the corporate profitability exploded in comparison to GDP and labor income. This indicates that since then, companies unleashed a new source of leverage. Classically any company builds his profitability on 2 pillars:

  1. Any employee should contribute considerably more to the bottom line than his own labor costs.
  2. The cost of capital employed should be significantly lower than the return on investments.

Obviously as of 2000 growth of corporate profitability really took off. As we have seen before, the decoupling of labor costs and productivity is an important reason for that. The other one is the relatively low cost of sourcing capital.

We need to zoom into these numbers a bit more, because something interesting is hidden in the graph above. Whereas on an individual level the middle class is 'between a rock and a hard place' on company level it is completely different.

The level of job creation from startups has come down significantly over the last decade:

Whereas Medium Sized Companies show an increasing contribution to employment:

Medium is Beautiful.PNG

So from an economic standpoint is seems to be of utmost importance to make sure that medium sized companies flourish and start-ups succeed in their growth towards being medium sized. From our experience external backup has significant impact on the success rate of start-ups in 3 respects:

  1. Pre-launch scrutiny
  2. Intensive guidance during built-up period
  3. Financial backing

Experienced and specialized Venture Capital firms or incubators provide these three levels of support. The numbers speak for themselves.

This calls for a system in which we support the mid sized companies more than we currently do. There are a lot of initiatives to facilitate start-ups, but it is clear that the economy could benefit significantly from more measures to boost mid sized companies. Availability of credit lines is certainly an issue, but management support and counseling is as important as in a start up situation. This segment should grasp all the opportunities that technical innovation has to offer and benefit from the trends as shown in the graphs above.

Starting a company from 0 to 1 is certainly not simple, but taking a company from 30 million to 100 million (the stage of real job creation) is at least as difficult. It requires experience in management development, financial structuring and all other aspects of leading a company. First and for all it usually requires the development of a new management layer in such a company. The founder/entrepreneur needs to gather a team around his and learn how to delegate. The team that brought the company to the 30 million is not necessarily ready for a next step. Numbers show that we should give them all the help we can offer them.