When Entrepreneurship Feeds Income Inequality And How It Can Change

What happens when Silicon Valley's "new money" entrepreneurs start skewing the wealth curve? How to address income inequality, as an entrepreneur.

From jeans-and-sneakers offices in Silicon Valley to the White House there is anxious talk these days about income inequality and how the venture wealth pie is shared.

Amidst jaw-dropping reports of heady private valuations of Uber, Square, and Dropbox—not to mention the Twitter-Facebook-LinkedIn market capitalizations and shareholder exits—Google’s Eric Schmidt says that he is "very worried" about inequality in the Bay Area.

In San Francisco, Hillary Clinton says that Silicon inequality "of the kind that we are now experiencing is bad for individuals, bad for our economy, bad for our democracy."

Valley super angel Ron Conway’s call to action includes donating community service and stock to community nonprofits. All followed on the heels of Tom Perkins’s incredibly insensitive likening of the Google Bus protesters to Kristallknacht.

Are Entrepreneurs the Good Guys?

Just five years ago it was easy for us to occupy Wall Street and vilify financial professionals hauling home huge bonuses before and during the very recession that tossed so many people out onto the street. But entrepreneurs? They’re the good guys right? Sure, entrepreneurs may disrupt the status quo of corporate America, but they don’t disrupt working class Main Street. Or so we thought. Suddenly, we are befuddled about what to occupy and where.

Our stereotype of Silicon Valley entrepreneurs is that they never aspired to be like Wall Street fat cats, believing that honest hard work, risk taking, and innovation would win out over (perceived) greed and avarice.

But as the Valley’s newly wealthy entrepreneurs drive about in their Teslas and buy rapidly inflating San Francisco real estate—threatening to drive out long-time residents who can’t afford the daunting increases—they’ve come to appear just like Wall Street’s tycoons.

This phenomenon isn’t limited to San Francisco—success in Boston’s Innovation District is also dramatically driving up real estate prices, threatening to leave many behind; it is no coincidence that new Mayor Marty Walsh has pledged to make reducing the inequality gap a central focus of his administration.

The problem is entrepreneurship, when successful, always leads to local income inequality, at least in the short and medium run, and ironically, the more successful the entrepreneurship, the more extreme the inequality.

To be sure, there is a positive side to this. U.S. entrepreneurs are disproportionately philanthropic—a significant portion of donations in the U.S. come from entrepreneurs.

Secondly, some of this astonishing wealth will over time trickle down through increased spending, inspiration, and investment (although this will likely take many years). There are also all kinds of local businesses (such as car dealerships and high-end restaurants) that will become more prosperous as conspicuous wealth triggers conspicuous consumption.

But on the negative side, the newly wealthy can now afford to bypass, for example, the local public school system or health care services if they don’t think they are good enough, draining public institutions’ vital resources. The wealth can also dramatically drive up the proximal cost of living: Properties will get reassessed, driving taxes up when neighbors pay millions for the house next door. The cost of some local services may also increase sharply, from cars to high-end restaurants to babysitting.

So what can entrepreneurs do to address this problem? There are no panaceas, but there are still ways to ameliorate the tension of the sudden income disparity that successful entrepreneurship creates:

Engage in honest dialog.

The first step is to recognize that it exists, and then talk about it as openly as possible. This may seem like common sense, but such dialog is almost non-existent. Wealth inequality is the elephant in the room, and if you pretend it doesn’t exist and isn’t having an effect on people, then dialogue is impossible.

Give back, and forth.

Open dialogue about wealth, even though it may be awkward, is healthy, in particular because many of the entrepreneurs who are getting wealthy have unusual talents for solving problems and have a lot to give. In the Boston Innovation District, entrepreneurs, facilitated by the mayor’s office, have reached out to the threatened artist community who gave the district it initial cachet, to discuss how they can benefit each other, even as the wealth disparity increases. Such dialog has led to numerous co-sponsored events to blend the two communities.

Learn how to be rich.

This discussion should not be limited to across income spectrums; it should also take place within, amongst the entrepreneurs themselves. In stratified economies where income inequality is hardwired into the social structure, rich and poor implicitly learn from a very young age how to play their respective "roles."

But where entrepreneurship creates sudden mobility in societies where you can sometimes go from rags to riches (and vice versa), this is both cause for celebration and consternation.

I vividly recall a champagne-drenched beach party when one of our Israeli portfolio companies was acquired 15 years ago. Captured in the major newspapers, it symbolized the insularity and unintentional callousness of great entrepreneurial success.

Surprised entrepreneurs have to learn how their wealth impacts the feelings of friends and the sensitivities of neighbors, especially those who feel that entrepreneurial success may lead to their disenfranchisement.

Inspire the latent entrepreneurs.

But the most positive role entrepreneurs can serve in their community is to inspire and motive, to be a role model. This is the surprisingly positive side of inequality: it can motivate people to work really hard to better their situation in life through entrepreneurship.

By interacting with others, entrepreneurs can help some in the community—young and old alike—see that they can achieve success as well. All of this will not eradicate the negative aspects of disparity, but it will certainly soften them, and in some cases can convert the pain into prospect.

The protests in San Francisco are a symptom of a fundamental problem: We as a society have been trying recently to encourage entrepreneurship, without understanding that it can cause great wealth disparity in a short period of time for some, and great pain for others. This should not stop us from promoting and encouraging entrepreneurship, but it should lead us to address the negative outcomes before our inequality gap becomes hardwired into our society.

Daniel Isenberg is a Babson Executive Education Professor of Entrepreneurship Practice, the director of the Babson Entrepreneurship Ecosystem Project (BEEP), and founder and CEO of Entrepreneurship Policy Advisors. For more information about Daniel, visit www.entrepreneurial-revolution.com and entrepreneurial.revolution or contact Dr. Isenberg at dan@isen.com.

[Image: Flickr user Jamie McCaffrey]

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