Reengineering Capitalism

11/14/11Follow @sramana

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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 get 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.

Sramana Mitra is the founder of One Million by One Million (1M/1M), a global virtual incubator that aims to help one million entrepreneurs globally to reach $1 million in revenue and beyond. She is a Silicon Valley entrepreneur and strategy consultant, she writes the blog Sramana Mitra On Strategy, and is author of the Entrepreneur Journeys book series and Vision India 2020. From 2008 to 2010, Mitra was a columnist for Forbes. As an entrepreneur CEO, she ran three companies: DAIS, Intarka, and Uuma. Sramana has a master’s degree in electrical engineering and computer science from the Massachusetts Institute of Technology. Follow @sramana

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  • http://onlyjustwords.wordpress.com/ CHalasz

    The reason the USA became a world superpower was because it had the structure of a republic and not a democratic structure. Try dusting off your constitution and weighing in the negative 30-year spin resulting from the impact of certain foolish misinterpretations— try reverse-engineering all the phoney-baloney and see what you come up with. Anything’s got to be better than this pool of collective insanity. Whoever thought allowing hordes of fraudulent mystery voters on informal message boards to trample all over our collective rights and freedoms while simultaneously magnifying the weakest elements of our collective consciousness was a good idea was insane, end of story.

  • Macka

    A republic and a democracy are identical in every aspect except one. In a republic the sovereignty is in each individual person. In a democracy the sovereignty is in the group, majority. I am sure the author did not used word democracy in political meaning, i.e type of government, but rather in meaning”of or for the people”. I think it is great idea.

  • Drew E

    Sramana- great analysis of the problem, the socialization of the losses of speculation. The solution is not new laws to regulate this, but to stop legalizing that socialization. Freddie and Fannie have socialized $100s of B’s not because we had too few laws, but our government INTENTIONALLY in law socialized those losses. That is the crime- we did so for Citibank, for General Motors, and for others. We must simply stop accepting their losses, and the speculation will stop- no one will risk such absurd losses if there is no free downside insurance.

  • Chris Noble

    The problem is in Sramana’s question: “Is capitalism still THE right answer for the future of our world?” Neither capitalism nor socialism is THE answer. Our society requires a balance between the interests of capital, the interests of society and the interests of the biosphere around us. Unfortunalely, our political process has been hijacked and brought to a halt by those whose faith is in a single silver-bullet solution, on the Right and on the Left.

    I agree wholeheartedly with Sramana on the benefits of small and mid-size capitalism. 1M/1M sounds like a powerful idea!

  • http://www.ThinkerClothing.com Lisa C. Clark, MBA

    Brava, Sramana. Beautifully, truthfully and generously written and I agree with every word.

    What we now call “capitalism” seems to have only BIG implementation, yet our nation was founded on commerce, the giving of value for value in a mom ‘n’ pop store or at a folding table with a cigar box holding change.

    We’ve seemingly come to define “success” as launch-to-global *only*, where “good enough” just isn’t unless a business gets huge. And there are many millions of families who live plenty well on “good enough”.

    When I pitched my start-up I was reminded that (customer + revenue + profits) = entrepreneurship, and went off to focus on that … the core of my business.

    As a strategic marketer I’ve had recent successes advising a number of those incubator ventures to which you’ve alluded, reminding them to start one customer, message and order at a time — and it has resonated.

    Distributed capitalism takes businesses of every size, across every sector, involving the widest possible spectrum of population.

    And teaching/learning *how to do it* is key, from elementary school (when those lemonade and cookie stands go up) forward with a “Yes, you too can think of something great and you don’t have to be a genius or have a lot of degrees” attitude.

    Imagination + powers of observation + problem-solving skills + the mechanics of how to launch and grow an idea into a business, and what help is needed — are all elements of fostering entrepreneurship … which through centuries would also be called simply figuring out how to feed, clothe and shelter one’s family.

  • GhiOm

    “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.”

    Not at all. Europe is reeling under the burden of refunding the banks. There is no socialist government in Europe, only social-democrat ones, which by many ways have the same kind of policy than liberal ones: whenever major banks loose too many assets and threat of collapsing if not refunded by the taxpayers’ money, the governments bend and dig their public debt.

    Europe has decided with its several treatises not to lend money from the central bank to the nations directly, but only through commercial banks (which can borrow from the central bank). This leads to commercial banks sucking up huge fees (up to 25% in 2 years for greece in the last months). The nations’ debt goes sky high. Then politicians point at the social wages, which are not in cause at all (most of them were started after WWII, when the continent was in ruins).

  • Keith

    Capitalism is the idea of distributed stewardship of property. The erosion of private property rights replaced with compulsory, monopolistic, fascist, non-market regulatory agencies that can not die has destroyed the social safety net of private gain and loss, and mutually voluntary exchange. Price controls from minimum wage and farming subsidies to “price stabilization” and “quantitative easing” can only cause small harm or great harm to society as a whole no matter how creatively we imagine them to be something other than what they are.

    The world operates with or without academic understanding of human social behavior. All prices are speculative whether or not they change. All people that deal with prices are speculators.

    The financial collapse came from subsidizing failures both directly from legislation and through artificially loose credit. Not complicated. Money continued to be spent to catch the cascading failures of resource mismanagement until such failures were so huge that the destruction could no longer be hidden in creative accounting tricks. People had to come to terms with the reality of how poor they had become.

    What people need to do is learn what capitalism and private property are from books and not from the news. “We” are not the government, but we ARE the economy. When all else fails, try freedom. I think we have already tried everything else.

  • David L

    Sramana–let me say first that I wholeheartedly agree education and entrepreneurship are the keys to real economic growth. However, you take for granted capitalism is broken. In reality, though, you have to recognize that the “socialized losses” you deride are not at all a hallmark of capitalism, but of cronyism. Furthermore, I think most people would be hard-pressed to disagree that our policy-making mechanism has been largely hijacked by special interests. That is not capitalism either. And the cumulative impact of cronyism and special-interest influence is an intractably regressive and opaque regime of regulatory macrame that cannot possibly be considered a free market.

    In a system of free-market capitalism, speculators suffer the pain of their own errors in judgment, and so speculation plays an indispensable role in price discovery. To blame speculators for a crash is like blaming Copernicus for the tides.

  • Moe H

    I agree that our system of capitalism has been hijaked by speculators. We DO NOT need them for price discovery. They only create price manipulation. That is why the stock market is so volitale.
    As Mark Cuban stated today on MSNBC, the stock market is being manipulated and is not a legitimate investment mechanism any longer.
    If this is the case then we should eliminate it from the tools of capitalism. It does not serve its original intent of providng capital.

  • http://www.sramanamitra.com/ Sramana Mitra

    David, Moe — You are right that speculators have been ‘allowed’ to misbehave. Without the checks and balances – read regulations – greed takes over, as it has. Free market capitalism – unbridled and unregulated – is definitely NOT the answer.

  • Drew E

    Sramana-
    The speculators were much more than ‘allowed’ to misbehave- they were given free downside insurance to misbehave- they kept the upside, we ate the downside. Senior management at fannie and freddie made tens of millions, and continue to do so, while we continue to eat the losses. GM paid execs bonuses while we paid for the losses. AIG lenders were made 100% whole, at taxpayer expense. The list goes on. If that were not the case, none of those individuals or organizations would have misbehaved so badly. Perhaps not perfectly, but no where near so badly.

  • http://pangaia.sf.net Mark Janssen

    I have the exact platform for you. This platform synthesizes the benefits of both the socialist and capitalist ideals and is Open Source. It uses the Internet to create a peer-2-peer “Creative Economy”.

    It’s still in its infant stages, but you can check out the wiki at pangaia.sf.net. Be sure to view the main “diagram” and “macrocosm” (actual page names you can type in the search box) that shows how it works.

    Cheers,

    Mark
    Santa Fe, NM

  • Mauricio Brazil

    Just the richest benefit the poorest in the world. In one way or another ends up getting the economy back on track. You can not stare at that all countries have huge losses for capitalism to be saved. At this point the occupation of wall street on the right track.
    Basta que os mais ricos beneficiem os mais pobres do planeta. De uma forma ou de outra a economia acaba entrando nos eixos. Não dá para ficar olhando que todos os países apresentem perdas gigantescas para que o capitalismo seja salvo. Nesse ponto a ocupação de wall street vai no cominho correto.

  • http://www.reengineerdemocracy.com/ Efrain M. Martresa

    Dear Sramana:
    We certainly have more reengineering to do. Click on my name for another one, in a few words.

    Also keep in mind that we, the consumers, are king/queen. By means of boycott, well organized and respectful, we can get real respect. Money talks, “occupy” walks.

    Just an example: if we cancel our health insurance, say above 90% of the insured population, the U.S. will finally have a health policy and passed in record time.

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