July 1, 2020

Capitalists aren’t always the bad guys

Not all capitalists are building companies the world doesn't need, and not all social entrepreneurs are having a hugely positive impact.

Nicolas Colin

5 min read

Henry Ford

The world of business has always been divided in two: those who are in it for the profits (the capitalists), disregarding ‘social problems’; and those who are in it because they have a higher purpose, profits be damned (‘social entrepreneurship’). 

At the moment, several trends are pushing European startup founders a little too far toward the ‘social’ segment. There’s the backlash against tech companies in general and Silicon Valley in particular that’s been building for years. There’s the more pointed backlash against the venture capital world and the kind of dynamics it imposes on startups, as seen in this recent conversation between Connie Loizos and Tim O’Reilly. And then there’s the context of the Covid-19 pandemic and the idea that maybe we should be tackling big problems rather than obsessing over making money.

Yet is it really an either/or question? Is putting purpose first incompatible with building a scalable, profitable business? The short answer is, it depends on the current state of technology. 


It all comes down to scale

The goal of a capitalist enterprise is to pursue increasing returns to scale so as to escape the rigours of competition and retain a substantial fraction of the value added. You’re good at doing capitalism if you scale up your business while generating a growing surplus. Retaining that surplus and turning it into more money for various stakeholders is how capitalism contributes to economic development.

Not every activity, however, lends itself to capitalism. In the past, manufacturers dominated the economy: the combination of standardised parts (the ‘American system of manufacturing’) and assembly lines ruled by scientific management was the recipe for generating the highest returns on invested capital. Manufacturing was where the technology of the day made it easier to scale up while generating enormous profits. ('What’s good for the US is good for General Motors, and vice versa.')

On the other hand, there were sectors in which increasing returns were nowhere to be found, no matter how hard you tried. In education, for example, the capitalist playbook that worked so well in manufacturing simply couldn’t deliver. You could try to standardise and scientifically manage educating children all you wanted, but you still needed to employ X amount of teachers who ultimately had to manage their individual classrooms: the low labour productivity made it impossible to scale while delivering a profit. 

This is why the norm became for schools to be operated at a loss by the government, churches or other charitable organisations. We as a society decided that we needed a school system operating at a large scale, but we also acknowledged that it didn’t lend itself to the capitalist game, making it become part of the ‘social’ sphere.

Hungry software

Fast forward to today and our very different paradigm — which is not about mass manufacturing anymore, but rather about software eating the world. With that paradigm shift comes changes between the clear-cut categories of the past. Suddenly, some ‘social problems’ that could never be solved by capitalists are being tackled by VC-backed startups pursuing increasing returns to scale.

Education is a good example of that shift. It’s still early but, as illustrated by the likes of online education platforms Coursera, VIPKid, Brainly, Teachable, Outschool and Wonderschool, we sense that it’s now possible to educate many, many children without relying on so many teachers — and thus to grow capitalist enterprises in a sector that was historically ignored by the money makers. (Publishing textbooks was the exception, but in most cases even these are ultimately paid for by taxpayer money.)

But there are also jobs that used to be done by capitalist enterprises where the shift to software suddenly makes it impossible to turn a profit at scale. Take the news business. In the past, you could build a capitalist empire printing and selling newspapers. But now that the business has been displaced by software, the never-ending competition makes it impossible for news organisations to retain even a tiny fraction of the value they add. And so a problem once tackled by capitalist enterprises has suddenly become a ‘social problem’.

You’re not necessarily a ‘social entrepreneur’ if you’re building a startup in education, just because we all agree that education is a ‘good’ thing.

In this context, entrepreneurs need to know where they stand instead of sticking to the categories of the past. You’re not necessarily a ‘social entrepreneur’ if you’re building a startup in education, just because we all agree that education is a ‘good’ thing.

On the other hand, if you’re building a startup in the news business, you might have the impression that you’re walking in the shoes of legendary capitalists such as William Randolph Hearst or Rupert Murdoch, but yours is in fact a ‘social’ calling. News today has become such a commodity that it can only be produced at scale if it’s subsidised by governments or paid for by philanthropists, like ProPublica.

Enough with the patronising

The upheaval we’re witnessing across the globe has given a fresh allure to being a ‘social entrepreneur’ — pursuing things such as ‘tech for good’ or ‘conscious capitalism’. Many would-be tech founders think that turning their backs on plain old capitalism is the only way to tackle the big problems of our time: we’re seeing this in the fight against climate change, and in sectors such as healthcare, social services, housing, education, consumer finance and others. But that misreads the situation.

It’s not anti-social to solve real problems at scale using capitalism if that is the best approach to do so.

It’s not anti-social to solve real problems at scale using capitalism if that is the best approach to do so. Likewise, it’s not particularly social to decide to stay small by principle when you could insert more capital into your production process, generate those increasing returns to scale, and thus solve the problem for more and more people. Sure, it’s OK to renounce scale if that’s how you’d prefer to build your business, but don’t call yourself ‘social’ and patronise others just because that’s your decision.

The key is properly evaluating where your problem stands in today’s technological paradigm. You then need to understand the economics of the related sector (does it lend itself to capitalism or not?), and then (if you want it) go as big as you can by using the playbook that best fits that sector.

Nicolas Colin

Nicolas Colin is cofounder of VC firm The Family. He writes a regular column for Sifted