I spoke at a high school in Cleveland a while back about entrepreneurship. Many parents were there, and one father asked me, “What made you think that you were capable of starting a company?”
I thought for a second and responded, “When I was a kid my parents hammered into me that I could do anything anyone else could do. I met some people who had started companies, so I figured that I could, too.”
I started my first company when I was 25, in 2000—Stargiving.com, a fundraising site for celebrity-affiliated causes. It was much harder than I thought it would be. We raised about $250,000 in increments of $25,000 over a 10-month period and launched a website. Despite some early press, we quickly lost altitude. We ran out of money as the Internet bubble burst and our investors lost interest. It became clear that our prospects were terrible, and after a year and a half we shut the company down.
This first professional failure did a number on my confidence. Everyone I knew was well aware that I’d tried to launch a company and it had tanked and gone under. I still owed $100,000 from loans I’d taken out for law school. I used to call my school loans “my mistress” because it felt like I was sending a check each month to support a family in another town. My self-esteem was low, and I had a hard time meeting people or facing my parents.
Now, looking back at my first company, I realize that I was unusually well positioned to both start a company and rebound from its failure. At the time it hurt. I was 25, had lots of school debt, and didn’t really know what I was doing. But I was unusually well educated. I had a co-founder—my officemate at Davis Polk had left the firm to co-found the company with me. I had savings (which I burned through) and access to credit. I was able to get in front of enough rich people to raise a couple hundred thousand in angel investment. I had a friend I could move in with to save on rent when things got tough. I didn’t have any family responsibilities—I had no kids or spouse, and my parents didn’t need any financial support—I merely had to listen to them periodically question my life choices. I also had confidence I could get a job if all else failed. Enough in my life had worked out that I thought I could make starting a company work out, too. I also thought—correctly—that even if it didn’t work out I’d be fine.
My story is one of relative abundance, and it should feel familiar. America was once the place where starting a business was commonplace and people were optimistic about their futures. Unfortunately, this has stopped being the case for the vast majority of Americans.
I’ve met and worked with hundreds of young people around the country who aspire to be entrepreneurs. Many aren’t from privileged backgrounds and feel that there’s an overlap between starting a company and one’s personal and family resources. They believe that privilege and entrepreneurship go hand in hand, and that entrepreneurship isn’t meant for “someone like them” because of their background, class, gender, race, education, or geography.
Unfortunately, for the most part, they’re right.
There’s a substantial correlation between one’s socioeconomic background and starting a successful company. A UK study found that the most common shared trait across entrepreneurs is access to money via family, an inheritance, pedigree, and/or connections. A U.S. survey found that in 2014 over 80 percent of startups were initially self-funded—that is, the founders had money and invested directly. A recent demographic study in the United States found that the majority of high-growth entrepreneurs were white (84 percent) males (72 percent) with strong educational backgrounds and high self-esteem. One of the authors commented, “If one does not have money in the form of a family with money, the chances of becoming an entrepreneur drop quite a bit.”
I’ve worked with hundreds of successful entrepreneurs around the country, and most came from financially comfortable backgrounds. The truth is that it’s a lot easier to start a company if you have a few things going for you. In addition to resources, you have a mindset of abundance. After you make one thing work out, you kind of think you can make anything work out.
I’m not trying to minimize all that goes into being a successful entrepreneur. Building a business is super difficult no matter who you are. There are always obstacles, trials, and very long hours. It’s virtually impossible to build a consequential business or organization without tons of work, persistence, and heart and soul. I admire everyone who has started a business, from the corner diner on up. It’s also not the case that entrepreneurs uniformly had easy lives. Many were marginalized, bullied, or made to feel like they didn’t belong as kids—Elon Musk related this as his immigrant experience. Some had family traumas that gave them a chip on their shoulder and drove them to achieve. Barbara Corcoran and Daymond John both described growing up dyslexic and being told that school wasn’t going to be their route to success. Immigrants have higher rates of starting businesses because some feel that they don’t have much of a choice.
But the mechanics of entrepreneurship make it a lot more accessible to people who can realistically gather meaningful resources, defer money, and take on risk. The startup community nationally is very unrepresentative of the American population. Though women will soon make up nearly 60 percent of college graduates and the country will be majority nonwhite in the next 27 years, tech is dominated by (in my view, mostly good-natured) white men, most of whom are well educated. For a woman or person of color trying to start a growth business, every step is harder—lower personal savings, lower access to capital, dismissive or creepy investors, fewer professional role models and mentors, potentially more personal obligations, and so on. Venture for America is trying to help address this—our last class was 43 percent women and 25 percent black and Latino.
Entrepreneurs have among the most powerful mindsets of abundance of anyone. Silicon Valley, TED, the Aspen Institute—they’re uplifting places because the people in attendance believe that all things are possible, often because they’ve made unlikely things happen for themselves. You can say something about starting a new company or organization, and people simply nod at you and think, “Of course.” It’s like there’s more oxygen for ideas, along with more money.
I attended TED last year, perhaps the most exclusive conference in the world. I got invited through a friend and paid $8,500 for admission, not including travel expenses. When I got there, there was a meditation tent. My friend wanted to try it, so we sat down and each listened to a peaceful podcast. As I sat down, the attendant gave each of us a small black envelope. Within was a $150 gift card to Lululemon, the tent’s sponsor. My mood improved significantly, and I wasn’t sure if it was because I’d meditated or because someone gave me a $150 gift card right as I sat down.
That’s an environment of abundance. Money comes to you and good things happen to you seemingly for no reason, though the real reason is where you happen to be sitting.
Contrast the above with the lived experience of normal Americans, who operate in a perpetual state of scarcity. The average American lurches from paycheck to paycheck with no financial cushion, spending significant bandwidth scrambling to stay one step ahead of their bills and borrowing from Peter to pay Paul.
Their paychecks are not only modest but highly variable due to unpredictable shifts and being paid cash fees for hourly work like manual labor and babysitting. A study of tens of thousands of JPMorgan Chase customers saw average monthly income volatility of 30–40 percent per month for customers with annual incomes of $35,000 and even higher swings for people making less than that. They might make $2,000 one month, $3,000 the next, $1,800 the one after that, and so on. “Since the 1970s, steady work that pays a predictable and living wage has become increasingly difficult to find,” said Jonathan Morduch, a director of the U.S. Financial Diaries project, an in-depth study of 235 low-and moderate-income households. “This shift has left many more families vulnerable to income volatility.” The JPMorgan Chase study showed that roughly 80 percent of customers had insufficient cash to manage the differences in monthly income and expenses, and any unexpected expense like health care or car repairs would wreck the family’s picture for the year. They observed the income level at which point income volatility stopped being a problem at about $105,000 per year, a level far out of reach for most families.
Often people are unable to plan or budget effectively because they don’t know how many hours they will receive at their store, restaurant, or construction site. Forty-one percent of hourly workers say they are not given more than a week’s notice of their schedule, and many say that if they turn down a shift it will mean fewer hours the following month. They thus live in a perpetual state of both scheduling and income uncertainty. The average worker dreads schedule volatility so much that they’re willing to sacrifice 20 percent of their income for predictability, according to one study.
Scarcity has a profound impact on one’s worldview. Eldar Shafir, a Princeton psychologist, and Sendhil Mullainathan, a Harvard economist, conducted a series of studies on the effects of various forms of scarcity on the poor. They found that poor people and well-off people perform very similarly on tests of fluid intelligence, a generalized measurement that corresponds to IQ. But if each group was forced to consider how to pay an unexpected car repair bill of $3,000 just before taking the test, the poor group would underperform by the equivalent of 13 IQ points, almost one full standard deviation. Just having to think about how to pay a hypothetical expense was enough to derail their performance on a general IQ test and send them from “superior” to “average” or from “average” to “borderline deficient.” Activating scarcity through a hypothetical expense was also found to reduce correct responses on a self-control test from 83 to 63 percent among the less well-off participants, with no effect on the well-off.
A mindset of scarcity is more than just “stress”—it actually makes one less rational and more impulsive by consuming bandwidth. In another study, Shafir and Mullainathan asked two groups to memorize either a two-digit number or an eight-digit number. They then presented the groups with both cake and fruit. The people who were preoccupied trying to memorize the eight-digit number ate cake much more often. When an ethnic person served the study participants a repulsive traditional dish, the preoccupied group was more likely to be rude or make a racially insensitive comment. The group with the easy mental task had the bandwidth to restrain their reaction and maintain decorum.
We all respond poorly to scarcity. Imagine yourself sitting peacefully at your desk in your office. Someone rushes in to tell you that you forgot about a meeting that starts in five minutes and you’ll have to hurry across town to get there. All of a sudden you burst into action. You hurriedly think about what, if anything, you have to prepare. You might be prone to forget your keys or some other belonging on the way out the door. Getting detailed directions to where you’re going seems like it will take too much time, so you just head off in the general direction. You frantically text or email the person: “On my way, will be a bit late.” Some part of you wonders how you forgot about this meeting and if it’s someone else’s fault. You may become agitated and need to settle yourself down before you actually enter the meeting, taking a couple deep breaths to try to compose yourself to make yourself presentable.
Or imagine a particularly busy day when you are forced to skip lunch. By the afternoon you are fiending for something to eat, but you’re in back-to-back meetings. Pretty soon you are distracted and just thinking about whether anyone has a granola bar or if there’s a vending machine nearby instead of listening to what people are saying. Studies show that people on a diet are continuously distracted and fare worse on various mental tasks. The same goes for sleep-deprived people, lonely people, people with their phone on the table in front of them, and poor people who are asked to think about money.
Different forms of scarcity are often tied together. For example, if someone lacks the ability to pay for their car repair, they may have to figure out another way to get to work via public transportation, and then figure out if they will make it back in time to pick up their child from school, and whether that means they’ll need to arrange child care, and so forth. When you’re poor, these many choices define your waking hours and become almost existential and all-consuming. Any money you choose to spend means that you’ll have less money to spend elsewhere, making every decision and calculation both important and taxing.
Shafir, the Princeton psychologist, observed, “There’s a very large proportion of Americans who are concerned and struggling financially and therefore possibly lacking in bandwidth. Each time new issues raise their ugly heads, we lose cognitive abilities elsewhere. These findings may even suggest that after the… financial crisis, America may have lost a lot of fluid intelligence… they don’t have room for things on the periphery.”
One of the things that has struck me about the age of the Internet is that having the world’s information at our disposal does not seem to have made us any smarter. If anything, it’s kind of the opposite. Most of us find ourselves struggling with scarcity of time, money, empathy, attention, or bandwidth in some combination. It is one of the great perversions of automation that just when advancing technology should be creating more of a feeling of abundance for us all, it is instead activating economic insecurity in most of the population. It’s quite plausible that as steady and predictable work and income become more and more rare, our culture is becoming dumber, more impulsive, and even more racist and misogynist due to an increased bandwidth tax as people jump from island to island trying to stay one step ahead of the economic tide. One could argue that it is essential for any democracy to do all it can to keep its population free of a mindset of scarcity in order to make better decisions.
A culture of scarcity is a culture of negativity. People think about what can go wrong. They attack each other. Tribalism and divisiveness go way up. Reason starts to lose ground. Decision-making gets systematically worse. Acts of sustained optimism—getting married, starting a business, moving for a new job—all go down. If this seems familiar, this is exactly what we’re seeing by the numbers here in America. We are quickly transitioning from the land of plenty to the land of “you get yours, I get mine.”
A mindset of abundance or scarcity is tied closely to what part of the country you live in. Different regions are now experiencing such different levels of economic dynamism that they often have utterly different notions of what the future holds. One’s way of life is largely a product of where you happen to live.