Growing wealth inequality is a commonly accepted social issue that is plaguing the world. Some ascribe that to poor governance on the part of our lawmakers whereas some others point to the low interest rates which has driven financial asset inflation which makes the rich richer and doesn’t particularly benefit the poor. Paul Graham, a computer science expert, founder of a tech company and most famously the founder of Y Combinator, the prolific global start up incubator, comes at it differently.
Paul dissects the Forbes 100 richest Americans list of 1982, when it was first published and its most recent one in 2020, to see how the composition of the rich has changed and if there’s any clue we can get about wealth inequality from there.
“In 1982 the most common source of wealth was inheritance. Of the 100 richest people, 60 inherited from an ancestor. There were 10 du Pont heirs alone. By 2020 the number of heirs had been cut in half, accounting for only 27 of the biggest 100 fortunes.
Why would the percentage of heirs decrease? Not because inheritance taxes increased. In fact, they decreased significantly during this period. The reason the percentage of heirs has decreased is not that fewer people are inheriting great fortunes, but that more people are making them.
How are people making these new fortunes? Roughly 3/4 by starting companies and 1/4 by investing. Of the 73 new fortunes in 2020, 56 derive from founders’ or early employees’ equity (52 founders, 2 early employees, and 2 wives of founders), and 17 from managing investment funds.
But the main source of new fortunes now is starting companies, and when you look at the data, you see big changes there too. People get richer from starting companies now than they did in 1982, because the companies do different things.
In 1982, there were two dominant sources of new wealth: oil and real estate. Of the 40 new fortunes in 1982, at least 24 were due primarily to oil or real estate. Now only a small number are: of the 73 new fortunes in 2020, 4 were due to real estate and only 2 to oil.
By 2020 the biggest source of new wealth was what are sometimes called “tech” companies. Of the 73 new fortunes, about 30 derive from such companies. These are particularly common among the richest of the rich: 8 of the top 10 fortunes in 2020 were new fortunes of this type.”
With some of these fascinating figures, he then goes on to show why 1982 was the anamoly as far as favouring incumbents and 2020 is more liberating as today’s world offers relatively more opportunities for those who want to create wealth than those who inherit them. He shows how till the late 19th century, America was conducive for entrepreneurism until the wave of consolidation led by the likes of JP Morgan ended up oligopolising the economy. It’s only in the last quarter of the 20th century that these monopolies fell primarily triggered by deregulation but also their own complacency driven monoliths threatened by the advent of technology, especially microelectronics.
Paul then answers the question: “Why are people starting so many more new companies than they used to, and why are they getting so rich from it?”
“It’s easier now to start and grow a company than it has ever been. That means more people start them, that those who do get better terms from investors, and that the resulting companies become more valuable…because newly founded companies grow faster than they used to. Technology hasn’t just made it cheaper to build and distribute things, but faster too.
This trend has been running for a long time. IBM, founded in 1896, took 45 years to reach a billion 2020 dollars in revenue. Hewlett-Packard, founded in 1939, took 25 years. Microsoft, founded in 1975, took 13 years. Now the norm for fast-growing companies is 7 or 8 years.Fast growth has a double effect on the value of founders’ stock. The value of a company is a function of its revenue and its growth rate. So if a company grows faster, you not only get to a billion dollars in revenue sooner, but the company is more valuable when it reaches that point than it would be if it were growing slower.
That’s why founders sometimes get so rich so young now. The low initial cost of starting a startup means founders can start young, and the fast growth of companies today means that if they succeed they could be surprisingly rich just a few years later.”
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