When Staples founder Tom Stemberg took a star spot at the Republican convention last August, the weakness in Mitt Romney’s message should have been obvious. The retailer’s price already had fallen by a third since March; a month later, Staples announced a 15% cut in its floor space and 3,200 layoffs.
I don’t mean to diminish Bain Capital’s biggest success story, but Staples belongs to the wave of entrepreneurial success that ended in the 1990s. The last two waves of American entrepreneurs, in dotcoms and real estate, were carried out in body bags. What once was a disruptive business idea — office superstores selling at low prices — is now past its best-used-by-date, as Amazon offers cheaper prices for the same merchandise online.
Romney’s message centered on one great idea: the revival of entrepreneurship. The presidential election shows that Americans don’t believe in entrepreneurship any more. There’s a reason for that. No-one has seen much entrepreneurship of late.
America no longer has a tech sector as such. We have so-called tech companies that walk, fly, and quack like mature consumer franchises. Here’s a simple way to look at it. Back at the peak of the tech boom in the late 1990s, the volatility (standard deviation of daily returns) of the S&P 500 Information Technology sub-index was a multiple of index volatility. Emerging companies with disruptive technologies are riskier (more volatile) than mature companies, so that is just what one would expect. After 2008, though, the volatility of the tech sub-index converged with the overall index. Tech companies, in other words, traded like staid, solid, mature franchises.
Volatility of S&P Information Technology Sub-Index Converges with Index Volatility
Source: Macrostrategy LLC
The last wave of entrepreneurship is long since gone, and there is nothing in the pipeline to replace it. The startup sector of the U.S. economy is dead in the water. In past recoveries, firms with 500 to 1,000 employees were the biggest job creators, as the successful few became big companies. This time around, firms of this size lost the most jobs. Venture capital is doing terribly. Three-quarters of venture capital firms lost money during the past decade, and the sector performed well below publicly traded indices. Once the poster-child for edgy entrepreneurship, Apple has transmogrified into a would-be monopoly that relies on its legal team more than its engineers to suppress prospective competitors. That’s distasteful, considering that Steve Jobs started out by stealing the idea for GUI from Xerox.
In a recent report for Macrostrategy clients, I examined the profitability of 680 publicly traded tech companies. The top 50 firms (by market capitalization) had an average return on investment of 10% as of the second quarter of this year; the bottom 630 had an average return on investment of negative 15%. Tech startups have been a money-losing proposition overall — not surprising in a global market where products are standardized and profit margins are thin. And the much-heralded next new thing, namely social media, became the stock market’s headline disappointment with Facebook’s post-offering plunge.
There are a lot of reasons for the slow extinction of American entrepreneurship. Globalization raises the threshold for success. Successful startups must be global from the outset, with deeper pockets and broader management than ever before, as an important new book explains. Obama is not to blame for all of the problems, but the plethora of regulatory obstacles and financial burdens exemplified by Obamacare made an already challenging situation much, much worse. Mitt Romney might have turned the situation around. Now we face a downward spiral.
No innovation, no returns: the monopoly rents generated by America’s established franchises will diminish over time. Apple eventually will turn into Sony. The unprecedented expansion of welfare and entitlements with which the Obama administration bought the election will keep trillion-dollar deficits coming indefinitely, and the deficits will require massive tax increases — first on the “rich,” and than probably a European-style value added tax. Asset returns will remain miserably low, and pension funds will fail to earn enough to pay out defined benefits. As America turns into a “nation of takers,” as Nicholas Eberstadt put it in his new book on welfare dependency, America’s residual entrepreneurial impulse will be smothered underneath a pile of new taxes.
There are a lot of other things to be said about the state of the electorate in 2012. When Reagan beat Carter, the median age of the Baby Boomers was thirty. The middle class had capital to invest after home equity tripled over the 1970s (and rose by 40% after inflation). Today the median age of the Boomers is sixty, and the average household lost 40% of its net worth between 2007 and 2011. Thirty years ago we were young and affluent; now we’re older and poorer, and a lot of us are dependent on the fast-expanding welfare state.
But it all comes down to the simple fact that most Americans stopped believing in the American dream. God help us; we no longer seem to want to help ourselves.
Image courtesy shutterstock / DM7