 Welcome to Rational Alchemy. I'm joined today by author, Seth Levine, who has come along to talk about his new book. Seth, welcome to the show. Nigel, thank you for having me. Now, apart from being an author, you are also tied in with other little ventures. Why don't you give us a brief overview of where you are today in life? Thank you for asking about that because I think it's important to how we actually came to writing this book. So by day, I'm a venture capitalist. About 20 years ago, I came into the venture industry and about 13 years ago, I started my own venture firm, which is located in Boulder, Colorado, although we invest nationally. We have about $3 billion under management. The firm is called Foundry Group. So I do that by day. I write along with my co-author, I should mention, Elizabeth McBride. She's, unfortunately, wasn't able to be here today, but we wrote that by night, so exactly. But I came to thinking about this book really because of the experiences I had in venture, working in the technology venture capital world and realizing that maybe there was a broader story to be told about entrepreneurship. That's interesting because when we were chatting, just prior to recording the show, we were talking about business and how business has changed over the last 30 years when it comes to the venture capital side of starting new businesses. So can you give us a brief scenario of what really has changed over the last, say, 35, 40 years to today? Absolutely. I mean, there's a couple of things that have changed. For starters, the venture capital world has exploded, but the world of entrepreneurship actually has not. It's actually been declining. And I think a lot of people don't realize that because what they read in the mainstream press suggests that entrepreneurship is on fire. It's really not the case. And in particular, there have been some real changes in the nature and the type of people that are starting businesses now. Increasingly, people who are starting businesses in the United States are black, brown, female, and quite a bit older than most people realize. Those changes in demographics of who's starting a business have really shifted significantly. And frankly, our way of supporting those businesses, the ways that we have of getting capital to those businesses, the way we have of getting advice, help and mentorship to those businesses, haven't kept up. Okay, so we've got a brand new group of people that are now looking for capital to start their business. Is this tech industry or other industries? One of the things that's happened, I think, over the last 30 years is that technology and the world of venture capital has sort of eaten up entrepreneurship. And if you go way back, of course the U.S. was founded by entrepreneurs and there was a time when essentially everyone in the United States was an entrepreneur, meaning a small business owner, someone who was sort of making their own way. And for a long time, we used the term entrepreneur to mean really anyone who was starting a business. And over the last 30 years, that's begun to shift and we think shift in some dangerous ways. And so now when people talk about an entrepreneur, they're more likely to be talking about and thinking about someone who's starting a technology business likely on one of the coasts or in one of the big technology startup hubs. They're probably white and male because people that start technology businesses or at least people that are being funded to start technology businesses have really skewed in that direction. And we think that that's really missing the story because the story of entrepreneurship is much broader. And we've kind of lost this love and respect that we had for the small business owner and really kind of shifted that focus and attention to solely be focused on these white male technology business startups. And the other thing about those businesses that's probably worth mentioning is that the goal of starting a small business it can be varied, right? Many people start businesses to create a life for themselves and their family, right? To lift themselves out of a situation or because they have a passion for food or for fitness or something like that. But our infatuation with technology and sort of the venture capital model which really relies on a small number of breakout high growth businesses has kind of allowed us or forced us to miss the beauty in starting and running a business that's small and it may stay small. It doesn't need to have aspirations to become huge and become a large, large business. There's a lot of value in small businesses. And the truth in the United States is that nearly half of our GDP and about 40% of our workforce work for and is produced by these small businesses. So really it's a small business that helps the economy just to keep chugging along and rolling over years a year. The truth is that small business is really the engine of the U.S. economy. They provide, as I mentioned, significant portion of the GDP of our economy. They employ almost half of the labor force. But more than that, they're responsible for most of the dynicism and a lot of the innovation that comes in our economy. I think people misunderstand the innovation that comes from maybe larger technology businesses. And it's not that they're not innovative but at some point a business gets to a certain size and their innovations are incremental. Right. And because they're looking to preserve their existing market and market share. And so they're less motivated to invest and invest in R&D and invest in new products and new product lines. And instead, really where a lot of the innovation comes from are from these smaller businesses, whether they're smaller technology companies nipping at the heels of these larger businesses or innovations across more broad sections of the economy. Again, from these smaller businesses looking for new ways to do business, for new processes, for new customer segments, for new market segments. And we really, we lose that when we allow our economy to become out of balance as we've started to. The company I worked for, I won't mention the company's name, but they were renowned for buying small, small companies that had a complimentary aspect to our main product line. So they used to buy the company, look at their software, we'd make all the little changes to it so we could integrate it into our software. I got the impression they thought it was better doing it that way than it was trying to start a new division, always better to buy rather than try and create. Absolutely. And what you're really describing is what you might call off balance sheet R&D. So they let other businesses do these things in turn. I've never heard that term, but yes. Yeah, that makes sense. That's how we talk about it sometimes in the venture world. And so these smaller businesses create these innovations and then larger businesses come and buy them. Now, there's a danger too, because sometimes the large businesses buy the smaller businesses not to adopt the technology, but to kill the small business because they want to continue to keep their market dominance. And so that can be a little bit dangerous. What's interesting, they've actually studied this. So there have been studies about the efficiency and effectiveness of R&D. And of course, we just lived through a real world study of that. We provided, the U.S. provided a huge tax cut to corporations a couple of years ago, dramatically reducing the tax rate that was charged to businesses. And the promise was that businesses would then invest in R&D. The challenge is that what you described is too often the case and these companies didn't know where to invest. So the thing that actually happened was that most of them invested in buying their stock back. So if you look at the year after the tax cut was enacted, it was by far the largest year of stock buybacks ever recorded in history, basically reflecting that the managers of those businesses felt like they were more likely to produce gains in stock value by simply reducing the number of shares that existed of their stock, therefore increasing their earnings per share, rather than finding new ways to invest in their businesses. And that says something about the state of the large business investment climate in the U.S. economy. And again, it's not that it's bad, but it does raise the question about whether that huge tax cut should have gone to large businesses so they could buy their stock back or maybe there were other ways that we could have invested in the U.S. economy that would have resulted in a broader set of investments that had benefited a greater number of people, not just the shareholders of these big businesses. Right. When a company buys back shares, are those shares basically taken out of the pool? That's exactly what happens. Perhaps the easier example is to describe a company that has a thousand shares that are out in the market if they buy a hundred shares back in a stock buyback program, now they have 900 shares. And so if their earnings per share were a dollar, now when there were a thousand shares, right now it's, I'm not gonna do the math in my head, now it's $1.10. And of course, most companies get valued to some extent based on earnings per share. And so the reason that story of companies buying their stock back is important is because it was reflected, companies can create value, increase earnings per share by increasing earnings, right, or reducing the number of shares. And of course, investing in new technologies and new business lines is one way to increase earnings, but in this case, more and more managers of these companies looked at their options where they might invest and decided that they didn't have good ideas for investing in increasing earnings. So instead they invested in decreasing the number of shares. Right. And you know, I'm not in for a second arguing that companies shouldn't have freedom to buy stock back or invest in the way that they choose. That's up to them. However, it's because of the circumstances of why they had the extra cash. Exactly. And it was a real world experiment that said if we give companies a windfall of capital, how will they invest it? The book is not overtly political. I mean, certainly when you read it, you get a sense for different types of policies. And we have a whole chapter that talks about different policies that we might implement, but it's not intended to be a political argument. And in fact, one of the things we talk about is that small businesses often live sort of in the middle, right? They have customers who have all sorts of different beliefs. And we tell this wonderful story about a family of wilderness guides in Montana, how they relate to conservation and frankly how a lot of libertarian, maybe even Republican-leaning people in Montana who run these sorts of businesses embrace conservation and conserving the land because many of them make their living off of helping bring people to that land. And so it describes this sort of middle ground that we believe small businesses often exist in. And that's maybe in part why our country is becoming increasingly polarized because we're losing so many of these smaller businesses that sit in that middle space. What would be my next step in being able to get venture capital? And how would I actually get mentorship on the correct ways of doing all of this? So if you look at how businesses raise capital, about 17% of businesses take money from banks, some sort of formal loan for the business. Fewer than 1% of businesses take money from venture capital. Only 1%? It's a lot of dollars and quite a bit of impact in that world, but it's 1%. So that leaves 80%, just over 80% of businesses actually that aren't taking money from any formalized source. And one of the things that we talk about is that one of the reasons that entrepreneurship in the United States is dying is because it's become harder and harder for this 80% of businesses that have to self fund in some way to garner investment capital. And that's because of a couple of things. One is that the average black and Hispanic family has significantly less wealth than the average white family. And so as the demographic of people starting businesses has changed, those people now that are more likely to be starting businesses have less access to family wealth because of systemic and structural history of the United States that has led black and Hispanic families to have less wealth than white families. In the case of black families, it's about one-tenth the wealth. In the case of Hispanic families, it's about one-sixth or one-seventh the wealth. So significant differences. The other thing that's also happening is that many of the people in this middle 80% get money from the equity in their homes, right? So we're from friends and family and by that, the equity in their friends and family's homes. And I think one of the reasons that entrepreneurship started really struggling after the Great Recession, the net new number of businesses that were started in the United States was negative. And then as it became positive, business, net new businesses starting were much more concentrated in a very small number of markets. And I think this is reflective of, in part, the changing nature of entrepreneurship, the challenges we have about getting money to new entrepreneurs. I think also, it was reflective of the fact that the nature of the 2008, 2009 recession was that home prices, right? It was a bubble that collapsed in home prices. And so people didn't have that home equity to tap in order to start their businesses. So 80% of all businesses started here in America are all self-financed, one way or the other. Correct. Okay. Credit card debt. Just don't rob a bank. Don't rob a bank, yeah. No, the bank is there to rob you. Let's not forget that. Probably more businesses fail than succeed. Would I be correct on that or? That is absolutely true. Eventually, more businesses fail. But that doesn't necessarily mean that they didn't create value during the time when they were alive. Oh, no, no, no. If I started a restaurant and it lasted for, I ran it for five years and I decided the market changed or moved or whatever. My menu was no longer in favor. And ultimately, I decided to close down. That counts as a business failure in this context. But really, it ran for five years. I employed people. I obviously served customers. And so from that perspective, and it was my livelihood, it was successful. So we need to be a little bit careful when we talk about most businesses failing. That's absolutely true. But it doesn't mean that they didn't create quite a bit of value while they were operating. How is failure seen in the entrepreneurial world? It used to be that the United States broadly embraced failure. And it set us apart from the rest of the world. They actually, there's a group that has studied this for decades, attitudes towards failure across different countries in different regions. And it really was a unique characteristic of American entrepreneurs. We were very embracing of failure. Some of that's because we had a strong social safety net and people, the cost of failure was not quite so high. And some of that was, a lot of that was just attitudinal. People accepted that in order to achieve something great, you have to try something hard, right? Thomas Edison famously said, I didn't fail, I just found 10,000 ways that didn't work. And that was broadly speaking, the U.S. attitude. And of course, Silicon Valley absolutely, and the tech sector, absolutely embraced this notion of failure. In fact, so much so that I think that they think that they were somehow unique, but really they took the failure model and acceptance of failure from the rest of society. But they've kind of kept that acceptance. And it's been one of the reasons why Silicon Valley has been so incredibly efficient at churning out businesses because there's no fear of failure in Silicon Valley. It's almost seen as a badge of honor and of courage. That's not true in the rest of society. And in fact, the acceptance of failure in the United States has dropped significantly. And actually now we're relatively in line with the rest of the world. It's no longer a case of American exceptionalism. We are not exceptionally open to failure. And we believe that that is one of the reasons that fewer and fewer people are starting businesses. Simply put, they are more afraid of failing. Another is that I think the cost of failure has gone up, frankly. We don't, as I mentioned, have the same sort of social safety net that we used to have. And I think it's funny. We talk about this in the book. We don't argue for sort of a socialist economy. In fact, to the opposite, we argue for, in favor of an entrepreneurial capitalist economy. I like to joke that I'm capitalist by job title. I mean, it absolutely is part of how I think about the world. But interestingly, we argue for a certain social safety net that it would be an enabler of the capitalist society that a lot of people on really, on both sides of the aisle, but in particular, Republicans try to argue for. And I think that's really important. The other thing that was probably the most common thing that we heard from people who were starting businesses is that they were concerned about their access to healthcare. One of the reasons that people cite as not starting a business is because their healthcare is attached to their job and they're not able to take that risk of losing their healthcare. I've had a couple of friends who've actually started contracting and they went through the same thing. What are we gonna do about healthcare? How does America fit in to say the English model, sorry, United Kingdom, is obviously far more of a socialist. I'm gonna use that term very, very, very loosely. But it's far more socialist than say America. We have the National Health Service, et cetera, et cetera, et cetera, lots of social programs all the way through. You look at companies in the UK that are starting up and it seems to be at about the same race as America. Yeah, so I don't have data on the actual startup rate. No, no. America versus the UK. I certainly know the data around, for example, fear of failure, which is now, the UK has stayed nice and constant. The US used to have a very high tolerance for failure. Now it's relatively even to other societies in Europe in particular, right? Asian societies still have more of a fear of failure, which is probably why their startup rates are lower. So I think there's a lot of reasons why people have concerns over failure and I think there's been some systemic changes to just how we rear our children, how we think about failure, how we guide them towards things that they're successful with versus allow them to try different things and be accepting of the fact that some things they'll do well at and some things they may not do well at. I think those are all things that sort of get wrapped into why our embracing of failure has changed so much over the last 20 or 30 years. So tell me, we've gone through a lot of issues. There's a lot here and there's even more that we talk about in the book. So I would encourage everyone listening. We're barely scratching the surface on some of these questions. Well, we've only got a limited amount of time, unfortunately. And by the way, the beauty of the book is that we talk about, we tell the stories of so many entrepreneurs and describe some of the broader sort of system changes that are taking place. But in the context of the stories that we're talking about. Interesting. And so we really, that's why we call it the new builders. One, because they are, that's our term for the next generation of entrepreneurs, of course. But also because the book is really about the new builders. It's really about them and their stories. So we've just been 20 minutes talking about what's wrong. Do we have any fixes for these issues? All the fixes for these issues that we can talk about. Yeah, well, there's certainly, we remain, Elizabeth and I, remain very optimistic about the entrepreneurial economy. And I think that the reason is because the new builders that we met and whose stories we tell in the book are incredibly optimistic group. And that optimism really kind of rubbed off on us. And so I think there's a lot of reason to feel very excited about and optimistic about the future of American entrepreneurship. But we do need to think about ways to better support new builders the next generation of entrepreneurs. That starts with money, which is really important. We've systemically dismantled our community banking system, the CDFI system, which is a subset of the community banking system. And those are great ways for new builders to access capital. There are other new capital models that we talk about in the book that individuals can get involved with, invest their own money in local businesses through these platforms. The U.S. over the last handful of years has opened up the ability to more and more people to be investors, which used to be closed off to all but just a small subset of society. And now we're allowing far more people to do that. And so there are opportunities there. And then there are other opportunities to simply support new builders with advice and mentorship. And I think that's something that's also very important. And when we look at some of the models that have been most successful for funding capital to support these new builders, what all of them have in common is that they also funnel support to new builders. So in one of the organizations that we talk about extensively in the book is a group called E for All, Entrepreneurship for All. They operate where we are in Laudmont but also in Massachusetts. They are opening up a couple of new programs as well shortly in upstate New York, one in Rhode Island. They really are a great example of pairing entrepreneurship with mentorship. And really it's a mentor model that is what's driving their success. We talk about a number of other platforms that have had similar success by pairing capital with mentorship. And I think that that's also really important. And in part, that's why local sponsorship to new builder businesses becomes increasingly critical because it's not just capital, it's access to that capital, right? Actually getting them to understand that there is capital available. So we need to expand the pool of capital. We need to let new builders understand that that capital is available. And then we need to overlay all of that with help and support and mentorship to help them be successful. Your company offers the full package or knows people that can help. Well, that's true. My main job is as a venture capitalist. And of course we do do that but we do that for this segment of the business. But what we argue for in the book is that's just not reaching enough people. So we're not arguing for the end of the venture capital model by any stretch. No, no, no. I still have my day job and I'm happy for that. But we're arguing for new forms of capital and new models to support a broader number. To support a much broader spectrum. And in particularly to go after, to expand the 17% that are banked, right? That should be a much larger number. And then to think about new capital models that can help bridge this 80% of entrepreneurs that don't take money from either venture or from banks. Seth, let's call it quits because I'm pretty sure we could carry on talking about this for forever. But what I would like to do, I'd like you to come back to the studio saying about two months after the book's been released because by then you'll have heard what people feel about the book and we can really get into answering some of their questions. Absolutely. Seth, thank you so much for coming in today and I wish you all the success with the book. Don't forget everybody, May 4th, you'll be able to buy the hardcover version. And a Kindle and an audio book. And a Kindle and an audio book and at any of your favorite bookstores around the country, go in and order it, The New Builders. That's what you need to remember. Absolutely, and if you want more information you can go to the newbuilders.com and we leave the bookstores to buy it on and obviously we tell some of the stories that we tell in more detail in the book. Seth, once again, thank you very, very much. Ladies and gentlemen, thank you once again for watching another episode of Rational Alchemy. I'm Nigel Aves, your host, signing off. Thank you.