%20transparent.png){kind=small}
Every year since 1982, Forbes magazine has published a list of the richest Americans. Comparing the 100 richest people in 1982 with the 100 richest in 2020, some major differences stand out. 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 and accounted for only 27 of the 100 largest fortunes.
Why would the share of heirs decline? Not because estate taxes have increased. Rather, they have fallen significantly or been abolished during this period. The reason that the share of heirs has fallen is not because fewer people are inheriting large fortunes, but because more people are creating them. How do people get these new fortunes? About 3/4 through business creation and 1/4 through investment. Of the 73 new fortunes in 2020, 56 came from the equity of founders or early company employees and 17 from the management of mutual funds.
There were no fund managers among the 100 richest Americans in 1982. Hedge funds and private equity firms existed in 1982, but none of their founders were rich enough to make the top 100. Two things changed: fund managers discovered new ways to generate high returns, and more investors were willing to trust them with their money.
But the main source of new wealth is now business creation, and if you look at the data, you can see big changes here, too. People are getting richer from starting businesses today than they were in 1982 because businesses are doing different things.
There were two main sources of new wealth in 1982: oil and real estate. Of the 40 new assets in 1982, at least 24 were primarily from oil or real estate. Today, only a few are: Of the 73 new fortunes in 2020, 4 are in real estate and only 2 are in oil. The largest source of new wealth in 2020 is so-called "tech" companies. Of the 73 new fortunes, about 30 come from such companies. These are particularly common among the richest of the rich: 8 of the 10 largest fortunes in 2020 were new fortunes of this type.
Why are people starting so many more new businesses these days than in the past? At the end of World War II, the major sectors of the economy were either organized as government-backed cartels or were dominated by a few oligopolistic companies. In 1960, most people starting a business today would have worked for one of these companies. You could get rich by starting your own business in 1890 and since the early 2000s, but it wasn't really a viable option in 1960. You couldn't break through the oligopolies to get to the markets. So the most prestigious way in 1960 was not to start your own company, but to work your way up in an existing company.
After various measures against the flaccid and bloated oligopolies in the seventies and with the advent of the Internet, it became easier to found a start-up with each passing decade.
But the main reason it's easier to create a startup today is that it's cheaper. Technology has lowered the cost of both product development and customer acquisition. In turn, the falling cost of creating a startup has changed the balance of power between founders and investors. In the past, when a startup meant building a factory, you needed investors' permission to do anything at all. Today, investors need founders more than founders need investors, and that, combined with the increasing amount of venture capital available, has driven up company valuations. So the falling cost of starting a business increases the number of rich people in two ways: it means that more people are starting businesses, and it means that those who do start businesses can raise money on better terms.
But there's a third factor: the businesses themselves are more valuable because startups grow faster than they used to. Technology has made it not only cheaper to build and distribute things, but also faster.
This trend has been going on for a long time. IBM, founded in 1896, took 45 years to reach $1 billion in revenue, adjusted for inflation. Hewlett-Packard, founded in 1939, took 25 years. Microsoft, founded in 1975, took 13 years. Today, the norm for fast-growing companies is 7 or 8 years.
Fast growth has a dual impact on the value of founders' stock. The value of a company is a function of its revenue and its growth rate. So when a company grows faster, not only do you reach a billion dollars in revenue faster, but the company is more valuable when it reaches that point than if it grew more slowly. This is why founders sometimes get so rich at such a young age. The low initial cost of starting a business means that founders can start young, and the rapid growth of today's businesses means that if they are successful, they can be surprisingly rich just a few years later.
It's easier today than ever before to start and grow a business. That means more people are starting businesses, those who do are getting better terms from investors, and the resulting businesses are becoming more valuable. Once you understand how these mechanisms work and that startups were suppressed for most of the 20th century, you understand why the Gini coefficient [1] is rising in America. Of course the Gini coefficient is increasing. How could it be otherwise if more people are creating more valuable businesses?
As an investor, one should be aware that we are in a whole new world of accelerated growth.
Gian-Luca Thalmann, 10.2021 inspired by the thoughts of Paul Graham, 04.2021 (How People Get Rich Now).
[1] Gini Coefficient: The Gini coefficient is a standard statistical measure of the inequality of a distribution. The coefficient is most commonly used to determine income and wealth inequality. It can take values between 0 and 1. The higher the value, the more pronounced the inequality measured. For example, a Gini coefficient of 0 means that all persons compared have exactly the same income or wealth. A value of 1, on the other hand, means that one person receives all the income or has all the assets and everyone else has nothing.