Creative Destruction

The Rotman South Building Exchange Café has the best mediocre coffee on the University of Toronto’s downtown campus.

And the nicest washrooms. And no asbestos awaiting eventual removal.

Over the 2015-2016 academic year, as I finished my dissertation, I formed a habit of working there, hunkering in the glow of electric fireplaces and power-dressing vicariously through the self-conscious business casual of future-MBAs.

Rotman’s Creative Destruction Lab (CDL) has recently announced that it has expanded to the west coast (UBC Sauder). Not unlike myself (see UCLA, 2016-2017!).

Going west has a way of impressing upon you the implications of space. Lots of space. And I thought it a fitting time to post some thoughts on the connection between the promise of “scaling up” through tearing something else down. Growth through demolition. Generation through violence.

Why creative destruction, Rotman School of Management? Because I’ve been thinking about creative destruction as a name for the way the chemical, food, and pharmaceutical industries have used microbes and enzymes to generate value from waste products. Citric acid. Penicillin. Insulin. Monosodium glutamate (MSG). Countless products in the history of food science and biotechnology have become available through the deployment of microbial or enzymatic transformation and experimentation with industry “co-products” or wastes (e.g. sugarcane, corn, wheat, petroleum). So, breaking down leftovers to recombine them, and in so doing, turn liabilities into assets. See an earlier post for more on this.

What does professional Creative Destruction look like? The CDL program’s workspace is a three-tiered fish bowl commanding the northern side of the Rotman atrium’s stairwell. That staircase dares you not to appreciate how chic it is. Its saucy splashes of hot pink in an otherwise stark, modernist space remind you: we’re playful here. Innovative. On trend. (Check out this cross-section). Giant lettering in a modern, white font declares this glass box’s name: the Creative Destruction Lab.The CDL space has a big, white conference table. And a vertical banner in the corner that reads: “Build Something Massive.”

It is fair to say the CDL is preoccupied with size.

The year-long MBA program’s three advertised testimonials mention “depth and breadth.” Flying (and I paraphrase) to previously unimagined heights. Using the CDL’s “breadth and depth” of vision to turn your “relatively small vision” into something way bigger. It defines itself “as a unique program for massively scalable technology-based ventures.” Are you a tech geek with a little program, or a small business? The CDL program’s goal is to scale up that wittle potential into a commercial venture that “maximiz[es] equity-value creation.”

So, how is making things big (read: maximally valuable) about destruction? One testimonial gives the CDL’s distinguishing value as its “Demo or Die” philosophy. You can even attend DemoCamp and leave with the six steps to start-up success. How? The CDL program’s entrepreneur-coaches have “spent decades in the trenches of the startup ecosystem.”

And… we’re getting a bit rich in metaphors.

What do the above have in common? A foundational feature of capitalist growth. What’s the best way to get a really high rate of return on your investment? Start with something really small.

It’s the tyranny of math. Once your company’s big (in terms of $$s), it’s hard to have a steep rate of growth. What’s one of the most well-known finance adages? Buy low, sell high. Get in on the bottom, when something’s small, inject capital, promote promote promote, and then think about getting out when excitement and earnings are high (and before growth stagnates and profitability wanes). Make *&%ton of money. Open offshore account or three. Wait for furor over Panama Papers to subside. Repeat.**

**DISCLAIMER: This is not investment advice, nor does it intend to represent the complexity of contemporary financial markets. I became an historian so I could play with words and not numbers.

What I will say is that “creative destruction” has an important history in economics and political economy. Marx wrote about annihilation or destruction (in German, vernichtung), or the phenomenon by which he saw capitalism dismantle previous economic orders and assemble itself in their wake. He wrote that capitalism operates by necessarily devaluing existing resources (anything deemed by a society to be of value) in order to make possible the creation of new wealth, for example though war, dereliction, or economic crisis.

The German Marxist sociologist Werner Sombart has been credited with the first use of “creative destruction” (Krieg und Kapitalismus “War and Capitalism” (1913). Joseph Schumpeter, early 20th century Austrian-American economist, wrote about creative destruction as a process in which new technologies and products make old ones obsolete. Economic structures continually dismantling the ones that came before (Capitalism, Socialism and Democracy 1942). In a detailed reading of Marx, Schumpeter calls “creative destruction” the seed of capitalism’s success–and its demise.

In 1976, Milton Friedman, Nobel prize-wining conservative economist, leader of the Chicago school of monetary economics, theorized that economic change never occurs without a crisis to shock the system into said change, i.e. natural, induced, or perceived (war, terror threat). No stranger to controversy, Naomi Klein wrote a book in 2007 called The Shock Doctrine: The Rise of Disaster Capitalism, in which she argues that “disaster capitalism” is the phenomenon fuelling a new world economic order, in which “global instability does not just benefit a small group of arms dealers,” but is hugely profitable for the homeland security sector, for heavy construction, for private health-care companies, for the oil and gas sectors – and, of course, for defense contractors.

For now, I’l be channelling the destabilizing inspiration of being uprooted myself into more fully cooked research on this topic. Pondering… what does it mean – and how does it matter – that capitalism turns destruction and loss into a productive devaluation of somethings and someones, making possible a “massive scale-up” in capital value of other things and for other someones?  What are the “science-based startups” of the CDL destroying in order to reportedly create “more than $800 million (CDN) in equity value”?  (*Spoiler alert* They re-parcel investors’ less profitable funds into more, and more rapidly, profitable revenue streams.)

Are we going to see more crowdfunded food start-ups like the L.A.-based meal replacement product, Soylent (now backed by the same venture capital firm as Facebook and Twitter)? And why, oh why, among these creative destructors, are there so many dudes?

ST

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