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Household Finance in the Entrepreneurial Age
European Straits #168
⚠️ The paid version of European Straits launched some time ago. In addition to this free edition, my paying subscribers receive a Monday Note as their work week is about to begin and a set of Friday Reads that dig deeper into various topics related to investing in tech startups, especially in Europe.
If you’re not one of those paying subscribers, here’s what you’ve missed lately 😉
A primer on the discussions related to surveillance and privacy when it comes to fighting the pandemic: Big Brother or Chaos? Is There a Third Way?
An in-depth focus on schooling after the COVID-19 crisis and the challenge of educating children at home: Homeschooling: The Next Frontier?
A discussion of what’s happening on the stock market during the crisis, with shifts between geographies and growth and value stocks: Asset Allocation In a COVID-19 World.
If you don’t want to miss the next paid editions, it’s time to subscribe! In the next Friday Reads, I will focus on how software eating the world is changing the rules of the game for multi-asset allocators.
As for today, I’d like to share a bit of what my family has been up to lately, and a few lessons we’re drawing from the current crisis when it comes to our household’s finances 👇
1/ Since the release of my book Hedge, I’ve been writing at length about what the Entrepreneurial Age means for us individuals: the risks we are exposed to and the consequences those risks have on our way of life.
Entering the Entrepreneurial Age doesn’t mean that we’ll all become entrepreneurs or freelancers. Quite the contrary, it’s likely that the majority of the workforce will remain employed in the traditional sense of the term. But one thing will change in a drastic way, and it’s the security that we’ve long enjoyed in the realm of salaried work.
In the past age of the automobile and mass production, an institution was born that we call “a steady job”. You would find a job in a large, Fordist organization, and then you would move forward in the same industry, potentially spending years, even decades, with the same employer, hopefully on an upward path.
In the Entrepreneurial Age, such predetermined careers barely exist anymore. Salaried jobs are no longer synonymous with security and the steady job has become a remnant of the past. Today, we may still be employed by corporations, but the chances are high that we won’t stay long, either because our employer will go bust, or because it will be forced to constantly reinvent its business, in turn forcing its employees to hop from job to job and to frequently learn new skills in the process.
2/ It’s worth digging into this radical transformation a bit and realizing that there are several trends at work, some of them predating the current technological revolution. Here’s a short list:
The two-income trap. In the distant past, only men had a steady job. Women could work, certainly, but it was often a temporary solution to a reversal of fortune. A housewife would take a job at a retail store or a nursing home nearby until her husband found a good job again. Then, in the 1970s, having both spouses working became the new normal, which means that a household can’t use an occasional second income as a safety net anymore. (It turns out Elizabeth Warren, previously a candidate in the Democratic presidential primary, wrote a book about that topic! Have a look: Elizabeth Warren’s book, The Two-Income Trap, explained.)
Financialization. Financial services have taken over the entire economy through many channels, including private equity, a more sophisticated corporate finance, and the securitization of many assets. It’s a good thing in many respects, but it’s also a bad thing because it exposes many parts of the economy, including households, to the brutal ups and downs that previously existed only on financial markets. We saw the results with the financial crisis in 2008. Have a look at Rana Foroohar’s work (reviewed by me): After Financialization.
The shift to the age of computing and networks. That’s what Part 2 of my book Hedge is about. To make it short, computing and networks bring about increasing returns to scale in every sector of the economy (“Software eating the world”), which in turn bring about fiercer competition, widespread instability, an increased pressure on wages, and greater inequality. An economy dominated by tech companies is essentially more entrepreneurial, which has a deep impact on how households should manage their finances.
3/ Now, this doesn’t mean that the new world is synonymous with throwing the majority of workers into a jungle. Instead, we need to invent new mechanisms so as to provide individuals with stability in a more unstable world. And as I explained in Hedge, I think startups form a vanguard and will pave the way for radical institutional change. Here’s a related blog post, 10 Startups Coming to Save the Social Safety Net:
If history repeats itself, the “Great Safety Net 2.0” will be discovered by entrepreneurs and will only then be expanded and operated primarily by the state. But I think the situation will play out differently this time. The nature of today’s technology, based in ubiquitous computing and networks, makes it possible to deliver high quality at scale—a foundational feature of the Entrepreneurial Age as defined by Babak Nivi.
4/ In the meantime, because I like to walk the talk, let me explain a bit about my own household’s situation and how we’ve made changes to try and become more agile and resilient in this new age:
Almost five years ago, my wife Laetitia and I decided to move from Paris to London with our two children. There were several reasons for the move. Laetitia wanted to explore new professional horizons, which seemed to be easier in London. My firm The Family was about to open an office in the UK. And we wanted our children, who were then 6 and 3 years old, to attend school in the UK so as to become fluent in English, which they now are (even more than in French)!
However, we decided not to move in the traditional sense of the term, that is, bringing all our stuff (furniture, books) with us in London. Instead we went full Marie Kondo and decided to get rid of most of it and keep the rest in a small house in rural Normandy that we had bought from my mother-in-law back in 2007. We found a furnished house in London and only brought clothes, a few books, our computers, and some toys for the children.
We were operating on two rationales. One was that we didn’t know what to expect—what life would be like in London, how much it would cost, how many times we would have to change houses. The other was the inspiration of my cofounder Oussama Ammar, who likes to live his life with nothing more than what can fit in a suitcase, leaving him free to move around, adapt to changing circumstances, and seize opportunities. We wanted to emulate him, but in a way that worked for us as a family. Having that base in Normandy made it all possible.
5/ Five years later, I must admit the situation changed a bit. After eventually moving into a new, unfurnished house in London, we had to buy new stuff such as beds and chairs, and our constant ordering of books from Amazon has made our household somewhat heavier. But in the end, what we have in London is still much less than what we previously had in Paris (I even had a grand piano back then!). Indeed, we still like to see ourselves as being constantly on the move, as Laetitia wrote about a few weeks ago:
The skills we need [in an age of transitions and migrations] seem quite obvious. What’s less obvious is how we go about developing them. Well, I do have an idea about the how. At least, I’ve made life choices for the sole purpose of developing the aforementioned skills in myself and my children. Five years ago we moved to the UK (from France) to experience linguistic and cultural changes, and expose our children to them. Our children are now half English half French (not administratively, but culturally and linguistically). They understand what it means to communicate across two fairly different cultures. The UK may not be far geographically, but culturally, it might as well be in another hemisphere.
6/ Those choices we made 5 years ago are especially rewarding now that we’re in the midst of the COVID-19 crisis—both on the cultural side (see Laetitia’s piece Normal is dead. But soon we’ll have new normal) and on the financial side. You’ve all read the articles about urbanites fleeing the city and invading rural areas, bringing disruption and disease with them. But let me explain our particular situation:
We’ve had this country house in Normandy for 13 years, and so we immediately thought it would be better for the confinement period than our house in London.
This was an even more obvious decision because back then the UK government was still doing nothing to prevent the virus from spreading, which was very frightening. France was heading into lockdown, and the contrast between quarantined France and careless Britain made staying in London unbearable.
We brought food in suitcases and waited 14 days before shopping for groceries here, so as to make sure we didn't contaminate the locals (none of us ended up having symptoms).
7/ And then it all happened very fast:
After a few days we realized that the lockdown would likely last for weeks, even months. So we gave our 1-month notice to the landlord in London and found a removal company that brought all our London stuff to Normandy, where it’s now stored in a shed.
In any case, our plan had already been to move to Munich, Germany later this year (November or December) so the crisis just accelerated the whole thing. We're in transit in Normandy, having left London earlier than expected and waiting before we can settle down in Munich.
We don't have to deal with the school system because all schools are closed in the three countries involved (UK, France, Germany). In ordinary times, schools are the factor that makes it especially difficult for a family like us to seamlessly move across borders.
8/ Obviously this is just our very specific case. However you can see how much it resonates with what I wrote above about individuals living in the Entrepreneurial Age: For 5 years now, we've designed our household economics to provide as much agility as possible in an age that rewards it more than ever before. The heavy stuff is here in cheap Normandy, which is our basecamp, if you will. Then we always rent in the city, with as few belongings as possible.
About the latter, now that I know a lot about corporate finance and wealth management, I’ve realized there are severals rationales for renting rather than buying:
We want more room in the city, which we couldn't afford if we wanted to buy. If you rent, you can match comfort with what you earn and what you need at the moment. If you buy, on the other hand, comfort depends on what you earned in the past, which in the Entrepreneurial Age is always a very bad predictor of your situation in the present.
We want to be able to leave in an instant and take refuge in Normandy if the circumstances require it. If you own the house you inhabit most of the time, you can’t really leave without selling it; and if you do, you’re dependent on how the market is faring when you want to leave. Ask all those engineers who had to sell their houses near Detroit right after the 2008 crisis!
Now I know what you’re thinking: owning real estate is still the best way to build wealth. But who said you should own the house that you live in, and that’s it? It’s not a coincidence that the advice of most wealth managers and financial advisors is indeed to own real estate, but not the house or apartment you inhabit. That’s because you don’t want to confuse two very different things: your wealth and how you manage it; and your home and how you inhabit it.
9/ Until recently, those scenarios of going through ups and downs had only existed in theory, but now we’ve had the real experience courtesy of COVID-19. Indeed, we’ve found a new strength in such times: moving out of London so quickly made it possible to eliminate that high cost of living and divide our family cash burn by a factor of almost 5!
It's true that, COVID-19 or not, both Laetitia and I enjoy the luxury of being able to regularly work from home, and that move we just made is not something everyone can afford. But then like so many others our incomes are taking a big hit: Laetitia is a speaker and most of her gigs have been cancelled, while I have to manage my firm The Family’s path through the crisis, taking a big salary cut to guarantee a more stable footing. And so how we manage our household’s finances must stay very much in line with what’s likely to happen to us on the income front.
10/ Apologies for what I see can be read as a bit of rambling, but I think the whole crisis reveals a glimpse of what city vs. countryside could become in an entrepreneurial society of hunters.
Right now our society has this model of living full time with high fixed costs in the city and occasionally spending time in the countryside at an additional, variable cost. This is particularly true in Europe, where most people prefer to live in cities rather than suburban areas!
However, just like a business, as a household you don't want to have to deal with high fixed costs because you never know how the market is going to evolve. The only assets you want to hold are those that generate income or make it easier to generate income if needed—what Lynda Gratton, author of The 100-Year Life, calls “transformational assets”.
Maybe, post-COVID 19, the model will become the opposite of today’s norm: living most of the time outside cities (with lower fixed costs), and occasionally spending time in them when work or leisure requires it, renting an Airbnb or simply staying in a hotel (variable costs). We'll see!
In conclusion, I’d note that this is one rule of thumb in the Entrepreneurial Age: In general, we should think of a household as a business. It has consequences in many dimensions of our life. Take the example of the tax system, which should be upgraded to account for households behaving more like businesses. Here’s what I wrote a few years ago in We Should All Be Taxed Like Donald Trump:
In the world of software, in which every transaction can be tracked and documented in the cloud, my guess is that it will become ever easier to separate business-related expenses from personal ones, thus opening the possibility that we all use that famous loophole: we wouldn’t pay taxes, and would even be able to spread potential losses over multiple years, if our business-related expenses exceed our income in a given year. On the other hand, taxes would be due when our own “startup of you” becomes profitable over the long term.
If you know corporate finance, there are incredibly interesting lessons to be drawn when it comes to managing your money as a household. Today, the goal for most households is to maximize income while they can and to invest in the home they inhabit to prepare for retirement. Tomorrow, will households, like businesses, learn to maximize return on equity rather than just holding on to assets to cover future expenses? This, obviously, is a discussion to be continued!
In the meantime, I’m happy to hear your feedback—and particularly your pointing out any interesting startups, either in consumer finance or real estate, that are making this new way of life more of a reality. (Thanks to Ranjan Roy of Margins for prompting this.)
🇫🇷 For those of you who prefer to read in French, don’t forget that there’s a French version of Hedge now! Buy it here on Amazon FR: Un contrat social pour l’âge entrepreneurial.
🏠 Obviously confinement is still ongoing, and no one can say when it will be over (whether partially or fully). But at The Family we are discovering that online events can have real advantages, and that when properly structured they can give not only a sense of community, but even increased interactions between speakers and the public!
⚠️ To that end, I’d highlight three events coming up this week:
I’m starting the first of a series (in French) called Nouveau Départ. Similar to what we did years ago with Les Barbares Attaquent, I’ll be going in depth on individual industries to examine how they’ll be forever changed by the ongoing COVID-19 crisis. The first edition is today, from 5:45-8:00 pm (CEST), focusing on education—join me!
On Friday afternoon, we’ve got top European investors coming to talk about fundraising in challenging times. This is the place where entrepreneurs can get the knowledge they need to navigate fundraising, whether with VCs or via other options, even in these moments when it seems like nothing is like it was before. Tickets here.
Finally, on Saturday morning we’re having the 2nd edition of our “Be my cofounder” event. The networking possibilities on Hopin (our go-to solution for online events) are wonderful, and so we’re taking advantage to generate that little bit of serendipity that can lead to great founding teams. Sign up here!
The comprehensive reading list attached to the European Straits weekly essay is part of the Friday Reads paid edition. Subscribe if you want to receive that list of articles to dig deeper into household finance!
From Normandy, France 🇫🇷