Blog Series: The Middle Class – Engine of Innovation

Consider this: The greatest inventions of the modern age— from the light bulb and the telephone to antibiotics, airplanes and the computer— were all made possible by the purchasing power of the middle class. Without this market much of what has redefined the way people live today would never have been successfully developed.

While early adopters fund initial inventions (one of the first home computers cost thousands of dollars in the 1970’s),  mass market appeal keeps the innovation engine humming. Energy, automobiles, communications, pharmaceuticals, electronics and retail make up the vast majority of the world’s 500 largest companies. Commercial financial institutions account for only 19% of the total.

When executives sit down to plot out what new products they’re going to pursue they inevitably size the market. That’s business 101. None of today’s global companies would even exist if it weren’t for the mass middle market. And when that market begins to shrink real consequences follow.

Investments in nascent and emerging businesses are no longer growing like they once did. Venture capital fundraising, one of the main financial sources for start-ups and fast growth young companies has yet to recover from its 2008 high water mark of $25 billion, plummeting to under $14 billion in 2010. Results for 2012 remain cautiously optimistic. Reuters and the National Venture Capital Association reported a 10% rise for the first half of 2012 compared to the same period a year ago after a disastrous first quarter drop of 35%. The number of firms raising new capital has shrunk considerably, however.

Start-ups, especially during recessionary periods are critical job creators while existing firms tend to shed employees. During the 1991 and 2002 recessions they added nearly 3 million new jobs while established firms laid off four to five million people according to a Kaufmann Foundation report. Meanwhile corporate research and development funding, while growing nominally at about 2.8% in the U.S. remains flat in real terms owing to inflation.

While start-up funding has become more difficult for start-ups a new crowd sourcing platform is emerging. Still in its nascent stage this has led to millions being raised on which has grown from an indie creative fundraising outfit to a real source of finance for entrepreneurs. With the passage of the Jumpstart Our Business Startups (JOBS) Act individuals will be able to invest directly in small companies for an equity share within certain limitations.

The “industry” is still finding its way and looking to create a unified set of standards. Fraud concerns are real and need to be addressed (hopefully better than the pervasive fraud on Wall Street these days). Crowd Funding Intermediary Regulatory Advocates (CFIRA) has held events to solicit public input. has launched an accreditation program. The Securities and Exchange Committee has scheduled an Aug. hearing on lifting advertising bans on securities. New rules on crowdfunding up to $1 million in equity are expected by the end of this year.

New approaches to small business support will go only part of the way to rebuilding a middle class. Much broader efforts need to be implemented to save the middle from truly hollowing out and innovation grinding to a halt. Middle class consumption clearly drives innovation. Their health is the health of a nation. Until they recover, there is no recovery.

Coming up: Middle Class Awakening – when the middle does not hold.

Photo: Tokyo at Night, Brian P. Klein, 2009