The Prof G Pod with Scott Galloway - Office Hours: Raising the Minimum Wage, Seeking Venture Debt, and Getting on the Property Ladder

Episode Date: September 28, 2022

Scott takes a question about the nuances of raising the federal minimum wage to $25 an hour. He then offers advice to a startup founder on whether he should raise venture debt or venture capital, and shares his thoughts on how to invest in real estate as a renter. Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the PropG Pod's Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at PropGmedia.com. Again, that's officehours at Proptymedia.com. Again, that's officehoursatpropertymedia.com. First question. Hi, Prof G. Tim Tortore here. I'm a CFO in network TV production, and I recently heard you talking about a $25 minimum wage. I generally think the idea of a minimum wage bankrupting businesses is BS and a scare tactic. But at the same time, a high national minimum wage that moves the needle

in metropolitan America will spike inflation and kill jobs in small market America. It seems to me that the market solves for wages. And if you force a $25 wage nationally, West Virginia, for example, will forever be left in poverty because it can't compete on lower costs to increase jobs. And in New York City, it likely won't even move the needle for most people. I think minimum wage should be indexed the way the GSA does for federal employees, housing reimbursement, or per diems. A $25 minimum wage is a nuclear bomb swatting a pesky fly instead of a fly swatter that is more surgical. Does your thinking have more nuance, or is it just as simple as $25

nationally and figure it out? Tim, thanks for the thoughtful question. Minimum wage is something I'm thinking a lot about recently. If minimum wage had kept pace with productivity gains since 1968, it would be above 20 bucks. I think it'd be about $23 right now. So the minimum wage from 1968 wasn't kind of hammering these lower income states. Having said that, I think there's some merit to what you're saying. And that is a more nuanced approach would be to say, okay, what don't know, the Bay Area, and then maybe index it to that and say, this is the minimum wage across different states, or the minimum wage is a calculation based on the cost of living there. And we're going to decide that if anyone works 40-plus hours a week, they should not live below the poverty line. That might be a means of marking or identifying what the analysis is. So I think you're right. I think that we don't want, it's going to take

more than one type of hammer. The problem is, if you were to start doing that, I see it getting out of control and everyone inserting their own language into the types, the calculus. And the states that have implemented higher minimum wage, despite cries of all these businesses going out of business, what they found is the economy has actually grown. Why? Because the wonderful thing about lower and middle-income people who would mostly benefit from an increase in minimum wage is when you give them a dollar, they spend it all. And when you give a wealthy person a dollar, they invest it, which takes down interest rates, takes up the market, and there's some advantage there. But most of those benefits accrue to the top 10%, if not the top 1%, who own 90% of stocks and bonds. So just some data about minimum wage. When it's adjusted

for inflation, it's at its lowest level in 66 years. And the $25 minimum wage threshold has been tried. 10 cities in California, including Los Angeles, have either passed or introduced a $25 minimum wage for healthcare workers, which is kind of interesting. By mid-August, the share of searches for $25 an hour jobs on Indeed, the job site, was up 120% year on year and surpassed the share of searches for $15 an hour. The UC Berkeley Labor Center found that low wages cost taxpayers $100 billion annually. Lower wages equals a greater dependence on social programs, including SNAP and Medicaid. In sum, you're going to pay for poor people one way or the other. We found the $700 billion to bail out the richest cohort in America, small business people with PPP.

We found $600 billion to a trillion dollars to provide debt relief to the third of Americans that got to go to college, but we don't want to increase minimum wage. I think a big step to address mental health issues in this country is to give people a sense of purpose. And nothing gives you a sense of purpose like a job. Would certain companies go out of business? Yes. Would certain consumer stocks get hammered? Yes. Would this solve homelessness? Would this solve depression? Would this solve obesity? Would this solve kids living in poverty? No, but it would help all of them. And stocks going down and consumer companies getting hammered and some businesses going out of business, it would be worth it. And also, I think we just need to get people back to work in a dignified

way. We have to say to them, working is awesome. This is America. We work. That's one thing I've always noticed about America is that we work harder, but there's no reason why the wealthiest country in the world shouldn't pay better than any. What's the point of being the wealthiest nation in the world? Wouldn't the most basic litmus test be how much do you pay your least well-compensated employees. And I was on the board of a retailer and the CEO used to say, well, we let supply and demand sort out the labor market because we used to get a lot of shit for not paying our frontline employees in our 550 stores a good wage. And I did say this. I said, when you totally rely on this kind of Milton Friedman labor market based on supply and demand, you end up with one in five households have food insecure kids. The market fails around low-wage households, and we need to move in. It would be a better multiplier effect. They would spend all of it. They would spend all of it. There's not a lot of evidence that it destroys businesses. As a matter of fact, the economies and job growth has increased in nations with higher minimum wage. And just bringing it back to where it was in 1968 would be $23 a share.

I'd love to see a candidate run on this. But let me circle back. Noted. Noted. It probably requires some more nuance at a state level. I hate getting into this, though, because it immediately becomes a political football. And I think it would be easier just to have a federally mandated minimum wage that gave people dignity of work. Thank you for the question, Tim. Next question. Hey, Scott. It's Jeff from Chicago. Best city in the world, nine months of the year.

Really like your new markets-focused podcast each week. Here's my question. My business partner and I have bootstrapped our fintech venture out of personal funds the last 18 months. Development and betas are complete and now ready to add some gas. While we're still pre-revenue, we have high confidence in our business model. We would strongly prefer to bring in expansion capital via venture debt or loans instead of venture capital. We're talking less than $3 million and we're new to the process. So where would you advise a new company like ours find access to debt and creditors? The problem we're facing is that to get traditional debt financing through a bank, we have to show 12 to 24 months of revenue.

But we're not going to get there without an expansion of capital first. Anyway, love to hear your riff on our situation. Thanks, Scott. Jeff, in Chicago. I was in Chicago about 12 hours ago. I connected from Las Vegas through Chicago to get to London. I haven't slept in about 28 hours. I could start, I don't know, I could start hallucinating any moment. I feel okay right now. I mean, that's sort of mania phase when you don't sleep. But I was in Chicago, or specifically, I was at

O'Hare for about two hours. Whenever I'm at O'Hare, I do what you do when you're in Rome, and I have McDonald's, which is my favorite airport meal. Anyways, not what you were asking. So, I don't think you're going to be able to get debt. I think your company is too early. And typically, venture debt from a Silicon Valley bank or Comerica oftentimes follows venture financing. Why? Because people think venture capitalists are smarter than them. And if they've invested 20 million in equity,

that if they give you three or $5 million in venture debt, that it should be safe because venture debt sits higher in the cap structure. What do I mean by that? If your business goes out of business, if it goes bankrupt, hopefully there's some asset value there. The IP, some of the business relationships, if it goes bankrupt, hopefully there's some asset value there, the IP,

some of the business relationships, whatever it might be. There's some assets, the computers you have, maybe you have a great lease or you bought your office, whatever it is, and the creditors, the debtors, get to show up and get claimed to those assets before the equity. So what Comerica does, when I started at Commigold Del 2 and General Catalyst put $15 million, I think, into our Series B, Comerica just shows up and says, if a tier one VC, such as General Catalyst, has invested $15 million, we'll give you $5 million in venture debt. And we didn't need the cash, but the terms were something like 3.25% with some warrant coverage. And I said, send it over and I'll sign it and fax it back because it felt like nearly free money. So there are some big players in venture debt, but typically

they follow an equity round or as you said, financials that say this company is a good credit risk on its own. They bypass that evaluation, that diligence when a great VC has come in because they trust the VC's diligence. So I think you're going to have a tough time getting debt. I also think you should consider perhaps bringing in outside capital. It sounds like you have the type of business that might be kind of capital consumptive. But I think the right VC, a couple million bucks in financing, then maybe a million in venture debt, get some good people on your board that have some domain expertise, can help you build the company, have been there before. One of the guys on my board, Larry Bond from General Catalyst,

Larry just has this sort of sixth sense around how many people should be in each department. He can look at our costs and see where we're spending too much or where we're investing too little. He just has a feel for value creation and capital formation. And a good VC has just seen a lot. They can also bring some enterprise value, not as much as they advertise, but they can help you with recruiting. They can help you with some HR-related issues. They can help do a search for key positions. But for the most part, it's all about the individual. Anyways, long-winded way of saying, I don't think you're going to be successful finding debt based on what I knew about your company. I would consider doing a small equity raise if your company is doing as well as it sounds like it's doing, and then maybe top it up with some venture debt. Thanks very much for the

question, Jeff. We have one quick break before our final question. Stay with us. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Hey, it's Scott Galloway, and on our podcast, Pivot,

we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions. What should you use it for? What tools are right for you? And what privacy issues should you ultimately watch out for? And to help us out, we are joined by Kylie Robeson, the senior AI reporter for The Verge, to give you a primer on how to integrate AI into your life.

So tune into AI Basics, How and When to Use AI, a special series from Pivot sponsored by AWS, wherever you get your podcasts. Welcome back. Question number three. Hi, Scott. I'm calling from Swansea on the edge of the Gower Peninsula. Great place to visit if you'll come to the UK. My question is about getting on the property ladder. And it's like eight times annual income in the UK, maybe five times in America. So getting a deposit together is kind of hard, right?

So shouldn't renters get some kind of equity or property assets for their rental payments that they are paying? So can we reconstruct it? And I was thinking, if you take the rental payments and have it guaranteed, you insure them, the renter does that. Maybe with some non-adversarial insurance company like what Lemonade has done, that's a B Corp insurance, not like these greedy insurance companies, then their rent's guaranteed for six months, right? So why shouldn't they get some of the upside of that property? In the UK, we've had lease-to-buy, rent-to-buy schemes, which the governments have set up for nurses and critical workers to help them get on the property ladder. Surely, it's time to stack the capital markets and the property markets in favor of the next generation. And is there a way to do this? Can DAOs help achieve this? Can smart technology

help achieve this? Thanks for my question. You've got a great show. And that's okay. Palaf and Swansea, thanks for the thoughtful question. First off, kind of what should happen is a bit moot. It's sort of what is. Everybody should have access to a roof and shelter. And ideally, it's a fantastic way over time. If you look at it as an asset class, it usually doesn't overperform other asset classes. But it's a great for savings mechanism because you don't want to get evicted from your house, so you make that payment. And you slowly but surely pay down your mortgage, time takes over, you've lived somewhere 10 or 15

years. Most real estate that you hold for a long time survives cycles, and you end up with something that's worth a lot of money because you've had forced savings and it's compounded, and you've gotten to enjoy it along the way. So I've made good money in real estate. I think I've made money on almost every house I've owned, but maybe that's a function of, I bought my first house in 1994 or 95. You can't participate in the real estate market without owning a home. You can invest in REITs or real estate stocks. So there's different ways to take advantage of appreciation in real estate. It is outrageous that mortgage interest is tax deductible and rent isn't. Who owns homes? Old people.

Who rents homes? Young people. Everything we do around tax policy is meant to do one thing, and that's transfer money from people under the age of 40 who have seen their wealth as a percentage of GDP go from 19% to 9% in the last 40 years, such that old people, seniors 65 plus, are 72% wealthier than they were just 40 years ago, right? The wealthiest cohort in the history of the planet, baby boomers and seniors in America, get $1.5 trillion transferred to them each year from young people in the form of Social Security. I'm not suggesting we let

seniors starve. You make over a certain amount of money or have a certain amount of assets, you should not be getting Social Security full stop. And people say, well, I paid into it. No, it's called Social Security tax, not Social Security pension. Anyways, bit of a rant. I can't get over how expensive housing has become for people your age. So you either move to a lower cost area or you start investing in REITs. But I don't think what you're talking about is politically palatable. So just some stats here. Homeowner's median net worth is, get this, 80 times larger than renter's medium net worth. A homeowner who purchased a single family home 10 years ago would have gained on average almost a quarter of a million dollars in equity if they'd sold for the median price today. There is a startup doing something similar to what you're suggesting, up and up. Renters get a return on the profits of the rent that they pay. And if the value of

the property they're renting goes up, the returns increase as well. They can use the proceeds to make a down payment on a home or cash out at the end of their lease. But the bottom line is home ownership has become increasingly unattainable for young people because of economic policies that continue to transfer wealth from young people to old people. And also this bullshit, rejectionist, nimbiest culture we've created in the United States where once we have a college degree, we love that admissions rates go down, such that our degree from UCLA or MIT or Georgia Tech continues to gain in value because it's more scarce. Once we have a tech company that's successful, we begin immediately filing

all sorts of patents and putting our elbows out and giving money to politicians and senators that will try and squash competition. Again, more rejectionist, nimbious, and even worse, once we own a home, we start showing up for local civic board meetings or planning or architectural review boards and make it impossible for new development. Because once you have a home, you want less supply such that the price of homes go up. What does this mean? Young people have to pay increasingly exorbitant prices for college, for houses, and also to start businesses. It's total bullshit.

America is about as much opportunity to as many unremarkable people as possible. That was a bit of a rant. Anyways, save money, live below your means, invest in real estate stocks until you have a down payment for your own home. Thanks for the question, Paolo from Swansea. That's awesome, Paolo from Swansea. Well done. That's all for this episode.

Again, if you'd like to submit a question, please email a voice recording to officehours at profgmedia.com. Our producers are Caroline Shagrin, Claire Miller, and Drew Burrows. Sammy Resnick is our associate producer. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Profiteer Pod from the Vox Media Podcast Network. We will catch you next week. deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software? How will AI affect both? And how are these tools changing the way we use our computers to make stuff,

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