Ideally our society organizes itself around the principles of a meritocracy: we award the “winners” in our society, where by “winning” we mean that in the competition of a fair and equal capitalist market, those who are the best and brightest percolate to the top.

Of course this is the ideal. But in such a huge work force, local factors prevent the best and brightest from percolating up, and local factors entrench the less worthy at the higher echelons. For example, think of a boss who has political connections within an organization entrenches himself and promotes the “yes” men while the people who make valuable contributions to the bottom line are pushed out as threats to the corporate power structure. While it is true that in the long run such inefficiencies would lead to the “creative destruction” of that company, as top-heavy structures built around inefficiencies allowed that corporation to be overrun by startups–including those potentially founded by the workers who were pushed out by that corrupt boss, “creative destruction” also has a negative social effect as other workers who did an excellent job lose their positions because of a boss who doesn’t uphold his fiduciary responsibility to the company.

One interesting thing I’m now watching first hand is the incumbent problem at a startup company I’m now working for.

In this slow economic environment we just got our ‘A’ round of financing, so now we’re in a position to start hiring people. And because the economy is very slow I’m seeing a few excellent candidates come through the door–people who, in my opinion, could potentially do a better job than many of the incumbents that already hold a job at our little startup. And here’s the problem: how do you balance the risk taking of less competent incumbents with the needs of the company to hire the best and brightest? After all, the incumbents were the ones who got us to this stage–even though they may not be the best to take us to the next stage.

I used to hear horror stories about Venture Capitalists firing the founders of a company as soon as the company starts taking off, and I used to look at it from the point of view of the founder–someone I could sympathize with. After all, someday I wanted to start a company, and it’d be terrible if I took all that risk, only to have my dreams and ideas taken by someone with a deep checkbook.

But now I’m watching it from the other side–from the side of a Venture Capitalist who is investing a lot of money into a company and who wants to maximize their return. And sadly, it could very well be that the founder who gets tossed off the company he founded may not be the worst thing for a company–since, quite honestly, the primary purpose of a company is not to entrench yourself with your buddies, but to make a profit. And with a VC-funded company, to make enough money to give a decent return on the high risk investment the VC is making.

I sort of get the feeling that’s one of the primary reasons why a startup fails: because the incumbents don’t know how to deal with the company they’re starting, but they won’t step out of the way to allow knowledgeable people step up to the plate.