SOPHISTICATED FINANCE

The Effect of Culture on Charitable Donations

@John_Menezes tweeted an interesting article from the BBC News, "Social entrepreneurship takes off in China". The article discusses several successful projects in China using social entrepreneurship. The article makes clear that social entrepreneurship is a more effective model because of the difficulty in using a donative non-profit approach. 

I think that social entrepreneurship is the preferred approach over donative models in all cultures because you have more control over cash flow and better access to capital. However, in China the point is even more clear. In China most donations are given to state run charities and not to private charities. There are two possible reasons for this behavior:

1. Donations to state run charities garner favor with the government
2. Donors have more confidence in state run charities

In the United States there is a high degree of confidence in organizations, perhaps due to the legal system and reporting requirements for non-profits. In China, for a variety of cultural and historical reasons, trust is based principally on personal relationships and this has not changed for thousands of years. Without a personal relationship, there would be few donations. Government run charities perhaps have a better reputation because of government scrutiny. 

Perhaps the conclusion to draw from this article on China is that donative models are likely to be more successful in cultures where organizations are trusted. Otherwise, one is well advised to start with a social entrepreneurship model for a social venture. 

In my presentations on social ventures I always make the point that it is the first decision whether to use a donative model or a commercial model for a social venture. I have a strong predjudice in favor of social entrepreneurship and this story from China reinforces that view.

Foreign University Students

As is the case in many U.S. universities, especially at the graduate level, a significant number of the students are from foreign countries. The amount paid by these students or their governments is a very significant amount, as discussed in this article in Forbes "Stop Wasting Foreign Aid: Let's Import Millions Of New College Students Instead", by my friend Iqbal Quadir--founder and director of the Legatum Center for Development and Entrepreneurship at MIT. 

Some eye opening facts about higher education:

1. Higher education in the U.S. has annual revenues of $400 billion
2. 700,000 foreign students attend U.S. universities
3. Foreign students pay $21 billion annually in tuition and living expenses
4. If foreign students increased from the current 3.5% to 15% of total students, the economic benefit would reach $100 billion annually and foreign students would total 3 million

Expanding the number of foreign students, Iqbal argues, would have three benefits beyond increased revenue:

1. "Expertise and resource development in educational institutions; 
2. Enrichment of the knowledge ecology from foreign graduates who remain in the US; and
3. Connections between this augmented American knowledge base and foreign graduates who return to their countries"

I like the idea of expanding the number of foreign students in U.S. universities. It might facilitate greater understanding between countries and would be a significant economic benefit.

Theory vs Practice

One of the ongoing debates in education and particularly in the field of entrepreneurship is whether learning can be purely through practice or whether theory plays a role. Students tend to prefer the practical and practice approach. I on the other hand prefer a blend of theory and practice. For example, many algorithms, heuristics and processes such as business model development, Porter's Five Forces and the concepts of value creation and value capture can help to prevent costly mistakes that squander capital for the entrepreneur.

Today's post in Equity Kicker has a quote from Ralph Waldo Emerson which makes the same point eloquently.

"Without ambition one starts nothing. Without work one finishes nothing. The prize will not be sent to you. You have to win it. The man who knows how will always have a job. The man who also knows why will always be his boss. As to methods there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble.

Computer Technology and Test Scores in Education

Much has been written to show that technology does not improve student learning. More precisely, what this statement typically means is that student test scores do not improve after laptops are introduced in the classroom. If we step back and look at the results of computer technology in classrooms, we have four possible conclusions:

1. The laptops and software are being used to reinforce traditional methods of teaching (so why would one expect better test scores)
2. The laptops have no software that allows learning in new ways which might improve test scores
3. The laptops and software are allowing children to learn faster but this benefit is not captured in test scores by the grade level measurement system
4. The laptops and software are allowing the children to learn new skills that are not measured by the test scores

3 out 4 chances (1, 3 and 4) for testing to show that laptops do not improve education. 3 out of 4 chances (2, 3, 4) to have a meaningful contribution from laptops and software, if only we asked the right questions. 

As Clayton Christensen, the famous HBS professor, showed in "Disrupting Class", we should not expect better results if we use technology to reinforce traditional teaching methods. The question (3) that intrigues me is whether we could educate children faster using self-paced technology, graduating children faster and thereby freeing up resources for other students such as the disabled. The new discoveries in neuroscience have not yet been incorporated into learning and education and software based on this new knowledge may improve the way children learn (2). Of course, if we realized that education needs to change to reflect the easy access to information through the Internet we would focus on the need for children to develop new skills (4) for the 21st century. Any of these questions are more relevant than does technology improve test scores.

Note: Another possible conclusion is that the teachers do not know how to use the laptops in the classroom, but I think there is enough evidence to show this is not the case. Many groups have the know-how to train teachers to successfully adopt laptops in the classroom. South Kent School is one such group. 

 

Other post on education are here.

These views are my personal views and do not reflect the views of any client, company or other organization with whom I am affiliated.

Creating vs Consuming Information

Walter Bender, the Founder of Sugar Labs, recently gave a talk (link to YouTube) in Goa titled "Learning to Change the World". In the talk Walter makes the distinction between education and learning. Education is something that is "done to you" and learning is something "you do". Schools educate but children learn or should learn. This distinction extends to information, where the two choices are creating information and consuming it. Creating information is the active development of content in whatever form and consuming is the more passive processing of what is available. Extending these ideas, learning is a process of creation and education is a process of consuming.

If we consider technology in this framework, we have two choices. We can either focus on education and consuming or we can focus on learning and creation. Many people ask if technology makes a difference in schools. If the technology merely fosters consumption and education then it probably makes only a small difference. We have had excellent techniques for educating students for hundreds of years and the technology makes only a marginal improvement, if any. On the other hand if the technology, and here we mean 1:1 computing, is used to encourage the creativity and exploration of the child then we foster creation and learning.

In Walter's speech he talks about the mistakes and successes of teams at MIT over the last 30 years in trying to foster 1:1 computing and the process of creation and learning by students. Improving education and consumption through technology is easy. It is much more of an ongoing challenge to find effective ways to foster learning.

The risk is that we take the easy road and just try to improve education. The results, although well publicized, will be minimal with a low return on investment (if measured). Projects like OLPC and similar 1:1 initiatives may not be a perfect solution, but they are tackling the hard question of how to foster learning through computers and that's the question we should all be working on. 

I have written many posts on related themes (including here and here). In the second link, "Competence and Comprehension", I take a different slant on the same issue and it may be helpful.

Inside MIT

I have been visiting MIT regularly for the last three years, given some lectures there and taught a course in social entrepreneurship in January 2011 and 2012. People ask me about MIT and all I can say is it is a special place. Debbie Liu, a graduate student at Harvard, wrote a guest column for The Tech which captures the essence of MIT and why it is a special place. The article is below.

"A love letter to MIT

I received my bachelor’s from Wellesley College (‘06), master’s from Boston University (‘08), master’s from Harvard University (‘08), and will be receiving my doctorate from Harvard; but it’s you, MIT, that has made the biggest impact on my life — academically, socially, and personally. And for that, I love you. You have succeeded in making a positive impact not just on your immediate family members, but you have touched the lives of people who are only a mere part of your extended network.

You made yourself an open playground. Literally, your buildings are always open. You can easily find an open classroom for students and friends to gather to brainstorm startup ideas. This is quite different from Harvard where even if you are a student, you are often met with locked doors. You allowed me to conduct my senior thesis research through UROPs (the Undergraduate Research Opportunities Program) at what is now the Koch Institute for Integrative Cancer Research, and take courses at MIT without any hassle. By being a cross-registered student of even just one course, you gave me access to everything at MIT. I could ride on the SafeRide, print for free, and access all your buildings and libraries.

By you making it possible for me to be an efficient learner (not having to worry about gaining access to buildings and classrooms, paying for printing, getting around), you made me a more successful person academically. I was able to spend my time thinking about more meaningful things than logistical hurdles to overcome. At Boston University, only one computer lab allowed free printing, and you would have to stand in line to pick up your printouts. At Harvard, I couldn’t ride the shuttle because only select schools within Harvard could use them. Yes, I don’t get it either. And that’s why I love you. You get us. You get your students. You get people.

Even now, being at Harvard, I am still benefiting from MIT. Your professors open their arms to all students regardless of whether they are getting a degree from MIT. My doctoral research at Harvard entailed interviewing scientists at the forefront of 21st century science, and your most notable professors were there for me. Robert Langer replies to emails on his Blackberry with an average response time of one minute. And yes, I mean Bob Langer, the PI of the largest biomedical engineering lab in the world and winner of the Noble Prize-equivalent for engineers (Charles Stark Draper Prize). Philip Sharp agreed to a sit-down conversation without any hesitation, a Noble Prize winner. I am always so amazed at how the people at MIT are so humble given their brilliance, a rare trait among the elite schools; I know this from being at a school where people wear double pop collars and white pants with pearls. I even have MIT professors sitting on my Harvard dissertation committee. None of them have any obligation to me as I am not an official student at MIT, but they do it because they care about their contributions beyond the walls of the institution. This is the energy you foster at MIT. Thank you.

Besides enriching my academic and research life, you enriched my social life during college. By allowing Wellesley shuttles to drop off students at various MIT locations, you’ve enriched the love lives of many Wellesley and MIT students. From MIT, I’ve dated the right and wrong guys, and ended up with my current husband (MIT ‘06; the right guy). Trust me, there are a lot of happily married Wellesley-MIT husbands and wives, thanks to you. I got to experience the fraternity life, being a “rush” girl, throwing rush week events, and taking childish jabs at other fraternities. I even lived at an MIT fraternity over a summer, as they become co-ed over the summer, and lived unofficially as a resident girlfriend during other times. You gave me the best times of my life at MIT. I got to party with people that were uncannily witty, jovially sarcastic, and all the while had substance and big goals for their lives. It was through seeing your students working together from two o’clock a.m. to sunrise on problem sets that were almost always impossible to solve that I learned the bigger purpose in life. It’s not all about getting A’s, which is surprisingly a more random process than you might want to believe, but being able to unselfishly collaborate, share information, and come out of the experience with a memorable story to tell and a band of friends that will be secretly thinking about all the people you’ve dated while you’re saying your wedding vows.

I love you MIT for making your constituents’ lives easier and more efficient, which consequently enable us to lead a more meaningful life. I love you for hosting numerous contests to support your students in becoming innovators and entrepreneurs; this is what makes your students so attractive and why I fell in love with one of them. I love you for being an open university, literally and figuratively, providing free access to knowledge like OpenCourseWare and now edX. I love you for being out-of-the-box fun by turning a blind eye to the ingenious hacks by MIT students. Yes, I was there when a group of MIT students moved the 1.7 ton Fleming Cannon from Caltech across the country to MIT and adorned it with a MIT Brass Rat ring over the cannon as if a finger; it was only after MIT notified Caltech did they realize the cannon was missing and it took them weeks to figure out how to move it back. I love you, MIT, for valuing creativity over titles or degrees. For example, hiring Joi Ito to be the director of Media Lab, who has never graduated from college, but is a recognized cyber-elite. Now, that’s bold!

These are but a sampling of the myriad of reasons for my deep-seated love for you. If you only remember one thing, just know that you have touched more lives than you recognize. I love you with all my heart."

My friend Mariana (@Yaquesita) posted this story on FB.

SEP-7 Business Plan Workshop Miami

I will be leading a workshop on how to develop a business concept this Friday, September 7 for the Pino Entrepreneurship Center at FIU. The workshop closely follows my book on developing a business model but is organized with a series of group tasks to better understand the concepts. Several themes are illustrated by both social ventures and for-profit companies. All attendees receive a sample business plan that raised A round venture capital. 

Advanced registration details are here. Proceeds go to the Pino Center.

The Next Silicon Valley

My friend Mariana (@Yaquesita) is one of the best sources of excellent articles and blog posts I don't find myself. She covers a wide range of subjects, including education, gadgets, tech, entrepreneurship and all things Mexico to name a few subjects. She is well worth a follow on Twitter. Today she sent me a post “Can our country be the next Silicon Valley?” from Tech Crunch.

The article lists six factors to duplicate Silicon Valley, which are:

1. Market
2. Capital
3. People
4. Culture
5. Infrastructure
6. Regulations

I think this list misses the point. To foster great entrepreneurship requires three factors:

1. Available capital to finance early stage companies
2. Great universities, such as Stanford and Cal Tech
3. A culture of business people (this is a difficult point to explain at the risk of being discriminatory, but certain groups have thousand year cultures of doing business)

You also need a regulatory environment sufficiently permissive to allow individual empowerment. Not a full fledged democracy, but a certain permissiveness that allows business formation.

In many countries the biggest challenge is the lack of great universities (Latin America). In an equally large number of countries there is no long standing culture involved in business (perhaps much of Africa). Everywhere access to early stage capital is an issue, even in Europe.

If we reduce the scope of the analysis to regions like Silicon Valley or cities, the possible centers of entrepreneurship are reduced further. For example, in Asia there may be only 5-6 cities that have a great university devoted to technology, but 4-5 of these lack multiple sources of organized capital for early stage companies.

Re-creating Silicon Valley is not impossible, but I would start by attracting a great technology oriented university to the area. Two would be better as Silicon Valley shows with Stanford and Cal Tech. Also, note that Boston has both MIT and Harvard.

My last article on this theme is here.

Change in email

Effective 9-SEP 2012 I will no longer be using rhhfla at mindspring dot com. I have had this account since 1998.

9 Subjects Every CEO Needs to Understand.

Lately I have been spending a lot of time on developing a new brand. It is the first time in my career that I have faced this challenge or at least recognized the need to do it. What surprised me is that in the last two weeks I found 5-6 new, excellent articles on branding, but can remember few articles on the subject in the last seven years of online reading. Has branding all of a sudden become popular or is it that I am now paying attention to the subject. Obviously, it is the later, which prompts today's post.

There are probably 9 business topics that everybody should understand and/or be archiving good articles for future use. Trust me, at some point in your career, if successful, these are the subjects you need to understand well:

1. Corproate culture
2. Strategy
3. Branding
4. Product development and customer need
5. Sales
6. Public relations
7. Capital raising
8. Interviewing for hiring
9. Leadership

I would add microeconomics but nobody writes about it. Start archiving good articles on these subjects. I recommend Evernote as the repository.

As soon as I organize my thoughts on branding I will share them in a post.

Questionable Criticism of Toms BOGO Model

NextBillion.net is a nice site focused on social ventures. A friend sent me a recent post that discussed the buy one, give one model (BOGO) popularized by Toms Shoes. The criticisms of the Toms BOGO model were:

1. "When individuals receive donations, they begin to see themselves as passive recipients of aid rather than active participants in making decisions about their own communities."
2. "When products are given away (be they shoes or English classes), local businesses that sell those products wither."
3. "Shoes, no surprise, are not often on the priority lists of the poor. When outsiders choose what gets donated, they often overlook other (more pressing) needs."

In response I would point out:

1. The needy people appreciate the shoes and economic development theory can be discussed at conferences in the U.S. Also, shoes reduce the transmission of diseases. It's not a shoe program it's a healthcare initiative. Gee, that sounds so much better.
2. Mom and pop retail is an unsustainable concept. Perhaps the local merchants should appreciate the early warning so they will already be in new businesses when Walmart or Carrefour opens.
3. If shoes are not a priority teach the recipients to sell the shoes and buy what they need. Then they would be "making decisions about their own communities". 

All we need is a shadown NGO that follows Toms around to teach people to sell their shoes. That sounds like it would be responsive to the three criticisms initially listed above. Another alternative would be to have Toms only distribute their shoes in cold climates where shoes are a "priority".

Toms BOGO program is a great idea that helps people. Let's not over complicate one company doing some good.

Immigration is the New Discrimination

Image credit: Flotingcubans.com. Perhaps the most well known Cuban raft of all time.

Every year in Key Biscayne, FL there is a 4th of July parade to celebrate U.S. independence and patriotism. One of this year's floats was a Cuban raft that floated up to Key Biscayne. The float represented all of the values of the holiday and was awarded a prize as the most patriotic float. 

The uniqueness of the float and the symbolism for all the Cuban exiles in Miami and their friends prompted the Miami Herald to write this story. However, when you read through the comments to the story another theme emerges. Many people commented that the Cuban exiles had taken their jobs, committed many unlawful acts and lived off government donations that diverted taxes from funding better education and other social programs. 

Setting aside that the English of many of the commenters shows uneducated writers, what concerns me the most is the linkage between immigrants and joblessness. The commenters believe that the Cubans took their jobs. As jobs increasingly become difficult to find for many reasons, I expect that the linkage between unemployment and immigrants will become more common and frequent. I think that this issue will become a central theme in the social and political dialogue with all the negative and harmful consequences of other forms of discrimination. 

In a country where almost every family was at one time immigrants, I think we are about to see recent immigration become a new form of discrimination. While many Mexican Americans, for example, might point out that this has always been the case, my real point is to highlight that I think the issue is going to dramatically escalate.

Related post: Planet Money on the origin of immigrants over the last 100 years