“…growth companies go public much later. Microsoft went out at under $1 billion, Facebook went out at $80 billion. Gains from the growth accrue to the private investor, not the public investor”
“Startups require 50% of the capital of 12 years ago to become publicly traded companies or reach twice the revenue on the same dollars invested.”
Putting these two ideas together we realize that the capital efficiency of recent tech investments has enabled the private investors (venture capitalists and private equity) to manage capital requirements more easily and keep for themselves a large amount of the value that used to accrue to public company investors. So what was the factor to explain the emergence of crowd funding for equity?
Crowd funding permitted investors not able to secure limited partnership interests in VC and PE funds the opportunity to invest and garner the returns of high growth companies that were no longer available in public market listings. While many, myself included, have found fault in recent years with financial markets, market makers do demonstrate an amazing ability to innovate to provide the desired returns to a specific group of investors.
Reuters reported today that a group of tech leaders have banned together to attempt campaign finance reform. The group call themselves "Mayday", as in "the ship is sinking". The ship sinking is the American democratic process, subborned by large campaign financiers. Given this news it seemed appropriate to share a post I wrote several months ago but never published til today.
I have been concerned by the popularity of social media such as Facebook, Pinterest and Reddit for several years. I see it as serving no real purpose. I do not think it is a product or a service in the traditional economic sense. I understand that social media is responsive to our fundamental needs for community and collaboration and research even shows that it increases self-esteem in men (and probably dogs). I think of social media like financial derivatives, of limited value and a huge diversion of capital away from productive investment in products and services. But both activities are widespread and I cannot understand social media except in a historical context.
Social media dates back to the Roman times of Cicero (106 BC), according to Tom Standage’s new book, Writing on the Wall: Social Media-The First 2000 Years. Standage makes two important points in the course of tracing the history of social media through to today.
There is always an increase in the frequency and intensity of social media at times of momentous social change. The English Civil War and the French Revolution are cited examples.
Social media uses the newest technology to expand the distribution of the message at times of momentous social change. For example, Christianity was the first religion to make use of paper as the means to distribute its teachings. The German Reformation was facilitated by the newly invented printing press that allowed Martin Luther and others to more quickly and cheaply respond to Vatican criticism.
What Standage helps us to realize is that all the social media we see today is perhaps the smoke and not the fire. The popularity and increase in social media, facilitated by new technology, are most likely the indicators of another momentous social change comparable to the German Reformation or the French Revolution. We know from many sources including Standage’s examples that a momentous social change is either religious or political. There could be a religious movement emerging but I think not. For many people religion is irrelevant today and another significant group are religious extremists unlikely to lead mainstream social movements.
I think that the social change must be political, perhaps 10-20 years in the making or perhaps 50 years will be required. The change that is coming is:
A reduction in the scope of federal and state government
An increase in the importance of local government in part due to the increasing percentage of urban population
I do not come to this conclusion because I am a Republican or a Democrat, which is irrelevant.
Thomas Hobbes and John Locke defined modern democratic government in the 1600s. The purpose of government was to prevent untoward interference in the lives of the citizenry. As people increasingly benefit from existing and future IT tools they will become more and more sole practitioners and independent contractors rather than paid employees. As this trend accelerates people will become comfortable with less and less federal government and a return to a state of "self-reliance" similar to the way the U.S. was pre-1930. People will increasingly wish to reduce their payment of taxes for a government that provides what will be considered unnecessary, overpriced or outdated services. The fact is that today most working people need very limited services from the federal or state government, perhaps only the armed forces, law enforcement, courts, FDA, CDC, research funding, financial instrument regulation and a collection system (taxes) to pay for such services. Other services, including social services for the disadvantaged, could be privatized if desired. National parks might be an example.
Government is slower than slow [to recognize] and particularly at times when the status quo is dramatically changing. Therein lies the risk in government and the reason, in part, that environmental, urban and educational issues have received inadequate attention. Fortunately there are many examples where individuals and private sector companies have taken over the “traditional” role of government, which provides the early evidence for the change in the scope of government I foresee:
More parents are home schooling and charter schools are growing rapidly, replacing government run public education
Public infrastructure such as buses (Miami) and airports (Chicago) are being considered for privatization, matching the way most of the world provides such services
Crowd funding is demonstrating that it can raise serious amounts of money, which allows for the raising of critical early-stage equity capital in a self-regulated environment
Bit Coin, which Investopedia describes as the “alternative currency”, is growing and rumors circulate that large private sector companies such as Facebook will launch their own currencies, perhaps the first currencies not issued by a government in many centuries
The last point of evidence for my prediction both troubles me and gives me hope. The Snowden disclosures of secret NSA information made public the scope of U.S. government surveillance worldwide. I do not condone in any way the Snowden disclosures, but I understand the widespread anger at the scale of the surveillance. Nassim Taleb, author of The Black Swan, was one of the first writers to point out that we are outraged by the federal government’s behavior but no one complains about Google’s collection of so much private data related to our Internet behavior. Effectively, we have more trust and confidence in a Google or a Facebook than in the U.S. government. Whether Google or Facebook warrant the trust may still need to be determined, but they portend a new future of more limited government and greater reliance on individuals and the private sector.
Note: I think the U.S. is probably headed for a prolonged period of slow or modest growth in the economy. Such an event will slow the growth in tax revenues available to the federal government and exacerbate the over borrowed state of federal finances. Such a situation will reduce the government’s ability to pass on benefits to the citizenry and most likely lead to a reluctant reduction in benefits. Such a reduction in government benefits will contribute to the reduced scope of federal government I foresee.
Now this analysis might be entirely wrong. Perhaps there is another momentous social change afoot. Since the time of Franklin Roosevelt, the federal government has been expanding its power as it increasingly provided non-traditional services. What Roosevelt did was re-interpret the constitution such that what was not prohibited was permitted rather than the earlier interpretation that found that only what was stated was permitted. Many Presidents after Roosevelt followed his interpretation of the constitution and federal powers expanded.
At the same time the power of businesses and especially financial institutions was expanding. For example, the repeal of Glass-Steagall in 1999 greatly expanded the scope of businesses that were permitted for various financial institutions. We can argue about whether this legislative change directly led to the Financial Crisis of 2008, but the near collapse of the world financial system would suggest that financial institutions probably had too much discretion about products and/or risk.
Of course, the increased power of the financial institutions was permitted by the federal government, which brings me to a point. The federal government and business have both increased their power over the last eighty years to the point where we now probably have an unhealthy oligarchy of government and business. Both Karl Marx and Friedrich Hayek, perhaps the two writers who define the limits of the political spectrum, both predicted that businesses would eventually suborn democratic government. I do not know if I am ready yet to state that business has suborned government, but an oligarchy composed of financial institutions and federal government may be correct.
How does one go about challenging an oligarchy? Who is available to work toward re-balancing power, to restoring a more even-handed society consistent with the original tenets of Locke or Hobbes? There are three choices:
Religious organizations
Academia
Media
As stated earlier, religious organizations have lost much of their effectiveness as agents of social change as people increasingly see religion as less important to their lives. Academia may also have little power to bring about social change given the decline in public intellectualism, the de-emphasis of social science curriculum and the job preparation orientation of many universities. Which brings us to the media.
For most of human history, individuals created the information and arranged for its distribution to their community. With the advent of newspapers and then radio and television, the model changed. Information was centrally prepared and then disseminated to the individual. What the IT-based social media of today has done is allow us to return to the historical approach where individuals prepare and disseminate much of the information they wish to consider.
However, the social media remains the smoke and not the fire. The increased social media today still only signals a momentous social change. The momentous social change might be a re-balancing of power in society and the start of a breakup of a government-finance oligarchy. Facebook, Pinterest and Reddit might be just practice for the real battle to breakup an oligarchy.
On various fronts efforts are being made to reduce the scope of federal government. We must be wary that we do not leave businesses or financial institutions as the sole power brokers in society. From totally different perspectives, the considerable intellects of both Marx and Hayek predicted that business would eventually control a democratic society. Restoring the power of the individual in society should be the ultimate objective and the social media of today may be the only remaining way to reach that end. Reading more Hobbes and Locke might also be beneficial.
I commend the people looking to scale back campaign contributions. Please feel free to share this post as a sign of support for Mayday.
I spend quite a bit of time considering the future. This practice started in Indonesia where I had to consider the future in order to mitigate risk. Since Indonesia I have tried to predict the future in order to better understand technology. This thinking has led me as well to take a serious interest in the nature of the customer experience and how it will evolve. All of this thinking about the future hopefully also has some positive impact on my teaching of entrepreneurship.
Steve Jobs once asked his former boss, Nolan Bushnell, “How in the world do you figure out what the next big thing is?" Bushnell answered:
"You’ve got to figure out how to put yourself into the future and ask what you want your computers to be able to do"
I rarely think about the future of technology this way but the technique looks imminently reasonable after Bushnell points it out. Excellent advice for an aspiring entrepreneur.
Lately I have been reading Our Mathematical Universe: My Quest for the Ultimate Nature of Reality by Max Tegmark. While the book largely deals with cosmology, the origin and development of the universe, the part I find more fascinating is the scientific methods used by the scientists. Given that the universe began around 14 billion years ago, many of the problems are very complex. One technique is the reverse of Bushnell's approach. The scientists know the status of the universe today from observations. Therefore, they assume what had to happen 14 billion years ago according to quantum mechanics to explain today's universe. Then they look for empirical eveidence to support their assumptions about the start of the universe. A lot of math later, if the empirical observation matches the assumption about the beginning of the universe, then the assumption is correct. If the assumption is proven wrong, it may actually mean that the question asked in making the assumption was wrong. Another example of the importance of asking the right question.
Bushnell says to assume the future you want. The cosmologists assume the past to prove their theories. No guessing about the future or the past. Assume what you need and then develop it.
Recently I have been fortunate to be interviewed several times. A sidebar at left now archives a good selection of my digital events under " Videos, Interviews and Workshops".
Karen R. Lawrence, the President of Sarah Lawrence College, recently wrote an article for Forbes, "The Six Critical Abilities Students Need for Success After College". The six abilities are:
think analytically
express ideas through writing
exchange ideas effectively through oral communication
innovate
work independently
accept and act on criticism
These abilities look very similar to the way I was educated at Hamilton College and to the educational objectives there since its founding in 1814. I can think of another twenty excellent, small liberal arts colleges where the objectives are the same as Sarah Lawrence and Hamilton and have been for 200 years (plus or minus). One can conclude that the objectives for the well educated graduate have not changed in the last 200 years.
If we look at how Ms. Lawrence framed the question, we see she had three questions:
what are these critical abilities?
how do we structure our educational approach to develop them?
how can we evaluate whether our students develop these critical abilities, and do so in a way that allows us to continuously improve the value we deliver
If I were asked to frame the question in order to guide the education of future college students, I would ask these questions
How will life be different for people routinely living to be 100
What will be the nature of economic, social and spiritual activities in fifty years
What role will government need to play, if any
What will be the impact of globalization, networks and automation on society
I am reasonably certain that we need for our children to have a different set of skills than in 1800, 1900 or Ms Lawrence's analysis. Computer automation, AI and IOT combined is a technology tipping point probably more dramatic than the automobile.
One skill I am certain that is required, but absent from Ms. lawrence's list, is collaboration. Globalization, networking, understanding not knowledge, design thinking, customer experience, all of these require collaboration much more so than individual efforts.
I am also reasonably certain we need a concept of "economic self-sustainability" wherein the individual rather than the employer is expected to provide for a "family's" well being. Probably everybody needs a course(s) in 21st century "marketing", which includes, story telling, branding, video communications, etc. Perhaps we teach writing in the branding seminar and oral communications in story telling. We could analyze Aristotle and then brand him and develop his business model. I vote for "father of artificial intelligence".
I think every university and college should undertake an analysis similar to Sarah Lawrence. If the answer looks the same as 200 years ago, I respectfully suggest the paper be redone.
This weekend I read an article in Pieria, the British equivalent of 3 Quarks Daily, both of which promote intellectual thought (2008) on a wide range of subjects. In Pieria a writer defined the extremes of thought on economics as Marxism and the Austrian School. Given my hearty respect for the Austrians, I was somewhat disturbed to be categorized as an extremist.
I actually think anarchists are at the opposite extreme of Marxists, but the anarchists write very little about their economic system. Marxists define the one extreme because of their heavy reliance on centrally planned economies, whereas the anarchists advocate for no government and consequently no regulation. However, I digress.
The Austrians were probably the first economists to acknowledge the role of self-interest in markets and economic activities. From these writings many derived a negative view of capitalism and the Austrians. Both the capitalists and the Austrians have suffered from this association with self-interest for over 100 years, the same period in which perhaps the greatest economic development in history has taken place. What has been overlooked by the critics is one simple fact:
" A man may promote the interests of others even though the interests he seeks to promote are his own. " (1)
If you do not understand this quote, then it could be re-stated:
to build a large company, solve a problem for a large number of customers
to design a value proposition you have to create value for the customer
What has been overlooked by the critics of capitalism and many capitalists is that the most fundamental premise of capitalism is that one serves one's self-interest by serving others....profitably.
I have used Evernote for years, first as a web app and now as an application on all three of my Apple devices. I also use the web clipper on every browser. About a year ago I increased my use of Evernote when I started to use it to organize my teaching and book writing. A very good decision. I am a very happy user....but here is my problem.
I get advertising type pitches from Evernote on Google+, Feedly and the Evernote apps. More impressions than I probably want, but I could tolerate it if the pitches had some value. For the last 12-18 months Evernote has been using a headline similar to "10 tips to get more out of Evernote". For the last 18 months they have not added a new tip that was not obvious to a 3-year old. Evernote..provide some value or stop boring me. Hint: think about the emotional value of the product rather than the feature set. At least the ads would be interesting.
Another peeve. On Google+ the comments in response to the postings all sound like PR department comments. 1 PR comment out of 100 is OK but not 99. Again no value in the comments and it is boring.
Evernote, you have learned how to use social media to increase sales. Now you have to learn how to provide valuable information to existing users. Remember marketing is customer acquisition and customer retention.
Courtesy of the fine thinkers at Marginal Revolution, I came across this article--"Machines v. Lawyer". The article documents the decline in the number and earning power of lawyers over the last few years. Applications to law schools have declined 40% since 2004 and small law firms are particularly hard hit.
The article makes two important points:
Increasing computerization and artificial intelligence are replacing legal services previously provided by lawyers (humans)
The cost of legal services may decline because the IT-based products are cheaper than humans
I tell my students interested in law to go into environmental and intellectual property (IP) law. I think the proliferation of open source hardware and software, 3-D printers, the Maker movement, etc. are all going to challenge current IP law to evolve and change.
I do not see litigators being replaced by computers, but the cost of litigation may go down. Regrettably, that might trigger more lawsuits. I think most real estate attorneys are toast (replaceable by automation), except for the few that do large land acquisitions, financings or construction loans. Corporate/ transaction attorneys are very likely to decline in numbers. Many very good legal documents for investment and transactions are available online prepared by first class attorneys. Maybe you still need a lawyer but they can start with these drafts and save countless hours and fees.
I think accelerating the decline in lawyering is a big business opportunity. Applying AI, big data and application development to the process of law to reduce headcount, billable hours and complexity (using standardized forms) is a big market opportunity.
To all my friends who are corporate/transaction attorneys, develop industry expertise, become expert in specialized transactions, learn to speak more foreign languages and have your children learn to code.