SOPHISTICATED FINANCE

Notes on Proof of Concept

I do not think I have ever posted my work-in-progress notes on a subject. These are unedited excerpts that I put together from my archive as the first step in a new project. The document attached is on "proof of concept" and how one might think about delivering such a concept. Notes are not complete but there are definitely some nuggets included that go back to 2009. Document is here  Download POCC Notes 2017.

Further thoughts on social entrepreneurship

For the last seven years I have taught an IAP course at MIT on social entrepreneurship. The early years focused on my experience at One Laptop per Child (OLPC). OLPC started at MIT and was one of the largest social entrepreneurship ventures (SEV) at the time. In recent years I have focused the course more on scaling an SEV and use three different models to develop an understanding of the key concepts for scaling. This week I am at MIT.

Coincident with this year's course I have been reading the writings of Ludwig von Mises. Von Mises is considered by some to be the leading thinker in the Austrian School of economics. I prefer Hayek for the wide range of his writings, which arguably included complexity, information theory, behavioral economics, psychology, political theory and economics. Von Mises is however the better writer with a lucidity and logic that is both compelling and original.

One of the points von Mises makes clear is the importance of capitalism and markets in allocating capital. He wrote at a time in the 20th century when socialism and communism were being actively advocated for as better alternatives than capitalism. In class one of the students was advocating for government subsidies to support certain social initiatives. I asked why he thought the government was better at allocating this capital than the individual taxpayers. Silence followed, and then he said that a small group in Washington was better able than the public to make decisions about the future. I replied that small group decision making was the same model used by dictatorships. Deafening silence. In fairness to the student, everyone has problems with decision making about the future, but let's continue to explore von Mises point.

Suppose the government announces that they are raising taxes to subsidize a lunch program for students. Sounds good, research shows that children learn better when not hungry. However, this tax revenue will now prevent the next Google from raising its first round of venture capital because certain people will not have the capital to invest. Setting aside the question of financial return, what if the next Google cures cancer! Now it may not be so obvious that we should let the government use our money to subsidize school lunches.

The point of this post is that when you look at government investment and social projects one should always consider the allocation of capital. Such an approach probably reduces the role of government and raises the bar for social projects, which I assume here will nearly all be social entrepreneurship. The bar is raised because now the social project needs to focus equally on impact and capital efficiency. One could argue that such an approach prevents certain worthwhile projects from being funded. Perhaps, but there are so many good social projects now, why not pick one that is capital efficient. It is not for me to decide whether clean drinking water or childhood education is more important, so I have no concern picking the capital efficient one amongst the two. When both projects are capital efficient I am willing to consider other factors. This paper from SSIR, Across the returns continum, offers a logic for such trade offs from Omidyar Network. If the project were a platform to facilitate additional social projects, that would probably be a deciding factor for me.

Personally I find nothing inconsistent with combining the thinking of the Austrian School of economics with social entrepreneurship. I think it brings an added discipline to the practice of social entrepreneurship. In the end the Austrians always come back to the concept of individual empowerment, whether it be in economic development or capital allocation. I am always very comfortable looking at social entrepreneurship through the lenses of individual empowerment. 

 Further von Mises reading. 

20+ previous articles on social entrepreneurship are here.

 

 

Nature, Technology and Combinatorial Creativity

This is a chapter from a new book that is almost finished. Comments are most welcome.

The book explores ten large market opportunities that have repeated throughout the last 40,000 years of human history. Every methodology for entrepreneurship that I have studied or taught always assumes an opportunity. I thought it was time to address how to find the opportunity beyond the usual advice to follow your passion.

Push vs Pull: How Society is Changing

After WWII the U.S. economy transitioned from a wartime to normal economy. In the 1960s the first large (30,000 square feet) discount stores appeared, K-Mart being a notable example. What K-Mart represented is that retailers could no longer succeed by pushing basic merchandise at the consumer. Instead the retailer had to offer a varied merchandise assortment from which the consumer "pulled" what they wanted. 

Roll forward to today and we see several opportunities for the transition from push to pull. Instead of a doctor-centric approach ("push") to healthcare, Kaiser Permanente, the large healthcare provider, is switching to a patient-centric model ("pull") and achieving significant cost savings to boot. Another example is in university education where the monopoly of universities has broken down in favor of MOOCs and other providers such as Kahn Academy. Now students cannot only select what and where they learn subjects but when--high school, university or as part of lifelong learning. Healthcare and education may suggest that many services that are heavily regulated by the government are going to transition from push to pull. However, as is the case in education, the consumer is initiating the change and not usually the service provider.

In a recent article, Networked Leadership, the author makes the point that leadership is transitioning to a pull model directed from the bottom rather than an asymmetric, top-down push model. To me it makes sense that if the business is living in a real time environment dictated by the customer, then leadership and management styles have to change to much less rigid, hierarchical alternatives.