SOPHISTICATED FINANCE

Four Major Trends in the Current Fourth Industrial Revolution

 

This is my recent article on Medium about trends in the Fourth Industrial Revolution.

 

An observation on the role of information

The quote below is from Paul Heyne‘s 1982 speech “What Is the Responsibility of Business Under Democratic Capitalism?” 

"The primary problem that modern, industrialized economic systems must solve is the problem posed by the scarcity of information.  We are inclined to overlook these difficulties and to take their resolution for granted, because we take for granted the remarkable mechanism of social coordination through which we gather and disseminate the knowledge that is essential to the system’s functioning.  In overlooking the knowledge or information problem, we focus undue attention on a different scarcity, the scarcity of goodwill.  We erroneously suppose that goodwill can resolve problems that can in fact be resolved only through the accumulation of additional information.  Moreover, many of our proposals for increasing the amount of goodwill in the economy fail completely to attain their objectives, but do manage to subvert the crucial information system."

Increasingly I come to the conclusion that social problems are caused by the asymmetry of information. Rarely do I see approaches that take this idea into consideration. 

Why the 4th Industrial Revolution may not surpass the 3rd

I was talking to someone recently that argued that government grants to private companies were the most effective grants because the companies had proven methods to commercialize innovation. The person cited government funding for Tesla, but I can find little evidence of government cash as opposed to incentives going to Tesla.

This Tesla example reminds me of a big difference now at the beginning of the Fourth Industrial Revolution compared to the Third Industrial Revolution that began in the 1960s with the advent of computing and digital information. In the 1960s government funding was plentiful at top universities like MIT and for government agencies like NASA. This investment lead to new technologies such as computer networks, microwave and advanced materials which were widely adopted. Eventually the resultant creation of economic and social benefit reached unheard of levels of prosperity. 

The situation today is one where government funding, in limited amounts, is made available for basic research at universities. Little money is available for applied research and agencies like NASA have been greatly reduced for many years. If we think about when a startup needs money, the answer is in the early stage when it cannot easily access capital markets. If we look at an Industrial Revolution, again the capital is needed in the earliest stages to fund the primary innovations.

What might save the Fourth Industrial Revolution from a lack of government funding is that so much innovation surrounds data, information and technology (like the Blockchain) that does not require huge amounts of funding. Now generally I favor limited government and a commercial playing field not disrupted by government. However, government funding for significant basic and applied research makes sense to me, particularly given the declining spending on research by corporates. The corporates with the best ROI still invest in research according to HBR. Almost all the other corporates choose to enrich management or shareholders rather than invest in research.

The views expressed herein are my personal views and do not reflect the views of any organization that I might represent.

For expert advice on real estate in Queens, NY, please contact my daughter Christina at 347-768-0427 or email [email protected]

Examples of Good Thinking

 

Yesterday's reading discovered some excellent articles:

1. Esko Klipi on Medium, "It is only a few network connections away". He points out that networking is growing increasingly important as the Internet shrinks the world. Makes one realize that networks created by people could be more powerful than 20th century forms of organization.
2. Evonomics.com on inequality, "The Science of Flow Says Extreme Inequality Causes Economic Collapse". What caught my attention was a quote from Robert Reich, "But in The Work of Nations (2010), Robert Reich also points out that the companies that are flourishing through globalization and technology are ones pursuing what he calls high-value capitalism, the high-quality customization of goods and services that can’t be duplicated by mass-produced uniformity at cheap places around the world." I rarely agree with Robert Reich, but I think he is correct this time. I think that corporate governance has enforced too narrow a set of objectives and the executives have opted for the easiest path. BTW, Evonomics is doing an excellent job of trying to redefine how we look at government economic policy with a particular emphasis on complexity economics.
3. Stanford Social Innovation Review on corporate social responsibility, "Corporate Social Responsibility for a Data Age". In managing disasters much valuable data is behind corporate firewalls and not normally available to the government. The article suggests that the data be made available after the disaster, but it appears more logical to me to pre-position the data.
4. At 25iq two great articles on entrepreneurship, "A Dozen Lessons on Growth" and "A Dozen Lessons About Product/Market Fit". Just simply one of the best blogs around on entrepreneurship. Step-by-step type detail on understanding subjects that most people misunderstand.
5. An interesting article about neuroscience, "Measures of Entropy and Complexity in altered states of consciousness". What could be more geeky than entropy, complexity and neuroscience. What caught my eye was the notion of plotting complexity vs entropy. 
6. In another of my favorite blogs on economics, Marginal Revolution, "Online Education and Personalized Learning". The article makes the point that in any class there are students performing at many different grade levels. Online learning provides one way for students to follow their own pace of learning. Pace of learning is a big issue that I see rarely addressed. (See image above.)
7. Aswath Damodaran on ValueWalk, "My Snap Story: Valuing Snap Ahead Of It’s IPO!". Damodaran is a leading academic authority on valuation and Snap will be one of the biggest IPOs of 2017, if it gets away. Sorry, got confused and included a finance article
    

Image credit: Marginal Revolution

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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.

 

 

Outsourcing City Services

 

Read Write Web has an interesting article on the challenges of city management, "Smart cities need banks’ data muscle more than governments". The article states that cities are not likely to be able to manage all the data required to provide modern services in an age of IOT. To solve the data management problem perhaps the banking industry with its expertise in large volume, real time data management is a solution for cities. Given that I think most banks will not survive the coming disruption from distributed networks and related technology, maybe banks should move into data management for cities.

Of course you may have realized that cities and banks share one common characteristic. They are both subject to significant government regulation. Just like healthcare and education, they are also leading industries to be disrupted. Effectively, the artificial boundary of government regulation is now being pierced by new technology. 

The point on data got me thinking about whether we should not consider outsourcing more city services than just data management. If we consider cities a stack of software services or perhaps a stack of networks, we realize that every part of the stack is a candidate for outsourcing. In the end, the only service that may remain with the city government is the right to set policy, which is, of course, a basic requirement of a democracy. This notion of the outsourced city government perhaps becomes more interesting when we recognize that power is going to shift away from the national level and back to the cities. Networks and communities are naturally gaining power through the new technology, which will lead to local initiatives that will manifest themselves in the cities and their governance. The networks and the communities are gaining power because comparatively more information is now flowing to the local level through the new technology. Effectively, the individual captures information better than the government, as evidenced by the article that began this post.

The role of information in the shift of power is explained in this Powerpoint, "The Great Convergence". Download .

This is the link to my previous writings on cities and urbanization.

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Insights on the economics of technology

I increasingly believe that BCG is doing the best thinking and writing on business and related topics, far superior to HBS, Stanford or McKinsey to name a few organizations. In a recent article in BCG.Perspectives, Why Technology Matters, there are two interesting quotes:

1. "...the energy industry produces the highest income per dollar of technology spending ($24.24). At the other end of the spectrum, the software publishing and internet services industry produces the lowest ($0.98)."
2. "...in the US, the IT cost per day of a hotel bed is $2.50, and for a hospital bed, it is $65. The IT cost of a car is $323." 

My observations on each quote:

1. Pricing in the energy market is probably the largest wealth transfer mechanism ever devised or to be devised. Increasingly the issue of income inequality comes back to governments that tolerate it or facilitate it. 
2. The low revenue/IT cost in software and Internet publishing is consistent with the relatively low value-add in those services
3. The IT cost per day figures demonstrate competitive advantage to me and the lower the number the easier it is to use IT technology to disrupt the industry. Airbnb would be an example. BCG does not provide statistics for all industries, but I imagine the number is low for retail also where disruption is rampant. For your next entrepreneurship venture, calculating the IT cost might document the opportunity. Note, it might not document the timing.

 

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Another Framework for Economic Development

 

I believe that the economic prosperity of individuals can be achieved through individual empowerment and entrepreneurship. Regardless of whether one discusses poverty, equity or the wealth gap, empowerment combined with entrepreneurship provides a solution that offers the most effective approach.

I began studying individual empowerment after I concluded that government economic development programs will never address poverty effectively. The simple reason is that government programs typically focus on government objectives and not individual solutions to problems. I saw this mistake by governments all over the world when I worked at One Laptop per Child.

For individual empowerment to succeed, there are three necessary conditions that must be met for the individual:

1. Safety and self-esteem
2. Education
3. Social inclusion

To these conditions must be added access to information, which I explain in a TEDx talk--"The Poor Know How to Overcome Poverty".

If we look at the conditions for individual empowerment, we see that condition 1 frames a psychological requirement. Condition 2 dictates a minimum level of education (FA Hayek thought it should be through primary school). Condition 3 addresses the constraint or boundary that must be overcome.

Now if we think about applying this three-part framework to entrepreneurship for disadvantaged peoples, we might use the same types of conditions:

1. Trust and sharing (psychological)
2. Education
3. Access to capital (constraint/boundary)

(We would also have to provide access to information.)

Condition 1, trust and sharing, would be required to address the worldwide problem of most entrepreneurs--finding good staff. Of course, most of the reason they cannot find the staff is that they have not learned how to trust people, which demotivates staff and prevents delegation. Education would be specialized training on identifying opportunities and execution. Condition 3 would address the limiting boundary--capital. Capital is also frequently cited by entrepreneurs around the world as one of their biggest problems.

I think that many programs fail to address the psychological issues and access to information. Much as the early Head Start programs succeeded when they realized they had to feed the children breakfast, any program to overcome poverty has to address the fundamental issues which include the participants psyche and their risk profile. And, of course, no economic program can succeed without access to information because therein lies the opportunity for the individual to help themself...which brings us back to individual empowerment.

(These conclusions are derived in part from teaching a national program for over 200 small and medium size businesses.)

Image Credit

 

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How the Private Sector Can Lead Social Change

A recent post, "The Business Model to Downsize Government", talked about how the private sector could lead social change. I wanted to come back to this theme when I had more evidence than some research from HBS. I now have several confirmations that show that Tulane University was the local leader in rebuilding New Orleans after Hurricane Wilma. Local government was apparently so corrupt and inept that a group of people, including the leadership at Tulane, took into their own hands to plan and execute a recovery. 

Perhaps we have a data point where the private sector addressed and solved a large, complex social problem.

Also, interesting to note that one of the multiple networks of Tulane University (the Trustees) engaged in the project and then energized the other networks to support. Successful organizations have multiple effective networks, but it only takes one network to capture the attention of the other networks and bring to bear the full resources of the organization.

A reader wrote to correct me. The hurricane was Katrina.

My TEDx Talk on Poverty.

My TEDx talk on overcoming poverty.  The solution to social problems is to empower the individuals.

 

 

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The Future of the Corporation--How They Will Process Information

This post reflects some of my thinking for a new book on a framework to identify the large market opportunities that have consistently repeated themselves over the last 4000 years.

 

 

Image credit: en.wikipedia.org

 

Evangelos Simoudis guest posted in Steve Blank's blog: 

 

"The last 40 years have seen an explosive adoption of new technologies (social media, telecom, life sciences, etc.) and the emergence of new industries, markets and customers. Not only are the number of new technologies and entrants growing, but also increasing is the rate at which technology is disrupting existing companies. As a result, while companies are facing continuous disruption, current corporate organizational strategies and structures have failed to keep pace with the rapid pace of innovation." 

 

Much of the article is devoted to the evolution of organization structure as technology fostered changes in society. Small family firms evolved into specialized corporations that then became geographically disbursed to serve multiple markets. This very interesting history supports Simoudis' point that corporate organizations change in both strategy and structure. What Simoudis does not explain is why these organizational changes take place. The answer lies in the amount of information that an organization needs to process.

 

Has information increased or decreased since the Industrial Revolution began around 1770? Of course, the answer is that information has increased dramatically and since the 1960s the rate of increase has accelerated. Ronald Coase the Nobel Laureate helps us to understand why increased information causes organizational change. Coase showed that firms were organized to reduce transaction costs. Firms internalized functions when it was economically beneficial compared with buying the service. This insight defined the line between the firm and the market. Now if firms are organized to efficiently use external resources, one might logically expect that firms also organize to use their internal resources in the most efficient way. What are the internal resources? Coase described these resources as legal rights.Effectively, what Coase meant by rights is information--knowledge in workers, contracts, intellectual property, business processes, business models, etc. As JR Galbraith makes clear in "Organizational Design Information Processing”, organization form and structure is updated to process information more efficiently. This, of course, is the same behavior that complexity theory would predict. Organisms are constantly trying to organize information in order to reduce the amount of energy required for search and organizing. 

 

Now what does all this discussion of information mean for how corporations should be organized. Brainspace has a good article, "5 Impacts of Sharing Knowledge Within an Organization,

proposing one way to look at the problem. The five key takeaways from Brainspace about how corporations should deal with information (in the future) are:

 

1. Identify subject matter experts 
2. Information will be captured for reuse
3. Access to information in context creates value
4. Open, collaborative workflows and processes will be required
5. Leaders need to gain a real-time view into the knowledge network

 

Brainspace identifies correctly the need for a corporation to totally redefine how they think about information and how they create it and manage it to achieve knowledge (meaning derived from information). The most important point is No. 4, where Brainspace tries to articulate the new role of the individual employee. However I think that words like collaboration, workflow and processes, Twentieth Century words, do not accurately capture the new environment. I think ants, as famous in complexity theory as ducks, may be a better way to describe this new organization. Individual ants, with no directions or orders seek out food sources, independently capture information about food and report back (through pheromone trails), which may trigger exploration by additional ants who also report back until sufficient information through pheromone confirms a good food source. Workers in the future will capture information that will be available to everyone in an organization, which will prompt various other employees to investigate.. some in more detail. A significant portion of the information will be in real time, captured by IOT sensors.

 

I expect that corporations in the future will:

1. Assign a portion of each employee day to information management--search, analysis and curation--in order to keep up the larger volumes of constantly changing information
2. Use some form of Evernote designed as an enterprise-wide app, with equal attention to the future and current environment
3. Use AI to organize and re-organize information in enterprise systems, based in part on the results  from individual employees doing information management
4. Adopt more analytics for decision making, but realize that information capture to feed the analytics is the priority

 I think that when artificial intelligence can re-organizes the information for a company’s employees to better reflect their evolving understanding of a subject, then organizations will look like ant colonies with a large number of integrated but autonomous information gathers. Some might call this holacracy, but I think "ant colonies" better captures the idea.

Re-structuring Corporations

Since WW II corporations in the U.S. have gone through several "periods" in which the nature of the corporation was redefined. First we had simple companies that produced mostly industrial products and the bare consumer necessities. 

The first noteworthy change was the conglomerate period in the 1960s where acquisitions of any kind added value. High PE (price-earnings multiple) companies purchased low PE companies but the added earnings plus cost savings were erroneously valued by the market at the higher PE ratio.

Then in the 1980s the first private equity firms appeared to do LBOs (leveraged buyouts). In the early days the PE firms were able to buy undervalued companies, strip out and sell unnecessary assets and earn a nice profit selling the remaining company. 

As the undervalued assets disappeared, the private equity firms switched to doing rollups. Buy a platform company in an industry and then buy multiple companies in the same industry. This strategy produced scale, economies of scale and administrative cost savings. 

Today we see a trend toward companies themselves (with no help from Wall Street) outsourcing operations to reduce costs and focus on the areas that are critical to creating value for the customer. More on this theme in this article from Danielmiessler.Com, "The Future of Renting vs. Buying".

What all of these examples make clear is that the concept of a corporation changes to address the opportunities to extract additional value. As Ronald Coase made clear in his Nobel Prize winning work, corporations are formed as a means to reduce (transaction) costs. While this logic was originally applied to understand integration efforts in corporations, starting with the LBO phenomenon we see corporations basically decoupling functions and assets to lower costs. This trend toward decoupling will only accelerate in the years ahead as we become comfortable with using IT to manage and control a wider and wider range of remote third party functions.

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Reducing the Role of Government

I have been reading a lot this summer on complexity, networks and related themes. One thing that becomes clear is that networks form to the extent that they are cost-benefit justified. Anything that adds to cost (distance, trust, search cost, boundaries) tends to retard the development of a network. While there are some benefits to government, government can frequently be a cost that slows network formation.

While everyone heralds Uber as a great example of sharing, I prefer to characterize it as a disruptor in a regulated industry. I am excited to see government regulated industries disrupted. Such disruption   will lower the cost of "networks" and doing business. 

This article at Marginal Revolution, "Can economists justify pre-market exclusion for pharmaceuticals?", challenges some traditional roles for government in drug approvals, home mortgages and Exim Bank. I think this research area is very interesting. I think it further initiates a dialogue about the role of government. I have no doubt that government's scale and scope will be reduced as technology allows us to do things more cheaply than relying on government, but we need to start a real dialogue about the subject and academia is one place to start.

My new book, "Scaling Social Entrepreneurship: Lessons Learned at One Laptop per Child", is available on Amazon in paperback and Kindle e-book versions.

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Entrepreneurship and Complexity

About ten years ago I began teaching entrepreneurship at a university, which lead to the realization that I needed to study more about entrepreneurship. The study of entrepreneurship still continues, but I have expanded my study to include learning and complexity. These three themes are actually part of an integrated whole, if one considers Henry Mintzberg’s concept of emergent strategy, but today I just want to discuss entrepreneurship and complexity.

To set the stage, let me define entrepreneurship and complexity. I think Harold Gardner at HBS defined entrepreneurship well as “entrepreneurship is the pursuit of opportunity without regard to resources currently controlled”. The focus on opportunity and the challenge of mustering resources in order to execute frames the issue well. I might have added the concept of “scaling” in the definition of entrepreneurship, but most traditional economists do not. “Complexity” is a dynamic system where variables are inter-related but uncertainty from lack of information prevents deterministic analysis. Uncertainty here is Frank Knight’s definition, which to paraphrase is “a situation where you lack sufficient information to determine probabilities”. (For Knight “risk” was a situation where you had sufficient information to determine probabilities.) Deterministic analysis is the type of mathematical analysis that one finds in operations research, financial modeling and most planning disciplines. So to summarize, complexity is an uncertain situation not subject to deterministic analysis for lack of sufficient information about the inter-related variables.

What lead me to ponder the relationship between entrepreneurship and complexity was the fact that entrepreneurship is a classic example of the inter-related variables inherent in complexity. However, much of the analysis in entrepreneurship is deterministic. So how does one reconcile the uncertainty of complexity with the deterministic, mathematical analysis so common in entrepreneurship and business? Fortunately economic theory provides most of the answer. It just took me awhile to put it together.

If we think about entrepreneurship, we can break it down into two concepts—opportunity and execution. Opportunity or market opportunity sets the theoretical size of the company and execution dictates whether the company scales, fails or suffers along at below its potential. Execution can be further simplified to two basic  concepts—product development and sales. Effectively, the company needs to develop repeatable processes to source, manufacture and distribute the product. Repeatable processes also explain the approach to product/market fit initially and at scale, which allows the company to successfully satisfy the needs of the customer. These repeatable processes, what we can consider as optimization problems, are where the mathematical analysis applies. One could probably argue that if the process is not repeatable, the mathematical analysis would not be reliable. To put it another way, repeatable processes provide sufficient information to determine the accurate probabilities required for mathematical analysis. It all looks so deterministic, so where does the complexity come into entrepreneurship?

If we return to the product development-sales framework, product development governs the relationship with suppliers. As the entrepreneur adjusts the product for any of a myriad of self-interested reasons, the suppliers of goods or services are “shocked” in economic speak and forced to act in their self-interest. However, we lack information sufficient to determine how the suppliers may react and therein we find the complexity. In the sales framework, imagine the entrepreneur raises prices. We lack sufficient information to determine how the customers, the competition, the press and perhaps even the government will react. Again, the “shock” of the price increase allows complexity to manifest itself.  "Economic phenomena like prices are the unpredictable result of the complex mutual adjustment of millions of individuals" [1] acting in their self-interest.

The shocks described here are the normal shocks of supply-demand--the allocation of market resources--and the related information travels over a peer-to-peer network of linked individuals including suppliers and customers. This peer-to-peer network extends the shocks and the complexity and leads to what Brian Arthur at Santa Fe Institute calls the perpetual invention of the economy … and the entrepreneur. This perpetual invention would be called evolution if we were studying biology.

The next subject for me to explore is the role of networking in economic shocks. May have to go back and re-read Sandy Pentland's "Social Physics", an excellent book on how networks really work.

Further reading that influenced this article and my thinking on entrepreneurship and complexity:

1. Complexity Economics: A Different Framework for Economic Thought; W. Brian Arthur
2. The Capitalist and the Entrepreneur (Chapter 5, 6); Ludwig von Mises Institute (Available in PFD version)
3. Economies of Scale, Economies of Scope; Ribbon Farm; Venkatash Rao
4. Classical Liberalism: A Primer; Institute of Economic Affairs [1]

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I have been teaching social entrepreneurship for five years at FIU in the Honors College and at MIT Sloan, which was made possible in part by my 3+ years as CFO of One Laptop per Child (OLPC). OLPC was started by Nicholas Negroponte and faculty at the MIT Media Labs to provide every child in the developing world with a connected laptop. OLPC started as a donative non-profit but converted to a social entrepreneurship model in 2009. I joined to carry out this change in business model at OLPC.

Steven Weinberg, Nobel laureate physicist, says he teaches a new course to learn a subject. I do the same thing, but courses are better for organizing conceptual thinking and writing books I think is a better method to organize practical thinking. So when I think I understand the practical side of a subject, I write a book to confirm it to myself.

The first half of my new book, Scaling Social Entrepreneurship: Lessons Learned from One Laptop per Child, deals with defining social entrepreneurship. I do this in part by contrasting it with government, non-profits and NGOs. Two themes are developed in the first half of the book:

1. Social entrepreneurship is a better model to solve social problems than the traditional ways and increasing in popularity
2. Properly taught and modeled, over time entrepreneurship should not need the modifier "social" and the debate about the morality of capitalism can be put to rest

Organizing a social project is not particularly challenging, but organizing something that can scale to multi-country or Google scale is very challenging. In attempting such an effort one has to plan for worldwide coverage from the beginning. In traditional entrepreneurship, one gradually reaches the point of scaling after product/market fit and commercialization. In social entrepreneurship, early on one needs to find the model because lower operating returns and less startup capital do not give you the flexibility to iterate. This fact is even more true if you operate  as a non-profit.

The second half of the book is devoted to the business model to scale a social venture. I strongly recommend in favor of for-profit companies in order to have better access to capital markets. I believe evaluation needs to be baked in from the beginning because access to social impact funds is becoming increasingly competitive. I advocate that one try to establish a movement to support the social objective, something akin to Gandhi, Mandela and King. That may look like a difficult undertaking, but OLPC achieved that objective--worldwide 1:1 computing for children. Lastly, I cannot say enough about the importance of partners to a social entrepreneurship venture and I recommend private sector partners.

The book is available in both paperback and Kindle versions on Amazon. I would be happy to sign a copy of the book that you give as a gift. I also think it makes a fine introduction to social entrepreneurship for a corporation looking to transform its corporate responsibility program into something more substantive. 

 

Companies with No Humans

This quote in a story in Fast Company caught my attention:

"...a system in which a program can be written to find an answer—or to execute a smart contract that can buy something, sell something, or do something. In aggregate, a group of smart contracts could run what is known in Ethereum-speak as a "decentralized autonomous organization" (DAO) or a "distributed autonomous corporation" (DAC)—in other words, a corporation distilled to its most basic tasks, and operated by little more than code and the logic of if this, then that." (emphasis added) Companies will have a single asset, a code base using AI, that will enter into transactions with independent service provides to create, deliver and capture value.

Perhaps this novel idea caught my attention because I had spent the weekend reading about datafication, which is explained in a study by Ericsson "The Impact of Datafication on Strategic Landscapes". Digitalisation is the evolution of IT starting in 1950 which brought us apps, mobile devices and a focus on IT for productivity improvement. Datafication is the new approach to IT which recognizes the changes coming in IT from the large number of physical objects capturing or generating data. The differences in digitisation and datafication (from the Ericsson study) are summarized below.

 

Now, as every aspiring entrepreneur knows, one must understand the customer and their problem to successfully start a new business concept. The question one should be considering is whether datafication provides sufficient information for the code based AI company to successfully identify a large need and develop a solution. Ericsson believes the answer is yes and the data source will probably be your cell phone, which captures and generates data on your entire life. When a company with no humans is analyzing data about you, it brings privacy issues to a whole new level.

Maybe the solution to the problem of the morality of capitalism is to replace the human managed companies with "no humans" companies. Might be more socially aware :) 

Instead of robot challenges every weekend, maybe we should have challenges for best code to autonomously operate a company. 

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Variations on Social Entrepreneurship

I have become something of a collector of different models of social entrepreneurship. For the purposes of being accepted as an example of a different model of social entrepreneurship, the company must be for-profit and have a unique way of delivering measurable social impact. The examples I have collected are not necessarily the first such companies. The only distinction I make is I do not accept CSR projects.

Two examples recently caught my eye:

1. The Miami Herald reports that Carnival Cruise Lines is forming a new division/company where the onshore excursions will be to work with local people on socially beneficial projects (instead of going off to see sharks or polar bears). If Carnival were to develop multiple ships and cruises for this purpose I would applaud them for their social impact. If they need a local social entrepreneurship professor to help them plan their impact and projects, please let me know.
2.  Norton Sound Corporation is one of many native-owned corporations established for the benefit of indigenous people at the time of Alaska statehood. Norton Sound operates Norton Sound Seafood and Norton Sound Seafood Restaurants. All of the seafood is caught by members of a particular indigenous group near Nome, Alaska. Sale of the seafood to the corporation provides much of the livelihood for the natives. The creation of a branded product and metropolitan outlets for a product provided by indigenous people is a model I like. 

Wonder how much seafood, if any, Carnival buys from Norton Sound or any other native corporation in Alaska. The new division should consider such questions.

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What Colonization Teaches Us about Social Entrepreneurship

What Colonization Teaches Us about Social Entrepreneurship

I have just returned from vacation in Alaska. Most majestic landscape I have seen anywhere in the world. As is my custom, I read some books about Alaska and the indigenous population. The indigenous people have been in Alaska for 16,000 years and have survived two ice ages. After 16,000 years in the same place a people develop a comparatively advanced culture very suited to the surroundings. All was bliss and comparative harmony until the Russian explorers arrived in the 1700s. 

These early explorers were charged with determining whether a colony should be established. With the abundance of furs, Alaska was a natural location for a colony. In keeping with the "business model" of the time, to establish a successful colony one maximized financial return with complete disregard (exploitation) of the local population. The Russians improved on run of the mill exploitation by kidnapping the natives' wives and children until a ransom was paid in pelts. As the fur trade grew in monetary terms the Russians looked to change the business model from exploitive to sustainable. The Russians were never able to achieve sustainable colonies in Alaska, which prompted them to sell Alaska to the U.S. government for a mere $15 million. The Russians failed because they never engaged the self-interest of the locals and the local market forces to support the colony.

The errors by the Russians are the mistakes I see frequently in social entrepreneurship:

1. They committed to a strategy (kidnapping) which made it difficult to execute a second or iterative approach to strategy
2. Their arrogance blinded them to understand the self-interest of the local people
3. They did not make use of the local market forces, which in the case of Alaska had been developing (albeit primitive) for thousands of years

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I believe that social entrepreneurship is a temporary form of entrepreneurship and that over time we will no longer need the adjective "social" to differentiate a form of entrepreneurship. With education companies will come to serve a wider range of stakeholders and provide more "social" benefits. Should such a realization be achieved, perhaps that will quiet the critics of capitalism. Such critics claim that capitalism is immoral.

The Institute of Economic Affairs has a well written defense of the morality of capitalism in "Free market capitalism and morality". The article has some excellent citations from Adam Smith's writings. If I could figure out the legal issues, this is the first article in eight years of writing this blog where I would just reprint the article.

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Today Nancy Dahlberg has a nice recap at Starting Gate of the Miami Herald Business Plan Challenge, which I judged. Noteworthy was this year's winner in the high school category, Teenography. I very much like the idea of teaching entrepreneurship to high school and junior high school students--not checkbook management or accounting, but real business concept development and go to market strategies.

Teenography operates an exchange/marketplace/platform (pick the word you like) that enables young (high school) photographers to offer their services to clients in need of photos for events, marketing materials, etc. Average charge rate is $40/hour compared to  professionals who charge $100/ hour in South Florida. Why the difference of $60/hour. You might say professionals versus amateurs but the real reason is what economists call asymmetry of information. Information on photographers used to be difficult to find and incomplete, the asymmetry, because there was no easy way to find out about amateur photographers. When information on amateurs becomes available through Teenography and more complete information is the norm, the price per hour of photographic services drops by $60/hour. Reducing the premium created by the asymmetry represents the business opportunity.

In markets where there is an asymmetry of information, there are two new business development strategies:

1. Exploit the asymmetry and earn abnormal returns (hospitals),  or
2. Eliminate the asymmetry, e.g. Teenography,  Etsy, CarFax    

As is obvious, the Internet and ubiquitous information make it possible to profitably eliminate the asymmetry. A trend I see emerging is for such exchanges to bridge service providers in developing countries with clients in developed countries. One example of this is Behance, which enables third world graphic artists, web developers and designers to showcase their work to the world. The site allows for the service provider to be contacted but not for a contract to be consummated...yet. Customer service from India is not so far from the exchange model nor is artesans in Africa posting their wares on a web-based exchange where socially motivated buyers can pick what they want to purchase.          

This business model of the exchange that bridges the developed and developing world ('bridging marketplaces") I think will become very common. The timing is excellent because low skill jobs for immigrants in the U.S. are being taken over by robots. Fruit picking and nursery work is now done by robots, according to this post in Marginal Revolution.  If there are no jobs in the U.S. to attract immigrants, then I hope these workers find bridging marketplaces that provide local employment.

If someone had good open source exchange software, one group of socially motivated people could focus to organize the local service providers and another socially motivated group could focus on marketing the exchange products or services. A little imagination and we crowd source to fund the marketing.   

For more on the relationship between developed and developing markets, read this excellent article from the Washington Post, The Great Unraveling of Globalization.