Look carefully.  Then think about this statement about US job creation:

The only firms that create jobs on average are brand new ones.

So yes, you can save the world with startups.

Related posts:

1. Saving the World with Startups
2. Robin Hood Foreclosure Fund, part II

“We are in the lazy habit of thinking that the flow of the currency in a transaction is the one that matters instead of the actual flow of goods, services, resources, knowledge or participation which flows COUNTER to an exchange currency.

Those real-world currents shaped and enabled by currencies are what make them so valuable and powerful.

The currency itself is actually just a flow of information. But there are two reasons we myopically focus our attention on the currency flow as if it is the one that matters:

1) We are big-brained, symbol-using creatures, and it’s much simpler to us to deal with those nice clean symbols than the actual sloppy flows — dollars are easier to account for than time, random quantities of random things and other stuff which is difficult to count (such as the state of relationships), and

2) The REAL flow is an event which happens in a moment and is gone. If you were NOT there to witness the service being performed, the good being exchanged, or the participation of that person, then once that moment has passed, the only consistent way we have of knowing what occurred is the record we keep of the event. We use currencies to keep records of currents.

I believe this is the single MOST CRITICAL CONCEPT for currency practitioners to grasp. It allows us to break out of bad habits of thinking about currencies in very outdated ways (such as believing they have or should have intrinsic value because precious metals were once used as coins). This allows us to see currencies for what they truly are: formal systems which shape, enable and measure currents which allow communities to interact with those currents.

Of course, the story itself has passed. All we have left are the tracks. But the tracks can tell quite a lot to the right set of eyes: what types of animals were involved, how long ago it happened, which direction the bird flew off, etc. This is the role that currencies play in our economy. Actual currents of resources and relationships occurred and currencies are the tracks they left behind. The tracks are very informative to the right eyes, so we use them to make business and policy decisions.”

Source:  http://newcurrencyfrontiers.com/wagn/Introduction_to_Currencies

The centralized currency of our governments is undergoing a crisis.  But that’s simply evidence that the short-sighted hierarchical system of power in our politics and positively reinforcing system of capitalism have become obsolete in light of our electronic technologies.  Recommendation and trust network systems unbiased by the speed of light and low cost of competition are exposing the idiocy of godlike decision makers.  Do you really think the emperor cannot be naked in this Day and Age?

The point is NOT that these new systems of aggregative expertise and opinion are and will continue to be “better”.  Rather we are on the frontier of extracting patterns from behaviors we haven’t been able to capture before, due to the inferior biological, mechanical, and electronic technologies of the past.  The new systems will also become obsolete, and definitely at a faster rate.  But do you think we have a say?  Unless you think we can slow down or stop the pace of quantification of behavior when everything is becoming electronic?

What do you think about the last slide – Wealth a Living Systems Model?  OR do you want to wait a few months or years until “60 Minutes” tells you what to think?  That IS the question. Find sources of expertise YOU TRUST and trust yourself to move on when YOU judge them to be obsolete.

That’s precisely what MLK meant by this:
“Power properly understood is nothing but the ability to achieve purpose. It is the strength required to bring about social, political and economic change. … What is needed is a realization that power without love is reckless and abusive, and love without power is sentimental and anemic. Power at its best is love implementing the demands of justice, and justice at its best is power correcting everything that stands against love.”

Now don’t make me quote Eminem or Buddha. :)  Once you really understand that this means that the power is within you, you will be able to kill goats with a stare.

Related posts:

1. Towards an Economy of Abundance
2. Another Must Read on the Origins of the Crisis
3. Financial Crisis Act III: The Flailing Response

I want to make the world a better place.  But it’s not clear precisely what interventions will lead to the best outcomes over the long term. I think I’m a really smart guy, but I’m quite sure I can’t evaluate all the potential interactions within a system as complex as the world society to figure out the optimal plan.

Luckily, I don’t have to be that smart. We just have to collectively be that smart. And economic markets are the best way I know to organize collective action. The more effectively we can all create value, the better off we’ll all be. Creating wealth won’t directly solve a lot of problems, but it enables the solution of an incredibly wide range of problems.

So here’s the math that leads to my conclusion that increasing the number of startups we can fund is the best thing I can do for the world. This study shows that a 5% improvement in startup creation leads to about a half a percentage point improvement in the economic growth rate. If we could increase the rate of startup creation by 10%, we could add a full percentage point to our economic growth rate.

From this dataset, I determined that the world GDP growth rate over the last 30 years has been about 4%.  So we could probably achieve a 5% growth rate by increasing startup formation by 10%.

This seemingly small shift has dramatic results over the long term. In 50 years, world GDP would be 60% (1.6x) greater.  In 100 years, GDP would be 160% (2.6x) greater.  I think a world in which everyone were 2.6x richer would be pretty sweet.  That’s a gift I want to give to my great-great grandchildren.

Seed-stage startups are the key because that’s where businesses are born. A larger pool of innovative seed stage companies will naturally attract a larger pool of investment in later stages.  About $10B every year goes to professional investments in seed-stage startups in the US. So if we can add $1B, that’s 10%.  Even better, if we develop a better process, this process can be copied all over the world.  If it’s a lot better, I bet we can do significantly exceed a 10% improvement.

That’s why I’m focusing my time on revolutionizing the process for funding seed-stage startups.

Related posts:

1. Yes, You Can Save the World with Startups
2. What I'm Working On: Supercharging Innovation
3. You Can't Pick Winners at the Seed Stage

Have a look. Let us know what you think.

Related posts:

1. Simulating Angel Investment: Kevin’s Remix
2. Robin Hood Foreclosure Fund, part II
3. Robin Hood Foreclosure Fund

This is by far the most constructive article on healthcare, because it clearly identifies the fundamental issue in healthcare – our internal conflict.  Here are the excerpts, but read the whole thing and forward it on.  I dare anyone to challenge this of course; that’s the whole point of discourse:

“Those following the long march to health-care reform know that one of the few things beyond argument is that the old approach is unsustainable and threatens to bankrupt the country. Perhaps a little belt tightening and bargain hunting of this sort might make our health-care dollars stretch farther”

“To help maximize the overall benefits in health care under a utilitarian framework and conditions of constrained resources, health economists use an analytic tool called cost-effectiveness analysis (CEA) that quantifies the added expenditure necessary to obtain a unit of health benefit (typically measured in quality-adjusted life years or QALYs, pronounced “kwallies”). The most common application of CEA is to examine the value of medical innovations compared to the standard of care routinely available, since new technologies are an important cause of the increase in health-care costs.

If the “unit cost” for a QALY of benefit (that is, the cost-effectiveness ratio) is less than some threshold (conventionally $50,000 or $100,000 per QALY), then adoption of the innovation is deemed “incrementally cost-effective,” since the benefit obtained compares favorably to that obtainable at similar cost using accepted medical technologies (such as dialysis, which has a cost-effectiveness ratio variously estimated at between $50,000 and $80,000 per QALY). Above the ratio, they are deemed not to be cost-effective. That is, the (relatively small) incremental benefits of the intervention do not justify the (relatively large) incremental costs.

“

“Of special interest is “Bernie’s kink” at the origin, which reveals how medical markets actually behave.  People prove to be unwilling to surrender quality using the same formula they would use to accept increased cost.”

“Of course, if all innovation in health care fell into this northeast quadrant, innovation could only increase the costs of care. That is, even so-called cost- effective health-care innovations would always cost more money than the alternatives they replaced. This is often a point of confusion, sometimes purposeful, as when our political leaders claim that “preventative medicine” is highly cost-effective and would therefore save money. In fact, while most recommended preventative services are cost-effective (meaning the value of their benefits in terms of QALYs gained justifies the costs in terms of dollars spent), only very rarely are preventative services actually cost-saving, even when all the “downstream” avoided medical expenses are folded into the analysis. Indeed, new “cost-effective” innovations are one of the principal reasons that health-care costs continue to soar.”

“the selling price (often referred to as willingness to accept, or WTA) and the buying price (willing to pay, WTP) of a QALY should be similar, and the societal threshold for accepting or rejecting a technology should be symmetric and pass through the origin of the cost-effectiveness plane as a straight line. However, as David Hume anticipated, a reproducible observation is that consumers’ willingness to accept monetary compensation to forgo something they have is typically greater, and often much greater, than their stated willingness to pay for the same benefit. Several explanations exist, including the so-called “endowment effect,” the psychological principle that people value items that they already have simply because they already have them.

A 2002 review of 20 studies by the late Bernie O’Brien and his colleagues at McMaster University found that the ratio of individuals’ WTA to WTP was always greater than 1 and ranged from 1.9 to 6.4 for two scenarios specifically related to health care. They suggested that rather than a symmetric accept-reject threshold on the cost-effectiveness plane, societal thresholds should reflect the WTA-WTP gap seen in individual preferences, which would be captured by a downward “kink” (subsequently known as “Bernie’s kink”) in the threshold as it passed through the origin, indicating that a QALY’s selling price in the southwest would always be higher than a QALY’s buying price in the northeast.

Thus, there may be an inherent cognitive bias against relinquishing the gains of health-care interventions that have already been accepted, and the cost savings from decrementally cost-effective innovation may need to be substantially greater than conventionally used thresholds suggest.“

“Indeed, fewer than 2 percent of all comparisons were classified in the cost- and quality-decreasing “southwest quadrant”, and only 9 (involving 8 innovations) were found to be decrementally cost-effective (0.4 percent of the total)—that is, they saved at least $100,000 for each QALY relinquished.”

 “That decrementally cost-effective innovations are so rarely described in the health-care literature suggests that medicine is distinct from most other markets, in which cost-decreasing, quality-reducing products are continuously being introduced—think IKEA, Walmart and the Tata car. Several reasons may explain this “medical exceptionalism.” First, there is fundamentally a lack of incentives both for physicians to control costs, especially under a fee-for-service regime, and for patients to demand less expensive treatment when insurance shields them from the direct costs of care. Second, medical “bargains” frequently come with health risks, and trading health for money strikes some as vulgar, regardless of ratio. The inherent ethical unease that decrementally cost-effective innovations can elicit poses a serious public relations and marketing challenge.”

 “But regardless of the mix, expanding coverage to the uninsured, caring for our aging baby boomers, and accommodating new, effective technologies—while still feeding, clothing, housing, and educating ourselves, and catching an occasional movie—will require our system of distribution of health services to be more cost- sensitive, and will almost certainly mean the adoption of some decrementally cost-effective strategies for saving money. For example, Canadian-style delays for expensive diagnostic or surgical procedures certainly pose real, albeit small, medical risks, and would fall into this southwest category. Getting insured Americans to accept such new risks may be difficult, but slightly quality-reducing (that is, risk-increasing) cost-saving strategies have already been widely adopted within the American system, even if not studied or widely acknowledged. The gradual increase in the “hassle factor” in accessing medical care is one covert way that the industry has found to limit the distribution of services. More overt examples of rationing already adopted include aggressively shortening hospital stays and limiting formulary options (which sometimes require patients to change from a medicine they have been tolerating well to another in the same class). Despite the fact that doctors regularly (although sometimes disingenuously) deploy patter informing patients that the hospital is a dangerous place to stay and that the formulary medication is “just as good” as the one they’ve been taking, these strategies are certainly associated with small but real risks. Even a preadolescent quickly learns the true meaning of “just as good”; perhaps a more mature citizenry can also come to appreciate some of the upside of having “just as good” alternatives.”

Related posts:

1. If Rafe Were In Charge: Major Medical Edition
2. The Climate or the Uninsured?
3. Fixing Health Care I: The Uninsured

TED Feb 2010 – Live Labs Pivot demo

and the world beyond facebook:

One way to put it, is to say that Live Labs Pivot is “smarter” than a Firefox, but guns don’t shoot people… (unless of course there’s an accident) :)

No related posts.

$10K for Crowdsourced X Prizes Platform

• Allows anyone to offer a cash prize for achieving a goal they want achieved
• Allows anyone to pledge additional dollars to someone else’s already-offered prize
• Uses crowdsourcing to vet which goals are worthy of public prize offer and which get top billing
• Uses crowdsourcing to determine if/when a prize gets awarded
• Has been used to award at least five prizes of one thousand dollars or more
• Does not have any pending lawsuits alleging that the platform violates U.S. federal or state laws
• Has an opinion letter from a U.S. law firm that the system does not violate U.S. federal or state laws

Note that this is different from Kickstarter in that (a) it’s the donors who set the goal not the recipient; (b) Kickstarter does not use crowdsourcing in its vetting process at this point.

$15K for Y Prize Platform

Same as the above except, instead of prizes, the cash award is an equity investment that gets executed once the stated goal is achieved (as determined by the crowd).  The platform must have been used to invest at least $10K in at least one for-profit venture in exchange for an equity stake in the venture.

Again, this is different than Kickstarter in that they only facilitate pure donations, not investment.  It’s also different from Unreasonable Finalists Marketplace as it currently exists.  I love both of these platforms and think they have worldchanging potential.  And both are eligible for my prizes here if they add what I’m looking for.  But I don’t think they will (they’ve got different fish to fry) so don’t be discouraged from jumping into the fray yourself!

$75K for 20%

I’d like a 20% ownership stake in a for-profit venture achieves the Y Prize Platform above.  I don’t know if my making such a “reverse offering” would constitute a violation of U.S. law or not, so I am not actually offering it yet.  What I am doing is suggesting that if you build such a system, and you start a for-profit company to monetize it, and you can convince me and my lawyers that your company is fully legal, and you are willing to offer me 20% of that company, then I’m willing to invest $75K.

Furthermore, this whole page of offers is null and void in any jurisdictions in which it’s not 100% legal (a determination that you need to make personally, I can’t advise you on this).  And I reserve the right to modify anything on this page at any point in order to assure compliance with all U.S. laws and regulations and to clarify my intent.

Finally, if you are a lawyer licensed in the U.S., I’d appreciate your posting any legal opinions you have on any of this via the comments section below.

Related posts:

1. X Prize Annuity Funds
2. Project Runway
3. Open Letter to Gotham Prize

1. “It is not the case that the largest banks are the same as other banks, just bigger“
2. “The largest banks are different is that they have something close to monopoly power”
3. “They are not open to outside competition because there are huge barriers to entry”
4. “They promote a noncompetitive industrial organization… by, among other things, creating informational asymmetries.  The innovative products they promote — both derivatives and consumer products — give them an informational edge over their customers. The trading operations they run do the same.”
5. “So if we want to curb the risk taking, too-big-to-fail conflicts, opacity, and the creation of informational asymmetries and complexity, we need to move them down to the scope and scale of the smaller banks. We need to break them up.”

 I hope Rick has a way of converting his personal views into those of the SEC and its staff.  It may have been catastrophic to let the banks fail in the midst of a panic (fall of 2008 – early 2009), because wealth destruction through leverage could have brought the whole fiat money system to a halt.  But if we have learned anything from this crisis, it is that we need to break up JPM and BOA sooner rather than later. 

 Let’s not stop with banks though.  We can extend the information asymmetry analogy to politics.  Profit/money/wealth that was accumulated in the past always tries to control the future by creating barriers to entry (information asymmetry).  It may be as indirect as placing former industry experts on boards of the FDA, RIAA, and don’t forget the Fed.  It all boils down to the battle for copyright of ideas.  It may seem like it has to do with music, but that’s just where the battle front is for now.  Music and culture always build (remix) the past music and culture.  If we are allowed to recursively rearrange Shakespeare’s ideas into books, plays, and movies, then there’s something to be said for balance of the ability to create and copy in all facets of life. 

I am of the opinion that the relatively recent boom in emerging countries has a lot to do with a phase shift in the ability to rip-off ideas.  Last I checked we sometimes call that learning.  Of course the standard counterargument is that one needs incentives to be creative and productive.  No one is denying that, but only to a degree.  The only argument I have is that IF the ability to copy an idea has become cheaper, then the copyright needs to shrink proportionately (but not exceeding the ability to create), whether we’re talking about cultures, ideas, wants or needs.  But scaricity is a very squishy concept.

If I invent the HIV vaccine, how much should I get paid?  How long should my copyright/patent last?  There is not enough information to answer these questions, because you first have to define what economic and political system I exist in as well as the cumulative benefits from an HIV cure and how much R&D is required.  The current state of the US system is moving towards that that of privatized gains and socialized losses.  You tell me what emerges from that!  France, Russia, China, Brazil all benefit from globalization by getting access to good ideas without having to invest as much in R&D.  That is the ecosystem that we exist in.  IF all the countries were one, what would the optimal (most balanced) system be?

But how do we quantify the value of removing scarcity (in this example – the abudnance of HIV)?  What if instead of fighting HIV, I choose to fight computer viruses and to create scarcity, I go out and hire people to create viruses for me to fight or at the very least prevent extermination of virus creators.  The RIP: Remix Manifesto refers to this as “Culture Jamming”.   Scarcity can be created artificially.  Yes, Beatles have a legendary standing.  So do the Rolling Stones, U2, and even Brittany at the very least if we look at their earnings.  They have all built empires remixing older music.  You tell me how much a musician ought to make.  If we can’t figure out music, we won’t make any progress with more important patents.

The whole movie is revolutionary, but these parts are critical:
RIP: Remix Manifesto – Part 7
RIP: Remix Manifesto – Part 9

If you want to jump ahead and become the teacher instead of the student, this is where the peanut butter to my current culture jam is:
The Incommensurability of Scientific Theories

Related posts:

1. Balance the past with Zeitgeist
2. Gene-culture Co-evolution
3. Last.fm Meet Research Networks

Now what if your friend said that they didn’t care what you did with the money or how much you made each year.  If you wanted to sit on a beach in Nicaragua learning to surf, go work in the Peace Corps, stay at home and do your art projects, whatever you want it would be fine, just as long as you made sure to always pay the 3% of whatever you make (as little as that may be).

And finally, what if your friend said you could buy out of your obligation at any point for $6 million in cash.  Then would you take the deal?

. . .

Personal Investment Contracts

. . .

Personal Investment Contract

Phil Gordon and I recently made such an investment in a person we both know very well, call her Marge.  The thing about Marge is that she’s one of these people you know — you can feel it in your bones — that she’s a superstar.  She may have a string of projects and startups that don’t end up producing much in terms of tangible results — in fact she already has.  But you know that all of this “failure” is simply building Marge’s brand equity.  She’s learning how to navigate in the world, how to build value (whether it be monetary value, social good, or however you define it).  She’s also making connections with people who are taking notice of her talent, love her undefinable qualities as a person, and who just want to somehow help her succeed in her life’s mission and be a part of her success.  Everyone who meets Marge knows it’s simply a matter of time before her success is tangible.  Maybe she’ll end up as a founder of a billion dollar startup, maybe her book will top the NY Times Bestseller list, maybe she wins a MacArthur Genius award.  Or maybe over the 40+ years of her career doing what she absolutely loves and was made to do, she will touch the lives of millions of people.

From our perspective as investors, it doesn’t really matter what path Marge chooses or what twists and turns that path reveals.  We’ve already determined that she’s a winner and she will adapt accordingly.  The cash investment was intended to smooth out the earnings curve so that Marge won’t have to take jobs that don’t further her life goals just so she can eat and pay rent.  And even if she blows through the cash, she’s still gotta eat and pay rent, which means she will find a way to make money (while pursuing her dreams).  Maybe one year she makes $10K.  Down the road she herself inherits some money and coincidentally that same year is paid handsomely on a consulting gig and ends up making $400K.  Or perhaps she finds that she loves climbing the corporate ladder and steadily increases her salary from $50K to $500K over the course of 20 years.  Assuming Marge makes an income of some sort for 40 years, she only has to average $250K (in today’s dollars) for us investors to get our money back.

Now here’s were it gets interesting for the investors.  It’s very unlikely that we will be negative on our investment over the course of Marge’s lifetime, unless she dies or becomes incapacitated (which happens of course; there’s no such thing as a risk-less investment).  And in poker parlance, we are “freerolling” to make a substantial return if she hits it big and/or she decides she wants to buy out.  But even if we don’t make a ton of money off of Marge, we know that our investment will have made a significant positive impact on the world.  Why?  Because we hand-picked her as “the one” out of the thousands of people we’ve met over the years to invest in.  Amongst those other there are surely many winners, they’re just not… Marge.

. . .

Simple, Flexible

You are welcome to download and use the document above as you like, it’s hereby placed in the public domain.  Obviously Phil and I have to disclaim any responsibility for what you do with it, and we cannot give you any legal advice.  We are very comfortable that we are not breaking any laws or regulations and we’ve had a team of lawyers and personal agents vet and refine the basic template from both the investor’s standpoint and the investee’s.

And sorry, we are not accepting applications nor will we consider investing in you.  But if you have people who believe in you and trust you as much as Phil and I do in Marge, then show them this blog post and convince them to invest.  The Personal Investment Contract (PIC) can be calibrated for just about any situation where the investor believes the person they are investing in is (a) a true superstar, and (b) completely trustworthy.  Here are the key numbers to keep in mind:

• Investment Amount – This should be determined by the entrepreneur such that they feel like they have enough breathing room to pursue their passion for at least a couple of years, or longer if they feel like supplementing their income themselves.
• Annual Return Payment – The idea is keep this low enough so as not to be a burden on the entrepreneur, but high enough to be attractive for the investor in combination with the Termination Amount.
• Termination Amount – If the ARP is low, this should be high; if the ARP is high, this should be low.  It’s the slider that trades risk for reward.

. . .

Examples PICs

• Example 1: Technologist or Business Person
  • Investment: $250K
  • ARP: 2%
  • Buyout: 10x ($2.5M)

• Example 2: Social Entrepreneur
  • Investment: $150K
  • ARP: 5%
  • Buyout: 5x ($750K)

• Example 3: Do Gooder or Research Scientist
  • Investment: $100K
  • ARP: 10%
  • Buyout: 1x ($100K)

. . .

Important Details

Despite the fact that the contract is ridiculously simple (three pages!), there are some key details in the contract that we believe make this work.  The first is the clause that says the entrepreneur has to give the investor a year’s notice that they intend to buy out.  This is so that the investor can’t be cut out of a big, pending deal that closes soon after the entrepreneur buys out.  It’s possible that the entrepreneur gives notice but for whatever reason (turn of fortune?) can’t come up with the cash required a year later.  That’s fine, the contract stays in effect and the entrepreneur can give notice again in the future.

The second important detail is that the Termination Amount isn’t really just the buyout multiple on the original investment but it also crucially includes the ARP times the net fair market value of all unrealized gains made during the course of the contract.  The reason for this is as follows.  What happens if the entrepreneur buys a house or invests in a business which becomes the dominant (or even just a significant) portion of their net worth by the time they want to buy out.  The investor rightly feels like they contributed to that gain and should get their fair share.  The entrepreneur may not want to (or even be able to) realize the gain at the time of the buyout, e.g. they still want to own and live in the house, or the business they invested in isn’t public yet.  But the investor shouldn’t have to take the worst of the deal.  Hence the fair market value assessment is made (by third party arbiter if necessary) and the investor gets paid.  For instance, consider a PIC using the numbers from Example 1 above.  Entrepreneur buys some property that appreciates by $20M, so the actual Termination Amount becomes ($20M x 2%) + $2.5M = $2.9M.

There are sure to be loopholes that we didn’t close, and it would be great if you could bring those up in the comments section below so the template can be adjusted or variants of the PIC can be made.  Ultimately we decided that because we are investing in people we can trust, and we want to foster that sense of trust and fiduciary obligation, it was better to have the contract be short and to the point, rather than cryptic and air-tight.  Yes, there could be problems down the road, but then again if one party really wants out of a contract or wants to bend the rules in their favor they will be able to.  We’d rather enter into a handshake agreement where we are partners in the success of a budding superstar — as motivated to help them achieve their goals as they are to leverage our resources, experience and connections — than to take advantage of someone because of their temporary circumstances.

. . .

Replicate, Don’t Grow

The first thing that angel investors or venture capitalists think about (once they decide they like the model) is how can they create a fund to achieve scale.  Caution! This way there be dragons.  A PIC is fundamentally a personal investment reliant on mutual trust and respect, not a mechanical device suited to turn into a factory.  PICs can achieve scale, but it will happen from the bottom up, rather than top down.  That is, they are meant to replicate, not grow.

. . .

Feedback

If you have any feedback or experience with this sort of investment, we’d love to hear it!  Share your stories in the comments below.

. . .

Related posts:

1. Equity Micro-Investing
2. The Challenge
3. $100,000 Reward: Y Prize