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

If you can convince someone you are a superstar, there’s a way out.  But if you are having trouble making that case, then maybe you’d consider becoming a Social Capital Uncontractor.  What’s that, you ask?  I’m not sure, I’m making this up as I write, you can help…

Here’s my life.  I have a large and growing number of projects that I am working on, and an even larger (and more accelerating) number of projects I’d like to begin.  The critical bottlneck for me is not money but time.  It’s getting so bad that I don’t have time to even think about the management of these projects, let alone manage them.  Plus I hate managing projects and it’s definitely not my biggest strength.  I’m much better advising and asking questions that make you think differently.

On the other hand I have many friends, colleagues, acquaintances, etc. who are underemployed, by their own definition.  I’ve thought about “clearing the market” by paying to get these projects done, but there are many issues involved.

Why I Won’t Pay You in Cash

• I refuse to pay a salary (it undermines the intrinsic motivation that is needed)
• I’m unwilling to have you in my life if you view me as a source of cash (if you need rent money, Starbucks is hiring, and there’s no time clock on my projects and any deadlines would be agreed upon upfront)
• If you’re thinking to yourself (no doubt, while you read this at the one internet cafe in your village before you trek home five miles with daily drinking water you just collected for your entire family) that there are no jobs paying what you need to survive so that you can work on one of my projects for no pay, you’ve failed the first test.

For all those who’ve passed and are still intrigued, I’m interested in doing an experiment in social capital.  I’d like to see how far I can get on my projects without my having to pay any cash and while reducing the time I spend currently on “the management issue”.

Why You Might Want to Work With Me

Eventually, if you are successful, you will become an equity stakeholder in one or more for-profit ventures that you oversee.  Or you may find a project that you go off and run by yourself.  Or I might pull some strings and recommend you for your dream job.

Uncontractors Only

Here’s the deal: there is no deal.  You either want to work with me in this capacity or you don’t.  There’s no commitment on either side, and no contract (stated on implied).  If you let me down, there will be no legal, financial (or otherwise visible) recourse.  Your social capital account with me will be diminished though.  And as it does, I pay you less attention, I stop recommending you to people, etc.  I start everyone with a positive social capital balance, but once you deplete it, it’s really hard to replenish.

Your Ideal Traits

• Emotionally self-sufficient
• Think like I do, but eager to accomplish stuff (vs just catalyze it like me)
• Can work well with others by generating, and using, your own social capital
• Communicate well via writing
• Communicate well visually (graphic design / video skillz are huge plusses)
• Technologically very savvy/geeky
• Only reinvent the wheel when it can’t be created with existing parts

Areas of Interest

Presentation Creation

• creating standalones like this and like this for subjects like cancer, social ventures, Science 2.0, whatever I blog about, etc.
• creating presentations on the same themes for live forums like TED, The Feast, Idea Project, etc.

Project Management

• Managing anything you see on RafeFurst.com and many more like them in development

Software Development

• e.g. email solution that sits on top of Mail.app or Gmail that adds functionality I want
• e.g. implementing crowdsourced rating system for my blog content (primary and comments)
• e.g. seeding the application space for A World of Goodies
• e.g. building out the vision on TruthMarkets.org (and combine with Goodies for EPIC WIN!)

System Administration

• Managing my domains, websites, blogs and integration thereof on an ongoing basis

How I’d Like to Work With You

Virtually, via a combination of skype video, email, and phone mostly.  Ideally, you just get shit done with as little interaction from me as possible, throw it on the web for the world to benefit, but do it in such a way that someone who knows me well could stumble upon it and “get it” in under two minutes and the first thing that would pop into their head would be: “OMG, Rafe would love this, I gotta call him and tell him about it!”

Time is Money

I love people who understand what this really means to me.  People who don’t understand it tend to write long emails and create work for me in having to read through stuff I don’t care about and expect me to respond appropriately.  People who do understand it, think really hard about how to get me interested in spending my limited time addressing what they’d like me to (and realize that it takes time away from my being with other people I care about too, helping other people with their also-important projects, etc).

Guilt works on me, but it very quickly depletes your social capital.  I take my obligations extremely seriously, which is why I hardly ever consciously create them for myself.

Money is Violence

I am not opposed to spending money to make things happen, I just view it — like violence — as a last resort.

I don’t want to pay you in cash because I don’t want to do violence to you.  My vision is that you make your money working hourly for someone else so you can meet your worldly needs, while at the same time, you work with me to get yourself to the Adjacent Possible where you can make increasing cash returns via the social value you add to the ecology.

I’m willing to pay cash for completed projects that meet my specification and exceed my vision.  I love crowdsourcing with cash prizes for this reason.  But I’m not going to pay you cash to complete the project because it’s a waste of your valuable time.

If you can figure out a model for a project that sustains itself financially and generates value (cash, social, some combo) then I’m willing to listen to your pitch as to why I should invest my money.  But realize that you start with two strikes against since I said at the outset this is about an experiment in pure social capital.

Want to Participate in the Experiment?

First and foremost I am looking for a single individual (a leader) who will oversee everything and not require oversight themselves.  If you fit into the big picture somehow but are not that leader, you can make your case below in the comments and prospective leaders will be able to evaluate whether they want to work with you.

Related posts:

1. Social Entrepreneurship Tax Credit
2. Equity Micro-Investing
3. “Social Entrepreneurship has Complexity Written All Over It”

$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

If you like the theme of “Social Entrepreneurship, Systems Thinking and Complexity” — and I know that you do because that’s what this blog talks about a lot of the time — then you may want to attend (or even submit a paper/talk abstract to) the eponymously named conference at Adelphi University in New York (April 30 – May 2, 2010).  Hope to see you there!

hat tip: Jerri Chou: @jchou

Related posts:

1. Social Entrepreneurship Tax Credit
2. The Quandaries of Quantifying Complexity
3. Economics Must Reflect Complexity

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

I just saw the most important talk I have seen in 300+ TED, Pop!Tech, etc talks that I’ve watched.  And at the risk of hyperbole, I will say that the worst case scenario is that Daniel Nocera simply wins a Nobel Prize (and yes, I’m willing to bet at even odds that it happens in under 10 years from today).  But if the system is able to scale through replication, it will be at least as important as penicillin in terms of ending human suffering and will have a bigger impact on the world as a whole.  Here’s why:

• Input: Water (clean, saltwater or dirty water)
• Outputs: Electricity + Pure drinkable water
• By products: nothing (other than what was in the water)
• Resources required to assemble: all abundant and most have substitutes
• Knowledge required to assemble: simple
• Cost to assemble: relatively cheap

Essentially what Nocera has done is reverse engineered and re-created a super-simplified photosynthesis process.  It’s a closed loop (i.e. autocatalytic) so it’s actually more efficient to run his reactor on a fixed amount of pure water.  But if you want you can use a flow of new water (say, parasite infested water) and as a side effect you get clean water out; all you have to do is have a way to dispose of the impurities that get separated.  You could do that manually if necessary, but once you have energy, that becomes easier and may be automated.

Here’s why I’m really excited.  The system is so simple that it can be built and maintained locally by the bottom billion, for the bottom billion, without the need for an electricity grid.  Sounds like a micro-franchise model that could be taught at places like Barefoot College and could simultaneously create economic development and solve the world’s biggest humanitarian problem, both as a side effect.

And it can be purchased for home use by the rest of us taking our homes off the grid, paying for itself and becoming cash flow positive at some point.  Same for businesses.  What about portable energy, like for cars?  Well, if you have a surplus of energy and water, you can charge hydrogen fuel cells.  Or you can spin up flywheels, store electricity in lithium ion batteries, etc.

The biggest risks I can see are twofold:

1. There crops up some collateral effects of running the system indefinitely that emerge over time and at great scale (e.g. some trace byproducts which were too subtle to notice get concentrated to the point of becoming toxic).
2. The patent on the invention creates a roadblock to replicating the system across the globe.

The reason I’m willing to wager on the Nobel Prize is that I don’t think these risks would sink that ship.  I think it’s worthy of a Nobel in one of the sciences already.  While those can take decades to be awarded, I am comfortable about the 10 year mark because as we all know, the Nobel Peace Prize is winnable in 10 months.

Are others as excited about this as I am yet?  Here’s a clue: when the president of MIT learned about Nocera’s invention she called just one person to bring it to the world, someone she thought could understand just how big it is and someone who could properly shepherd it and nurture it.  He’s a venture capitalist who at one point had been a world-changing inventor himself.  His name is Bob Metcalf, and he invented ethernet, the communication transport mechanism of the Internet.

Related posts:

1. Providing Global Energy Needs
2. How Many Calories for a Dollar?
3. A Theory of Scalability

What if you wanted to start your own sovereign nation in a tucked away corner of earth somewhere?  Problem is, every piece of land more than a few feet above sea level is already claimed by governments, private individuals or commercial interests.  Enter, the high seas.  Turns out there’s nothing stopping you from going out to international waters, building a platform, giant boat or floating something-or-other and starting over with government, completely from first principles.  Patri and Seastesd.org are committed to helping you do just that.  And before you go assuming that the best form for your utopian flotilla must be some form of democracy (social or otherwise), consider all the unsolvable problems that face even your very favorite “government service provider” today.

So with that in mind, I’ve invented a new form of government that I’m putting in the public domain for any would-be seasteaders, guerilla factions or velvet revolutionaries to use as they see fit.  Don’t thank me now, just send postcards from time to time.

•

Valuestan

“Having a nice life… Wish you were here!”

•

Principle 1: Values First

• Rather than assert that there are such things as Inalienable Rights (or even Rights at all), recognize that there exist a set of  Shared Values which can be explicitly stated.  It is the Shared Value Statement (SVS) around which the State is organized.
• To be a Citizen you must uphold and abide by the SVS.  You may renounce Citizenship at any time.
• The SVS may be amended (process TBD by founders; process subject to amendment by Citizens).  It is understood that any amendment is likely to turn some Citizens into non-Citizens.
• Any non-Citizen who is visiting or residing in the State is to be treated — and act — AS IF they were a Citizen.

Example values: Empathy; Discipline; Group Harmony; Consensus; Individualism; Personal Freedom; Happiness; Respect; Gratitude; Absolute Truth; Relative Truth; Parsimony; Efficiency; Sustainability; Education; Personal Improvement; Democracy; Meritocracy; Marketocracy; Autocracy; Theocracy; Ends Before Means; Means Before Ends; Aesthetic Beauty; Entertainment; ad infinitum.

It’s clear that Values are soft, not hard like Rights.  And that any particular set of Values will, to a greater or lesser extent, conflict.  The SVS is an unordered finite set.  Relative significance of Values is unspecified by the SVS and can only be known by inference from practical implementation via Principles 2 and 3.

It is up to the Citizenship to determine what values belong in their SVS.  Some sets of values will be inherently more stable than others, and some are simply not viable.  But it is a category error to suggest that some SVSs or states are more moral than others.  Morality is internal to the State and relative to Shared Values.

. . .

Principle 2: Positive Incentives Before Laws

• Where possible, formal positive incentives (economic, social and otherwise) will be used to shape individual action.
• Where such incentives are impractical or undesirable, formal laws may be created.
• Laws trump incentives and should be used sparingly.
• The entire set of formal incentives and laws (i.e. the Formal Code) is meant to embody and prioritize the SVS.

How the FC is arrived at, amended and implemented will vary from state to state, and is to be in accordance with the SVS.  If Democracy is part of the SVS you would presume to see some form of voting mechanism.  If Democracy is not on the SVS but Consensus is, you might expect the FC to be determined by a jury-like process.  And so on.

. . .

Principle 3: Practical Wisdom

It is recognized that Principles 1 and 2 are not enough by themselves to create a good society.  To wit: our loss of moral wisdom.

Therefore, it is the Responsibility…

• …of each Citizen to be a moral exemplar always and embody practical wisdom
• …of the State to celebrate moral heroes and create a culture of moral action

. . .

Principle 4: Non-Human Agents

It is recognized by the State that there are non-human agents that exist in the world, some of which exist in the State, and that they do not necessarily have the same motivations or moral capacity as humans.

Examples of non-human agents include: corporations, governments (the State, other sovereign states, local governmental bodies within the State), military systems, market systems, exogenous non-state actors (e.g. terrorist groups), religions, cults, sociotechnical complexes (e.g. military-industrial complex, academia-medical-regulatory complex, DDoS attacks, crowdsources), technological agents (e.g. software viruses, robots).  New forms of non-human actors are emerging at an accelerating rate, and are largely unpredictable.  So-called “artificial intelligences” are of particular interest and concern.

Non-human agents are good at responding to incentives, but not good at responding to laws or moral intuition.  The proper treatment of non-human agents — including and especially the State itself — is recognized as important, especially as it pertains to the legal system.

The treatment of non-human agents as Citizens in Fact may be a threat to a good society.  For instance:

• Should Corporations be treated as Persons (as they are in the U.S. legal system for many purposes) ?
• Should the State or local governments be party to lawsuits?
• Should there be a para-governmental system designed to protect humans inside the State? the State itself? the SVS? humans not in the State?  humanity as a whole?
• What should be done about non-human agents which threaten the State from (at least partially) inside (e.g. military-industrial complex) ?

. . .

Related posts:

1. Financial Crisis Act I: Government Meddling
2. Notes from TED
3. Crowdsourcing Election Verification

In thinking about this I am reminded about a duet of innovators who spoke at the Pop!Tech conference last year about scaling.  Both Bunker Roy and Paul Polack have some profound lessons to teach us about scalability.  You will learn these lessons by watching Roy talk about Barefoot College and by watching Polack talk about his Out of Poverty approach (also see BarefootCollege.org and PaulPolack.com).  But despite all of the incredible wisdom to be gleaned from observing how Roy and Polack achieve scale, I’ve been wondering about how their success can be translated to other realms.

Replicators

In creating a general theory of scalability, I think there is a key conceptual anchor from Susan Backmore’s TED talk on the third replicator.  Now, I have to pause here because as simple and great as the universal Darwinism principle is, I know from conversations that many people have a really hard viewing evolution in non-biological systems as anything more than a good metaphor.  It’s hard for most people to see that “true evolution” — the kind that Darwin was talking about — is actually what is happening in these non-biological systems.  I will address this in detail in a later post, but ask that you indulge me for the time being so that we can talk about replicators.

When we talk about scaling sociotechnical systems, really we’re talking about one of two things: either growing the original system to handle “more”, or replicating the original system (or enabling it to replicate itself) with appropriate variation for the new context.  Growth models are the more familiar and comforting to governments and policy makers for reasons that should be obvious to anyone who has noticed how scared these types get when faced with systems that scale via replicators.  Formal organizations (corporations, non-profits, governments, anything with a legal structure or formal set of rules) are growers; networks of cooperating agents (open source software, social change movements, revolutionaries, anything that is formed in a grass-roots / bottom-up manner) are replicators.

I am not here to argue that either type of system is dispensable, indeed they are both essential.  I will leave it as an unproven conjecture that we are at a point in history wherein the ecology of sociotechnical systems is dominated by growers that are straining and stretching to the edges of their dynamic range.  Societal edifices are crumbling under their own weight, and are thus vulnerable to subversion by an algal bloom of replicators in their midst.  For those that want the argument and evidence, go read The Chaos Point by the grandfather of complex systems theory, Ervin László.

And I will leave alone in this theory of scalability the entire grower side of the equation.  It’s been systematized and refined since at least the days of Machiavelli;  we know it today as management science.  Instead I want to suggest that there is lacking an entire half of the formalization project for a unified theory of scale, and that’s a formal model for scaling via replication.  The reason this formalism has eluded us for so long is the same reason Darwinian evolution is so hotly contested: it requires a fundamentally different way of thinking than the Western analytic tradition is based on.  That’s not to say that the complex systems paradigm is not scientific, just that the scientific method as it exists today has not yet incorporated the bottom-up, emergent calculus required to be complete.

The first question we must ask is what exactly is being replicated, and only then we can ask how that replication is achieved.  Blackmore names three classes of replicators which I would like to refine by pointing out (as she does) that these are really self-replicators.  In her TED talk she observes that biological self-replicators exist (i.e. what we normally refer to as “life”), that mental self-replicators do indeed exist (though most people don’t take this notion seriously enough yet), and that technological self-replicators are in the process of being born.  If we think about it though, it is easy to see that certain forms of this third replicator already exist: computer viruses, bot nets (e.g. as are used in DDoS attacks), digital agents in artificial life simulations and genetic algorithm systems, and others.  What Blackmore was hinting at with the her more restrictive definition of technological self-replicator is one in which the artifact being replicated has a physical form (as opposed to digital information form).

I must digress here for a moment to point out that it is a red herring to try to neatly circumscribe the system being replicated (the “artifact” or agent) from its environment.  In reality there is no such thing as a true self-replicator; there are always some resources or information that is outside the self-replicator that is required for replication to occur.  Neither the chicken nor the egg can recreate itself.  And if you (rightly) view the chicken/egg system as the thing self-replicating, you only need observe that food is also essential (as are many other things) for replication to occur.  Given this truth in the realm of biology, is it really so far fetched to view digital cameras self-replicating technological agents, that is replicators of the third kind?  Sure they require humans, manufacturing processes and other technology from their environment to replicate, but I’ll reiterate that there are no biological life forms either that are entirely self-replicating.  (This blog post puts an even finer point on it all, if you are still not convinced).

Principles

The scaling brilliance of Bunker Roy and Paul Polack was hard-won, after many years of solving specific problems at the bottom.  It was only after gaining a deep understanding all of the interacting subsystems was it possible for each of them to engineer an overall system that was scalable via replication.  Looking at various attempts to scale sociotechnical systems, both successful and unsuccessful, a pattern starts to emerge of the key principles and dynamics.  Here are a few:

• Counterintuitive: Brilliant solutions are only obvious in retrospect.  Crazy. Crazy. Crazy. Obvious.
• Self-Replicators: It is important to identify the parts of the system that are — or that can be made to be — self-replicating.
• Fecundity: Digital information replicators are more easily replicable than mental constructs (i.e. memes), which are in turn more easily replicable than organizations of humans.
• Mutation: The more fecund the replicator, the easier it is to co-opt for ulterior motives, and the more likely it is that random variation will throw the overall system off course.
• Environment: It is easy to mistakenly believe that a prospective environment is suitable for replication when it’s not.
• Side-effects: With any complex dynamic process there are always side-effects. If ignored, this usually leads to collateral damage, but on the flip side there is usually an opportunity to accomplish other goals and turn side-effects into new benefits.

In thinking about how to engineer a system to bring solar electric installations to rural villages around the world, it is counterintuitive to think that poor, illiterate grandmothers (with no formal education and very little social standing in their village) could learn to be solar engineers.  To further think that they could be taught by illiterate trainers (who don’t speak the same language) is crazy.  Until Bunker Roy proved it was possible.

Microcredit was crazy too, until Muhammad Yunus proved that it wasn’t, and then it was obvious.  So obvious in fact that it became a viral meme and has spread all over the world.  The concept of microcredit is a very fecund self-replicator.  Unfortunately, the practice of microcredit in many places has ignored the nuances of different environmental contexts and unintended side-effects.  Add to that a high mutation rate: the model being tweaked to confer greater benefit to lenders (at the expense of borrowers); the introduction of middlemen who screw up the incentive structure and unwritten social contracts; etc.  The net effect has been that in some areas microcredit has been a net negative to the economy, and especially negative to the borrowers, whom the model was originally designed to help most.

Polack’s franchise model (an indeed all franchise models) are inherently replicators.  They are also good self-replicators because customers and other locals get exposure to the idea of becoming an entrepreneur themselves. And some of them end up as franchisees.  That is replication.  But to move from solving one problem (e.g. clean drinking water) to solving a very different one (e.g. locally available energy), new technologies that are also “radically affordable” have to be created on a regular basis.  And this type of innovation does not self-replicate.  So Polack created an entirely separate institution, the non-profit R&D lab, specifically to tackle the problem of replicating franchises (i.e. going from an electrochlorinator franchise to a solar concentrator franchise).

Applications

With this nascent framework in mind, I’d like to invite you to evaluate some of the social ventures that I encountered at The Feast (and a few of my favorites from Pop!Tech last year) and see if you can predict how scalable their model will be based on the replicator principles above.  And in cases where they have achieved some amount of scale (like charity: water and frontlineSMS), can you explain their success using the theory?

• SHE (Feast talk Session #3 starting 0:46:30)
• charity: water (Feast talk Session #4 starting 0:01:30)
• frontlineSMS (Feast talk Session #3 starting 0:25:45)
• Yellow Brick Road (Feast talk Session #1 0:31:37)
• 9th Ward Field of Dreams (Feast talk Session #4 starting 0:59:20)
• Change.org (Kitchen)
• International Transparency Solutions (Kitchen)
• Madecasse (Kitchen)
• Parent Earth (Kitchen)
• Srina (Kitchen)
• TrustArt (Kitchen)
• VotaVox (Kitchen)
• Global Citizen Year (Pop!Tech)
• Vittana (Pop!Tech)

I would love to hear your thoughts, both on the specifics of these ventures, and on the theory of scaling through replication.

Related posts:

1. Alfred Hubler on Stabilizing CAS
2. Autocatalytic Systems
3. Daniel Nocera’s Gift

Jay and I fall into category 1 and Michael falls into category 2.  All three of us agree that the gap above exists — due in part to rapidly declining startup costs — and represents a very real (and lucrative) investment opportunity if it can be closed properly. This opportunity is partly what the so-called “black swan fund” is tapping into as well, but I’m talking here of a distinct effort, which we want your feedback and participation on.

Creating a Workable Micro-Investment Model

Michael, Jay and I represent the three basic classes of people in this entrepreneurial ecology.  Michael is an entrepreneur, I am a micro-investor, and Jay is person who sees and creates deal flow.  We are trying to come up with a model that works, especially for Michael and myself — if it works for the two of us, Jay’s life becomes much easier and he makes more money.  To these ends, I’ve outlined here the important elements of a micro-investment from my perspective (that of the investor).  Hopefully Michael and others will chime in and say what’s important from the entrepreneur’s perspective (and what they need to motivate people on their team).

• I’d like to invest $1K to $5K in a number of different nascent “projects”.

• Monetary ROI potential is a necessary pre-condition for this activity, but it’s not my main motivation.

• The main “return” on investment for me is a combination of:
  • catalyzing social good (40%)
  • being “in the mix” on a social/business level (30%)
  • feeling personally useful and productive in my life (20%)
  • getting external ego validation (10%)

• The thing I want to invest in is a tribe in the Seth Godin sense.  Tribes by definition coalesce around a leader (aka, the entrepreneur).
  • I specifically don’t care about the legal structure or legal standing of the tribe.  It can be a whole company, a project within a company, a de-facto, fluid, amorphous partnership of individuals, or a crowdsource.  If successful, it will evolve into the correct formal/legal structure and I will trust the entrepreneur to honor the spirit of my investment in compensating me (see “moral integrity” bit below).

• I have to like and trust the entrepreneur first and foremost (and then I take it on faith that the tribe is reflective of that person’s values and energy).

• I will only invest in projects whose leaders I like personally and who have high moral integrity.

• I know I will be disappointed on the moral integrity front at some point by someone, and that’s okay.  There will be zero tolerance for moral lapses: no more investment for such people, and they will be ostracized from my circle of influence.

• I am looking to get about 10% of the equity of the project for my initial investment of $1K to $5K.

• I expect the first look for follow-on funding if the project gets traction, and I understand the price will go up since the risk is lower.

• I expect the tribe to know if the project gets traction within about 3 months, if not it needs to be ruthlessly abandoned.
  • I will not shed any tears and will praise the entrepreneur/tribe for making that tough decision rather than dinging them for “failure”.  True failure — tragedy in fact — results from missing the real opportunities due to wasting time and money clinging to a bad or mediocre one.

• Since the cost for me to get in is about a tenth of the typical angel investment, I feel no qualms about doing little to no diligence or business model validation — in fact I feel liberated.

• Some entrepreneurs will ask for my strategic help (connections and advice) more than others.  I will (mostly) give it on an as requested basis and not worry if a leader is not making the most of the relationship.
  • Those that do leverage my strategic help are definitely more likely to get funded by me in the future, unless of course they make me a ton of money without it :-)

Three Paradoxes

Here are some paradoxical-seeming truths that I have come to believe through my past experiences, and which the above model of investing relies upon and leverages:

#1  I am more happy and motivated to strategically help projects that I put only a small amount of money into (or no money!) than ones I put a big amount into. With the latter, the leader  needed to convince me they have a brilliant, solid business plan and know exactly how they are going to go from concept stage to being wildly successful over the course of 3 to 5 years.  This, of course, is utter bullshit: no success story follows the original business plan.  But having that CEO come back to me (after convincing me to plunk down $100K) and admit they have no idea how they will eventually be successful, that does not inspire confidence.  With a micro-investment, I’m happy to throw it on the wall and see if it sticks.  If not, let’s all move on — and let’s keep the kitchen open to make more pasta while we still have some dough, the water is boiling and the staff is happy.

#2  Making money has little to do with why I want to invest like this, but if the project does not have making profits as it’s #1 goal, I’m not interested. Why?  Because I don’t think it will be successful in achieving the non-monetary goals either in that case.  When I evaluate a project for potential investment, I will concentrate most of my decision on the money-making potential.  But I will need to convince myself that the project is set up so that non-monetary goals are structurally assured if the money flows.

#3  By “overly” and “naively” trusting the entrepreneur with my money, I know that I will be paid back manifold financially in the long run. Because by giving this trust so freely (once I am convinced of moral integrity) I am invoking powerful social influence factors that will make the entrepreneur feel like treating me more than fairly whenever they have any discretion in making decisions that affect me.  And by not boxing them in with rigid contractual obligations and manufactured incentive schemes, I am increasing the number of discretionary decision points the entrepreneur has.

If you are interested…

If you have actual experience as an entrepreneur or angel investor, I want to hear from you most of all.  Please comment below on what parts of the above resonate with you and what parts do not.

If you have put serious thought into becoming an entrepreneur or making an angel investment but have never done so, I want to hear from you as well, especially the reasons why you haven’t (there are no wrong reasons).

If you don’t fit any of these categories, please don’t respond, your opinion is not relevant.  I will update everyone on what ultimately transpires.

Related posts:

1. Investing in Superstars
2. Social Entrepreneurship Tax Credit
3. The Challenge