Investing
With the recent talk of reddit being cannibalized by bitcoin technology, I thought it a good time to post something I’ve been thinking about for a while. Could a completely decentralized startup one day rival the likes of Google, Facebook and Amazon?
Within the bitcoin world there’s a common understanding that the most valuable thing about bitcoin is not the monetary currency but the underlying “blockchain” technology that the bitcoin currency runs on. For those unfamiliar, you can check out three heavily-funded ventures creating infrastructure that would enable anyone to program applications on the blockchain that go way beyond monetary currencies: Ethereum,Swarm and Blockstream.
One such application is what’s known as a “Distributed Autonomous Organization,” which is an organization like a corporation, government or NGO, but which has no central leadership and uses internet technologies to organize and function. Examples of DAOs that you are familiar with include open-source software systems like Linux; terrorist organizations like Al Qaeda; communities like Anonymous; and …
Adjacent Possible, Agency, Alternative Institutions, Architecture, Computation, Crowdsourcing, Economics, Emergence, Incentives, Innovation, Investing, Markets, Politics, Socio-technical systems, Superorganism ,
My TED Talk on the Magic of Crowdfunding
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Adjacent Possible, Alternative Institutions, Cooperation, Crowdsourcing, Economics, Incentives, Investing, Markets, Scarcity / Abundance, Social Entrepreneurship, Social Networks, TED ,
In my last blog entry I talked about the perils and evils of debt for both the lender and debtor. Here I’d like to discuss an alternative which I believe could replace the entire concept of debt.
Revenue sharing, sometimes referred to revenue-based finance and income-contingent loans, is just recently starting to take off. The White House is making a big push for income-based repayment of student loans.* And at least two private (and highly capitalized) startups are launching soon to provide revenue-based financing options for individuals who agree to pay a portion of their future income in exchange for cash upfront.
With U.S. consumer debt topping $2.5 Trillion and student loans now totaling over $1 Trillion, it’s no wonder that there’s a lot of interest in revenue-based finance. Let’s look at several common debt scenarios and see how they could be different — and better for all parties — if they were based on revenue-sharing instead.
There are many ways to structure a revenue-share …
Alternative Institutions, Cooperation, Economics, Incentives, Interventions, Investing, Markets, Scarcity / Abundance, Social Capital, Trust ,
Prior to the mid-19th century, those who could not pay their debts were routinely tossed into prison. Actually, you can still go to debtor’s prison in Germany, Greece, China and Dubai. In the United States, two of the signatories to the Declaration of Independence (James Wilson and Robert Morris) were incarcerated for their unpaid debts. In theory, the U.S. abolished such practices in the 1830s. But six states still allow you to be arrested and detained indefinitely until you “work it out” with your creditors.
And while we humans seem to have a visceral negative reaction to welshers, our disdain for bad faith lenders goes deeper. Condemnation of usury dates back to the Vedic texts in ancient India, and is condemned as well in all the other major religious texts in the world. Islamic law (Sharia) prohibits the charging of interest at all, and considers the practice to be one of the seven heinous sins, right up there with murder and “unlawfully taking an orphan’s …
Alternative Institutions, Cooperation, Incentives, Investing, Scarcity / Abundance ,
Here are some things I used to believe:
- The power of the free market comes from competition
- If you are nice to someone, you will be rewarded commensurately
- A penny saved is a penny earned
- The more scarce something is the more valuable it is
I no longer believe these statements to be true. To understand why, I’d like to share a little of my journey as an entrepreneur and investor.
In the mid to late ’90s I was working on a startup and getting my feet wet as an angel investor in Silicon Valley. I, like everyone I knew, was an adherent of the Chicago School of Economics and the Efficient Market Hypothesis. One of the mantras of this religion is that
The invisible hand of the marketplace will feed us all, but we have to compete vigorously with one another for it to work its magic.
Signing a Non-Disclosure Agreement on a first date — that’s not just good business, but a moral …
Adjacent Possible, Alternative Institutions, Competition, Cooperation, Economics, Incentives, Investing, Invisible Etiology, Markets, Scarcity / Abundance, Social Capital, Social Entrepreneurship, TED, Trust ,
- Startups add an average of 3 million jobs in their first year, while older companies lose 1 million jobs annually. (ref)
- Without startups, job growth in the US would be negative 1.2 percent. (ref)
- Angel investments created 370,000 U.S. jobs in 2010, nearly half of the private sector jobs created that year. (ref)
- 265,400 individuals provided $20.1B in angel investment capital to a total of 61,900 entrepreneurial ventures in 2010. (ref)
- In contrast, the private equity industry invested $180B in 2010. (ref)
- Historically, angels invest $50B per year into 50,000 companies, representing 70% of capital for new ventures; 11 times more than the amount provided by Venture Capitalists. (ref)
- The long-term historical return of the U.S. Angel market is 27% annually, three times higher than the public stock market. (ref)
- Warren Buffett’s historical return is 24% annually. (ref)
- Venture Capital historical returns are around 20%, but over the
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Economics, Innovation, Investing, Markets ,
[NOTE: I updated this post with more detailed examples]
Background: part 3, part 2 and part 1.
In the interview with Jon Gunn in Part 3, I mention that I’ve been thinking of what “version 2” of the Personal Investment Contract might look like. Here’s the model:
- Investment Amount - Same as before, intended to give the individual some time to pursue their passion (or figure out what that is) without having to worry about how to support themselves.
- Maximum Return - The cumulative total amount that the investor can receive as return on their investment. If and when this amount is reached, the contract is over.
- Annual Exclusion - The amount of annual income the entrepreneur can make without having to share any of it with the investor.
- Minimum Revenue Share - The minimum percentage of gross income the entrepreneur returns to the investor after deducting the Annual Exclusion.
Following are some examples of various different career paths and uses for a …
Alternative Institutions, Cooperation, Happiness, Incentives, Innovation, Interventions, Investing, Psychology, Scarcity / Abundance, Social Capital, Social Entrepreneurship, Trust ,
For the background to this post, start with part 2 and part 1. The follow up is part 4.
I get a lot of questions from folks who are interested in learning more about Personal Investment Contracts and so I felt it was time to synthesize some of the most common ones and give you some answers.
Who is the first person you invested in?
A film maker named Jon Gunn.
What is your relationship with Jon outside of this investment?
He is my brother-in-law, and a former business partner of mine in an instructional DVD company we co-founded with Phil Gordon. I’ve also invested in a couple of his independent films.
Why did you invest in Jon directly?
I have been a big believer in his talent for a long time. None of the ventures I just mentioned though have made me any return on my investment. Phil had been suggesting for a while that if we simply invested directly in …
Alternative Institutions, Creativity, Happiness, Health, Incentives, Innovation, Interventions, Investing, Psychology, Scarcity / Abundance, Social Capital ,
When I was in Silicon Valley in the 90’s the joke was that you couldn’t go on a first date without having your love-interest sign a Non-Disclosure Agreement; after all, they might be working on a competitive venture.
These days when I’m hit with the “I’d love to talk to you about my startup, will you first sign this NDA?” my first reaction is to laugh in their face. I know instantly that they don’t get it and are doomed to failure. While the NDA may once have been a necessary tool, in today’s environment (and increasingly so) it’s a hinderance to ultimate business success. If you don’t get this, I’m not going to waste your time trying to convince you otherwise. You’ll either learn the hard way or prove me wrong. Either outcome is fine by me.
But if you do get it, and you also encounter this old-school naiveté, I invite you to do what I do, which is to thank the person …
Creativity, Culture, Innovation, Investing, Mutual Knowledge, Scarcity / Abundance, Social Capital, Trust ,
For the background to this post, start with part 1. The follow up is here: part 3, part 4.
In a subsequent post, I’ll talk about some lessons we’ve learned. In the mean time, what questions would you have, either as a prospective investor or investee in the above scenario?…
Alternative Institutions, Incentives, Investing, Psychology, Scarcity / Abundance, Social Capital, TED ,
I meet a lot of social entrepreneurs who are just starting out and have the following dilemma. They are full of energy and creativity, but they don’t have a single tangible project or venture yet that they feel they can commit to. What they need is the time and freedom to explore the possibilities, brainstorm with a community that believes in them, talk to everyone they can, and get practical experience working on cool projects that their friends are doing, without needing to draw a salary. What they is need some runway… the modern day equivalent of backpacking around Europe or joining the Peace Corps.
Here’s a quote from Kickstarter, one of my favorite platforms for accelerating possibilities:
Kickstarter is focused on creative ideas and ambitious endeavors. We’re a great way for artists, filmmakers, musicians, designers, writers, athletes, adventurers, illustrators, explorers, curators, promoters, performers, and others to bring their projects, events, and dreams to life.
Wouldn’t it be great if the creative …
Alternative Institutions, Autocatalysis, Crowdsourcing, Investing, Social Capital ,
Inspired by the X Prize, Y Combinator’s “Startup Ideas We’d Like to Fund” and Kickstarter, I am offering a $100K prize in three parts:
$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 …
Alternative Institutions, Crowdsourcing, Incentives, Innovation, Investing, Social Entrepreneurship ,
This is the first in a four part series. The other are here: part 2, part 3, part 4.
Imagine you are in your early twenties, out of college several years and your best friend, who recently came into an inheritance of $300K cash told you they could think of no better way to invest the money than to invest it in you. Not the company you started, not as a loan, but invest it in YOU, as if you were a startup. In return your friend said all they wanted was 3% of your gross income for the rest of your life. Do you think you would take it?
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, …
Alternative Institutions, Incentives, Innovation, Investing, Social Entrepreneurship, Trust Alternative Institutions, Incentives, Innovation, Investing, Social Entrepreneurship, Trust,