Project to watch:, microfinance to Haiti

Several organizations are making an impact in Haiti in innovative and powerful ways, notably CrisisCommons and Samasource. The latter's CEO Leila Chirayath Janah has a great blog profiling her training activities there and beyond to teach women and refugees how to perform dignified, digital work.

Add to the list, a microfinance organization in Haiti aiming to provide support to small and mid-sized businesses.

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Book Review: You are Not a Gadget by Jaron Lanier

The ascendant tribe is composed of the folks from the open culture/Creative Commons world, the Linux community, folks associated with the artificial intelligence approach to computer science, the web 2.0 people, the anticontext file sharers and remashers and a variety of others. Their capital is Silicon Valley...their favorite blogs include Boing Boing, TechCrunch, and Slashdot, and their embassy in the old country is Wired.

Thus Jaron Lanier describes the "cybernetic totalists" or "digital maoists" whose rising influence Lanier fears is leading us down a path of online culture where appreciation for humanity is displaced by blind trust in technology. In You are Not a Gadget Lanier laments recent trends in the online world - belief in the wisdom of crowds, reliance on algorithms for recommendations rather than people,  mashups and other piecemeal appropriation of others' content, templated web 2.0 designs - and argues that this failure to appreciate individual expression in the web world may have grave consequences for creativity and culture.

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Financial innovation that is necessary -- impact investing

Achieving a double bottom line - making financial gains while also contributing to social or environmental progress - is increasingly the objective of many institutions. Individuals are also interested in putting their money to good use financially in ways that they can feel good about morally, as evidenced in part by the rise of practices like peer to peer lending and microfinance.

But while institutions can make meaningful contributions, individuals are constrained by regulations that limit their impact.

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The Middle Man can be Good and Sometimes Essential

On this blog we often discuss new models that find creative ways to cut out the middle man and bring greater transparency to the customer. The benefits of disintermediation (coming about increasingly from the internet business models) are straightforward: lower prices for the customer, greater profits for the producer, and more transparency.

But are there negatives to disintermediation? And are there times when the middle man adds significant value? 

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An Interview with People Capital: P2P Lending for Education Finance

The limitations of the current credit risk modeling approach – the FICO score – are manifold, but nowhere are they more glaring than the complete inability of FICO to evaluate young people. A system based entirely on prior payment history discriminates against youth who are just entering the financial world. For students seeking to continue their education, and needing loans to get there, the consequences are severe – automatically labeling as a credit risk may shut them out of the private loan market and prevent them from attaining higher degrees, regardless of their potential.

Around this striking weakness of the current education finance market is where People Capital, a p2p student loan platform, is seeking to innovate.

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Perils of web taste personalization

Nice variations, but nothing particularly disruptiveI am exhausted of Amazon's recommendations to me. And I'm tired of hearing the same songs continuously on Pandora and seeing such similar music recommended to me by iTunes Genius. In short, taste personalization is feeling constrictive and extremely limited.

It wasn't always this way.

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Rethinking aid to Haiti : An argument for work

The outpouring of charity and aid to Haiti from official government efforts to citizen micro-donations via mobile phone to volunteer web developer Crisis Camps is a powerful testament to human care and outreach in the face of suffering. Recently though I heard a story that I found quite troubling: A friend recounted that his father's long-time business in Haiti is struggling mightily now that the US government response is in full swing. This would not be so shocking post-crisis, except two of this business's core products are buckets and paint, two goods in extreme demand in country right now. The problem? Not only are donated supplies flooding the market, but companies like Home Depot are allowed to mass import their products now tariff-free, significantly undercutting the local businesses.

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Doubling the p2p portfolio on Lending Club

Since I wrote recently (and critically) of the recent negative articles about p2p lending, I thought it was time to put my money where my mouth was, so tonight I doubled my Lending Club investment portfolio.


Of the initial $1,000 that I invested last month, $250 didn't clear (because loans either fund fully or not at all so if a borrower fails to attract enough investors, the lenders who initially pledged retain their money), so I began backfilling that portfolio. Then I used their investing tool to screen by a few filters - less than 3 defaults in the past 2 years, approved by Lending Club - and create a customized "moderate risk" portfolio. I scanned the 50 proposed notes and eliminated those that seemed particularly egregious. Like last time, "egregious" to me meant poor grammar, failure to answer investor questions, and bad business ideas, such as this gem:

I help executives with 15+ years of experience start their own businesses as solo Entrepreneurs, or "Solopreneurs". After streamlining the setup process and creating an "incubator" that has most of the systems already setup for them, I am now ready to deliver this service via the web using an interactive website. (Emphasis added)

I then filled in the gaps with handselected loans that met my most stringent criteria - verified income, no defaults in the last 2 years - plus an effort to get loans that will clear more quickly - notes that end in less than 7 days. My expected return, accounting for expected defaults, is just shy of 12%.

My standards are rather lower than I thought they would be. I suspect that if I actually knew these people, I wouldn't lend to the majority of them. Maybe I'm being elitist. The questions asked by the lenders also seemed particularly invasive, "e.g., what steps are you taking to ensure that you will not end up in this financial hole again?" I thought about signing up as a borrower as well to see the experience, but now realize that I would prefer not to be so examined by strangers myself.

Still, I'm really excited about my Lending Club investments. I've begun to receive my first deposits and I look forward to continuing to grow the portflio.


Web community of developer volunteers steps in to support USG and NGO efforts in Haiti

The evolution of CrisisCommons just over the past week or so is an amazing example of how much a distributed online community can produce when united behind a common cause. A quick glance at the site reveals 7 new projects in addition to the 11 on-going and released projects, all developed by hundreds of techies across 12 cities in less than 2 weeks.

CrisisCommons co-founder Noel Dickover explains:

"We are witnessing the development of a transformational change in how an average citizen can participate in the crisis response effort. Previously you could only send money.  Now, you can directly help in the response. An existing social network of national and international first responders, web 2.0 developers, and NGOs had been established, so the immediate response was just a matter of galvanizing existing relationships."

And to those who doubt the value to the Haiti relief effort of techies creating apps and other IT projects for the field: my Department of Defense client called me earlier this week looking for development assistance for a situational awareness capability that the DoD sought to implement in Haiti. I found Noel on Twitter, put him in touch with client, and now CrisisCommons has a top notch team of developers working directly on the project. This all happened within 2 days. I believe this process, created by Noel, Andrew Turner and the hundreds of CrisisCamp volunteers, is creating an entirely new value stream for relief efforts, delivering major impact.


Continued criticisms of p2p lending

A slew of articles criticizing the emerging p2p lending industry appeared this week, beginning with Mark Gimein's post at Slate's the Big Money, "You are Unlikely to Prosper". Felix Salmon soon after wrote "The Problem With Peer to Peer Lending" and then Techdirt followed with "Person to Person Lending Not Saving the Economy...Actually Looking Really, Really Bad".

The message of all of this coverage? That p2p lending is riskier than advertised, most lenders have lost money, adverse selection abounds, and really the whole venture is a failed innovation in finance. As usual in articles about p2p lending, the comments are full of testimonials from lenders about their terrible losses on and how p2p borrowers tend to be deadbeats.

If we were back in 2008, these criticisms would all be noteworthy. Prosper undeniably made terrible, risky gambles, produced misleading advertising, and failed to adequately screen borrowers in the early years. Investors are still reeling from those mistakes (see Fred93 who dropped $800K into the site), but why are we still focusing on earliest years and the losses incurred during the height of the credit crunch? This seemed like old news back in April.

By contrast, Lending Club (scarcely mentioned in these articles) launched with SEC approval, institutes stringent borrower requirements, and has a happy lender community (no hate blogs that I've found yet). Gartner predicts that p2p lending will increase by 66% over the next three years. It's 2010. Let's look forward and let the new crop of p2p lending companies learn from Prosper's early mistakes and do better.

Note: The best discussion forum to get a sense of p2p lender frustration is

Flickr credit: amalthy


Selling your personal equity: $300K now for 3% of your lifetime income

Three more high-achieving young people are taking themselves public in order to gain unrestricted cash infusions today. Kjersten Erickson, Saul Garlick, and Jon Gosier are the social entrepreneurs behind the Thrust Fund, an effort to raise money for each of their non-profit ventures by selling equity in themselves (rather than of course, their organizations). Like the earlier case we wrote about, Saul and John are valuing themselves at about $10M, asking for $300,000 today in exchange for 3% of their incomes for the rest of their lives. Kjersten is asking for $600,000 for 6% of her lifetime income.

This emerging and innovative model of selling personal equity raises a host of fascinating questions, likely most importantly, how to arrive at a valuation of an individual. The fact that all of the first movers in this space came to the same valuation of a round $10M makes the number seem a bit arbitrary. Perhaps the best example of a robust methodology to evaluate individual potential is that being used by People Capital, the peer-to-peer lending service for college loans that has created the Human Capital Index with MIT to determine loan terms for entering college freshmen. I don’t know what methodology the Thrust Fund used, but if this model takes off, over the long term it will be interesting to see how certain activities and characteristics can have a dollar figure attached to them. Exactly how much does that English degree from Harvard increase your personal value and how much more or less would you be worth to investors if you instead got an engineering degree from your local state university?

One of the main criticisms of this personal equity approach is that if investors were interested in your ideas or causes, then they should invest directly in them (where the value is more tangible) rather than in you (where valuation is so difficult). If a good methodology is developed, however, the personal investment might be even easier from the investor perspective. I believe that I can better evaluate the future success of the people that I know than the companies that they found. This approach may challenge the typical investor notion that talent, intelligence, and drive are not enough to determine the success of a venture, but there is probably a person out there who you know well and have full confidence that they will be extremely successful in the future. Even if his current project fails, that person is sure to come up with a killer concept later on. Better maybe to make the investment once and go along for the ride.

Which leads to my main problem with the Thrust Fund’s approach to this model: there is a conflation of the person and the project. Kjersten explains that she seeking to "mortgage her life in order to generate growth capital for her nonprofit organization". Besides being the height of work/life imbalance, this approach is not "investment in a person" but rather a donation to an organization with an independent promise from its leader. The $600,000 cash infusion is not an upfront investment in her to increase her earning potential later on. It may allow her non-profit to scale dramatically, but the investor is not sharing in that growth. It’s a creative way to raise money for a non-profit, but it doesn’t make much sense to me to send the entire investment into the working capital of a non-profit with no reason to suspect that act will make the individual heading it more valuable. These individuals are obviously all standouts in achievement and drive, but they are also committed to social causes, clearly not the path to high income. Saul writes, “"If we are given some freedom in the form of an upfront investment, who knows what we may go on to do. We may be working in non-profit space now, but a true entrepreneur never stops at his/her first enterprise. There will be others and it’s likely some will be for-profit." That would not be terribly reassuring to me as an investor.

By contrast, I have spoken with a young entrepreneur who says that he would likely take the deal because he figures the time that he would gain from being able to quit his day job now and focus full time on his startup will easily translate to a 3% income gain through the rest of his life. This calculation makes sense, much like a young aspiring lawyer accepting an investment to enable him to get an education necessary to making tons of money later on in life.

One thing that I do like is that the Trust Fund is sticking to a 1-to-1 model. The best implementation of this concept would seem to be a trusted mentor/mentee relationship. This is something that shouldn’t be crowdsourced, but rather a commitment by someone who believes in you and wants to make a concrete investment in your success. Which of course does raise the question of what the psychological pressure will be on Kjersten, Saul and Jon. Reciprocity is one of the strongest human instincts and these people signal a high degree of responsibility. How will entering into such an agreement impact your future life decisions? They are not required to provide a certain return of course, but will they feel a personal commitment to their investors? Does such an agreement make a person less likely to drop out of the workforce for a while to raise a family, for example? Maybe the buyout clause is the key to retaining a sufficient sense of freedom.

This is a bold move and I applaud all three of them for taking it. There is probably no greater signal they could send regarding their commitment to their respective organizations.


Mobile giving at its most compelling: text your donations to Haiti

Usually I write about the benefits of mobile payments in terms of the great convenience or the interesting social experiments, but today's tragedy in Haiti provides the most compelling use case so far: through mGive, you can immediately text your donations to relief organizations on the ground.

To donate $10 to Red Cross International Relief, simply text Haiti to 90999.

Flickr credit: Glasshalffull91


Using the social graph to facilitate higher trust interactions begins with the premise that the current commissioned sales model is broken and that your professional interactions  could be vastly improved if you stuck to people already trusted and vetted by your network. In fee-based service industries, the incentive for many salespeople is to extract excessively high margins on transactions and buyers too often do not have the savvy to know the fair price. In a market where people are often simply web searching to find a mortgage broker, financial planner, or accountant, "lemon" salespeople may continue to thrive unchecked by any review process that alerts new prospective clients to their poor behavior.

To confront this challenge, utilizes Facebook Connect to allow you to search for the service provider you need within the networks of your friends. Co-founder Nathan Labenz explained to me recently via e-mail: "By situating the sales processes in a social context and making reputation durable, we hope to create interactions that begin with trust and proceed quickly."

With Facebook as the platform, my main question was whether the main filtering value that the site offers is to signal trustworthiness of the seller rather than competence or if it could do both. After all, I like my friends on Facebook, but I usually wouldn't be able to speak much to their professional abilities, and I'm not "friends" with my insurance agent who I might want to recommend. Labenz had two answers for this: first, that they will be introducing a review and recommendation function to highlight competence; and second, and more interestingly, that they are deliberately targeting specific use cases where the competence is really secondary to providing a good deal. By this, I understand that he is arguing that in industries such as accounting and insurance, you can assume that all prospective providers in your network are baseline competent to help you with the paperwork, so the real question is how good of a deal you can get rather than can you get the *best* accountant out there. In that case, the signal may be the most important.

With Facebook Connect as the platform, the power of the site does seem to be a bit limited (I personally would be better able to recommend professionally via my LinkedIn or Twitter contacts), but does see the potential in mashing different networks or maybe Facebook will evolve to be less about friends and more about contacts. In many of these industries, however, trust is at a premium and I'm not aware of any mechanisms to find really already vetted providers besides, of course, asking your friends and family. takes that idea and makes it scale.

I'm intrigued by the use of social networks to bring better transparency to the sales market, potentially moving it to a new equilibrium where buyers get better deals, scrupulous salespeople get rewarded with more business, and lemons are shut out. was accepted into the Founder Institute incubator program last year, launched in October, and now has a serious funding commitment from a Silicon Valley investment firm.


On Second Thought, Hunch Revisited; Or, are preferences portable?

Addendum: Hugo has clarified our conversation, please read the comments.

Are preferences portable? Since my recent post about all the sites I love that track my tastes and make recommendations accordingly and my subsequent musing about the weakness of generic Q&A sites, I had the pleasure of a dinner conversation this weekend to shake all my thoughts up.

On the one hand, the former (sites like Pandora and Amazon) are niche and probably derive the power of their accuracy from that focus. The latter (sites like and Yahoo Answers) I found struggle to be all things to all people and fail in the process. I wondered: is it possible to combine the accuracy of niche sites with the breadth of generic sites? In other words, would bringing my finely honed Pandora music preferences over to Amazon help in their book recommendations which in turn could help with my Netflix movie recommendations? Over time with a successful universal ID that knows all my tastes, many decision engine questions could be rendered moot. Chief Scientist Hugo Liu was not so optimistic. His experience as a "taste researcher" suggests that preferences are not portable. Amazon "knowing" my music tastes, he suggests, has a neglible impact on the power of their book recommendations to me compared with their data on what people who bought my most recently purchased book also bought. I wonder, then, why Hunch tries so hard to "get to know" you to inform their recommendations on a wide variety of topics. Hugo has discovered some pretty interesting, and perhaps revealing, correlations from the Hunch data, for example, that people who like to dance regularly overwhelmingly seem to also prefer Macs over PCs. Curious, yes, but how much should this discovery impact their recommendations?

More surprisingly, Hugo questioned the value of web personalization at all and suggested that it could even be dangerous. On New York Times, for instance, I am pretty happy using the "Most Popular" box as my guide to the top stories. Do I need personalized "Just for You" results? What would happen if Google started filtering my search results according to what I would be most likely to like? Personalization comes at what price of objectivity?


Beyond traditional bank loans, specifically for small business

For small businesses with cash flow challenges, the current loan environment is difficult and sometimes non-existent. Because many proprieters start out putting business expenses on credit cards, their credit score suffers and that alone is enough to disqualify them from traditional bank loans. On Deck Capital, however, believes "that a small business with a healthy cash flow should be supported." They facilitate loans exclusively to small businesses and open up credit to many companies that were previously shut out because, "by reviewing business performance in addition to credit history, we extend loans to companies that we believe in, but may have been considered too risky by traditional lenders."

Their model offers several distinctions and innovations:

  • Loan approval based upon business performance (cash flow, credit card revenue, and payment behavior) in addition to credit score
  • Daily Direct Debit payments. On Deck Capital processes direct deposits to repay the loan rather than sending monthly notices. This approach is "proven to prevent the snowball effect often caused by missing larger monthly payments"
  • Short loan terms of either 6 or 12 months

Unlike p2p lending companies like Lending Club, On Deck Capital doesn't promise rates that beat the bank's. They acknowledge that traditional bank loans are generally the most favorable option, but also recognize that the credit score required makes such loans often inaccessible to small businesses. On Deck Capital's rates are in the "ballpark" of banks' but are priced higher to reflect that small business is risky and many small business owners have less-than-excellent credit. Still, they are clearly a better option (they claim 50% better) than putting business expenses on credit cards or turning to cash advances.

I'm intrigued by On Deck Capital's narrow focus on small business loans. Alternative financing options clearly are clearly needed for the small businesses that drive much of our country's growth, but I've been skeptical of the ability of p2p lending companies to fill that gap. In my personal experience as a lender on Lending Club, I steer clear of the small business loans because 1) they seem to be an excessively risky proposition, and 2) they are nominally "personal" loans that the borrower should be able to repay regardless of the success of the business, but that case is not made convincingly. I don't feel particularly comfortable judging small business loans and prefer to stick with the personal loans with attributes I know how to evaluate (debt to income ratio, credit score, etc). 

On Deck Capital is managed by people who know small business risks and can make the right evaluations based on a composite of attributes that form their patent-pending algorithm. With 223,000 transactions completed, totalling $45M in loans, they seem to be one of the few firms that is constructively helping small businesses cope with the credit crunch.