Broadband access furthers free markets and the United States is behind the curve

I spent the last two weeks in Estonia enjoying the free WiFi on my iPhone throughout the capital of Tallinn, including hotspots on the street to guarantee coverage literally everywhere. Finland last month already announced a 100 megabit per second broadband connection to be a legal right. Now today Techcrunch reports that Sweden has announced a new broadband strategy that promises that same level of connection to 90% of Swedish homes in the next decade (a much better policy than publishing personal tax data).

Northern Europe has it right. The internet opens up markets of opportunities -- from lending/borrowing to e-commerce -- to people otherwise left out of traditional systems. We've discussed online micro-employment opportunities, but the benefits extend to education, health, and the environment. The United States is falling way behind: Pre-arrival in Europe, I couldn't even access free WiFi in the first class Scandinavian Airlines lounge at Dulles Airport. Internet penetration in the United States is less than 75%. It's time to make access a priority.


Victors & Spoils – the First Ad Agency based on Crowdsourcing Principles

Thursday marked the launch of Victors & Spoils, the world’s first creative advertisement agency built on crowdsourcing principles.

The company is based on the idea that bringing together the leadership and management of an ad agency together with the diverse creativity of crowdsourcing can create a new business model that can change the industry.

The company is still figuring some things out.  The logo and branding for Victors and Spoils will be the first project to be outsourced.  The compensation for designers also seems to be a work in process.  However, the company’s founders have made it clear that they believe that all participants should be rewarded in some form for being a part of the creative process.  As they state in their blog, “members will not only be rewarded for the solutions they develop (both individually and as a group) but also for participating in the community itself.”

In a response to the controversy surrounding spec and to shed more light on compensation, Victors & Spoils explains in another post:

Now if you’re thinking that “crowdsourcing” has gotten a bit of a bad rap lately from the “No-Spec!” movement, you’re right. It has. And we believe those naysayers make some really great points. So another thing to know about our model is that each V&S project will always yield more than one winner (Victors), will always provide more than one way to “win,” and will always have some of the largest rewards in crowdsourcing (Spoils) attached to it.  And perhaps the most important thing to know about our model is that all of these ways to contribute and win will build each creative’s V&S Reputation Score (or better name TBD).”

It doesn’t seem that Victors & Spoils plans to set up their own crowdsourcing platform for the time, but instead leverage existing ones, such as CrowdSPRING, 99 Designs, and Genius Rocket. 

As the company continues to develop its operational process it will be interesting to see what develops.  Will it make more use of social networking principles to build the community that its founders envision? Will decision making be limited to the company managers?  Will it truly become a place where talent is developed, so that even if participants don’t win a prize they win a better chance at a job somewhere else in the long run? I believe that this new company has many opportunities to innovate a new model that truly uses the masses to create a better product.  A part of how successful it will be in doing so depends on how far it is able to limit the “sweepstakes” model.  But there is also room for adopting new and innovative tools and processes.  As the first of its kind, I look forward to following its development.


A venture capital alternative for early financing offered by LaunchCapital

Access to loans and funding for entrepreneurial small businesses is abysmal right now. Low access to credit at reasonable terms due to the financial crisis and limited action by venture capital firms are creating few opportunities for entrepreneurs to gain early funding for their ventures. Perhaps its due to regulatory challenges, but there has been surprisingly little innovation in financing such activities.

I've been interested by the possibility of p2p loans to help fill some of the gap, but as a personal loan maxing out at $25,000, this is an option really only for a small set of small businesses who already making money. Crowdfunding like they are doing at Trampoline Systems is perhaps even more exciting, but as I know from a nice lunch that I had with founder and CEO Charles Armstrong, the regulatory challenges took months to sort out and that was in the UK.

With this backdrop, the new offering of LaunchCapital is particularly welcome. The firm announced yesterday that they have launched a new small business opportunity that recognizes the current funding challenges and VC focus on hi tech and biotech, seeking to empower "main street" entrepreneurs. Through the past year of developing the product, they have come to three major insights that describe the businesses that they seek to serve:

  1. Main Street businesses are not interested in taking on expensive equity at the seed stage of their development
  2. Main Street entrepreneurs have little trust in venture capital
  3. Main Street entrepreneurs take on personal risks that are uniform regardless of industry or experience

Their product is a small business loan up to $150,000, with a small common equity ownership of less than 15%. I would be interested to know if entrepreneurs see this offering as an exciting new option.


Outrageous transparency: publicizing tax data in Norway

What could be worse for a society that upholds equality than to publicize in a searchable database the salary of every citizen? The Norwegian tax authorities have published to the media the full list of 2008 tax statements. Norwegians can now query a database to see how their salaries compare to those of their neighbors and kids can search to see whose parents are the richest (and poorest).

The New York Times writes: "Defenders of the system say it enhances transparency, deemed essential for an open democracy." Yet "transparency" is a curious term to describe the practice of making public information on citizens with no political ambitions or overt role in the political process. I call that a gross violation of privacy. I suspect that full knowledge of salaries will lead to more unequal treatment; it's human nature to treat people better or worse once you know if they make much more or much less than you.


For transparency...in government and p2p micro-lending at Kiva


Lawrence Lessig's article "Against Transparency" in The New Republic has sparked a lot of debate about the perils of going down the road of "naked transparency".  Lessig fears open data for government may end in citizen cynicism and withdrawal from the political process. Rather than being actually against transparency, he makes clear in his follow-on article and this interview that his real concern is that people will see transparency as the sole answer rather than the necessary combination of transparency + meaningful campaign finance reform.

I agree that transparency is not a panacea, but I believe he overstates the "perils" of open data. Take a look at the Sunlight Foundation's display of health care lobbyist contributions to Senator Max Baucus, author of the current main health care reform bill being debated in Congress. Will citizens reach "unwarranted conclusions" upon seeing the nearly half a million dollars Senator Baucus received from these lobbyists while he was shaping health care reform? It's a scandal that such a revelation does not lead his career to "be destroyed".

Of course, Prof. Lessig is in support of such thoughtful analyses and he is right to bring up the broader reform issues.  I believe we need more of the kind of transparency and analysis that the Sunlight Foundation has fostered, but the cynicism question raises an important point. One can imagine a scenario in which people are participating in a process that is ultimately good while ignorant of some of its messier internal mechanics. Should that process be made transparent at the risk of alienating the participants or is ignorance really bliss?

Take the case of Kiva. Yesterday the Harvard Businesss Review pointed out that the peer-to-peer lending platform tells a story that is not entirely true. A large part of Kiva's appeal for lenders is the implicit promise that your money goes directly to the needy entrepreneur of your choosing. In reality, the $25 that you donate on Kiva to Ndidi Bienose, for example, is routed through his sponsoring NGO, Lift Above Poverty Organization (LAPO). LAPO collects all lender money and in turn distributes it to their entrepreneurs. This is one reason for the unexpectedly high repayment rates of Kiva (~98%) -- individual losses can be easily disguised within a group under an NGO. Microplace uses the same model, but has always been straightforward about it.  Kiva, however, has been vastly more successful because of their more appealing, albeit untrue, story.

This unplanned transparency could turn into an example of what Lessig fears: that the exposing of the behind the scenes action will turn previously happy do-good Kiva lenders into cynics who now see P2P micro-lending as just as corrupt/misleading as the more traditional forms of aid that it hoped to supplant. Due to the attention problem that Lessig identifies, lenders will not take the time to learn that the end result of Kiva's and Microplace's approach is actually more effective and more efficient than direct peer-to-peer lending.

It's too soon to tell whether some Kiva lenders will be turned off enough by the revelation to stop participating, but I'm optimistic that the real Kiva story can be told effectively.  There is a powerful fact that Kiva can stand behind : Lending through a field partner is more reliable than direct lending and smooths the process for the benefit of the entrepreneur that the lender is hoping to help. The bottom line of Kiva remains the same -- to alleviate poverty through microloans -- and in the end, your money still goes to Ndidi Bienose. In Seth Godin's parlance, the P2P story is still authentic, even if it is not entirely true.

So is the new transparency in Kiva a good thing? A few lenders may be lost, yes, but the ones who remain will have full knowledge of the process and will no longer be duped. The strongest and most engaged communities are built on honesty. The same is true of government.

Flickr credit: bgblogging via Creative Commons, where I get all my photos and a concept for which I thank Lawrence Lessig for pioneeering


Collective intelligence at the Motley Fool to evaluate stocks

The Motley Fool, a financial services company and online investment community has a new service, CAPS, to find and evaluate the next big stocks. The site automatically screens for promising small-cap stocks and then publishes them on the site:

We'll tap the collective intelligence of our CAPS members to see whether these companies present real opportunities -- or whether the numbers fail to tell the true story.

CAPS members can then give the stock a 1 to 5 star rating based on their personal evaluations, presumably with the goal of sinking obvious-yet-less-promising companies and raising hidden gems. Here is the interface:

This service seems a bit superfluous. Since these are all publicly traded companies, I would think that the stock market is already pricing them to reflect their future value [and since real money is on the line, I would expect the real market to be more accurate and reliable than a 5 tier starring system]. But I will take the Hansonian* point of view that traders in this marketplace enjoy affiliating with the Motley Fool and trust that segment of the population to be wiser than the broader investing population.

*A philosophy, espoused by our friend Robin Hanson, that explains much of human behavior in terms of signaling and affiliation. See here.


An Interview with Lending Club: The future of P2P lending and what can be learned from microfinance

Lending Club, and the P2P lending movement more broadly, reached a major milestone this past week as the company attained its 25,000th investor.  In addition, they also issued more than $5mm in loans in September, presumably becoming the largest P2P Lending operation (based on monthly volume) worldwide.  After being the first peer lending facilitator to pursue and complete the path of SEC registration, thus insulating its investors and borrowers from regulatory upheaval, Lending Club is now boasting average return rates of 9.65%, after fees and defaults are taken into account, and an annualized default rate of only 3%. I had the pleasure of chatting recently with Rob Garcia, Senior Director of Product Strategy (on Twitter @RobGarciaSJ) about how Lending Club is doing and how they plan to take the concept mainstream as they approach their third year– including what they can learn from other P2P platforms like microfinance.

The connection between microfinance and P2P lending

With the obvious similarities in their core practices – P2P connection, community emphasis, cutting out traditional middlemen, simple and sound investments – I questioned what Lending Club felt that it had in common with microfinance platforms like Kiva.  At Transcapitalist, we have been criticized for drawing too close a connection between these sites, but Rob agrees that their essence is the same, “people lending to each other practically and directly to accomplish something that they wouldn’t otherwise be able to accomplish.” He notes, however, the major difference in their reach and application.

Unlike Kiva and other microfinance platforms, participating in Lending Club is only marginally driven by a sense of social good.  P2P lending in the United States is measured like most financial investments: by rate of return. The fabulous success and reach of Kiva, however, still offers some major lessons to the domestic P2P lending industry about how to make an innovative financial product appeal to a mainstream audience.

Rob also mentioned the differences between borrowers.  At Kiva, loan recipients are typically unbanked or underserved entrepreneurs around the world, whereas Lending Club’s borrowers are those with excellent credit in the US looking for a better rate, and an easy yet confidential loan process. 

Is P2P lending right for small business?

In contrast to the microfinance focus on entrepreneurs, most of Lending Club’s loans deal with current debt obligations, like paying off a credit card.  Some experts think that P2P lending will never take off for American small business owners since the barrier to entry is so high that most aspiring entrepreneurs who can pass through all of the other hurdles can also qualify for a bank loan. Small business loans are actually declining as a portion of total loans made through the site, from 20-25% at Lending Club’s launch 2.5 years ago, to 15-20% today.  Rob said this is most likely due to the current economic environment that makes entrepreneurship more difficult in general, but also to Lending Club’s adjustments to their credit policy since they opened.  

Lending Club, however, believes that there is a strong place for small business loans in the P2P lending framework and Rob suggests that the movement towards loans for credit card consolidation is largely a product of the current credit crunch. He offers two types of businessmen who could benefit from a small, relatively short-term loan: small business owners experiencing an upward cyclical phase and entrepreneurs with a new and innovative idea.

The former can probably get a loan from the bank, but with business lines of credit so expensive, a P2P loan may be a more cost-effective solution. The latter, Rob believes would probably actually struggle to get a traditional bank loan. The benefit for this type of borrower is that credit risk is evaluated according to personal ability to repay rather than more stringent small business loan requirements, meaning that borrower should be able to repay the loan regardless of the success of his product. For high credit individuals, it is thus easier to attain an unsecured, personal loan of up to $25,000 – the Lending Club product – than a bank business loan.  Rob offers Lending Club as an easier, cheaper and crowd sourced way to get an innovative idea off the ground, helping entrepreneurs avoid the typical trap of putting start-up costs on their personal credit cards.

Taking P2P lending mainstream

Given Lending Club’s success and growth, I inquired whether the company was considering applying the P2P lending concept to other products like micro-investing or crowdfunding, but Lending Club seems to first be committed to the success of their current product first, saving product expansion plans for when the right time comes. As P2P lending shows signs of going mainstream, Rob fears that adding any new product will just make it more confusing and is instead looking to first build a track record. The 9.65% return rate is helping to convince skeptics that the power of the platform is real and here to stay.

Lending Club is expecting the tipping point to be at their three year point, only a few months from now. They are already seeing  a rapid increase in deposits in the platform with average initial deposits growing from $100- $500 at launch to over $1,000 this past year, which Rob sees as evidence that “there has been a clear shift in trust.” Now that the story is sinking in on the investment side, the company is focusing on finding good borrowers, as they accept only a small fraction of those seeking loans. This commitment to quality has shown clear results: Lending Club’s initial screening plus the lending community’s judgment of the credit risk of individuals has so effectively evaluated risk that the site has only a 3% annualized default rate.

Rob identified Lending Club’s three current areas of focus that would help them increase P2P lending mainstream reach:  keeping their operations efficient, evolving the product to address people’s initial concerns  to adopt a new product, and making profile browsing and investing more efficient to allow the concept to better scale.

One limitation of a 25 person company with low operational expenses is that there is a very small marketing budget that simply can’t compare to traditional banking advertising. Lending Club has strong social media presence, which can only go so far.

The second hurdle is one of adoption. The normal cycle of any new product is to go through a phase of skepticism and Lending Club has seen this doubt manifest itself with accusations of being like a Madoff Ponzi scheme. Rob believes that phase is dying down now that the initial community that has tried it and succeeded.  I would counter that the big test remains the three year point, when the initial cadre of loans come full term.  With that said, many Lending Club investors are pleased with their loans’ performance thus far.

Finally, single profile browsing can be a laborious process. The only responsible way to lend on Lending Club is to diversify your investments, but with larger amounts of money, browsing and evaluating a sufficient number of investment options is no small task. Pertuity Direct attempted to confront this problem by eliminating profiles entirely, but this was probably a step too far at the time and created confusion about what exactly the term “social lending” meant. Lending Club is pursuing a less severe course. Rob disclosed that Lending Club is preparing to release a new investment UI to make it easier to invest large sums of money without needing to browse profiles individually, instead letting investors choose advanced credit and social filtering criteria to help assemble a diversified portfolio.  Rob recognizes that people are used to going to the bank and opening a CD without needing to look at it for 6 months, so while browsing is part of the core P2P lending concept, they need to find new ways to make it easier and give investors just enough control.

Moving forward, Lending Club is clearly betting on a growing place for P2P lending. Even as the credit crunch subsides, it is still unclear whether/when credit card rates will fall. Traditional banks will probably have a hard time cutting into their spread to offer  rates closer to the ones offered by Lending Club (as low as 7.89% APR) because in the end, credit cards are still an intermediary that needs a spread to account for a 10% default rate. By nearly eliminating that spread and operating leanly, P2P lending will continue to be a competitive product for both borrowers and investors.


Mobile Payments for E-commerce and P2P Lending -- Cut out the bank

One of the most exciting trends in banking and commerce is the rise of mobile payments. The effectiveness of mobile payment solutions, where individuals can purchase items directly through their cell phones without needing to go through a bank, is well-established in Africa where it has helped bring millions of unbanked citizens into the formal economy.

The United States is now getting in on the action. A few days ago, Amazon announced its new Mobile Payments Service, a one-click payment option to purchase items without needing to enter in any additional payment or shipping information. Boku launched earlier this year and facilitates micro-payments, especially for virtual goods for games like Mafia Wars, through cell phones.

Other notable examples:

  • Absa, a South African bank, just won the award for "Most Innovative Bank in Africa" for its cutting-edge services including Cash-Send, a card-free banking solution, as well as banking the disabled.
  • Splash Cash is beginning supplant Western Union as the preferred method of transfering funds between individuals in Sierra Leone. Customers can purchase credits on their phone and transfer money directly to another phone without ever touching a bank. And with a fee of only $4 for a $300 transfer and the ability to cost-effectively (only 16 cents) transfer sums as low as $1.50, the price gouging of Western Union may become obsolete.
  • We've covered earlier MGive, which lets lets you text money immediately to your favorite non-profits.

Finally, MoneyAuction, a Korean P2P lending company is now allowing borrowers and lenders to seek and bid on loans directly from cell phones. This seems like a great direction for U.S.-based p2p lenders to take. The infrastructure isn't quite there yet to support it, but with their emphasis on cutting out the bank, p2p lending companies could take the concept one step further by enabling mobile loan payments and lending.

Flickr credit: Lorianne DiSabato


Explosive technology growth is critical to the future of the U.S. economy

What if the singularity does not happen?

Peter Thiel -- co-founder of PayPal, early investor in Facebook, and current venture capitalist -- posed this question this weekend to attendees of the Singularity Summit, a conference that brought together some of the most forward-thinking technologists, futurists, and venture capitalists to explore the impact of technology on society.

The singularity can be interpreted as many things, but using the definition of Ray Kurzweil, it is a rapid and profound technological change that is irreversibly transformative. Kurzweil is known for his identification of exponential growth in technology, dating well before Moore's law, as in the diagram below, when Moore's law is seen as the fifth manifestation of this phenomenon. Source: kurwzeilai.net.

Continuing on this exponential path means that we should reach the singularity in this lifetime.

So what is Peter's conclusion if this doesn't happen?

Our expectations for constant growth that enable our credit-based economy to work will need to be seriously re-adjusted. This leaves us with two options: start saving a lot more (~40%) or work to ensure that we develop the technologies that will enable us to continue to grow. We'll probably need to do both.

In this interpretation, advancing technology IS the key to the economy. While on a panel with famous NYC-based VCs Mark Gorenberg and David Rose, Peter raised the question of whether maybe it is time to scale back on VC, given that most VC firms have not made money in the last 11 years. Maybe the 5% of his portfolio that Mark currently allocates to VC should be more like 2, 3, or 4%. The consensus of the panel, however, was that in the long run, if that 5% fails, then the 95% left is hopeless as well. It's the 5% investment in cutting edge technologies that will bring us to the next level and if we don't get there, then all growth will slump.

So who is most likely to power this growth? Peter was clear that it's not the so-called "technology companies" of Microsoft, IBM, and HP (he was far more positive about Intel). These firms are actually more like banks in that they are betting on no innovation in technology and would instead best succeed under the status quo. Peter is the primary donor to the Singularity Institute, who researches transformative technologies and ther impacts, and he also prefers to invest in companies that won't make money "for a long, long time." When you're the co-founder of PayPal, you can afford to do that.

Technology thus does not only further open and free markets, as Transcapitalist advocates, rather it is the critical input to the market's success.


Bet on your star economist to win the Nobel (Predictor) Prize

Too bad the pool is being adjudicated via snail mail. For we econ nerds, it would have been interesting to watch the dynamics of the market.

From Harvard University:

On Monday, October 12 the Swedes will announce the winner of the Nobel Prize in Economics.  While only some of you may hope to win this honor, all of you may hope to win a prize no less famous: the Nobel (Predictor) Prize.

HOW TO ENTER: Nominate who you think will win the 2009 Memorial Prize in Economics. Each name that you enter costs $1. You can also guess that no entrant will correctly guess the recipient(s). You can enter as many times for as many names you’d like.

To enter, simply input your details into the form here. You’ll need to write the name of each predicted recipient and the number of bets (dollars) you’re putting towards him or her. If you want to bet that no one will guess correctly just write “No Correct Guess” in one of the names. And no funny stuff—your bets will be disqualified and given to charity as per our unappealable discretion. Once you’re done with your entries, mail the sum of your bets IN CASH to

Tristan Reed, Littauer Center, Harvard University,

1875 Cambridge St, Cambridge MA 02138

We will post who the most popular choices are here on Sunday October 11.

RULES: Entries must be RECEIVED BEFORE 11:59 PM EST ON SATURDAY, OCTOBER 10. PAYMENTS MUST BE POSTMARKED NO LATER THAN THE SAME DATE. Economists in the Cambridge area can, if they prefer, place their entries and payments in Tristan Reed’s mailbox on the second floor of the Littauer Center. We are not responsible for missing cash under any circumstances.

All money collected will be divided between the winners of the pool. If there is one recipient of the prize, the payout will be divided among all those entrants who guessed correctly, with each of those correct guessers receiving a share in proportion to her/his share of the total number of bets placed on the prize recipient. If no one guesses correctly, the votes will be divided in the same fashion among those who entered "No Correct Guess." If there are n>1 recipients, exactly 1/n of the payout will be allocated to each and distributed as per the rules for one recipient.

This contest is open to any and all economists who wish to participate; please share with your friends, and good luck!

Tom Gole, Alex Peysakhovich, and Tristan Reed

2009 Pool Coordinators


Kickstarter is the epitome of awesomeness

22 hours to go to contribute to the development of "Put This on: A Web Video Pilot About Dressing Like a Grownup," a project crowdsourcing its financing on Kickstarter.  The project is already 264% funded and it's easy to see why.

Donations can be as small as $2 (with the reward of a warm and fuzzy feeling) to $50 (to receive funding credit in the video) to $250 (earning a personal style consultation with the project's creator), and beyond. No one has taken up the $250 offer, although it is creative rewards like that that make this site so fun to browse.

Contribute to an artist's dream project + concretely share in the experience. So cool.


Continuing the lobbying for micro, or bringing sense to the Consumer Product Safety Improvement Act

Micro businesses, like micro-lending and micro-finance, offer vitality and depth to our economy. Regulation, allegedly to protect the consumer, has dogged all of these industries. I wrote a while back about the threat of regulation to, of all things, small batch children's toys makers : the Consumer Product Safety Improvement Act (CPSIA) was passed hastily in response to the lead-in-Chinese-toys fiasco, mandating stringent testing procedures to prevent such a reoccurence. Savvy analysts noted that the most immediate result would be that small toy producers unable to afford such commercial testing would be forced out of business, leaving behind only the mega-toy companies (ironically, in China) to compete.

Etsy has been a vocal and important advocate for the handmade toy community. Small crafting community organizations have scored minor wins, such as exempting fabric from the law, as well as losses, such as failing to convince the commision to exempt rhinestones. A guest Etsy post from the Handmade Toy Alliance spells out well the challenges of this piecemeal approach. Artists are now fighting for their livelihood rather than focusing on creating the original and valuable pieces that so many consumers love and prefer.

This is what Umair Haque terms unconstructive capitalism -- government regulations are squashing vitality and p2p connections that people love, instead favoring the big toy companies or the big banks that can meet the requirements. I would trust a handmade toy from Etsy over a Chinese manufactured toy from Mattell any day: the engaged Etsy community is a stronger enforcement mechanism than the threat of government recall.

Flickr credit: Merwing


Taking the prize model to government: innovation, taxpayer savings, greening

Following the model of the Netflix Prize (winners officially announced this past week), the Department of Energy has its own L Prize: $10 million and consideration for future federal purchasing agreements in exchange for inventing a bulb that produces the same amount of light and color of a 60 watt bulb while using only 10 watts of power.  For the government procurement business, known for waste, contractor relationships, and stringent statements of work that hamper creativity, this type of open call for innovation by industry at a total bargain to the government is a welcome approach.

Like Netflix, DoE is implementing a goal-oriented program. Netflix told its participants that it wanted a 10% improvement in its recommendation engine; it did not say how that target should be reached. Similarly, DoE has laid out clear metrics on what the bulbs should be able to achieve, noting the ultimate goal that replacing 60 watt incandescent bulbs in the United States with their LED equivalents as described by the Department would cut carbon emissions by 5.6 metric tons annually; it did not provide the interim benchmarks and deliverables standard in government contracts.

Which gets to a major take-away: By freeing itself from traditional government contracting procedures, DoE has been able to incentivize massive research and development at private companies at a great cost savings to the government. Phillips has already submitted the first entry that is currently undergoing testing in the Department, while other companies are said to also be developing their own alternatives. DoE is also shaking up the lighting industry that has seen very little innovation since the 19th century when the incandescent lightbulb was first invented, by targeting the ubiquitous bulb that has nearly 50% market share in this country. An industry that wasn’t really taking energy efficiency seriously is now encouraged to pay attention. It’s the best type of government intervention: nudging through incentivizing rather than new standards that just pass additional costs onto consumers.

Of course, the prize model has its drawbacks. Just as The Ensemble in the Netflix contest found out upon submitting a winning product 10 minutes after BelKor’s Programmatic Chaos, there is no reward for second place. Three years and thousands of hours of work in this case lead to $0. It’s similar to the critique made of many creative design crowdsourcing sites – participating in prize competitions is inherently risky. Maybe there is a bit of glory in making it to spots 2 or 3, but in most cases, that is not worth the effort expended. When small designers are the ones slaving away in this high risk environment, it’s hard not to feel that something isn’t quite right. However, when huge industry behemoths that have resisted innovation for years are competing for lucrative government contracts, the drawback of this model – a first place winner-take-all outcome – seems to be greatly outweighed by the benefits – fostered innovation, taxpayer savings, and greening.


As Credit Card Rates Increase so does the Potential for P2P Lending 

A recent article in the Washington Post sheds insightful evidence that P2P lending may rapidly scale in the coming years.  What drives its potential for growth?  High rates on credit card debt. 

The article highlights several interesting facts:

  • Industry experts predict a twenty-fold increase in the amount of money lent via peer-to-peer lending sites from close to $282 million in 2006, to possibly $5.8 billion by 2010.
  • P2P officials state that increased traffic is due to increased credit card rates; about 50 percent of Prosper's loans goes to borrowers trying to consolidate credit card debt.
  • Credit card companies are increasing rates more aggressively now in part because of a new law that is expected to take effect in February, after which it will be difficult to increase rates.  
  • Credit card debt today can have interest of up to 20 percent and take more than 20 years to pay off.  Meanwhile, peer-to-peer loans generally have half the rates and are generally required to be paid off in three years.
  • Investors are also gaining—the rate of return is 12-13 percent and the average amount invested is $6,000 (diversified across many borrowers).

We have yet to see what will happen when 2010 comes and most P2P borrowers reach the end of their three-year loan term (most began borrowing in 2006).  Nevertheless, the numbers in this article speak to the fact that peer-to-peer lending is filling a growing demand and it appears that it may soon cross the chasm from a model for a minority niche to one that serves a more general population.  If it is able to do so, peer to peer lending could permanently establish itself as a genuine competitor to traditional banks and credit card companies. 


Unilever Testing the Value of Crowdsourcing

As the heated debate surrounding crowdsourcing in design and marketing rages on, another big name has decided to turn to the crowds for some help in branding.  Unilever, one of the world’s largest fast-moving consumer product companies, recently decided to offer a $10,000 reward on Idea Bounty for the winner of a competition to advertise Peperami, the company’s popular meat snack for children. 

Unilever owns more than 400 brands, including those pictured to the right.

Idea Bounty is a new crowdsourcing platform for designers and despite being less than a year old, it has attracted big names such as Redbull, BMW, and World Wildlife Fund.

Unilever claims this is not a publicity stunt.  In fact  the company believes that crowdsourcing marketing ideas might be a sustainable strategy they would be willing to consider for their other brands as well. The Peperami competition seems to be in some ways their pilot to test the value of crowdsourcing. Unilever’s Matt Burgess, (Managing Director of the division that owns Peperami) indicates that the company sees potential in creative platforms: "We want to get the creative back from 'good' to 'outstanding' again. The best way to increase our chances was to increase the amount of creatives exposed to this brief. This is the overriding driver."

Putting aside the debate about sites such as Idea Bounty or 99 Designs, it is interesting to see Unilever step into this space in such a strong manner.  Unilever is a company that is willing to take risks in the name of innovating ways to stay ahead of its completion.  One example is its Shakti program in India. By partnering with self-help groups it enables rural, poor entrepreneurial women to take on microcredit and purchase consumer goods from small retailers that they can then sell door-to-door and earn income. After several years, some pilots, and alterations, the program broke even, scaled rapidly, and increased revenues by cutting costs, reaching new clientele, and leveraging (while also supporting) local microenterprises to better market its products.   Could Unilver’s decision to crowdsource mark another such attempt to stay ahead of the competition? And if such an attempt is a success, what could it mean for sites like 99 Designs and Idea Bounty?

The truth is that companies like Unilever are not the typical “clients” one might expect at crowdsourcing sites.  Their entry into this field may mark a transformation for creative platforms, (from platforms generally catering to the small guys to ones that have real value for companies earning annual revenues in the billions) and it will be interesting to see the implications of such a transformation.

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