Entries in capitalism (4)

Wednesday
Dec082010

The Transcapitalist swan song: a summary of two years exploring the technology & free markets intersection

After 177 posts spanning nearly two years, Transcapitalist is going into hibernation. I have loved writing here, most of all for the opportunities to meet other people who think like me (and those who didn’t and told me why). Highlights of the experience were co-hosting Tap the Collective with Inkling Markets, participating in Ignite DC and Ignite Baltimore with my talk Web Capitalism Doesn’t Need a Bailout (a summary of the Transcapitalist philosophy), and having the opportunity to interview people at many of the companies that I most admire.

When I got started, there were three emerging constructs that really excited me: social lending, peer-to-peer e-commerce, and prediction markets.  As this was late 2008 at the height of anti-market fervor in DC, what struck me about these platforms was that they were essentially distributed marketplaces, largely self-policing, transparent, efficient, community-driven, and enabled by the internet. At a time when much of the political rhetoric focused on how the market had failed, these seemed to be constructs that offered a purer and non-exploitative example of how market capitalism could and should work. Transcapitalist began with this idea – to explore the intersection of technology and free markets – with the presumption that the former had the potential to transform the latter and for the better.

My viewpoint evolved through the course of writing here and discussions with others, but I still think that web capitalism has a lot to offer our traditional view of market dynamics. I’ve summarized my thinking on these topics below, linking heavily to previous posts with more detailed coverage.

In the face of tightened financial conditions, new investing and borrowing mechanisms are emerging ranging from the “personal IPO” to crowdfunding. Peer-to-peer lending remains a viable alternative to banks for both borrowing and lending at small scales with better rates for both sides of the transaction.

Largely in response to the credit crunch and the restrictions of the current financial marketplace, interesting financial innovations emerged over the past few years. We were particularly intrigued by the new concept of selling a percentage of your future income in exchange for a cash investment up front, which I referred to alternatively as the Personal IPO, or “taking yourself public” or “selling your personal equity”.

Another emerging construct which holds promise is crowdfunding. We came out early with enthusiasm for Kickstarter, a platform to match creators and artists with funding through, and we’ve been thrilled to see it take off ever since. The first real example at scale was set by Trampoline which sough to crowdsource its Series B funding. We loved the trend for mobile payments like Square for merchants and Venmo for repaying friends. More troubling financial innovation is on display at eToro which aims to create a “Zynga for real men” in the world of foreign exchange trading.

However the most prominent innovation is in p2p lending which experienced great change over the past two years as they sought to create an entirely new financial product and asset class. The original innovators Lending Club and Prosper Marketplace made it successfully through the SEC process (which at the time was far from certain as Prosper alternatively opened and closed), while promising privacy-focused hybrid upstart Pertuity Direct folded.  What began as a platform to browse individual profiles prone to adverse selection is now a more scalable steamlined dashboard experience to select target characteristics from vetted borrowers in order to create a custom portfolio. Since opening my Lending Club account, my discussions with their team and continuing healthy returns (~10%) encouraged me to expand my portfolio, and I plan to keep up my investments there for some time to come. The appeal of p2p lending is that it is simple and commonsense: by cutting out the middleman of the bank and lending directly, investors earn better returns and borrowers pay lower rates. Why give that spread to the bank? However, even with high interest rates and the credit crunch, p2p lending has not gone mainstream. Uncrunch America was an effort by a coalition of non-traditional finance platforms to encourage people to look beyond the bank, but it’s not clear that the message was heard.

More niche markets also emerged to mixed results. Yadyap (“payday” spelled backwards), which aims to provide an alternative to the payday lending market, has yet to get off the ground.  On the other hand, People Capital has secured significant financing and during my interview with them, they impressed me greatly with their concept of a Human Capital Index to replace the FICO as the credit evaluation metric for young people. Unithrive seeks to connect Harvard students with alumni who can provide interest-free loans. Vittana targets helping students in the developing world.

Internationally, internet-enabled market-based practices are introducing new concepts to traditional international development approaches.

Muhammed Yunus, godfather of the microfinance movement, pointed out that Grameen Bank’s microfinance investments performed steadily through the financial downturn where other lending arrangements failed and could be a means to “return the economy to health”. I keep a small amount of money with MicroPlace, interest-bearing investments in microfinance institutions in Nicaragua and Uzbekistan, which each send me $0.50 or so every month.

In China, p2p lending is a nascent movement, as  CreditEase offers a p2p lending platform to institutionalize informal lending practices, and Qifang employs clever cultural pressures for repayment, including posting the pictures of family members to shame defaulting customers.

I greatly admire Acumen Fund’s approach to international development, which seeks to invest in targeted local ventures, providing an example of a free market solution providing social good. And one of the top startups of the past couple of years is socially responsible outsourcing nonprofit Samasource which encourages you to “give work” through paying the poor to do online tasks.

New e-commerce platforms have the potential to cut out the middleman to directly connect small-scale sellers and buyers, but many remain in the realm of gimmick.

Etsy remains one of the most amazing and promising sites on the web. A destination for handmade goods which defied the odds to become the fastest growing e-commerce site, I covered it a full 20 times. It’s a prime example of an open marketplace, from its open API to the Community Council that brings the buyer and seller community together to talk about the future of Etsy, and it serves the artisan community well. Its blog encouraged me to join the outcry against the Consumer Product Safety Improvement Act, and I argued that the community-enforced handmade standards of the Etsy community were an approach to support, not smother with regulation.

I was an early fan of Groupon with absolutely no idea of how huge it would become just a year and half later, but my opinion now is considerably tempered. Also out there with innovative selling platforms are  the cleverness of Gilt Groupe and the fast purchase decisions made through online sample sales, the scam-like approach of Swoopo, and gaming travel deals on Off and Away.

Crowdsourcing is opening up problems sets previously thought as being too complex for non-“professionals” resulting in more efficient and open approaches.

Netflix set the model for challenge competitions as it successfully crowdsourced the improvement of its recommendation algorithm, setting off a trend within government to procure technology and approaches through contests, saving taxpayer dollars.  Other crowdsourcing projects we enjoyed included:

However, when I was ambivalent about its application in crowdsourced design sites such as 99 Designs, I received an unexpected outpouring of support from the design community and a simultaneous beatingon HackerNews by those who believed that this was simply a more efficient marketplace. I was less sympathetic to the artists’ cause when they rallied against the Australian government’s decision to seek citizen photos for its website rather than professionals’.

I was generally unimpressed with crowdsourced Q&A sites like Yahoo Answers, Mahalo, and Aardvark; however, Quora seems to be on to something.

Crowdsourcing was also applied in dumb, troubling, or useless ways, including:

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And finally, the two posts that didn’t fit into any clear bucket, but which were the two most read and commented upon posts on Transcapitalist …

After the first release of classified documents, I came out strongly against Wikileaks with “How Wikileaks threatens transparency”, arguing that its actions threatened transparency where it really mattered: between government agencies. All commenters both on my site and on HackerNews disagreed strongly, but I still stand fully behind my original opinion: with the latest release, we see exactly the closing down of information channels that I feared.

Markets at Burning Man” explored my personal experience of the gift economy on the playa and the contrast of the commercialism that is in the outside world before and after the event. The post started a fascinating thread on HackerNews by fellow Burners and Burning Man novices alike.

Thanks for reading and keep in touch.

Melody & Anita

 

Sunday
Aug022009

Why web capitalism matters

When a community of crafters passionate about "all things handmade" becomes the fastest growing selling side on the web, it is worth paying attention. In March 2008, Etsy faciliated $1.6M in sales in March 2008; by March 2009, that number was $12M. How did this niche marketplace become so hot and so beloved? When retail sales fell across the board over that period, how did Etsy record an 8 fold increase in monthly sales?

My take is that Etsy is creating value for both buyer and seller. Buyers get unique items that are sustainably produced and sellers generate direct income from their own creativity and drive. It's what Umair Haque would term : "thick value".

Similarly, when (mostly) Americans are choosing to send over $1M/week in loans to poor aspiring entrepreneurs around the world, usually in $25 or $50 incremements, something powerful is afoot. That level of lending is seen on Kiva alone. What is inspiring so many people to join the Kiva lending community?

Source: Kivalytics (a third party app)

I think that people are excited to get behind individuals who are seeking to build value through their own determination and hard work. Lenders are disillusioned by corrupt governments receiving aid but are inspired by stories of entrepreneurs creating organic growth in their countries. And many people fundamentally believe in the power of capitalism -- when properly done -- to best drive communities out of poverty.

Etsy and Kiva are among a number of value-driving online marketplaces that we've seen launch in the past several years that indicate real alternatives to the greed, recklessness, and imaginary profits currently associated with capitalism. Here are some of my favorites:

  • Samasource -- training marginalized people to perform basic internet-based tasks and connecting them with technology companies in need of those services -- "give work, not aid" (see more here)
  • Kickstarter -- providing a mechanism for creative people to fund their projects (see more here)
  • People Capital -- innovating an alternative rating mechanism to FICO for students, thus facilitating social lending for education financing (see more here)
  • Acumen Fund -- integrating investment banking approaches to international development (see more here)
  • Prosper Marketplace -- online auction market for p2p loans
  • Lending Club -- online financial community facilitating p2p loans
  • Lend for Peace -- connecting lenders to Palestinian borrowers (see more here)
  • Pertuity Direct -- providing alternative investment and borrowing opportunities by facilitating and bundling prime loans (see more here)

These sites matter because they are creating value and driving growth. They are building communities. They are enabling individuals to make meaningful contributions -- even if they are small. They operate transparently so people can make decisions confidently. They encourage creativity. They support entrepreneurship.

Saturday
May162009

Trends point towards increased regulation of high tech success 

Earlier this week, EU regulators levied a record $1.45 billion fine on Intel for anticompetitive practices. Through a suit brought by main competitor AMD, the commission found that rebate conditions and predatory pricing schemes violated anti-trust laws.

This exorbitant fine is bad news for the Intel, but even worse news for consumers. In the current down economy, Intel is a bright light of innovation and success that has not only revolutionized the computing industry but provided a massive engine of job growth. According to the Association for Competitive Technology:

For the past 20 years, the microprocessor industry has delivered more innovation, more speed, more functionality, and lower prices...Over the past 10 years, the average price of Intel's PC microprocessors has dropped by 60 percent. When the only one complaining about the competitive situation is AMD, it raises serious concerns about the efficacy of this action.”

This aggressive action against a company that is currently resilient enough to actually have the cash on hand to pay the fine (CEO Paul Otelinni announced two days ago that Intel has a healthy $10 billion cash balance) may be a harbinger of increased regulatory activity this side of the Atlantic.

Indeed, Ms. Christine Varney, the new commissioner of the Justice Department's antitrust division is scheduled to make a speech on Monday at the Center for American Progress outlining her intent to revive antitrust actions. Technology is one of the industries specifically expected to be targeted.

The question is: Why are governments going after high tech?

From Chairman Craig Barrett:

"The antitrust rules and regulations seem designed for a different era. When you look at high-tech companies, with the high R&D budgets, specialization and market creation they need to hold their big market shares, it's so very different from the old world of oil companies and auto makers that the antitrust regulations were designed for. They are out of sync with reality."

So the EU and American regulators are going to go after Intel (and TechCrunch predicts Google is next) where the vitality and money can be found, while propping up moribund industries like cars and encouraging massive consolidation in finance. How is this a recipe for innovation and growth?

Tuesday
Feb032009

The most troublesome of Harvard Business Review’s “breakthrough ideas” for 2009

It’s a phrase to make you shiver: state capitalism. Yet HBR has named the re-emergence of state controlled enterprises as one of its “cutting edge business ideas” for the coming year.

Unfortunately none of the innovative markets that we profile here made the cut. Instead, HBR focuses on where the real money lies: government expenditures. The U.S. auto and financial bailouts are just small one piece of an increasing worldwide trend towards nationalization. As the article profiles, the largest companies in the critical sectors of telecommunications, energy, and asset management dwarf their purely private sector counterparts. The authors correctly note the risk to free markets of state-owned enterprises, specifically:

The (often authoritarian) governments that are profiting from these enterprises will be tempted to take foreign-policy gambles, confident that their market clout in critical sectors will limit the response of concerned countries.

 

I would add another concern: Will innovation continue to thrive when governments hold leading positions in so many sectors of importance? [See David Brooks of the New York Times for a thoughtful consideration of the people who are now making many business decisions.]

Government involvement in these sectors is not new or particularly “breakthrough” (Russia and China being obvious examples), but the extraordinary scale is. P2p lending, p2p e-commerce and locavesting are tiny free market and independent counterweights to this behemoth of government direction in market affairs. Will their appeal find new ground with those troubled by this opaque anti-market trend? Or will they simply be swallowed up?