7/23/15

Note to self: Startups, the macroeconomy, and engines of growth

Lately, I’ve been thinking a lot about whether or not a bubble (or bubble-like behavior) in startups is universally a bad thing once you consider the broader macro situation we're in.

We currently live in a world starved for robust economic growth. And to get growth, you must be willing to invest for it. Since the financial crisis, this is exactly what global monetary policy has been trying to accomplish by (rightly or wrongly) lowering interest rates to near zero levels. The idea is that lower interest rates dis-incentivizes savings, and instead incentivizes investment into higher-risk, higher-returning assets as investors reach for yield. This type of investment today then forms the foundation for tomorrow's growth.

Though, just as not all investments are created equal, the nature of the growth that comes with each may not be either. Investments create the conditions for one of two types of economic growth:

  • Long term growth—which results in new capabilities and efficiencies, new jobs, and has benefits that are broadly distributed across society.
  • Short term growth—which mostly creates value “on paper” and has benefits accruing only to a small group of individuals.

In the past few years, popular risk asset investments have mostly been focused on the short term rather than the long term. We see this manifest most clearly in places like the stock markets where investors have been focused on short term profits—vis-a-vis margin fueled buying and greater fool behavior, while corporates pursue aggressive share repurchases funded by cheap debt. 

Contrast this with startups—where, even though they're risky, they at least have a built-in incentive to focus on the longer term. 

In the best case scenario a startup will fundamentally change the way we think about, or interact with, a core element of our daily lives [1]. They'll introduce new technology (or application of a technology), create new industries and business models, and catalyze changes in workforce capability [2].

In the worst case scenario a startup outright fails and you lose the capital invested (a "fixed" downside). However, one could argue that there is still some long term growth potential from a human capital perspective. The startup's employees still walk away with first-hand experience in working with users and customers, pragmatic risk-taking, and hypothesis-driven experimentation.

We often discount the value of this "startup toolkit" and it's fungibility across all parts of the economy. If these individuals end up later working for a large corporation, the government, or a non-profit, the attitude and skills they bring can only help to energize traditional institutions to think more about longer term value creation.

So to the question posed at the beginning—is it a bad thing that we have bubble (or bubble-like behavior) in startups? In the grand scheme of things, I’d say probably not. Absent of timely investment alternatives elsewhere, we need every engine of long term growth we can get.

Notes:
[1] Examples could range from visible consumer tech companies (like Facebook) to other less talked about startup themes spanning clean energy, agriculture, social impact, etc.

[2] Concrete examples in the latest iteration of the startup ecosystem would be growing interest in things like coding classes, coding boot camps,  data science courses, growth marketing courses, etc.

Thanks to Trevor for reading versions of this.

6/30/15

Note to self: Philanthropy is not only to do better, but to do differently

Jack Ma, in an interview with Charlie Rose, delivered an insightful perspective on philanthropy. In response to a question regarding his thoughts on the Giving Pledge and philanthropy in China, he responded (start watching around 16:10):

"...I never thought that the money I have belongs to me. It belongs to society. When you have a couple of million, you’re a rich guy. When you have 10-20 million, that’s capital. When you have over 100 million, that’s the social resources. Society gave it to you [...] it’s not my money..."
It’s that last sentence that I think is the most interesting, and worth abstracting.

Consider the US scenario. Philanthropy is given special treatment by the IRS. Mainly, contributions to charities and foundations are tax-exempt under Section 501(c)(3) of the tax code. Framing the notion of tax exemption another way, philanthropy can be seen as an "opportunity cost" to government spending on social resources. This means that the US government, and by extension US citizens, are trusting non-profit organizations with these resources to do better, and/or do differently than the government.

To do better, means to deliver more of a desired social outcome using the same resources. This concept has been around for a while, and has been widely debated. I’m not here to revisit that debate. I accept the premise that non-profits can do better than government in certain areas, and vice-versa. However, I do think there's room for improvement when it comes to having a robust evidence-base to show the differential between government and philanthropic-led social interventions/services.

To do differently, is where I think there's more headroom for growth and innovation. The biggest comparative advantage that philanthropic capital has over government capital is the loosening of constraints on dimensions like: return timeframes, deployment time, and politics—among other things. 

Philanthropic foundations answer to their own Board of Directors, their program staff, and to their stakeholders who don’t usually think along election cycle timelines.

The implication is that philanthropic capital boasts one of the most exciting features that very few other capital sources have—a potential for very high risk-tolerance. Its deployment can have a similar dynamic that venture capital has in the investment ecosystem. I think more non-profits and foundations need to recognize this and more critically evaluate their appetite for risk. This should start from the bottom (from how funding is deployed via grants), through to high-level strategy, culture, and spend-down timeframes.

To bring it full circle, philanthropy is one of the biggest tools we have in our toolbox for increasing system-wide social impact. It only logically exists if its: 1) helping to do better (e.g. increasing efficiency) and/or 2) helping to do differently (e.g. raising the bar and/or changing the paradigm). A risk-seeking culture has to be at the center of philanthropy that complements other "social resources". As with any basic principle of risk—only through taking big enough risks, will we ever have the opportunity at the bigger rewards.