Alternative Currency, YCombinator and the Creative Knowledge Worker

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YCombinatorI recently read an article on Ribbonfarm.com that provided a spur I have been waiting on for quite a while.  For months, I have been waiting for the right context and inspiration with which to write about the start up incubation model as a unique case study that combines two of my personal interests: mentorship and alternative currency.  The mentorship piece is fairly obvious; incubators like Y Combinator provide start-up founders with several months of intense, hands-on consulting and advising.  The alternative currency piece is more subtle and hinges on the facts that the monetary investments made by incubators are relatively insignificant and the returns on their investment are highly uncertain.  The connection with the Ribbonfarm article will illustrate why these characteristics should be more than curiosities outside the start up community.  To start off, let’s take a closer look at the incubator’s business model…

The Real World Innovator

The primary exchange occurring in the incubation model is the trade of mentorship for company equity.  Incubators are being compensated for their services with an asset other than traditional monetary currency.  Clearly, their long term goal is to earn a monetary return, however these equity investments may persist in their portfolio for a significant period of time with only a rather arbitrary accounting value assigned to them.  In other words, these assets are not easily converted into hard currency.

In what sense does this arrangement meaningfully differ from a typical investment?  Regular readers of this blog will be familiar with my categorization of currencies into two distinct groups…a quick refresher:

  • transactional/symmetric
    • used in the exchange of scarce goods
    • both sides of the exchange are defined explicitly and valued at the time of the transaction
    • each side of the transaction is expected to be roughly equal in value (symmetric)
  • reciprocal/asymmetric
    • used in exchange of abundant goods
    • no point-in-time transaction takes place, therefore no formal delineation of the terms of trade or explicit valuation takes place a priori
    • terms of trade may be highly unequal (asymmetric)

The transactional model is the one we generally associate with currency – a clearly defined exchange of money for goods or services.  The reciprocal model is implicitly in use for most activities that influence anything under the umbrella of social capital. For example, a favor is done for a friend creating some intangible increase in reputation or the implicit expectation of future reciprocation.

Returning to the incubation model….while it appears at first glance that the incubator is making a straightforward investment, in some respects this exchange actually has more in common with social capital than it does with a typical transactional investment.  The typical investment generally has an explicit market value that, though it may fluctuate, is acknowledged by other market participants at the time of the transaction.  Social capital, by contrast, is intangible stuff that only acquires tangible value when we “redeem it”.  An equity position in a start up is much more like the latter.  While an explicit transaction does occur and the incubator does acquire a tangible equity share, the value of those shares are highly uncertain (intangible) until they become “redeemable”, once the start up either produces a profit or a market price exists for its shares.

So here we have two factors combining to push the incubator arrangement towards the asymmetric zone:

  • the exchange of one abundant asset for another (mentorship and company equity are both abundant to their respective owners, see this post)
  • intangible value with no assurance of return

The first point distinguishes this model from other speculative investments, for which the returns may be uncertain but the exchange itself is clearly of one scarce asset for another (money now[investment] for money later[return]).  The second point distinguishes this situation from simple barter, trading one asset or service for another.  The incubation model avoids drifting fully into the social capital zone however, because the terms of trade are explicitly defined at the time of the transaction.

The Idealized Model

[note: the post discussed below is from 2009, see the comments for current thoughts from Venkat]

This is where we return to Venkat’s piece The Crucible Effect and the Scarcity of Collective Attention, in which Venkat attacks the notion that the average “long-tail” content creator should aim to attract 1000 raving fans.

This basic  model of creative capital is just not believable for two reasons. First, it reduces a prosumer/co-creation economic-cultural environment to a godawful unthinking bleating-sheep model of community.

The second problem is the tacit assumption that creation is prototypically organized in units of 1. The argument is seductive. The bad old corporations will die, along with its committees of groupthink. The brave new solo free agent, wandering in the woods of cultural anarchy, finds a way to lead his tribe to the promised land of whatever his niche is about.

He proceeds to argue for creators to organize themselves into groups of about twelve people – small enough to foster collaboration while at the same time large enough to motivate competition.  In this model creation is still an individual act but is perpetually spurred by the pressures and opportunities created within the group dynamic.   Venkat also asks that we consider a more intimate market for our creative output:

Your actual goal as a creative today is to find and keep your 150, to whom you pay individual attention.  Pass-through crowds don’t deserve much attention. In fact, the monetary value of your transaction with them is exactly $0.00.  Anderson hammered home the point that to the masses, the right price for your work is $0.00, but he didn’t address the flip side.  They are also worth only $0.00 to you on average. Which means you should put no marginal effort into pleasing them.  If one of them finds something you did for your 150 useful, let them have it. You get paid in word-of-mouth, they get free stuff. Small serendipitous barter transaction. Aggregate over 100,000 and net hard-dollar value is still 100,000x$0=$0.  The barter is non-zero sum, but doesn’t pay your rent.

As the closing comments make clear, Venkat is concerned with how the creative earns the “hard-dollars” that enable him to satisfy material needs.  While your group of twelve provides motivation and co-creation opportunities, it would be your 150 devoted customers who pay real money for highly personalized, high value service.

Connections

You have probably recognized by now that Venkat’s model describes the approach taken by Y Combinator quite accurately.  Y Combinator lists six partners on their website.  Adding in an equal number of non-partner contributors you would arrive at the magic number twelve.  Y Combinator also notes on their about page that they have “funded a total of 208 so far”…very much in the ballpark of Dunbar’s 150 and probably even closer if you were exclude those start ups that have already failed, been acquired, or are otherwise no longer within the relevant purview.

Do all these similarities indicate a nearly exact match? The significant point on which they differ is the compensation strategy.  The idealized version calls for 150 uber-loyal customers who pay hard currency for the personalized service that the creative delivers.  The incubator model, by contrast, calls for compensation in the form of an equity position in each of the “customers” (funded/mentored start ups).  In so doing, the incubator formalizes the deep relationship between the two parties.  The creator/mentor still achieves real hard-dollar compensation in the long run, but those hard dollars are funneled through a conduit that aligns his incentives with the interests of the 150.

Implications

So what was the point, at the outset of this piece, of analyzing the degree to which start up equity shares resemble alternative currency?  If we were only concerned with the behavior of a small number of venture capitalists then that analysis would have little relevance to most readers here.  However, Venkat’s ideal business model for the creative knowledge worker suggests that a diverse array of individuals might benefit from adopting practices similar to those that Y Combinator has established…including potentially taking compensation in the form of stock in their best customers – either in their success as individuals or their relevant projects.

The initial analysis was pertinent because it points out how such markets might take on a decidedly social capital-esque character.  These would be markets in which producers share in the successes (or failures) of their customers…markets in which financial transactions create an expectation of long term mentorship and collaboration.  An baby step towards this potential future occurred just last week when the SEC acknowledged the possibility of relaxing restrictions on investments in private companies…a move that would significantly blur the distinction between public and private companies, and thereby set the stage for a much more granular and subtle multitude of economic relationships.

How might our social and economic relationships look different if the legal environment empowered us to invest in each other, both formally and informally, as we might deem appropriate for any given situation?  What other types of innovative hybrid economic/social arrangements might we see?  Please leave your thoughts in the comments…

photo courtesy of jurvetson

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  • http://www.ribbonfarm.com Venkat

    I don’t recall what I said about the 150 (I calibrated that against Dunbar’s number basically), but I now think of them as not necessarily hard currency customers but as people who end up supporting your real-life costs in direct or indirect ways, cash only being one of them. Others I’ve found to be very important include leads/referrals for paying gigs, collaboration opportunities (in the sense of what John Hagel calls a “pull network”) for when you need partners to go after an opportunity too big to take down by yourself etc.

    I also think now that the medium and price structure can be a lot more varied. A blog partitions things the way I described (as does Y-combinator, perhaps). But a book for instance carves up the market very differently… you ARE making money off more than 150 (literally, I’ve sold over 180 copies of my book so far, and I’d estimate that only about 50 of them are in my core 150 for ribbonfarm, so that’s about 130 who I’d consider $0 types from the blog viewpoint).

    But this virtual currency angle is fascinating. I’ve been groping my way towards that theme as well, pursuing the thought that there are high real-world value transaction spaces that do not use cash instruments at all, except as gatekeeping with respect to the cash world. For example, an airline first class lounge gatekeeps with cash, but once inside, you get all the basics like coffee, internet, snacks and alcohol for “free.”

    The “cash” way of thinking about it is that the price is build into the price of a first class ticket etc., but while true, that’s an irrelevant point. I think the real reason such systems work is that they raise the economic game by creating a space where things like coffee aren’t even worth the transaction costs to pay for. That’s why we get the paradoxical effect that very rich people get a lot more free stuff than middle class people. You and I may complain that they can afford to pay, but the point is, making a lot of the high-volume cash economy free inside a “rich people firewall” allows the rich people to freely wheel-and-deal at million and billion dollar levels, where money behaves very differently.

    I haven’t yet fully figured this stuff out, but there’s something very important here around money/currencies.

    • http://OnTheSpiral.com/ GregoryJRader

      I agree you could have many other models. Mass production, to vary degrees and for certain types of goods, isn’t going away completely. Regardless, some subset of the 150 (or whatever group) have to deliver value to people outside the group…otherwise, you have created a closed economy, which clearly isn’t the point. What I think the YCombinator example points to is an environment wherein there will be many more intermediate forms of currency. Traditional money might still be the ultimate gatekeeper (I like that terminology!) for transactions with complete strangers, but within groups of varying intimacy levels you might have numerous other forms of exchange.

      What you are describing towards the end of your comments is the concept of Price Discrimination (http://en.wikipedia.org/wiki/Price_discrimination), or in more common language – bundling. A producer can capture more market share by forcing customers into an all or nothing decision. In a lot of situations this is a predatory tactic that sets the stage for disruption by a low cost competitor who sells just the essentials at a much lower rate. For example, a disruptive airline might sell you a much cheaper first class ticket by only incorporating the cost of the seat and excluding all the fringe benefits.

      However, this can also be a reasonable strategy in situations where the transaction cost of an individual decision is a significant deterrent. This is why subscriptions work – instead of deciding whether you want each piece of content you just agree to a bulk rate for everything.

  • http://www.openworld.com Openworld

    Lots of intriguing ideas here!

    They seem to converge with an earlier comment at http://is.gd/b6vbIN . This explored how self-organizing ‘learning circles’ can repay their learning partners through an equity-like system in future earning streams: in this case, a pre-agreed share of the participants’ (auctionable) future time-based personal currencies.

    Let’s say 12 friends pooled together to invite bids from learning partners, to gain measurable skills in one or more fields that they valued. On confirming acquisition of these skills – as validated by an agreed third party certifying or testing service – their agreed payment in time-based personal currencies would transfer to the tutor/mentor/partner they had chosen.

    This system could be used for acquisition of common skills (e.g. all members seek to reach a certain level proficiency in Drupal), or for developing a set of complementary skills that would help members in launching a planned venture (eg Greg learning Javascript, Venkat learning Quickbooks, and me a graphic language such as Processing).

    The larger (Dunbar) number, as noted in the past, could be the most active fans for the fledging venture – the ones who would themselves trade directly in personal currencies with the entrepreneurs.

    Yet I think the most successful ventures will be ones that establish a concentric circle of opportunities to earn into this core “true fan” group. Individuals inspired by the aims, values, style, and/or reputation of the core 12 — and/or their larger Dunbar ecosystem — might have opportunities to earn into the group by taking on pre-set tasks to enrich the digital commons of the founders and/or their supporting community.

    In this way, a self-selecting process could be established by which new entrants, by dint of exceptional contributions, could earn their way in to a preset number of founder or true fan slots (creating a competitive pressure on all of the original parties not to rest on their laurels).

    This kind of meritocratic circulation was used in the Lancaster System’s peer learning circles, which helped hundreds of thousands of poor kids to learn reading and arithmetic before the advent of public schools.

    What do you think?

    Best,

    Mark
    @openworld @peerlearning

    • http://twitter.com/sebpaquet Seb Paquet

      Mark, I believe there are parallels between what you describe and early-stage academic communities where a dozen or so people are truly leading the group in new, revolutionary directions and bouncing ideas off one another, and a cloud of ~150 (with non-negligible churn) helps filling in the details and provides social legitimacy to the whole thing, basically validating the general direction of research. The core typically takes more risk by venturing into an unvalidated area, but gets rewarded with citations and recognition when/if the area becomes more widely acknowledged as interesting.

      • http://www.openworld.com Openworld

        Seb, I agree.

        A very interesting opportunity may be at hand for prediction wagers to spread appreciation in the wider circle of prospective allies for a given set of disruptive ideas, especially in formative stages. For example, a self-organizing group of learners (or co-organizers of a disruptive venture) might encourage “bettors” to go on record for or against a proposed course of action. The bettors would realize reputation-building gains or losses (perhaps via alt-currencies?) based on their predictive success.

        Participants in such prediction markets could provide useful inputs for students, jobseekers, and organizers of disruptive ventures at early stages. A given learning circle might post background on its proposed aims as well as verified baseline data regarding its members’ interests/skills. From this, it could encourage bids from prospective learning partners or investors who might help them with their acquisition of desired skills in return for a share of future auctionable personal currencies. The responses of such partners/investors — as well as their description of predictive wagers, and explanations for the reasons for making them — could be a useful way for individuals to get feedback regarding their plans.

        Look forward to your thoughts on this – and perhaps a wager regarding whether it might work? ;-D

        Best,

        Mark (@openworld @peerlearning)

        • http://twitter.com/sebpaquet Seb Paquet

          Wager? We’d both bet on the same side. Though we could bet on when it will happen…

        • http://OnTheSpiral.com/ GregoryJRader

          What you are describing, particularly in the first paragraph, is a stock market ;)

          Unfortunately, insider trading regulations prevent the kind of “productive friction” that you are describing. In order for these “bettors” to add value for the core group they would have to become “insiders”. Current regulations of public markets essentially take the stance that markets should be “fair” at the expense of being productive.

          • http://www.openworld.com Openworld

            Greg,

            I’m a bit baffled!

            Why should student learning circles have to deal with insider trading regulations, if they are requesting predictions on their prospects of reaching desired skill levels?

            The rewards for successful predictors in this case would not be monetary. The best predictors would simply earn karma points or reputation-based currencies.

            It is true that learning partners could receive a (student-preset) share of their future personal currencies, once desired skills gains were demonstrated. Yet the participants in the prediction market wagers would not be competing to “win” this monetizable prize.

            Instead, the students would select the learning partners whose track records and approach seemed most likely to bring them to the desired skill level. If the learning circle (with the learning provider’s help) failed to achieve this independently-verified target, no monetizable exchange whatsoever would take place.

            In the case of self-organizing groups that form to launch disruptive business ventures, it might be less of a stretch for regulators to argue that insider trading rules might apply.

            Even here, however, regulatory risks seem remote if the startup opts for any or all of the following:

            1. Ensuring that the rewards offered to successful “bettors” are solely in the form of reputation/karma points, rather than the convertible personal currencies;

            2. Organizing the new enterprise as a fully-transparent Open Source Venture (@johnrobb’s tribe is now mapping ways for this to happen)

            Tom Bell, a Chapman University professor of law, has identified a number of additional ways that prediction markets associated with disruptive ventures can avoid entanglement with insider trading rules at http://www.midasoracle.org/2008/05/07/insider-trading-and-private-prediction-markets .

            Among the most fundamental solutions that he sees — an approach fully consonant with that of emerging Open Source Ventures – are “‘[the] corporation could simply make public the claims and prices of its in-house prediction market. Illegal insider trading laws only speak to material nonpublic information…”

            If a disruptive venture chooses to make everything posted in its prediction markets – positive and negative – open to public view, how would this be subject to “insider trading” regulatory challenge?

            I’d love to see these opportunities explored and a clear resolution found. It may be good to approach Clint Bolick and the Institute of Justice if there are lingering issues on the best ways forward.

            Look forward to your response.

            Best,

            Mark (@openworld)

          • http://OnTheSpiral.com/ GregoryJRader

            I was making a more general point. We already have prediction markets. Stock markets allow people to place bets on which companies will meet or exceed their goals and the bets that investors/traders make can meaningfully impact prices, thereby signalling to the company whether the market believes they will be successful.

            However, when you regulate that no one with material non-public information can trade on that information, then you dramatically reduce the likelihood that prices will accurately predict actual outcomes. Therefore, in order for a prediction market to serve as a reliable predictor, the participants must be able to act on ALL information.

            In other contexts, SEC regulations are circumvented in various ways. For example, venture capitals clearly invest on the basis of material non-public information, and they are permitted to do this because only “qualified investors” are able to invest in venture funds. Your suggestions might very well accomplish the same outcomes…

            My comment was not meant as a specific response to your proposal and certainly not as a rebuttal. It was more of a cheap shot at the public markets intended to point out a tangential point: that markets cannot be both fair (in the SEC sense) and accurate. Any prediction market that produces positive sum outcomes will need to abandon the notion of fairness so that the people with the best information can act on that information.

    • http://OnTheSpiral.com/ GregoryJRader

      Mark, I think you are on to something with the idea of concentric circles. As Venkat also noted in his comment, the 150 is only one possible organizational form…there will surely be many other and additional “loose-tie” layers supporting the smaller groups.

      I suspect that the types of formal arrangements you describe will be very context dependent. In some cases people will want to have formal agreements with other members in their group (or between levels) while in other cases it will be more beneficial to have a fluid structure wherein “membership” is less explicitly defined.

      I definitely agree that in a large number of cases there will be dramatic benefits to creating the competitive pressures you describe.

  • http://twitter.com/clayforsberg Clay Forsberg

    Imagine if we could just invest in a person. Investments need not be limited to individual projects, but rather the sum of what the individual produces. And the investment doesn’t have to be directly monetary. It could mentorship. It could be direct labor to assist the realization of “whatever was on the table.” It could be office or studio space. The input could be anything. And for the that matter, so could the return. Where is it written that an investment needs to return money. It could return future expertise or labor … or anything.

    Currency in itself is restrictive. Efforts can be made to make it equitable … but there will always be inefficiencies in the transaction. Resources exist everywhere. Direct transfer of these resources opens up investment participation to virtually anyone on virtually any grounds or terms.

    Imagine a clearinghouse or exchange of online portfolios of people, say young people or students. Each portfolio would be a “Here I am world, this is what I’m all about and why you should join me in my journey of life.” You could invest in your neighbor’s kid or someone two thousand miles away. You could invest whatever resources you had – it wouldn’t have to be money. You could have a “portfolio of people.” You could track their success and help whenever, wherever and however you could. And your return wouldn’t have to be financial, it could just be knowing that you were “part of the solution.”

    This clearinghouse could be a crowdfunding/crowdsourcing vehicle for people, for people and their futures.

    • http://OnTheSpiral.com/ GregoryJRader

      Clay, that is exactly what I am getting at, though with the caveat that you mention:

      “but there will always be inefficiencies in the transaction”

      That doesn’t only apply to monetary transaction, it applies to any sort of strict delineation of terms. Whenever you have to have the conversation – I will give you X if you give me Y – that negotiation is going to serve as a barrier. What I am calling the asymmetric currencies are gaining importance because they don’t require any negotiation…they are largely frictionless.

      I think the equity style solutions are so interesting because they indicate that currencies could really exist anywhere on that spectrum. The incubator solves the negotiation transaction cost by negotiating an abstract agreement at one point in time without any need for future interpretation of contingencies.

      I hope and expect we will see a lot more experimentation with intermediate solutions of this sort…

  • http://twitter.com/webisteme webisteme

    Great post. Another angle I thought about this was that mentorship is normally regarded as a gift. (To say you’re “selling mentorship” seems oxymoronic.) In that sense, the gift would be undermined through commodification and become something else – consultancy. In the case of YCombinator, the fact that this isn’t a typical symmetric exchange makes it possible to reciprocate the gift with a promise of hypothetical returns which the gift helps to create. It resembles an exchange of gifts rather than a market transaction. Interestingly though, would the gift of mentorship take place without the loose promise of reciprocation? Probably not… but many gift exchanges (e.g. between friends) are like this, implicitly.

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14 Responses to Alternative Currency, YCombinator and the Creative Knowledge Worker

  1. Venkat says:

    I don’t recall what I said about the 150 (I calibrated that against Dunbar’s number basically), but I now think of them as not necessarily hard currency customers but as people who end up supporting your real-life costs in direct or indirect ways, cash only being one of them. Others I’ve found to be very important include leads/referrals for paying gigs, collaboration opportunities (in the sense of what John Hagel calls a “pull network”) for when you need partners to go after an opportunity too big to take down by yourself etc.

    I also think now that the medium and price structure can be a lot more varied. A blog partitions things the way I described (as does Y-combinator, perhaps). But a book for instance carves up the market very differently… you ARE making money off more than 150 (literally, I’ve sold over 180 copies of my book so far, and I’d estimate that only about 50 of them are in my core 150 for ribbonfarm, so that’s about 130 who I’d consider $0 types from the blog viewpoint).

    But this virtual currency angle is fascinating. I’ve been groping my way towards that theme as well, pursuing the thought that there are high real-world value transaction spaces that do not use cash instruments at all, except as gatekeeping with respect to the cash world. For example, an airline first class lounge gatekeeps with cash, but once inside, you get all the basics like coffee, internet, snacks and alcohol for “free.”

    The “cash” way of thinking about it is that the price is build into the price of a first class ticket etc., but while true, that’s an irrelevant point. I think the real reason such systems work is that they raise the economic game by creating a space where things like coffee aren’t even worth the transaction costs to pay for. That’s why we get the paradoxical effect that very rich people get a lot more free stuff than middle class people. You and I may complain that they can afford to pay, but the point is, making a lot of the high-volume cash economy free inside a “rich people firewall” allows the rich people to freely wheel-and-deal at million and billion dollar levels, where money behaves very differently.

    I haven’t yet fully figured this stuff out, but there’s something very important here around money/currencies.

    • I agree you could have many other models. Mass production, to vary degrees and for certain types of goods, isn’t going away completely. Regardless, some subset of the 150 (or whatever group) have to deliver value to people outside the group…otherwise, you have created a closed economy, which clearly isn’t the point. What I think the YCombinator example points to is an environment wherein there will be many more intermediate forms of currency. Traditional money might still be the ultimate gatekeeper (I like that terminology!) for transactions with complete strangers, but within groups of varying intimacy levels you might have numerous other forms of exchange.

      What you are describing towards the end of your comments is the concept of Price Discrimination (http://en.wikipedia.org/wiki/Price_discrimination), or in more common language – bundling. A producer can capture more market share by forcing customers into an all or nothing decision. In a lot of situations this is a predatory tactic that sets the stage for disruption by a low cost competitor who sells just the essentials at a much lower rate. For example, a disruptive airline might sell you a much cheaper first class ticket by only incorporating the cost of the seat and excluding all the fringe benefits.

      However, this can also be a reasonable strategy in situations where the transaction cost of an individual decision is a significant deterrent. This is why subscriptions work – instead of deciding whether you want each piece of content you just agree to a bulk rate for everything.

  2. Openworld says:

    Lots of intriguing ideas here!

    They seem to converge with an earlier comment at http://is.gd/b6vbIN . This explored how self-organizing ‘learning circles’ can repay their learning partners through an equity-like system in future earning streams: in this case, a pre-agreed share of the participants’ (auctionable) future time-based personal currencies.

    Let’s say 12 friends pooled together to invite bids from learning partners, to gain measurable skills in one or more fields that they valued. On confirming acquisition of these skills – as validated by an agreed third party certifying or testing service – their agreed payment in time-based personal currencies would transfer to the tutor/mentor/partner they had chosen.

    This system could be used for acquisition of common skills (e.g. all members seek to reach a certain level proficiency in Drupal), or for developing a set of complementary skills that would help members in launching a planned venture (eg Greg learning Javascript, Venkat learning Quickbooks, and me a graphic language such as Processing).

    The larger (Dunbar) number, as noted in the past, could be the most active fans for the fledging venture – the ones who would themselves trade directly in personal currencies with the entrepreneurs.

    Yet I think the most successful ventures will be ones that establish a concentric circle of opportunities to earn into this core “true fan” group. Individuals inspired by the aims, values, style, and/or reputation of the core 12 — and/or their larger Dunbar ecosystem — might have opportunities to earn into the group by taking on pre-set tasks to enrich the digital commons of the founders and/or their supporting community.

    In this way, a self-selecting process could be established by which new entrants, by dint of exceptional contributions, could earn their way in to a preset number of founder or true fan slots (creating a competitive pressure on all of the original parties not to rest on their laurels).

    This kind of meritocratic circulation was used in the Lancaster System’s peer learning circles, which helped hundreds of thousands of poor kids to learn reading and arithmetic before the advent of public schools.

    What do you think?

    Best,

    Mark
    @openworld @peerlearning

    • Seb Paquet says:

      Mark, I believe there are parallels between what you describe and early-stage academic communities where a dozen or so people are truly leading the group in new, revolutionary directions and bouncing ideas off one another, and a cloud of ~150 (with non-negligible churn) helps filling in the details and provides social legitimacy to the whole thing, basically validating the general direction of research. The core typically takes more risk by venturing into an unvalidated area, but gets rewarded with citations and recognition when/if the area becomes more widely acknowledged as interesting.

      • Openworld says:

        Seb, I agree.

        A very interesting opportunity may be at hand for prediction wagers to spread appreciation in the wider circle of prospective allies for a given set of disruptive ideas, especially in formative stages. For example, a self-organizing group of learners (or co-organizers of a disruptive venture) might encourage “bettors” to go on record for or against a proposed course of action. The bettors would realize reputation-building gains or losses (perhaps via alt-currencies?) based on their predictive success.

        Participants in such prediction markets could provide useful inputs for students, jobseekers, and organizers of disruptive ventures at early stages. A given learning circle might post background on its proposed aims as well as verified baseline data regarding its members’ interests/skills. From this, it could encourage bids from prospective learning partners or investors who might help them with their acquisition of desired skills in return for a share of future auctionable personal currencies. The responses of such partners/investors — as well as their description of predictive wagers, and explanations for the reasons for making them — could be a useful way for individuals to get feedback regarding their plans.

        Look forward to your thoughts on this – and perhaps a wager regarding whether it might work? ;-D

        Best,

        Mark (@openworld @peerlearning)

        • Seb Paquet says:

          Wager? We’d both bet on the same side. Though we could bet on when it will happen…

        • What you are describing, particularly in the first paragraph, is a stock market ;)

          Unfortunately, insider trading regulations prevent the kind of “productive friction” that you are describing. In order for these “bettors” to add value for the core group they would have to become “insiders”. Current regulations of public markets essentially take the stance that markets should be “fair” at the expense of being productive.

          • Openworld says:

            Greg,

            I’m a bit baffled!

            Why should student learning circles have to deal with insider trading regulations, if they are requesting predictions on their prospects of reaching desired skill levels?

            The rewards for successful predictors in this case would not be monetary. The best predictors would simply earn karma points or reputation-based currencies.

            It is true that learning partners could receive a (student-preset) share of their future personal currencies, once desired skills gains were demonstrated. Yet the participants in the prediction market wagers would not be competing to “win” this monetizable prize.

            Instead, the students would select the learning partners whose track records and approach seemed most likely to bring them to the desired skill level. If the learning circle (with the learning provider’s help) failed to achieve this independently-verified target, no monetizable exchange whatsoever would take place.

            In the case of self-organizing groups that form to launch disruptive business ventures, it might be less of a stretch for regulators to argue that insider trading rules might apply.

            Even here, however, regulatory risks seem remote if the startup opts for any or all of the following:

            1. Ensuring that the rewards offered to successful “bettors” are solely in the form of reputation/karma points, rather than the convertible personal currencies;

            2. Organizing the new enterprise as a fully-transparent Open Source Venture (@johnrobb’s tribe is now mapping ways for this to happen)

            Tom Bell, a Chapman University professor of law, has identified a number of additional ways that prediction markets associated with disruptive ventures can avoid entanglement with insider trading rules at http://www.midasoracle.org/2008/05/07/insider-trading-and-private-prediction-markets .

            Among the most fundamental solutions that he sees — an approach fully consonant with that of emerging Open Source Ventures – are “‘[the] corporation could simply make public the claims and prices of its in-house prediction market. Illegal insider trading laws only speak to material nonpublic information…”

            If a disruptive venture chooses to make everything posted in its prediction markets – positive and negative – open to public view, how would this be subject to “insider trading” regulatory challenge?

            I’d love to see these opportunities explored and a clear resolution found. It may be good to approach Clint Bolick and the Institute of Justice if there are lingering issues on the best ways forward.

            Look forward to your response.

            Best,

            Mark (@openworld)

          • I was making a more general point. We already have prediction markets. Stock markets allow people to place bets on which companies will meet or exceed their goals and the bets that investors/traders make can meaningfully impact prices, thereby signalling to the company whether the market believes they will be successful.

            However, when you regulate that no one with material non-public information can trade on that information, then you dramatically reduce the likelihood that prices will accurately predict actual outcomes. Therefore, in order for a prediction market to serve as a reliable predictor, the participants must be able to act on ALL information.

            In other contexts, SEC regulations are circumvented in various ways. For example, venture capitals clearly invest on the basis of material non-public information, and they are permitted to do this because only “qualified investors” are able to invest in venture funds. Your suggestions might very well accomplish the same outcomes…

            My comment was not meant as a specific response to your proposal and certainly not as a rebuttal. It was more of a cheap shot at the public markets intended to point out a tangential point: that markets cannot be both fair (in the SEC sense) and accurate. Any prediction market that produces positive sum outcomes will need to abandon the notion of fairness so that the people with the best information can act on that information.

    • Mark, I think you are on to something with the idea of concentric circles. As Venkat also noted in his comment, the 150 is only one possible organizational form…there will surely be many other and additional “loose-tie” layers supporting the smaller groups.

      I suspect that the types of formal arrangements you describe will be very context dependent. In some cases people will want to have formal agreements with other members in their group (or between levels) while in other cases it will be more beneficial to have a fluid structure wherein “membership” is less explicitly defined.

      I definitely agree that in a large number of cases there will be dramatic benefits to creating the competitive pressures you describe.

  3. Imagine if we could just invest in a person. Investments need not be limited to individual projects, but rather the sum of what the individual produces. And the investment doesn’t have to be directly monetary. It could mentorship. It could be direct labor to assist the realization of “whatever was on the table.” It could be office or studio space. The input could be anything. And for the that matter, so could the return. Where is it written that an investment needs to return money. It could return future expertise or labor … or anything.

    Currency in itself is restrictive. Efforts can be made to make it equitable … but there will always be inefficiencies in the transaction. Resources exist everywhere. Direct transfer of these resources opens up investment participation to virtually anyone on virtually any grounds or terms.

    Imagine a clearinghouse or exchange of online portfolios of people, say young people or students. Each portfolio would be a “Here I am world, this is what I’m all about and why you should join me in my journey of life.” You could invest in your neighbor’s kid or someone two thousand miles away. You could invest whatever resources you had – it wouldn’t have to be money. You could have a “portfolio of people.” You could track their success and help whenever, wherever and however you could. And your return wouldn’t have to be financial, it could just be knowing that you were “part of the solution.”

    This clearinghouse could be a crowdfunding/crowdsourcing vehicle for people, for people and their futures.

    • Clay, that is exactly what I am getting at, though with the caveat that you mention:

      “but there will always be inefficiencies in the transaction”

      That doesn’t only apply to monetary transaction, it applies to any sort of strict delineation of terms. Whenever you have to have the conversation – I will give you X if you give me Y – that negotiation is going to serve as a barrier. What I am calling the asymmetric currencies are gaining importance because they don’t require any negotiation…they are largely frictionless.

      I think the equity style solutions are so interesting because they indicate that currencies could really exist anywhere on that spectrum. The incubator solves the negotiation transaction cost by negotiating an abstract agreement at one point in time without any need for future interpretation of contingencies.

      I hope and expect we will see a lot more experimentation with intermediate solutions of this sort…

  4. webisteme says:

    Great post. Another angle I thought about this was that mentorship is normally regarded as a gift. (To say you’re “selling mentorship” seems oxymoronic.) In that sense, the gift would be undermined through commodification and become something else – consultancy. In the case of YCombinator, the fact that this isn’t a typical symmetric exchange makes it possible to reciprocate the gift with a promise of hypothetical returns which the gift helps to create. It resembles an exchange of gifts rather than a market transaction. Interestingly though, would the gift of mentorship take place without the loose promise of reciprocation? Probably not… but many gift exchanges (e.g. between friends) are like this, implicitly.

  5. [...] throughout much of my writing has been the value of collaboration, intellectual diversity, and knowledge sharing.  The basic hypothesis underlying this line of thinking is that individuals can develop superior [...]

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