For those that don’t know about it, I should first recommend EconTalk. EconTalk is an hour long weekly podcast on various economics topics hosted by Russ Roberts (George Mason University Econ Prof and Stanford University Hoover Institute fellow) and published by the Library of Economics and Liberty.  Roberts typically has outstanding guests on the show so the hour is always well spent.

This week Roberts invited Arnold Kling (economist and author of From Poverty to Prosperity) on to the program. The discussion centered around the contrast between earlier economic models, like the Solow model, and new models of economics, like the Romer model (or the combined Solow/Romer model). The discussion of the differences between these models focused on how the new economic models (like the Romer model) are influencing economic development in both developed and developing nations.

It may be useful to lay down a (very) high level view of the Solow and Romer models at this point, which will help the non-economists pick up the podcast discussion much more quickly.

The Solow model is a solid model but, in general, it is unable to explain sustained economic growth over the long-run (e.g. the type of economic growth we have experienced in the United States). Romer figured that advances in technology were likely a root cause of sustained economic growth and worked to modify the Solow model so it would endogenize both growth and technological development (driven by ideas).

A key insight Romer brought forth was the difference between rivalrous and non-rivalrous goods. Rivalrous goods are items that can only be used by one person at a time. The MacBook I am writing this post on is a good example of a rivalrous good. While I am using it to write this post no one else can use it.

Non-rivalrous goods, on the other hand, can be used by many people at the same time. In other words, my use of a non-rivalrous good does not reduce the amount of said good available to you.  The classic example of a non-rivalrous good is an idea. Take for example, the Romer model itself. My use of the model does not preclude anyone from using the model at the same time.  Non-rivalrous goods also exhibit increasing returns, which is why the incorporation of them into an economic growth model helps to explain sustained economic growth much better than models that exclude non-rivalrous goods.

Economists’ modern understanding of growth and development centers on ideas and how they can improve technology, leading the way to prosperity. Kling discusses the idea of ideas with Roberts in detail during the podcast and the pair also discuss other topics of interest (like why trial and error is important to growth and why governments are generally bad at things that require trial and error).

Economists, entrepreneurs, scientists and researchers alike are sure to enjoy this episode of EconTalk because it covers the exciting intersection of ideas and economics.

Check out Kling on EconTalk

I recently finished reading “Portfolios of the Poor: How the World’s Poor Live on $2 a Day” by Daryl Collins, Jonathan Morduch, Stuart Rutherford and Orlanda Ruthven. The book was based on a handful of “diary” studies compiled by one of the authors. The diary studies were designed to get to the heart of how the poor manage their money.

Prior to the “diary” studies researchers tended to look at the finances of the poor in an aggregate sense (i.e. using beginning and ending balances for each household and even higher level data). The aggregate view of the finances of the poor, it turns out, does not capture the essence of how the poor manage money.  “Portfolios of the Poor” suggests that one has to look at the cash flows of poor households to really understand how the poor manage their money and what tools they need from the financial sector to improve their lives.

The “diary” studies looked at households in Bangladesh, India and South Africa and took samples of data from the households every two weeks.  This data – the cash flows of the poor – showed that the poor are active money managers and are constantly on the lookout for better financial products that more closely fit their needs.  In fact, the average household in the study turned over multiples of their yearly income each year via a handful of financial tools. For example, the Indian sample turned over 0.75 – 1.75 times their annual incomes on average.

Having spent a lot of time over the past 4 years thinking about microfinance I have to say that I thought I had a firm handle on things but “Portfolios of the Poor” and the data the authors uncovered through their “diary” studies caused me to see microfinance in a new light.  Here are some of the more surprising pieces of information that the “diary” studies revealed:

• The $2/day mark that is often quoted is misleading. The real trouble the poor have is not necessarily the small amount of money they earn (thought that is, of course, a big problem), it is the irregularity (and uncertainty) of their paydays.
• Lower incomes require more, not less, financial management. In other words, the poor do not use financial tools despite their low income, they use them because of their low income.
• The poor do not live hand to mouth (as a lot of people think).
• While microcredit is fantastic, most poor people still prioritize getting food on the table each day, not starting a business. More needs to be done with savings vehicles of different types and more flexible loan offerings to help with this pressing need.
• The most frequent lenders (in the “diary” sample) are still friends and relatives (who tend to loan interest free) showing that there is still a lot of room for microfinance to grow.
• What the poor really need are cash management tools.
• When looking at microfinance and other financial instruments the poor use to manage their cash flow one needs to think in terms of fees, not interest rates. A lot of financial instruments geared toward the poor don’t compound.  Along with that fact, the poor tend to view themselves as paying fees for a service, not interest rates on money borrowed (this is probably why the poor pay for savings in a number of cases, earning what is effectively a negative interest rate).

If you read through the list above I am quite sure you were surprised by at least some of those points.  If you want to learn more about how the researchers arrived at those conclusions please check out the book.

One last note before I conclude: The authors of “Portfolios of the Poor” put together a nice list of three hurdles the poor face in terms of money management.  Here is their list (i.e. “The Triple Whammy”):

• Small income
• Irregular income (or more importantly – an unpredictable income)
• Poor access to financial services that meet their needs

Of course this list is also a set of opportunities for existing banks and microfinance institutions as well as for upstart institutions. Here is the list recast as opportunities:

• Create tools to help poor households manage money on a day-to-day basis (e.g. revolving checking/savings accounts without set deposit or withdrawal terms).
• Create tools that help poor households build savings over the long run (e.g. structured savings accounts with set terms and deposit schedules that can perhaps be borrowed against to add flexibility).
• Create tools that help poor households borrow for all uses, not just to start microenterprises (e.g. loans for emergencies and healthcare needs).

If you are interested in international finance, international development, economics or microfinance I highly recommend reading “Portfolios of the Poor.” It is an engaging read and provides many insights that don’t come to the surface after only a cursory look at microfinance (e.g. the poor are much more financially sophisticated than people think).

In this post I would like to introduce you to three innovations focused on the bottom of the pyramid.  These three innovations are very exciting and you can get even get involved with any one of them.  First up, The Acumen Fund.

The Acumen Fund: A VC Firm Focused on the Bottom of the Pyramid

I first heard about the Acumen Fund a while back but it was recently brought to the front of my mind via a post on Marginal Revolution (one of my favorite economics blogs). Here is the explanation of Acumen directly from Marginal Revolution:

The idea is to invest patient capital in scalable, for-profit businesses that deliver services to the poor.  The fund, for example, has invested in a firm producing drip irrigation systems in Pakistan, a Tanzanian firm that produces mosquito nets and an Indian firm producing internet-telephone kiosks in small villages.

This is such a fantastic idea.  I can’t believe I had forgotten about Acumen.  I highly recommend checking out their website for more information. I am certainly going to do more homework on these guys.

The one thing I want to know is what their returns look like.  Acumen is a not-for-profit organization but I wonder if this type of investing could be done for-profit.  The one issue I can foresee right away is the liquidity issue.  For example, how do you sell or take public a Pakistani drip irrigation systems company or a Tanzanian mosquito net company?  Even if the companies were big enough I am not sure the capital markets or M&A activity is robust enough to get companies to exit. That said, it may be someday.

Samasource

I just learned about Samasource yesterday via an fbFund related tweet from Mr. Dave McClure.  Samasource was a participant in the fbFund Rev program this summer (the fbFund is a seed fund run by Facebook, the Founders Fund and Accel Partners).

The basic gist of Samasource is this: you can use their site to outsource computer-based work to women, refugees and youth living in poverty.

Samasource is helping to create jobs for the next billion by offering outsourced services ranging from data services and transcription to testing services and virtual assistance.  We have some tasks at TransFS that I am considering using Samasource for so I will report back on its effectiveness in a future post.

Here is a short presentation on Samasource with a few success stories:

Bankers Without Borders

Bankers Without Borders is a Grameen Foundation volunteer initiative. A number of microfinance related volunteer opportunities are listed on their site. When I first started getting into microfinance this site wasn’t around and it was much harder to find places where my skills were needed.  Bankers Without Borders makes volunteering in microfinance simple. If you are at all interested in microfinance I highly recommend checking out their site.

Vote for my SXSW 2010 panel

I had a fantastic time at SXSW last year but I was left wanting one thing and that was more finance and economics related content. There are so many interesting things happening at the convergence of interactive media, technology and finance and the field is ripe for innovation.  Given that, I was amazed at the lack of content around finance.

So, I decided to do something about it. I put forth an idea for a panel for SXSW 2010 called “Data is Money: How geeks are changing finance.” (Please vote for it here: http://bit.ly/LBApG and spread the word!)

This panel will bring together experts in finance and technology to talk about how the future of finance will be influenced by data geeks and technologists. We will explore new financial data formats, like XBRL, and discuss how these formats, along with other recent advances, will allow all of us to play a role in the creation of a better financial system.

Jesper Andersen, co-founder of Freerisk.org, is already on board for the panel and Charlie Hoffman, the father of XBRL and author of the forthcoming book XBRL for Dummies, will be joining us as well (schedule permitting of course).  I will also pick up one or two more speakers if the panel is chosen.

It should be a great panel and I hope all of you out there will vote for it so that it will be chosen. The topic is important and certainly relevant given where the economy is today.

Vote for my panel early and often: http://bit.ly/LBApG Thanks for your support!

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Other great economics and finance related SXSW panels you should vote for:

“Saving the New Economy from the Past”

“Banking 2.0: Financial services driven by people and emerging technologies”

I have seen a lot of talk both in my circle of friends and in the social and mainstream media circles about the space program.  Some of the talk focused on the large price tag that comes with a focus on the space program.  These people generally come to the conclusion that the money spent on the space program could do more good elsewhere.

This seems like a very valid point, especially in this day in age.  We’re in a decent size recession and there are a significant number of people around the world suffering.  Why in heck should we be funding a trip to the moon?  After all, it is a place we’ve already been!  I believe this viewpoint is very shortsighted though.  Here’s why.

First, the space program has either created or significantly pushed forward technologies that are crucial to our economy.  One of the most well known would be the semiconductor.  The space program was one of the influences that pushed the semiconductor forward and now the semiconductor, and things based upon it (i.e. computers, software, etc.), make up a huge chunk of our economy. The space program also created the technology at the base of:

• Cordless power tools
• Smoke detectors
• Home insulation
• Lasers (for surgery, etc.)
• LEDs
• Pill Sized Transmitters
• Camera on a chip
• Body imaging
• Oil spill control
• Alternative food production methods
• Firefighter breathing system
• Jaws of life
• Global communications
• Historical document and painting protection
• and many more…

Second, the human need to explore should not be pushed aside. Exploring new frontiers is in our genes and we should continue to push the boundaries.  I am not sure a world where humans were not continuing to explore would be a healthy place for any of us.  Along the same lines I think the exploration of space does a lot of good for the world from the standpoint of giving us perspective (for more on that see my post on Sagan’s Blue Dot).

Third, and my last point, I think suggesting that the space exploration budget could be better spent is only partly true.  Could the money be given out to people who need shelter, food and other human essentials.  Potentially.  However, I don’t think handouts are what we need.  If microfinance has shown us anything it is that the poor can help themselves by creating businesses and these businesses are sustainable.  Handouts aren’t sustainable.  Do we need handouts for some things, sure, but I don’t think the difference that would be made by diverting the space exploration budget elsewhere would be as big as people think.

I am curious to hear what you all think about this.  It is certainly a debate that splits the country and one that I am sure will be argued for quite some time.

Bonus point (my 4th point): space exploration inspires future scientists to be scientists.  I am sure there are a number of scientists who have done a lot of good for the world that were inspired to dedicate their lives to science because of the space program (although I don’t have any data for this).

Addendum (9.23.09)

After re-reading this post a number of times it occured to me that I did not touch on a crucial issue in this post. I do think that NASA is very inefficient. That said, perhaps the funding that goes to the space program, specifically the manned missions piece of the program, should be pushed out to private sector entities (like Space-X) that do the job better, faster and cheaper.

The function that NASA does really well, and that we should continue to fund indefinitely, is scientific research. They have those processes down to a science (hahaha). Manned space flight, however, is another story.

Talk about secondary markets for private company stock has been heating up recently but the thought has been around for quite some time.  In fact I, along with others, wrote about secondary markets for private company stock in 2007 and 2008 and I am certain that the argument goes much further back than 2007 since the idea is essentially low hanging fruit.

Why is talk about secondary markets heating up now?

It seems the secondary market idea, as expected, tends to come back every time startups (and venture investors) have very few exit possibilities.  As of late things have been looking very grim with regard to exits.

The public markets have been virtually shut down in terms of startup IPOs for some time now.  In fact, I saw some numbers (via the NVCA) the other day that showed how bad the IPO market has become.  There were roughly 86 VC backed IPOs in 2007, 6 (yes, that’s a single digit) in 2008 and 0 thus far in 2009 (goose egg).

OK, so what about M&A activity?  From 2004 to 2008 M&A activity has hovered around 350ish VC backed M&A exits per year or about 87 M&A exits per quarter.  Q1 of 2009 saw only 56.  You may think that that number isn’t too far off the average but when it comes to the average size of M&A exits over time the picture becomes clearer.

In 2007 the average M&A deal size was $177mm.  2008 saw a decline to $115.7.  2009, thus far, comes in at a whopping $49.6mm average M&A deal size for VC backed startups.  Ouch!

Where else can we (entrepreneurs and VCs) get liquidity?

That’s certainly a loaded question but one that needs to be taken seriously and addressed.  Why? Well, if liquidity events are rare then VCs won’t make many investments and, therefore, startups will become more rare and, thus, a vicious cycle ensues that severely impacts our economy (especially given that VC backed startups are a large job creation engine for this country).

This is how we get to the idea of secondary markets.  Secondary markets exist for many illiquid assets at this time.  In fact, secondary markets even exist for Venture Capital fund positions (i.e. LPs can sell of their VC investments in a secondary market).

I have to admit that I do find the idea of secondary markets for VC backed (and non-VC backed startups) intriguing but I am starting to see some issues with the whole concept.  That said, before I get into some of the issues I would like to chat quickly about a pain in the butt accounting rule that may actually help to enable secondary markets for private company stock to function.

FAS 157

A lot has been written about FAS 157 and how terrible the rule is. Even FASB didn’t like the first version of the rule they released.  That said what FAS 157 does, in part, is force VCs to value their investments each quarter.  Since this is a giant hassle (for reasons I may take a whole other post to describe – on second thought that would just be tortuous for you and I so I will skip that post) a lot of valuation firms have been springing up to help VCs and other funds (PE, hedge funds, etc.) value their investments.

As a by product of this rule lots of data is being generated on private companies and the valuations over time.  This data could potentially form the backbone of a secondary market for private company stock (i.e. these valuations could be likened to the analyst reports for public companies and the secondary market participants would then go ahead setting the price for the private company stock).

Wow, this sounds great! What could possibly be wrong with a secondary market for private companies?

This is, again, quite a question.  One of my big concerns about a secondary market for private companies was something I initially missed in my thinking about them.  The issue is this:

If private companies begin to be traded on a secondary market and, through FAS 157, are valued regularly, what stops private companies from focusing on the short term (i.e. short term value of the company, etc.) just like publicly traded companies do (to their detriment it seems)?

One thing that is great about startups is that by nature they take the long view.  Startups try to create long term value and they tend not to worry about short term valuations of their stock or short term revenue opportunities.

If a secondary market begins to take that long term thinking away by pushing companies to focus short term doesn’t a private company simply become a defacto public company albeit with less regulation imposed on it?  I think it may.

Some other issues that come up are equally large.  In the words of Fred Wilson:

I understand that there are issues with this development. It will be harder to strike options at low prices when the company’s stock has a price history. It will be harder to control who the shareholders are and it will be harder to keep employees motivated to stick around if they can cash out early. These are all problems companies usually don’t face until they go public. Now they will have to face them earlier.

The issue that is that heart of the couple Fred mentions is continuity.  One reason startups are able to take the long view is that they generally have a stable management team and a stable group of investors/board members. Part of the stability of startups lies in the fact that everyone is in it together for the long term so-to-speak since they can’t liquidate their positions easily. If founders, investors, board members and employees can suddenly liquidate their stock fairly easily what is left to keep them around?

If you can’t keep your people around then you need to bring in new people. Now you’ve lost time and continuity, which is bad enough but you are also going to have a hard time setting option strike prices at a rate that give the potential new employees good upside potential.

In my mind, there is enough to worry about in an early stage startup without having to worry about a lot of the things startups have to worry about only when they go public.  It seems that adding more issues to the mix will potentially decrease the success rate of startups.

In conclusion

Fred and others (VCs and entrepreneurs alike) are fans of the secondary market idea even though they see the issues that come about. Even I can’t say that I am not, at some level, a fan of the idea (we need something that allows for liquidity).  It just seems to me that these secondary markets need to be well thought out so we don’t lose the long term thinking and alignment of interests that are both big parts of the world of startups and necessary for continued innovation and economic growth.

Dan Primack of PE Hub passes along an idea on how to revolutionize venture capital in his latest post. The idea, given to him from an unnamed Boston based VC, centers around the partner as the core of the VC fund.  Partners have always been the core of a VC fund, right?  Right.  However, in this new model Primack suggests there aren’t really any partners to speak of.  Each “partner” would work on his or her own with his or her own pool of money provided by one (or perhaps more) LPs.

The analogy Primack uses to explain this new idea is that of a professional athlete.  VCs have been compared to professional athletes for a long time due to a number of similarities with both professions. In this case the similarity we’ll focus on is that VCs, like professional athletes, usually work in teams but are judged on their individual numbers.

The issue with teams both in sports and in the VC world is that the stars can get pulled down by poor team members.  So, the thought is, why can’t a star VC just go “one-on-one” and raise an evergreen fund  from one LP (or perhaps more) that only he or she will manage.  These star VCs can then sign contracts with their LPs  (3 – 5 years to start was what was suggested), take a salary of $1mm per year, get 15% of any carry and hire an assistant and an associate.

It is suggested that this new venture capital model would provide better returns for LPs if the star VCs remained stars and, even if those VCs dropped off, the LPs would lose less then they would have if they picked a losing fund with multiple team members.

Primack, of course, realizes there are some issues with this idea and lists them in his post.  Two of them caught my eye:

1. What about the fact that the partnership model encourages working together to figure out if the deals a firm is looking at are really the best deals? Partners, in theory, should be helpful in that they may have different points of view about a deal that the deal-leading partner didn’t think of, etc., etc.

Primack refutes this by saying that most modern partnerships operate within a quid pro quo of silence. i.e. Don’t knock my deal and I won’t knock yours.  I haven’t been involved in any funds other than DFJ Portage and we operate in a very collegial way and speak our minds freely. That said, I actually haven’t seen Primack’s argument in reality although I could see his argument being the case at larger funds.

2. Would LPs be able to pick the right individual VCs?

That’s a big question but if an LP is on top of the goings on of their VC funds they probably already know who the superstars in their funds are.

I think the bigger question really is: Would the superstars consistently perform?

I don’t have the data on this but I know my friends at Cambridge Associates do so perhaps they can carry out this proposed study for me (hint, hint).

My idea for a study is to look at data from as far back as one can until the present day and then use the data to figure out if superstars are consistent over a long period of time or if the superstars during one 5 – 10 period are the dogs of the next. My guess: they aren’t consistent over long periods of time.

I fixate on this particular issue for one main reason and that is the fact that even the biggest of the big name VC funds – the blue chips as it were – are inconsistent in their returns.  Some of a given firms’ funds are top quartile and others are bottom quartile and some are in between.

A number of the big guys have fund returns that look like a roller coaster and it makes me think that the superstars would not fare much better.

Another point along the same line of thinking is that the superstar VC may actually be a superstar due to his or her team.  This point is also highly correlated to the entrepreneurs VCs back in that the team (the entrepreneurs plus the folks they hire) is everything.  Entrepreneurs have to be great leaders but they also need to hire great teams around them if they intend on bringing their companies to the highest level. Venture capitalists may also need their teams to help the VCs perform at the highest level possible.

With all that said it seems to me that trying to move the industry as a whole to the individual model or the partnership model doesn’t make much sense.  What works will differ based on the individual.  Some folks work well alone, some with a team, and so on and so forth.  What we, as an industry, probably need to address is the following:

Too much money has been flowing into VC for a while now.

Because of this fact funds are too big to do what VC is supposed to do.  $100mm or less (maybe a little more in some cases) is probably a good size fund for true seed and early stage investing.  Venture capital just doesn’t scale well and perhaps we need to accept this as an industry.  This is an important point and one that still needs to be addressed.

I am continually thinking about how to improve venture capital because I think venture capital is vital to the creation of great companies and life improving technologies. It has become fashionable to argue otherwise and I am actually happy about that.  I relish the posts about the death of venture capital.  Why? Well, because I try to look at those posts as a challenge for us, the VCs, to do better.  We can always do better.

Perhaps this superstar VC idea isn’t the way to improve venture capital (although some folks could try the model as it may work for some) but I am sure that through all of the discourse we will have as an industry in the coming years we’ll figure out of a few things that will make venture capital better at doing what it is supposed to do: find and fund bright entrepreneurs and then help them to create the next generation of new technology companies that will move the human race forward (while also generating a great return for our LPs of course).

Umair Haque opened up a thread on his HBR site back in August (yup, I am a little late to the game on this one but I think it is still very relevant) entitled “Overinnovation”.

His main argument: innovation and sustainability are at odds (or are they).

He suggests this is something to chew on and I agree.  That statement is one that I am sure could spur debate for weeks, months and even years but I’ll simply talk about it for about 700 words or so.

Here is the premise in Haque’s words:

Innovation is premised on force-feeding people more junk; on fueling artificial needs for super-size meals, Hummers, and a new pair of sweatshop-produced fast-fashion jeans every weekend.

Sustainability, on the other hand, is premised on helping people finally step off that creaking treadmill of consumption.

Is sustainability the long-overdue nemesis of the innovation fever that’s gripped boardrooms for the last decade – and led to a banal consumptionscape of gewgaw-filled warehouses littering asset-stripped suburbs? Conversely, is sustainability just a crutch for players – like Wal-Mart -can’t innovate in the first place?

Or can sustainability drive a better kind of innovation?

(Some of the comments on his post are fantastic so I highly suggest reading them.)

I think Haque is a bit harsh in his description of innovation as “force-feeding people more junk” (although some innovations do lead to that conclusion).  I think, when done well, innovation looks to do something better, more efficiently and more inexpensively than it was done before and those things, generally, sit well with sustainability.

One of the commenters suggested that what Haque really should have used for terminology was bad-capitalism versus good-capitalism.  I believe what the commenter meant by this was simply that innovation and sustainability should never be at odds when compensation and motivations are pointed toward the larger good, as they should be.  This is probably true and it suggests that innovation isn’t at odds with sustainability at all.  In fact, innovation should drive sustainability when practiced in a system that values the right things.

It really comes down to what people value.

We are starting to see innovation and sustainability come into closer alignment as people begin to realize that our current system can’t work forever. Consumerism is simply unsustainable.

Due to this shift in consumer’s values we have seen a lot of innovative business models emerge. In fact, while they are innovative, some of them just seem, well, pretty basic.

One of the most interesting models to emerge is to turn a product into a service.  This model has been best employed by larger product based companies looking to provide a more sustainable service to their customers and it yields a recurring revenue stream to the business, which is a nice bonus.  The idea can be summed up in this example:

Say you are Carrier and you make air conditioning units.  When you make these A/Cs you aren’t incentivised to make an A/C that lasts forever.  If you did that than a customer would buy once and never buy again and that doesn’t make for a long lasting business.  So what you do is you build an inexpensive A/C that will break after a certain number of years so that the consumer will have to come buy a new A/C on a fairly regular basis. (In fact, it is known that some product companies actually do design in failure points for their products to ensure consumers need to continually repurchase.)

With the innovative move-a-product-to-a-service model Carrier would charge their customers for “air conditioning services” where they would sign a contract with the customer that stated Carrier would keep the customers air at X degrees Fahrenheit for $X per year, month, etc. Now that the cost of of the actual A/C unit (and the power to operate it) falls to Carrier they are incentivised to build the longest lasting most energy efficient A/C they can in order to lower their cost to provide the air conditioning service to their customers.

The longer lasting more efficient A/Cs are better for everyone since Carrier ends up with a nice recurring revenue stream, the customer can focus on their business and not their air conditioning units and the environment ends up with fewer broken A/Cs in landfills and less toxic freon floating around.

At the end of the day, when incentives are aligned properly, innovation and sustainbility should walk hand in hand.  They should never be at odds and, if they ever are, there are probably higher level systemic things that need changing.

Following on from Haque’s theme of organization as the next industrial revolution (that I wrote about a couple days ago) comes the story of txteagle, an innovative company I learned about this morning via an article in Technology Review.

As a lot of you know, using mobile phones to accomplish tasks in developing countries around the world, most notably the sending and receiving of money, has become more prevalent. This is due to the fact that developing nations have jumped right from no phones to cell phones and, since the phones are very affordable, a lot of people own them (billions of people actually).

txteagle is a new company looking to leverage the mobile phone to provide a conduit into developing nations for businesses that need certain tasks, like translating text and transcribing audio, completed.  txteagle realized a while back that companies pay people good money to accomplish these millions of text based tasks but companies haven’t really ever tapped developing nations to help with this kind of work. This is partly due to the fact that people in developing nations can be spread out and hard to reach.  This is where txteagle’s product comes in.

txteagle has built a system that can distribute text based tasks, such as translating a passage or transcribing an audio clip, to mobile phone users in developing nations via text messages.  Since there are over 1.5 billion literate mobile phone subscribers in the developing world and because text messaging is a very basic phone feature (meaning most every phone has the capability) txteagle has a large network to tap.

Folks who receive text messages from txteagle and complete the tasks asked of them can typically earn the equivalent of about $3 per hour for their work.  While this may not seem like a lot to us what you need to consider is that most of the people txteagle “hires” actually make less than $3 per day.  Also, the $3 per hour rate that txteagle pays, while being great for the “employees”, is also great for the company paying to have the work done. How great? The $3 per hour rate is about 60% less than current transcription rates.

txteagle is a great example of organizing a group of people in a different way to form a business that creates profits for the business and a less expensive service for customers while also creating a better life for the people who actually do the work.  I am sure we’ll see more of these innovative organization based ideas come about and I am excited to see how they will create a better world for all of us.

Commercializing innovation is one of my biggest passions.  It is what gets me up in the morning and I am glad I get to do it for a living as a VC and, previous to that, as an operator in a startup.  That said, I have to admit that what surprised me a little when I moved to the VC side and started working with a lot more professors and graduate students was that some of these folks didn’t seem that interested in pursuing commercialization of their innovations (to be clear there are also a lot of them that do think a lot about commercialization).

I totally understand where they are coming from.  They aren’t in it for the money.  They simply want to make the world a better place.  I am 100% with them on that.  I don’t do what I do for the money either.  I doubt someone can be very happy for very long doing something only for the money.  A higher mission is usually what drives people to new heights.

However, it seems that these folks don’t realize that working to commercialize their innovations can actually help get their innovations out into the world and helping people, which was the reason they spent their time and effort developing the innovation in the first place.

In fact, I heard from a professor today that another professor mentioned that, in his view, his work, in the form of an academic paper, may take 20 years to have any effect on society but when commercialized it could probably reach people in a meaningful way in a couple of years.

While businesses and corporations can be evil there is no reason they have to be.  In fact, if done right, businesses are really great vehicles for disseminating innovations to the public and doing it in a sustainable way (since they make money – and profits – and can use those to continue the business).  Not only that but they also lead to even more economic good for a region in terms of new, and generally higher paying, jobs among other benefits.

I view part of my role as a VC as spreading the message of commercialization and helping scientists to get to the point where their innovations can become a sustainable business and subsequently start improving peoples lives.  Sure, sometimes the innovations are years away from being commercialization ready but so what?  Working with these guys and seeing their innovations progress over time is a big part of the fun of being a VC (in my view at least).  Plus, it lets me put my inner scientist/engineer to work (let’s face it – I think most business side startup guys and VCs are really wannabe engineers and scientists are heart).

Commercializing innovation takes a lot of work but it is worth it. I look forward to my continued work with some of the brightest and most resourceful innovators around and I think we’re going to build some groundbreaking companies together in the years to come.