Reading time: 2 – 3 minutes

Chatter in the media about Chicago’s status as a technology hub seems to be growing. In the last few weeks I have been quoted in a couple articles on the topic. The first was a Medill article by Melissa Aparicio that looked at some of the policy issues in the state focused on technology growth. The second was a piece in the Tribune by Wailin Wong that focused on the possibility that Motorola may move their handset division to the west coast after they split the division off in 2011 and what the move may mean for technology.

In both articles I consistently stated my thinking:

• Chicago shouldn’t try to be Silicon Valley.
• Chicago should focus on what it is good at (e.g. building companies that use technology to disrupt businesses like trucking and printing and companies that focus on online advertising, ecommerce, etc.)
• Early stage funding in Chicago is getting better but is still extremely lacking (we need family capital focused on supporting companies in the region).
• There is a lot of great development talent in Chicago but keeping them here is hard and building tech teams is equally difficult.
• What you really need to build the scene in Chicago is to have some home runs hit and then help the lieutenants from those companies start their own companies (we’re starting to see more of that now).

Chicago has a lot going for it but also has some holes that are tough to fill (since they are chicken and egg problems for the most part).

Matt McCall – my former boss and one of my mentors – has a great interview in Fast Company (source: VC Confidential) where he describes his thoughts on the technology scene in Chicago (he even mentions a study/chart on exits in the area that he and I prepared a year or so ago that shows how many billions the Midwest has generated in the past five years). I agree with him on most points but I will say that being an entrepreneur here in the earliest stages is still very hard (but not nearly impossible).

Reading time: 3 – 4 minutes

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

Reading time: 4 – 6 minutes

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.

Reading time: 4 – 7 minutes

After joining up with Sean and Josh as the third founder of TransFS back in June I found myself in the middle of the world of payments and payment processing (for those that don’t know, our company is a comparison shopping engine for merchant services – i.e. credit card processing). I knew a little about this world from my undergraduate work in finance and information technology and also through my involvement in various microfinance initiatives but I wanted, and needed, to know a lot more.

Sean, the founder who knows the most about the payments industry, suggested I read “Paying with Plastic: The digital revolution in buying and borrowing” by David S. Evans and Richard Schmalensee to get up to speed. Needless to say I followed Sean’s advice but I have to admit I was a tad worried about how the read was going to go.  I mean, seriously, a book about credit cards published on a very academic press (MIT Press). I thought it was going to be incredibly dry.

Much to my surprise I found the book very well written and engaging. Evans and Schmalensee do a great job of both telling a compelling story and getting the facts across in a meaningful way.  This is a sizable feat given the subject matter.

That said, I highly recommend this book to anyone in and around the payments world.  However, I also recommend this book to anyone who regularly uses credit cards and other alternative payment media (i.e. paypal, charge cards, debit cards, etc.) and has an interest in finance and economics. In fact, there is a great section in book on “multi-sided platform economics” that is applicable to a number of other industries, including web applications and media.

Learning about how the credit card industry became the way it is today and learning how the whole system works was very intellectually stimulating.  I have to confess that I constantly find myself thinking about what is going on behind the scenes every time I swipe my AMEX card, and that is a direct result of reading this book. Here are some fun facts to start you off:

• Diners club was the first “card” payment program.  It was started by a man in NYC after he forgot his wallet and was stuck contemplating how to pay for a meal at a restaurant.
• Merchant discount fees, the fees merchants pay to accept credit cards, have steadily declined over the last 30 years.
• While merchants generally dislike paying to accept credit cards these days, when credit cards were first introduced a lot of merchants were ecstatic. Why? Because a lot of merchants were running their own internal credit programs at the time and found it both hard and costly to manage them. Credit cards allowed merchants to outsource this headache.
• In Australia interchange fees (fees paid to the acquiring bank on each transaction processed) were regulated for the first time fairly recently. This meant credit card companies had to find other revenue, which they did by charging annual fees on their cards and lessening or removing rewards. While you might think this would cause a drop in credit card usage it did not. Credit card usage continued to grow at roughly the same rate.
• Visa, MasterCard, AMEX and other card companies are generally some of the largest brand advertisers in the country.
• Checks, while widely used in the U.S., are hardly ever used in Europe and other nations.
• Smart cards (like the AMEX Blue Card) are used heavily in Europe and Japan but are not widely used in the U.S.

If you want to learn more about this fascinating, and crucial industry, please check out “Paying With Plastic.” The book is full of incredible information. However, one thing the book doesn’t get into is what merchants are charged for accepting a specific persons credit card.

Are you curious what merchants are charged when you use your credit card of choice? Check out TrueCostOfCredit.com – a site built by my partners, Sean and Josh.  Just enter the first six digits of your credit card number into the site and we’ll provide you with a report about what using your credit card costs merchants.

As transactions become increasingly digital and we move closer to a cashless society, understanding the way payments systems work will be very helpful.  “Paying with Plastic” can help you understand the current payment systems and will also give you a sense of what is to come with mobile payments, biometric based payment systems and other interesting innovations in the payments space.

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For another great read related to payments I highly recommend “The PayPal Wars” by Eric M. Jackson. Jackson was an early employee at PayPal and he chonicles all of the ups, downs and interesting stories that made up the early years of PayPal in his book. “The PayPal Wars” is a fantastic read (reads like a thriller actually) and will delight payments industry folks, entrepreneurs and readers interested in technology and startups alike.

Reading time: 2 – 3 minutes

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”

Reading time: 3 – 5 minutes

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.

Reading time: < 1 minute

Just read this quote in an article in the Economist and had to share it:

“Truth and technology will triumph over bullshit and bureaucracy.”

- Rene Anselmo: Spaceflight privatization pioneer and founder of PanAmSat.

Awesome.