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Saturday, July 25, 2009

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Lawrence Sinclair

One perspective would be to view States as a model owner of human capital. The Chinese government, for example, has long thought of its population as an asset class. But to a certain degree, all States could think of their citizens as an asset from which they derive a return.

What is that return? If we stick to money. A simple form could be viewed as taxes. But there are other forms of return, including the right to call upon those citizens to die for whatever hairbrained plan you wish to put them to use.

Assume you have a citizen. They make 100,000/year. You tax them 30,000. That's your revenue. You get to spend 10,000 on your stuff. But you have to spend the other 20,000 in taxes maintaining their subservience to you as their leader and reinvesting in their operation. I think it makes sense to think of taxes as the source of income from human capital, rather than savings. Even in China, savings are not generally subject to confiscation, and savings are eventually consumed or given away as individuals age.

My hypothetical numbers still provide the same 10% return that Dave put forward.

I love this sort of discussion, so I couldn't resist adding my two cents.

gotta run.

Dave McClure

thanks asif -- you're right i completely forgot to factor in income growth. appreciate the heads-up.

rough guess that probably doubles the market cap calc from $50K -> $100K, and in turn the asset class goes from $300T -> $600T.

in any case, let's just say it's a big number ;)

Asif Suria

Interesting twist on Discounted Cash Flow analysis. However your market cap for a individual is significantly understated.

While you have used inflation in the calculation to determine the real return on the savings, you did not use something similar to calculate the increase in salary, unless you expect this person to have stagnant wages throughout the 40 year period.

Interestingly the side effect of doing this is that you have also eliminated the potential of growth through productivity gains, innovation, etc.

Applying a 3% growth rate to the salary, they would have earned close to $2 million at the end of their working life.

Asif (@specialsin @AppStruck)

Matt (CEO, 1000 Markets)

Securitizing Happiness deck rocks.

A few years ago I led an effort to hack the LA Unified School district when I was on the board of the Trust for Public Land.

We found that the school district was ripping up and replacing grass playing fields with concrete and tarmac, much to the chagrin of the children. Not only did this uglify the schools, but it increased wastewater runoff by eliminating pourous surfaces.

Why was this being done? It was being done for monetary reasons. Tarmac and concrete are expensive but they are 10 year capital expenses and schools can float bonds for capital expenses. Every 10 years, they have to replace the tarmac so they use some bond money.

Grass, it turns out, has a lower total cost of ownership. That is, it is cheaper to plant and maintain grass for 10 years than it is install tarmac. The problem is that grass requires salaries for mowing services and watering and what not, and that comes out of the school operating budget not the capital budget. Schools have a very hard time floating bonds for operating costs.

So our hack was to start a non-profit Grass Corp. to package and sell to the district an amazing product: "10 year grass -- better than tarmac." The idea was to bundle planting + 10 years of maintenance into a product that the district could purchase as a capital asset just like they buy tarmac. In a sense, we were securitizing grass.

I wish I could say this program got implemented. We made a lot of headway with the LAUSD, but in the end we got swamped by the bureaucracy and red tape. But it was a great idea and the numbers penciled out.

John Prendergast

Dave,

I think something like this has already been done on a reasonably large scale. David Bowie securitized his work before 1990 (25 Albums) for $55 Million upfront. http://bit.ly/12Q3Nx If there were a demand, you could imagine doing this on a smaller scale.

Lindsay Blanton

Don't insurance companies already do this?

Variable Annuities?
Life Insurance Polices?

Somewhat of a variation, but still the same concept?

AnonJeff

Ask yourself: why do most start-up acquisitions fail to deliver the value? In fact, the larger the valuation paid, the more likely it was a failure. Post-acquisition there just wasn't any incentive to continue to produce value, though *the valuation was based on their continuing ability to produce value* - that is the key point. In other words, by trying to value something, you changed it!

More fundamentally, *value creation* is an ongoing, evolutionary process, while *valuation* (if it has to produce a return) is a backwards looking process. The most successful investor in the world doesn't pay for future performance - he pays for past 10 years of earnings.

Oh, what about all those VCs who are investing based on future promise? As Kedrosky has pointed out, VC returns are inherently bubble driven. Take out the bubbles (the big one and the echo one), and returns come down to earth (and the asset class isn't very attractive).

In a bubble-free economy, current venture capital models do not work, and will not work.

Marcus

K. Mike Merrill is an American individual who has succeeded in becoming a publicly traded person:

http://kmikeym.com/

Shares are valued in real time by trades made on his open public market, implemented as a web application. Shareholders vote on major life decisions, such as whether he should engage in certain business ventures, and even on very personal questions, such as whether he should get a vasectomy.

Buy some shares, try it out!

Matt

Thought about this in college a long time ago... All one would be doing under a plan like this is voluntarily becoming an indentured servant at best, a slave at worst. Once someone buys you and your future earnings you no longer have as much of an incentive to do well which isn't good for either party or the economy as a whole.

I wouldn't invest in anyone who would agree to do this because they essentially have the wrong mindset to succeed and are willing to forgo future earnings for the quick cash flow of today... If they don't own all of their earnings, why should they try very hard? Not to mention the overlying slavery/serfdom aspect of the idea.

If you want to invest in someone, invest in their idea and their company, that's why companies were created in the first place.

Dave McClure

@Chris: I'm sure there are likely cases of individual IPO events (I'd certainly invest in David Weekly; missed my chance the first time but it won't happen again!) however I think it's far more likely that this asset class works better on an aggregate basis. certainly the impact I'm arguing for here happens mostly at macro not micro scale. (btw I think the firm u mention used to be called MyRichUncle, not sure what the current name is now... smart guys; I've met one of the founders many years back).

@Hunter: I dunno u might want to sell me short rather than go long. I'm way overvalued compared to my actual skill. that said, there's no doubt the symbol for trading would either be AAAR or ARRR, unless perhaps GEEK or HATS are still available.

hunter

this is occurring at the edges - i can't find the link but i believe there's a company which lends college students money for a % of future income (capped at some upper limit).

so the real question is, what does a share of Dave cost and what would your ticker symbol be?

Chris Yeh

I love the concept of the personal IPO; I've been pushing it since the mid-90s. Perhaps even more powerful is the personal VC:

http://chrisyeh.blogspot.com/2005/12/part-ups-and-personal-vc.html

It's funny to take a stroll down memory lane; I used Auren Hoffman and Ramit Sethi as examples; I'd sure like to have an investment in those two.

Of course, as it turned out, I did manage to invest in PBwiki (now PBworks)....

Dave McClure

@james: actually i'd prefer to keep the model based on real money for the moment. makes it a hell of a lot easier to implement ;)

of course in the future i have no idea WTF our value currency morphs into. however i think much of the problem with "double-bottom-line" economics is that they aren't based on turning subjective value into actual capital, but rather trying to fake or estimate a value not based on real transactional data.

James Littlejohn

Hi Dave

Are you not in effect describing Whuffie? If so, the 'currency' of life will not be measured in $ i.e. monetary digits but in the digits of life, lets call that whuffie.

Looks like Whuffie will be a number based currency but whether current stock market mathematics will apply going forward, I'm not too but they might.

Overall, I agree individual and collective human capital is the biggest new market society will have ever created.

James

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