Master of 500 Hats

Taking "Me, Inc." Public: Market Caps for Individuals

I occasionally dabble in speculative (some might even say imaginary) asset classes.  One that doesn't really exist yet is the market for securitizing individuals, or groups of individuals. 

While this market does conceptually exist in various forms -- credit cards & microfinance provide unsecured debt, the real estate market is sort of a proxy for individual incomes, and government bonds are perhaps the largest aggregation of groups of individuals within geographic boundaries -- as yet there isn't a market for taking individuals (or groups of individuals) public.

While there are a few notable folks like David Bowie, the Beatles, or Michael Jackson who have executed a form of intellectual property securitization, these are infrequent & unusual examples.

(UPDATE & CLARIFICATION: many folks in the comments are focusing on the literal interpretation of my headline, namely taking *one* individual public.  while i'm neither for or against that concept, what i'm really talking about here is more likely the creation of a derivative instrument that maps to the future income of an *aggregate group* of individuals. i severely doubt any one person is going to be enslaved as a result of an individual IPO, but regardless that's not really what i'm getting at... the calculation for an individual market cap below is merely an exercise by which to arrive at an estimated value for the asset class.)

If we were to create an asset class for "human capital" securities, how might we calculate it?  

Well, we would probably add up the total market cap of all "stocks" in this potential market... which would be the equivalent of the collective market cap of ~6 billion people. 

So what is the market cap for an individual?

Let's assume the following:

• in developed economies, average wage earner makes ~$25K/yr
• the average individual works for ~40 years during their lifetime
• they save an avg of ~10% of income per yr (probably optimistic)
• their savings earns ~6% and inflation is ~2% (net int. rate = 4%)

Ok, so now the average wage earner in a developed economy might earn a cool million in revenue during their lifetime ($25,000/yr * 40 yrs = $1,000,000).  If they saved 10% of their income, they'd be able to put away $100K, which if invested appropriately might be worth ~$250K by the beginning of their retirement.  finally, let's assume that a present value (PV) calculation for that $250K using a discount rate of 4% results in a value of $50K at the beginning of the wage earner's working career. 

If this is a reasonable way to calculate it (not sure if i've made any obvious errors here; please comment if so and i'll revise), then the market cap for an individual might be around $50,000.  if you wanted to be generous, it might even be north of $100K.  if you're pessimistic on the savings rate, then it could be as low as $10-25K (or even zero i guess?).

anyway, i think i'm close enough to go on record in saying the Atomic Unit of Happiness = The Value of an Average Human Life = $50,000 (roughly).

if this is correct, then the overall market value of the asset class representing Individual Income Futures is $50,000 * 6 Billion people = $300T (T=Trillion)

now here is where it gets interesting...if we assume that at least a 1/3 of the world isn't earnng $25K per year, but perhaps only around $5K per year, and another 1/3 might only be making $500/yr or less (the Bottom of the Pyramid, or BOP), then what we're really saying is that the overall asset class is currently only worth around $100T, and is undervalued by about $200T due to the current state of healthcare, education, housing, and overall economic opportunities for 4 billion of the world's 6 billion people. 

imagine then if you could invest in the undervalued portion of the asset class, and then enable access to healthcare, education, and housing for those $4B people.  you'd have one of the best and largest investment opportunities ever.

Fifty thousand here, two hundred trillion there... pretty soon you're talking real money.

hope to see some of you folks at Social Capital Markets 2009 :)

(included below is my previous presentation on Securitizing Happiness):

Securitizing Happiness: Solving the World's Problems by Making Trillion-Dollar Markets for Individuals, Small Business, & Natural Resources

View more documents from Dave McClure.

Securitizing Happiness: Hacking Human Suffering thru Financial Engineering (TEDxShanghai, June 2009)

Below are slides from my talk on "Securitizing Happiness" at TEDxShanghai later today.  This presentation is a slight update to the original talk i gave back in March 2008 at the O'Reilly Collective Intelligence FOO Camp, held at Google HQ in Mountain View:

Securitizing Happiness: Solving the World's Problems by Making Trillion-Dollar Markets for Individuals, Small Business, & Natural Resources

View more OpenOffice presentations from Dave McClure.

Note: many of these concepts are still fairly raw, and since i'm not really a financial engineering expert they could certainly use further refinement... so your feedback and comments are appreciated.  That said, i'm optimistic the basic ideas here are viable, worthwhile and can have substantial economic impact on society in the future.

EBAY Q3 2008 Earnings: MarketPlace Rev$ Flat (note to mgmt: spin out PayPal, or expect to get taken over)

thx to Keith Teare for uploading eBay Q3 2008 Earnings ppt to SlideShare:

1. Marketplace revenue flat and/or decaying 
2. PayPal revenue flat this qtr *but* Y/Y growth, still plenty of potential
3. Skype shows surprising growth; maybe not bad a deal as ppl think
4. aside from acquisitions, still severe lack of imagination at the top
5. if they don't spin out PayPal+BillMeLater, someone else should LBO this sucker before mgmt drives it into a ditch. 

sigh.  so much potential being wasted. but hey, they do awesome powerpoints.

eBay 2008, Q3 Earnings

View SlideShare presentation or Upload your own. (tags: earnings ebay)

Got SchadenFreude? Profit from Other's Despair -- Enter the SlideShare "Credit Crisis in 30 Slides Contest" (Judges: Cuban, Varian, Kedrosky, Wilson)

Can you explain why High Finance is/isn't Going to Hell in a Handbasket in 30 slides or less?  Terrific. 

Enter the SlideShare Credit Crisis Contest (C^3) and you might win an iTouch, Nano, or Shuffle.  (yeah we know the prizes are cheap, but listen up mofo we're trying to preserve cash)

The Credit Crisis in 30 slides contest

View SlideShare presentation or Upload your own.

Credit Crisis Contest judges include:

• Mark Cuban (Dallas Mavericks owner / Entrepreneur)
• Hal Varian (Google Chief Economist)
• Paul Kedrosky (Finance Guru & Blogger)
• Fred Wilson (Venture Capitalist Pauper)

Mark Cuban	Hal Varian	Paul Kedrosky	Fred Wilson

just remember folks: the Startup you Save might be your Own.

Google.org Initiative: Accelerate Growth of SMEs, Small- & Medium-size Enterprises (Sonal Shah)

My friend Sonal Shah is working on a new initiative at Google.org to help fuel the growth of Small- & Medium-size Enterprises (SMEs), initially in India & Africa.  Along with Omidyar Network & the Soros Economic Development Fund, Google.org recently announced the creation of a $17M investment company focused on SMEs in India. 

VentureBeat reported the investment company announcement, and provided other info on commercial capital projects in India, including a report on India infrastructure investment by Arun Natarajun of Venture Intelligence.

These SME initiatives have tremendous potential, and i wish Sonal & Google.org & other groups best of luck with their efforts.  Go small business investment!

Below are two short video clips that explain more about the five core initiatives Google.org is doing; the end of the first video & the second video specifically discuss the SME initiative.

Video on Google.org & Five Core Initiatives:

1. Renewable Energy Cheaper Than Coal (RE<C)
2. Accelerate Commercialization of Plug-In Vehicles (RechargeIT)
3. Predict & Prevent Global Emerging Threats (ex: disease, climate risk)
4. Inform and Empower to Improve Public Services
5. Fuel the Growth of Small & Medium-Sized Enterprises (SMEs, @ 7m30s)

Video on SME Initiative:

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My Steamy Love Affair (!) with Microfinance, Startups, & Small Business Finance

Helping grow SMEs is an interesting topic that is closely related to two of my favorite subjects, startups & microfinance. Over the past 5 years i've spent time learning about microfinance & helping support Unitus, Kiva, & Microplace, and more recently running the Silicon Valley Microfinance Network (SVMN.net).  For the past 10-15 years, i've been trying to learn how to start & run tech startups better, and figure out how to make it easier to get them funded & financed.

That's Right Ma'am.. I Got My MBA from The School of Hard Knocks

Having spent a few years at PayPal & eBay, i was always fascinated by how small business provides a huge engine of growth for many global economies, yet equally amazed at how little access to capital & business education most SMEs have.  As a small business owner myself for a few years back in the mid-90's, i learned this the hard way. My first company, Aslan Computing, was a small consulting shop performing internet & e-commerce projects for clients in Silicon Valley and San Francisco.  I started out as an independent developer doing database consulting & programming for Microsoft & Intel, then gradually we grew into a small consulting group of ~15-20 people. 

But i was pretty clueless about basic business finance, and altho we grew rapidly so did my personal debt: in the first few years of the business i ran up almost $250K of personal & business debt, and explored every possible wacky financing angle including: high-interest credit cards (~10 of them, at one point over $100K in debt), borrowing money from employees, equipment leasing, factoring invoices, and selling equity to friends & family.  I even tried raising venture capital, but slowly came to realize most VCs aren't likely to fund consulting businesses (tho US Web, Scient, & Viant all did manage to get plenty of VC funding during the late 90's).  I once had an offer from an angel investor to put $250K into the company in exchange for 20% equity, but i wasn't very experienced at the time, and i wasn't sure about the investor.  Well, you know the old adage: experience is what you get when you don't get what you want. 

Folks, lemme tell ya: i got a lot of experience out of those years.

Overall it was quite the financial & emotional rollercoaster, and while i managed to make payroll mostly on time for ~3 years, eventually we ended up selling the business to a larger partner for a rather modest sum.  It was a small win, but i wish i spent more time learning how to manage our finances better, and had created a better financial foundation for the business with more reasonable access to credit.  Ah well, nothing like the school of hard knocks to teach you a tough lesson.  And perhaps also, to discover a new market opportunity.

Getting Back on the Bike... After RTFM

Anyway, that experience made me hungry for more info on venture capital, startup finance, and in general on how small businesses get access to capital.  In 2000, i read The Venture Capital Cycle by Gompers & Lerner, which explained a lot about the motivations of VCs and their LPs.  In 2001-2002, i read Hernando de Soto's incredible book The Mystery of Capital, and Muhammad Yunus' first book Banker to the Poor. 

Both books focus on how sole proprietors & small business have limited access to capital, and also typically a lot of bureaucratic red tape, but that in the right environment & with good capital availability small businesses can thrive.  Around the same time i also read MoneyBall by Michael Lewis, which made me think a lot more about how people overlook & underemphasize metrics.

Creating New Asset Classes & Securitizing Small Business

Ever since reading these books, and after i wrote the first draft of my magnum opus on Securitizing Happiness, i've become convinced there is a huge missing asset class in small business debt & equity that could dramatically help fuel the growth of the global economy.  All we are missing are 3 things:

• a way to automate business metrics & provide greater transparency
• a way to lower transaction costs & accelerate the financing process
• a way to provide back-end liquidity / fuel exits to 'make' the market

Gotta be a Pony in Here Somewhere !?!

While these are difficult & challenging issues to address, i'm optimistic several organizations are working on solutions that may emerge over the next few years.  In that light, it's great to see Google.org and others going after these opportunities.   I'm hopeful for the future, and i look forward to seeing what happens next :)

Securitizing Happiness (v0.9): Solving the World's Problems by Creating Trillion-Dollar Asset Classes for Individuals, Small Business & Natural Resources

For the first time i tried to put together my earlier thoughts on Securitizing Happiness, and gave a brief presentation at O'Reilly Collective Intelligence Foo Camp to people a lot smarter than me.  Here is the rough first cut...

Securitizing Happiness: Solving the World's Problems by Making Trillion-Dollar Markets for Individuals, Small Business, & Natural Resources

view presentation (tags: finance capital.markets social.entrepreneurship economics)

hopefully i didn't end up looking like too much of an idiot, but regardless it was great for me to finally get this out in the public domain and get some reactions.  appreciate any feedback or thoughts on the concepts & proposed solutions, and particularly any good hacks you think i've overlooked...

Kara Swisher is KING OF THE WORLD! (for a day)

I had a wonderful time chatting with Kara Swisher about All Things Digital up in SF earlier this week.  while sipping a delightful chai (me) & java (her) in The Castro, i decided to turn the tables and put *Kara* in front of the camera for once.  the following video is my first tyro attempt at video journalism. 

since Kara so often writes on what all the Internet powerhouse companies should be doing, i asked her what she would do if she were CEO for a day at the following companies:  Google, Microsoft, Yahoo, eBay, Facebook, MySpace, & AOL.

(apologies to Mr. Bezos: we forgot to include Amazon, altho they're executing pretty darn well lately so not much kibitzing needed).

briefly, the 100-word translation of Kara's tips for running Teh Internets:

* Google: full speed ahead to world domination.  sentient machines, etc.
* Microsoft: don't take shit from Yahoo board.  buy that mofo NOW Steve!
* Yahoo: STFUp & get bought already.  $31 low? remember: YOU F'd it up.
* eBay: Open up. Get off marketplace. unt SCHTOP! being Fascist mit Sellerz!
* Facebook: Figure out how to Moneti$e. still, $300M buys you some time.
* MySpace: Same challenges as FB, only bigger.  Grow up & get a real job!
* AOL:  umm.... help! i've fallen and i can't get up!  (geez, who the f knows?)

Wrapping up, i gave Kara a softball plug for The D Conference.  which she doesn't really need, cuz they're already way sold out, with a waiting list of hundreds.  [note to self: remember to ask Kara for more tips on selling out internet conferences... re: Graphing Social Patterns]

please try to ignore my Ed McMahon-like guffaws... i need to shut the F up & let the star do the talking.

Bill Gates "Kinder Capitalism" Requires New Asset Classes = Securitizing Happiness.

There's a WSJ article this morning about Bill Gates' new ideas for a more creative "kinder capitalism" that needs to work better to address the issues of the world's poor.  That #, depending on how you count it, is somewhere between one-third to two-thirds of the world's 6 billion people.  Altho he says the ideas are still a bit fuzzy, he's planning to talk about it further in his speech at the World Economic Forum in Davos.

Here's a brief video clip on his concepts:

I applaud this kind of thinking, and Bill's efforts through the Gates Foundation are groundbreaking & innovative.  Other similar-minded groups at Omidyar Network, The Skoll Foundation, & Google.org also do amazing work.  I'm a supporter of microfinance accelerator Unitus also doing terrific stuff on economic innovation & emphasizing market forces to make the world better.

Securitizing Happine$$

However, I think there are still a few critical missing market components in what Bill is calling "creative" or "kinder" capitalism.  In fact, i'd say there are several hundred-trillion dollar asset classes that don't currently exist that, once created, will dramatically stimulate market forces to address global poverty issues & other beneficial public infrastructure. I call this effort Securitizing Happiness, or in the long form "Solving Global Economic Issues by Making Markets for Individuals, Small Business, & Natural Resources".  I think this is along the lines of what Bill's talking about, & i've written about it a few times.   

Note that i'm not professing some wacky socialist proposal for redistributing wealth -- i'm talking about unleashing the power of the market via the creation of huge new untapped economic asset classes, similar to the creation of mortgage markets and financial derivatives markets.

In particular, i think these missing asset classes include:

• small business equity markets (~50% of US GDP, more globally)
• individual economic futures (incl. aggregates & derivatives)
• human health impact of natural resources (water, air, land, etc)
  

For my more wacky & lengthy thoughts on this topic, please read this post from a few years back.  I'm continuing to refine my thoughts on the subject, and the concepts i'm working on with Startup Metrics are related in a somewhat convoluted but very essential way. 

hope to do more work on this down the road, and i welcome feedback.

UPDATE: put together a rough slide deck on this here:

Securitizing Happiness: Solving the World's Problems by Making Trillion-Dollar Markets for Individuals, Small Business, & Natural Resources

view presentation (tags: finance capital.markets social.entrepreneurship economics)

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btw, also mentioned in the Gates article is Dr. Muhammad Yunus, founder of the Grameen Bank, one of the fathers of modern microfinance, & recent winner of the Nobel Peace Prize... and certainly one of the most amazing social entrepreneurs i've ever met.  He was in town recently speaking about his new book, Creating a World Without Poverty. 

Two other books mentioned in the article are among my favorites:

• The Mystery of Capital, Hernando de Soto
• Fortune at the Bottom of the Pyramid, CK Pralahad

The Mystery of Capital in particular is a book that really opened my eyes to the value of property rights and housing / mortgage markets in making economic progress.  It's worth the read.

Unitus: Venture Capital for Microfinance -- The Smartest Way to Change the World

Want to make a holiday donation that makes a real difference? 

Give to Unitus.

here's why:

i'm a Unitus board member, and tho it's not a Silicon Valley startup it's one of the most scalable & innovative ventures i'm involved with.

want more info on our impact?  here you go:

• Unitus partners with 16 microfinance institutions around the world
• Unitus reaches 3 million people lifting themselves out of poverty
• Unitus changes people's lives every day... but only with your help.

convinced?  good.   now give it up.

then kick back & feel good about yourself :)

A Thousand Startup Flowers, in Continuous Bloom = The Destruction of Venture Capital

Paul Graham has an interesting new essay on The Future of Web Startups he just posted for his talk at FOWA 2007.  Paul doesn't provide a toc, but i've outlined his essay here:

1. Lots of Startups
2. Standardization
3. New Attitude to Acquisition
4. Riskier Strategies are Possible
5. Younger, Nerdier Founders
6. Startup Hubs Will Persist
7. Better Judgement Needed
8. College Will Change
9. Lots of Competitors
10. Faster Advances
X. A Series of Tubes

Paul can be long-winded at times (me too) but he's usually well worth the read (me not).  In the above essay, he suggests that the increasing trend towards more startups is likely to continue, as well as a new trend toward smaller, more frequent acquisitions.  He also suggests that startup founders are getting ever younger, and that the value of university education is decreasing, except to the extent that you get to meet other interesting new startup founders.  All of these points result in system acceleration, and in particular will begin to force changes in the education ecosystem.

I don't disagree with these points.  And i also am fairly pessimistic about the value of most education systems (side note: altho i barely graduated from college, i never graduated from high school... and in hindsight i don't think i miss the diploma much).  If you read Paul's most excellent book Hackers & Painters, in it he's fairly negative about the entire education process -- he equates most schools to jails that we sentence our children to, mainly because we're too lazy / cheap to give them a real education, and because we don't trust them to enter the workforce until they're much older.

However, i think Paul's essay misses the real target of destruction for startup system acceleration... it's not the Education System, but rather the Venture Capital industry which is about to be Destroyed.

Let me explain.

While i won't delve into a long historical description of the VC business (read The Venture Capital Cycle by Gompers & Lerner), suffice it to say that Venture Capital exists because of several private equity market inefficiencies surrounding the market for funding startups:

• liquidity is limited (exits are relatively infrequent)
• transparency is poor (private company valuation is difficult)
• debt capital doesn't exist / is minimal (new, unprofitable startups can't get loans)
• transaction efficiency is horrible (deals take months to execute, not very standardized)

Now i'm not saying venture capital is evil or bad here... i'm just saying they exist because the market is not very efficient.  And because it's not efficient, capital is VERY VERY expensive.  And because VCs  get hits on average WAY worse than baseball players, VCs are VERY VERY risk averse.

Wait, WTF you say?  McClure's got his head up his ass!  Who is he kidding?  This is the BEST of times for entrepreneurs.  VCs are overflowing with money, there are LOTS of deals happening, and it's EASY to get funded, right?  Furthermore, how can he say VCs are risk averse?  Aren't they in the BUSINESS of making risky bets on unknown startups and markets?

Wrong, wrong, and wrong.

These are only the BEST of times for entrepreneurs compared to the dot-com bust when there was NO capital to be had, or compared to a decade or two ago when the # of startup deals was a fraction of today's market.  And exits took 5 rounds of funding and 5 years.  Now that some companies are taking 2 rounds of funding and getting acquired in 18-24 months, it seems like a walk in the park. 

VCs take big chunks of equity from startups in exchange for very little capital, and in general for very little expertise, because they are CRAPPY at investing in startups, and they need to juice their crappy performance at the plate with steroid-level ownership stakes in order to get anything close to a decent return.  What do i mean by crappy?  I mean if a VC firm is getting decent wins 1 out of 5-7 times, they're probably doing pretty good. 

But if they only get a win 15-20% of the time, then they need 10x performance or better just to get a decent return.  This creates misalignment of interest with entrepreneurs, who might very well look at a sale of the company for just 1.5x-3x as a good deal... but for VCs, that's not such a great deal, because they know how BAD they suck at the plate.  They HAVE to swing for the fences every time, because they're just terrible bunters & baserunners, because they so rarely get on base.

Furthermore, most VC funds FAIL TO BEAT THE MARKET.  One quarter of them make a killing -- largely because they have huge chunks of equity in companies to which they contribute precious little except capital.  but outside the top quartile, they probably don't beat the overall market, and they certainly don't justify the risk. 

So how can we justify such terrible plate performance from VCs?

Simple: because there ain't no other fucking alternative.  Banks don't lend money to unprofitable startups.  Neither does your uncle, if he's smart.  And the government doesn't have an equity-equivalent program to the SBA (debt, not equity).  Well, they do... they're called SBICs, and unfortunately the capital is not really available to most startups.  basically these are government-subsidized venture capital / private equity companies, and it's *their* job to find, filter, and invest in startups.

but here's the thing.  the market is changing.

ten years ago, technology startups were capital-intensive businesses.  they required years of development & financing, lots of expensive sales people to generate revenue, and exits tended to be larger and much less frequent.

these days, the world is quite different.

servers are cheap or hosted.  software is often free.  pipes are fatter, more audience is online.  so technology startups can easily get going for less than $2M, often less than 250K -- hell some startups began as weekend coding projects. 

and acquisitions are happening more quickly.

not exactly sure i understand why this trend is happening, except that there are now easily 5-10 large internet platform companies (Google, Yahoo, Microsoft, eBay, Amazon, Newscorp/MySpace, IAC, AOL, etc) all of whom have millions of users and are generating billions in cashflow.  and they need to buy new products to throw at their customers, but they can't innovate internally due to bureaucracy, so.... they buy startups.  WAHOO!

but this isn't even the most interesting part.

imagine: if you could measure startup performance more accurately, and if you could do company valuation more accurately, and there was a liquid market for quick, efficient transactions based on standardized metrics & standardized online transactions documents... what would happen?

well, if you had such market conditions... why, you could sell out at any time.

huh?  why would i do that?!?  I'M AN ENTREPRENEUR GOD DAMMIT.

well, ok... an entrepreneur with bills and a car payment.  and two kids.  so bear with me... supposed you could sell out at any time, at a reasonable market price.  So what?

so if you could accurately value the business at any time, and you can get an exit at any time, and transaction cost efficiency goes down... then you don't have to go to a VC for capital.  once you start having a liquid, transparent, efficent market, the cost of capital becomes very cheap.  and you could just start BORROWING money instead of SELLING equity to raise capital.   and when you wanted to sell, you wouldn't need any expensive VCs or investment bankers, you'd just sell to Mr. Market at whatever rate he's willing to pay.  lenders could accurately value businesses, bet on a rate of success/return, and quickly undercut the cost of capital for VCs. 

ok, right.  like that's gonna happen next week?  dream on, mcclure.

well i sure as hell hope so. 

and whether Facebook or Google or someone else figures out how to provide such a metrics infrastructure tomorrow or 5 years from now, the resulting market should hopefully be a much bigger fishpond for us all to play in.

ok, i'm tired... haven't explained this as well as i might, but i gotta get some rest.

i'll fill in the gaps and provide some pretty pictures & charts later.

"... the proof is left to the reader as an exercise.."

or just read alex iskold's post