THE LAB

Microfinance is a bold, world-changing idea that is in full bloom right now.  The aim is to provide low-income households with permanent access to a range of high quality financial services to finance their income-producing activities, build assets, and protect against risks.  The real genius of the idea is shrinking these financial services down to a manageable level for the world’s poor.  By micro targeting they have been able to dramatically expand their impact: going big by going small.

Finance is certainly one of the great tools to build assets and protect against risk, but there is even an older and more stable tool to accomplish this: land ownership.  In fact, you could argue that land could be a poor person’s most powerful asset – a tangible, transferable asset that can be the foundation for home and work.

The question is:  can you do to land ownership what microfinance did to finance?  That is, can you go big by going small?

The Rural Development Institute has been working hard on rural land ownership for decades, and they are now turning their attention to shrinking the concept.  They are working on a “microplot” project in India.  The results are pretty interesting and track closely to the kind of success microfinance has had.   Maybe the magic of “micro” will work for land too.

Business Week wrote a provocative story this month on peer-to-peer lending:

It has been a year of setbacks for peer-to-peer lenders such as Prosper, Lending Club, and Zopa, which use the Web to connect those who need a loan with individuals willing to act as lenders. Once positioned to become an alternative financing spigot for entrepreneurs, the nascent industry has been hit by regulatory issues, a slow economy, and a slew of defaults.

The biggest player, Prosper, stopped making new loans in October. It will resume after it completes its registration with the Securities & Exchange Commission. That has left the field to smaller rivals such as Lending Club, which completed its filing last fall. Zopa, a British company, pulled out of the U.S. market in November after deciding that its business model, which relied on credit unions, simply wasn’t attractive. As Prosper prepares to reopen this spring, one question looms: Can the industry attract enough lenders to be a viable source of funding for entrepreneurs?

The basic conclusion the article makes is ‘no’:

If peer-to-peer lending does make a comeback, it’s likely to serve only those with sterling credit who are shopping for better rates—and not the majority of entrepreneurs.

This is a dramatically simplified analysis of the model and why it is struggling.

First, peer-to-peer lending is the oldest form of finance and it is rooted in the principles of community.  Its first formal structure stretches back to 600 AD in China, but the basics of peer-to-peer lending were present in the earliest human civilizations.

Banks didn’t come around until much later.  Depending on your definition, the first banks sprouted up in the 1600’s.  And really a bank is basically an institutional formalization of the best of peer-to-peer lending.  A person makes a deposit and the bank uses some of that money to lend to another person; when that person pays the bank back, the bank gives some of that interest back to the person who deposited – and so on.

Remember that scene from It’s a Wonderful Life during the bank run.  George Bailey pretty much nails what a bank is: “You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house; that’s right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.”

The thing is that banks have a tendency to make this rather simple premise extremely complex, opaque, and inaccessible.  And it’s exactly this complexity and lack of transparency that got us into this massive banking crisis.  Things got out of hand when banks got away from the basic principles of peer-to-peer lending and into the madness of derivatives and trading on invented wealth.

Given this context, I think that peer-to-peer lending is more important than ever.

The modern peer-to-peer lending movement is a revival not an invention.  It is using modern tools to reconnect us with a very old tradition — and the important thing is that it cuts out the institution (the bank) and reestablishes the personal connection.

As the article points out, there are flaws.  But I’d argue that these are flaws in execution not concept.  I’ll get more into that in my next post.

Photo Credit: _G2 on Flickr

Turns out it’s Pittsburgh.

The Washington Post and the New York Times have been exploring Pittsburgh and Detroit and the differences and lessons from both experiences.  These urban experiences are case studies in the contrast between urban areas taking advantage of next generation thinking, and those trapped in old thinking.

The New York Times’ article is a powerful profile of Pittsburgh:

This is what life in one American city looks like after an industrial collapse:

Unemployment is 5.5 percent, far below the national average. While housing prices sank nearly everywhere in the last year, they rose here. Wages are also up. Foreclosures are comparatively uncommon.

A generation ago, the steel industry that built Pittsburgh and still dominated its economy entered its death throes. In the early 1980s, the city was being talked about the way Detroit is now. Its very survival was in question.

Deindustrialization in Pittsburgh was a protracted and painful experience. Yet it set the stage for an economy that is the envy of many recession-plagued communities, particularly those where the automobile industry is struggling for its life.

“If people are looking for hope, it’s here,” said Sabina Deitrick, an urban studies expert at the University of Pittsburgh. “You can have a decent economy over a long period of restructuring.”

Pittsburgh’s transition has been proceeding for decades in fits and starts, benefiting some areas much more than others. A development plan begun in the 1980s successfully used the local universities to pour state funds into technology research.

Entrepreneurship bloomed in computer software and biotechnology. Two of the biggest sectors are education and health care, among the most resistant to downturns. Prominent companies are doing well. Westinghouse Electric, a builder of nuclear reactors, expects to hire 350 new employees a year for the foreseeable future. And commercial construction, plunging in most places, is still thriving partly because of big projects like a casino and an arena for the Penguins hockey team.

The question is whether Pittsburgh can serve as a model for Detroit and other cities in the industrial Midwest as they grapple with large-scale cutbacks in the automotive industry. Even with the federal government’s $17.4 billion bailout, General Motors, Chrysler and Ford are expected to continue shrinking.

John Craig writing in the Washington Post chimes in with his own thoughts:

So when I think about the lessons the Steel City’s 30-year economic transformation may hold for Detroit, another town built on an industry beaten by competition and confronting bankruptcy, I have to say that the first and hardest lesson for the Motor City is this: Fundamental change will be much longer in coming than you can imagine. You’ll survive. The automakers, bailed out or not, will shrink and adapt to a new future and a new reality. The city will remake itself in whatever ways it can. But there’ll be no “getting over” your past, only moving beyond it.

Organizing and managing contraction is not an activity we Americans know much about. But you’re stuck with the job, Detroit, and it will go better for you if you’re clear-eyed about who you are and where you’ve come from.

While these articles are limited to two cities, the lessons here are applicable to cities across America.  There are valuable lessons in Pittsburgh’s experience for cities looking to survive this period of collapse and contraction.  The most important thing is to remember the core strengths of your own community and accentuate them, while embracing change, using nimble management models, and fostering creativity.

At the 2008 World Economic Summit in Davos, Bill Gates gave a speech calling for “creative capitalism.”  The rough take away was that corporations are good at solving problems, and the world has enormous problems. If companies would apply their unique talents to these problems, they might be able to find solutions that have so far eluded governments and civil society (nonprofits, etc).

Lots of people are toying with the idea – heck, we here at RVL believe that you can harness the power of business for a more vibrant and sustainable world.  But because Gates is who Gates is, the idea has been turned into an intellectual cottage industry headed by Michael Kinsley, the founder of Slate.  Kinsley has taken an open source approach to the subject, creating a blog populated by some of the smartest economists and economic thinkers in the world.

Kinsley distilled the best of that conversation into the book Creative Capitalism.  Because it is a book based on an open source dialogue, it is built to provoke more than conclude.  In fact, he seems self-consciously aware that the concept and the ensuing discussion is, at best, in its infancy – and that the real value of the book is to inspire ongoing conversations.

Some of the provocative subjects:

• Can altruistic firms survive in a competitive market?
• The problem with competitive capitalism is that it is unnatural, not uncreative.
• Why is creative capitalism so hard?
• Socially responsible ends should come from foundations and advocacy rather than the market.
• Would it be better to put our energies toward making governments more creative?

Check out the blog here.

What do you think?  Can capitalism save the world?

Maki over at Dosh Dosh has a great read on the power of social media as a marketing tool.   The challenge is that most people think of social media as an isolated tool, where if you build it they will come.  Maki tears this apart and makes a compelling case for a comprehensive and complementary approach:

A fundamental aspect of marketing is to gain the attention of a target audience and engage or redirect it in a way which fulfills specific objectives, such as a positive increase in reputation, legitimacy, mindshare, exposure (visitor traffic), sales and captured leads (subscribers, users, clients etc).

In terms of online marketing, social media channels offer many opportunities. Some webmasters focus on setting up profiles with self-serving user generated content only for backlinks and traffic. Other savvy brands or individuals actively interact with online communities while moderating the impulse to ’spam’, in order to build legitimacy, authority and a better reputation in the specific field.

And then there are a few that adopt a particularly powerful social media marketing strategy that consistently extracts attention with ease. A way that reaches out to every new and future member of a social community automatically with minimal effort. A tactic that markets continuously as long as the social channel exists and grows, without end or interruption.

Sounds good, huh?  Go read the rest, and then tell us what you think.

This article in Globe and Mail points out that everyone is searching for ways to solve problems in one of the most difficult economic climates in generations.  The temptation for institutional traditionalists is to sink further into their bunker while (paradoxically) looking for a new way forward.  This is exactly the kind of thinking that got us into this mess.

We need leaders to start looking for something more, and the author notes:

The key to finding that “something more” may well lie in “open-source problem solving” – a technique employed by Toronto executive Rob McEwen more than a decade ago to revitalize a dying gold mine at Red Lake, Ont., and turn it into one of the most productive lowest-cost gold mines in the world. (The story is well told in the book Wikinomics, by Don Tapscott and Anthony D. Williams.)

When Mr. McEwen took over the Red Lake mine, the gold market was depressed, the mine’s costs were out of sight and its union refused to make concessions. It looked like the end was near. (Sound familiar?) But Mr. McEwen believed there was gold to be found. He gave his geologists a “stimulus package” – $10-million for further exploration – and his faith was rewarded when they brought in test results indicating rich new deposits on the Red Lake property. But getting an accurate estimate of the gold’s location and value, and proceeding with development, proved frustratingly elusive.

Then, in 1999, Mr. McEwen attended a seminar for young presidents at the Massachusetts Institute of Technology. He listened to the story of Linus Torvalds and how he had assembled a world-class computer system over the Internet by using the “open source” technique. At its heart was Mr. Torvalds’s willingness to reveal his computer code to the world and invite thousands of anonymous programmers to vet and improve it.

Open-source problem solving! Expose your goal, your problems and all your data on the Internet. Invite proposals from anyone. Offer clear guidelines and substantial financial incentives to induce quality responses, and act on the best proposals received.

So, Mr. McEwen offered $575,000 in prize money to participants with the best proposals for developing his mining property. To the horror of his company’s old guard, he posted all the proprietary geological data on the Red Lake property on the Internet, inviting analysis from geologists and other experts all over the world. Responses flooded in identifying target sites for development, only half of which had been identified by the company. To make a long story short, the open-source collaborative process aided Red Lake in finding and extracting more than eight million ounces of gold and in re-establishing the mine on a more prosperous footing than it had ever enjoyed before.

It is possible to build innovation and increase productivity even by sharing a company’s previously proprietary information, if it includes inviting ideas from outsiders and breaking down artificial barriers between them.  The big problems are going to take a more comprehensive approach, and one way to get us all working on solutions is to embrace open source problem solving.

You can find more about Wikinomics here.

 
This video captures the opportunities and threats of these exponential times we live in.

Our challenge is to harness the power of this progress and steer us toward a more vibrant and sustainable world.  At RVL we believe that the answer to this challenge is to infuse this exponential progress with the fundamentals of community.

What do you think?