Miles To Go.

Charlie Green, author of Trusted Advisor

(MS) Since there is so much buzz around Sharing, (I’ve written about it recently here, here and here) and it’s key component, Trust, I’ve asked some experts to lend their opinions on my blog to fill out the color commentary. Here’s Charlie Green;

Whether you call it “the sharing economy” or “collaborative consumption,” there’s a fascinating new economic and social phenomenon going on.  While not identical, both terms refer to markets for the sharing of products and services between individuals.

It may seem obvious that the role of trust is pretty critical. But just what that role is turns out to be not so obvious.    

Background

The chroniclers of the movement are Rachel Botsman (Botsman & Rogers, What’s Mine is Yours), and Lisa Gansky (The Mesh: Why the Future of Business is Sharing). Botsman characterizes three sub-markets: product-services systems (like ZipCar), redistribution markets (eBay), and collaborative lifestyles (CouchSurfing).

Some of those sub-markets hint at huge scale economies: how many zillions of available-seat-miles go unused on the nation’s streets and highways on driver-only trips? How many available car-hours per day are actually used for driving, as opposed to uselessly hogging valuable real estate? And for nearly every traveler vacationing, there’s an empty house back home going unutilized.

Other sub-markets are more akin to intriguing social experiments: imagine a global foreign exchange student program run for adults, only faster, bigger, and with do-it-yourself vetting, and you’ve got something like CouchSurfing.

In an odd way, “markets” is precisely the wrong way to describe the social experiment part of the phenomenon – it’s anti-market, in a sense, to focus on collaboration and reduced consumption, rather than on increased sales and  intermediating exchanges.

But in more traditional senses, these are very much markets, with loads of interest. Technologies are enabling peer-to-peer interactions; but unlike stock exchanges and book-buying, many of them exist to facilitate real flesh-and-blood interactions. Subletting your house or apartment to someone, or simply hosting an out-of-town visitor, is no trivial social exercise. And lending out your car or tools, while not necessarily social, also involves a social risk.

Which is where trust comes in.

Trust in the Sharing Economy

If you’re going to open up your house to someone you’ve never met before, you will make some form of trust calculus about the possible guest.

The reverse is true as well: if you’re going to go spend some time as the house-guest of a perfect stranger, you also will make some assessment along the lines of, “Do I, or do I not, trust these people?”

Might there be a secondary market here for trust. Indeed, there might.  (Disclosure: I have a small relationship with one such venture, TrustCloud). Suddenly, the decision to trust has economic, and possibly very personal, consequences.

Trusting and Being Trustworthy.  People often talk about “trust” as if it were a single thing.  It’s not.  “Trust” is the result of a trustor and a trustee arriving at an agreement. Trusting is not the same as being trusted. Trust is, if you’ll pardon the abstract language, an asymmetric relationship.

To be clear, the one doing the trusting (the trustor) is the one taking the risk. If I loan my tools or house to you, you might abuse them. The trustee, by contrast, takes little risk.

The trustor’s decision is based partly on the perception of the trustworthiness of the trustee. Wouldn’t it be great, the thinking goes, if we could come up with the equivalent of a FICO credit score for would-be trustees.

The search for trustworthiness metrics goes in two directions. One is reputation;  the other is behavior. Reputation is relatively easy to assess; unfortunately, it’s also easy to game, and can easily be confused with notoriety. Kim Kardashian may score high on reputation, and even influence – but does that mean you trust her?

Behavior is harder to game: to fake behavioral dependability, I would have to establish a track record of dependable behavior – which is, after all, the point. It can be faked, of course, but such an elaborate con requires a level of effort quite out of proportion to the benefit, not to mention out of character.

Trusting. It’s easy to focus just on measuring trustworthiness, particularly in the product-services and redistribution markets, where the trustor wants information about the trustee to mitigate downside risk.

But in the collaborative lifestyles segments of the movement, it’s not just the trustworthiness of the trustee that is important, but also the trustor’s propensity to trust. In the fascinating sub-movement that is Couchsurfing, the parties aren’t just looking to cut risk: they want upside potential in terms of fascinating people willing to take social risks in order to meet others. They want trustors.

The 60s Redux?

The parallel with the 60s is instructive. Some of the era’s social experimentation didn’t make it out of the 70s. But the Beatles, Steve Jobs, and the Grateful Dead were all once-radical types who created models that are mainstream business today.

Even the hard-core economic segments of the sharing economy aren’t as radical as we think. The timeshare industry “shared” underutilized vacation home capacity; so did distributed computing in the 70s-80s. McDonalds’ discovery of breakfast was another capacity utilization play that paid off big.

In any case, we’re all going to be talking more about trust. And that’s likely a good thing for us all.

The Social Network is a hell of a movie, but the real people upon whom the characters were based have stated that the film’s version of the founding and growth of Facebook was overly dramatized. And appeared way more fun than it actually was.

Face it, entrepreneurship is hard. Angel investing is doubly hard. While we read about spectacular successes, one can hardly keep up with the many outright failures preceding them. The thin veil  can really only be perceived once you are on the right side of it-it’s practically see through! But if you are on the wrong side, the thin veil might as well be a brick wall.

Someone once said the two best traits an angel investor can possess are a strong stomach and a sense of humor. The strong stomach will tolerate its share of quick deaths from being too early, too late, poor execution or leadership, lack of funds, or just tons of competition. The sense of humor will come into play when you attempt to tell your God which element of your portfolio is going to be The Big One. God will invariably laugh and throw at least one thunderbolt, wreaking havoc with your “sure thing” — but turning your also-ran into a winner. (No kidding, it’s happened. But to protect the innocent, we won’t name those we feel were luckier than they were skilled.)

Other sources of angel heartburn include those frustrating periods of illiquidity…the fast pace of technology which upends business models and proprietary positions quicker than at any time in history… the global markets bringing competition to one’s door on a massive scale… the high valuations of exposed deals,…the lack of influence when part of a syndicate…the competition with other angels (and now, VC’s). The list goes on.

The angel game can be summed up in the words of the “advert” placed by explorer Ernest Shackleton (1874-1922) ahead of his Antarctic expeditions (none of them successful, by the way):

“MEN WANTED FOR HAZARDOUS JOURNEY.

SMALL WAGES, BITTER COLD, LONG MONTHS OF COMPLETE DARKNESS.

CONSTANT DANGER, SAFE RETURN DOUBTFUL.

HONOR AND RECOGNITION IN CASE OF SUCCESS.”

And yet, we do it.

EO: Great Group of Entrepreneurs

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. For a complete copy, visit the FOA website. 

Any SFO considering allocating a portion of their assets in venture toward angel investing has to acknowledge the significant risks in the market. One sobering take from the US Small Business Association is that roughly 80% of small businesses fail in the first year, 10% in the second and 5% in the third, leaving a paltry 5% of new ventures that even qualifies to deliver a return for investors. I am a member of EO (logo at left), a global organization with 8,000+ members that fosters entrepreneurs, and the odds are just slightly better there I think.

Sticking with the digital media businesses discussed in the last section, here’s a brief summary of the early stage venture risks associated with this sector:

Operational Risks are legion in startups. First out of the gate is execution on the development of the product. Many products and services simply fail to launch, whether due to poor specs, loose design
concepts, or from just plain misjudging a market need. Another common problem is never solving the cold start challenge and acquiring users. Assembling talent, accessing sufficient capital, maintaining differentiating advantages over competitors, and a go-to-market strategy are a few more risks to consider.

Timing Risk — also referred to as Luck. Often, an entrepreneur’s vision has merit, but market conditions have not yet gelled to support it. Frequently, capital is wasted on development and/or marketing in
anticipation of a developing market. When the tide doesn’t rise in time, the company is left high and dry. One example? The many mobile/ social networks that tried to deliver hyper-local advertising audience and failed. In the meantime, Gowalla and FourSquare entered the market just as mobile and social converged, and were propelled to higher and higher market caps. Likewise, any mobile/social solution launched now with similar attributes would be too late and face heated competition.

Funding Risk can be mitigated by an SFO in the early stages of the company, but in our digital media example, additional capital will be needed — or at least easy to acquire –in order to scale the business. A good example of funding risk affecting returns would be the inability for mobile ad networks/ platforms to raise capital before mobile was “proven” viable (see AdMob’s sale to Google and Quattro’s sale to Apple within a 6 week period). Before those landmark deals, funding sources constantly questioned whether there was a “real” market in mobile, citing the struggling networks who hadn’t succeeded, despite $250,000,000 of combined capital. Several early stage companies faltered for lack of capital, and several other investors suffered dilution from large downdrafts in valuations. An SFO can, of course, prolong the agony by continuing to fund (Fred Wilson’s famous quote here is “I have a 0% mortality rate- I just keep funding!”) but the effect on returns when others do NOT fund, or fund at lower prices, is undeniable.

So, if you are considering angel investing with your SFO be sure to match the risks with the rewards. There are more of the former than the latter!

 For a complete copy of the complete paper, visit the FOA website. 

Fred w phone. No unlimited data plan just yet...

There is a yawning gap emerging in the world and I think this gap will define the advancement of societies, the creation of jobs,  and even the happiness of populations in the decades to come: it is access to mobile data and I call it Flintstones vs. Jetsons. (shout out to April Rudin for the headline).

• Generation segue: Some of us remember Fred Flintstone. Worked in a quarry, drove a foot pedal car. Loved to bowl and eat steaks. Life was simple, and there was not a lot of reason to innovate. Pebbles and BamBam didn’t seem to be a big generational culture gap. A loveable guy in the Jackie Gleason vein.
• And his cartoon counterpart, George Jetson. Worked are Spacely, drove an automated space scooter. Astro walked himself, Rosie the Robot did the chores. Skyped with the office, used the tele-puter on his wrist. Loveable knucklehead is in a fast-moving world, but he kept adapting and he kept pace.

So my point, my belief, is that we have arrived at a crucial inflection point in our history, where people, countries, leaders (and entire industries) are choosing to go Flintsone or Jetson. And the catalyst for this decision is, clearly, the smart phone and the data it generates. The Flintstone are content with how things are. They have found ways to live until now without technology, and they resolved they would coast from here on in, whether in their carreers or their lives. Financial planners are on the list. So is much of the financial services (non retail) industry. Traditional media has hated the transition. KONY is no fan. Nor is Assad, or Mubarak. People of a certain age (but not all!). There are lots more.

Meanwhile, the Jetsons accelerate. The gap has not even yet begun to present itself.

mOcean at Mobile World Congress

If you have any doubt of how quickly this industry has grown, check out the Mojiva/Mocean (I am an investor) booth at The Mobile World Congress. MWC was, five years ago, just a bunch of suits from Nordic and Asian countries wielding flip phones for voice and text. Today, MWC is heralded as the biggest and the best mobile technology event in the world. According to conference organizer the GSMA, this year’s event played host to a record number of attendees, topping out at 67,000 visitors from 205 countries; an 11% increase over the 2011 show. The four-day conference and exhibition attracted mobile operators, software companies, equipment providers, Internet companies and media and entertainment organizations, as well as government delegations from across the globe. More than 50 percent of this year’s attendees hold C-level positions, including more than 3,500 CEOs.

Most telling perhaps, CEO’s were wearing jeans, T’s and blazers…

So here’s the shocker datapoint from cisco: 40% of the worlds smartphone data is consumed by… 1% of the world population. That means a small group of people are gaining an unfair (perhaps) advantage because of their access to information

• The subways are down: take the bus.
• This new place is overcrowded: here’s another local option.
• Gas prices are skyrocketing, but discounted in NJ this weekend.
• This client has spent xxx seconds on the site and is ready to take the next buying step
• Yo Twitter! The rally to unseat the government has been moved to the following sidestreet!

The examples go on and on. A few minutes saved. A better solution for the moment. A bit more background before the interview. A better way, on the way. Compound that millions of times over billions of people and guess what: you have a new gap between the haves and the have-nots. Food for thought before you make your choice between Flintstone or Jetson!

Shields up!

This excerpt is serialized from a whitepaper titled Angel Investing for Single Family Offices (SFO’s) by The Family Office Association and Vaux les Ventures. For a complete copy, visit the FOA website.

I am often asked how I have dealt with risk as an entrepreneur and now more often as an angel investor. Short answer is I have just become accustomed to it, and at least always know when it’s there. Here are a few risks that both angels and entrepreneurs should consider:

Structural Risk must also be considered before making angel-type investments. While there are several angels who’ve become well known with their “spray and pray” philosophy, diversity won’t save an investor if the structure of the investments isn’t optimized. Unless the criteria are to be entirely passive and devoid of value-add to the company, then an SFO might consider putting some basic protective structures in place. These can be as simple as board and information rights for the SFO or one of its angel partners; basic protective provisions in the stock purchase agreement or reasonable valuations that still leave room in the cap table for another, larger investor later on.

Super-long hold periods are a recent – and generally unwelcome — development in the angel market. These are primarily a result of the moribund IPO market in the tech market over the last few years, as well as VC’s managing billions of dollars in committed funds. As a result, most companies are being forced into “hold” periods that can last 7-10 years — without liquidity. The VC’s have a vested interest in funding the company for a bigger exit (as they’re paid in part based on the amount of funds they manage). Entrepreneurs and angels are on the other side of this argument, as many have committed their lives, livelihood, and capital, and continue to risk significant portions of their net worth (in the entrepreneur’s case) and investable assets for the sector (for the angels) over an entire decade of risk exposure. The pressure has begun to release in the form of secondary funds like Second Market and Millennium Technology ventures, which purchase founder and angel shares far before the respective VC would consider doing so.

There are so many risks to being a start up, and those risks can be compounded (and/or mitigated) through how you go about angel investing.

Best rule of all: go in with eyes open!

Largest on water cleanup- Ever.

News spread pretty quickly that the Shell Oil LNG platform destined for Long Island Sound sunk back into oblivion last week, likely for good. In its proposed form, it would have towered above all other structures on either side of that great body of water and inspired the curses of generations to follow. It should have been a procedural layup, with the interests of the Sound split between two states, both struggling with budget and resource constraints, and zero organized advocacy to oppose the revenue generating and cost saving proposal.

Now the legend of how that didn’t happen continues to grow, just as quietly as it snuck up on everybody before the battle began.

Begin with Leah Schmalz, a delightful director of legal and legislative affairs for Save the Sound, a program of Connecticut Fund for the Environment who began the opposition eight years ago with meager resources and virtually zero platform to get the word out. She picked her punches wisely.

Then, out of no where, Kayak for a Cause jumped in, ostensibly because ”Save the Sound” had the brand that most directly fit the core values of the organization. But as KFAC learned more, both organizations realized the symbiosis of their existences. What followed was a virtual marching band of support for Leah and her work at STS. When STS needed to get the word out, KFAC designed an “on the water clean up” over 14 miles of sound. When STS needed a platform to gather more supporters, KFAC was there with a stage, a microphone,and a tremendous crowd ready to listen. When STS needed promotion during a crucial state senate vote, KFAC rallied its 10,000 donors to flood the capital with expressions of concern. And when STS needed financial resources to back up Leah, KFAC was there with five figure support, year after year.

Was is most amazing, perhaps, is that all of this was started with nothing, and done for love: One simple bet, and a few guys redirecting the proceeds to charity became an annual tradition along the Sound.

It’s now hard to fathom that KFAC has always been an entirely volunteer organization which somehow fields a crew of 500 committed souls every year to manage the logistics of a modern day Normandy with a beach party at the end. The leadership and organizational talents of this group are stunning. People like Shirleen Dubuque and Steve Showalter organize provisions, supplies and people with sublime, 11th hour hijinx. Kim Beaumont at DownUnder and Dave Haddox from Purdue have likely trained hundreds of kayakers to be safe enough to make the voyage. Tad Jones worked stage miracles for years, packing thousands of people into legendary beach parties that rallies the troops around the charities. Patrick Sikes was a master magician at logistics. Amy Rule and Kathy Foreman wrangle hundreds of volunteers to do undesirable work details at unmentionable hours. And Adam Uhrynowski and Brian Russell have this magic touch capturing the whole thing on film for us to replay over and again in the long winter months of  frozen water.

All of this energy was harnessed and directed to something good, for years on end. And then last week…

“In sending a letter to the Federal Energy Regulatory Commission requesting to vacate their certificates, Broadwater has signaled that their proposed floating gas plant is finally dead,” said Leah Schmalz. “Eight years ago, the citizens of Connecticut and New York recognized that this proposed project was not good for our environment or our livelihood,” Schmalz said. “It took years of fighting, partnering with federal and state officials on both sides of Long Island Sound, but now we can say that the health and safety of our Sound will not be compromised by the proposed industrial complex.” More here

Years ago, another KFAC treasure named Morley quoted Pete Seeger  in “Where Have All the Flowers Gone” from the stage, as she had witnessed KFAC grow from dozens to hundreds and then thousands.

I’ve been surprised by some good things happening in my lifetime. Sometimes quite suddenly.

Imagine a big see-saw, with a basketful of rocks sitting on one end. That end is down on the ground. At the other end, up in the air, is a basket half full of sand. Some of us are trying to fill it, using teaspoons. Most folks laugh at us. “Don’t you know the sand is leaking out even as you put it in?”

We say, that’s true, but we’re getting more people with teaspoons all the time. One of these days that basket of sand will be full up and you’ll see this whole see-saw just tip the opposite way. People will say, “Gee, how did it happen so suddenly?”

Us, and our little teaspoons.

Leah Schmalz is now working on controlling emissions and ecoli bloom from the Bridgeport harbor. Kayak for a Cause launches for its twelfth year on July 21th. And Long Island Sound is that much nicer because they do what they do.

Not exactly the deal honeybadger

This excerpt is serialized from a whitepaper by The Family Office Association and Vaux les Ventures.  For a complete copy, visit the FOA website.

I am often asked- by both entrepreneurs and angels- about where the best places to find superior deals and superior angels. Well, your hang out Group will determine Your Structure (for better or worse). One of the most important – yet frequently overlooked – elements of angel investing is how an SFO or angel arrives at terms for investing in a company. How you source and who you associate with will dramatically affect how successful your investment might be, regardless of how well the company does.

I’ve always trised to keep an open mind as to where ideas come from, and avoid getting locked into all the same sources.

On this point, here are some things to consider:

EIR Program- “create your own deal” is the scenario in which an SFO has the greatest control over terms. They literally dictate. While this seems ideal for an investor, it does leave out of the equation market forces, setting up surprises if outside financing is ever sought. The venture landscape is littered with rejected companies whose cap tables and governances were reflective of a controlled situation — that don’t fit into real-life market conditions.

Angel Networks drive a unique dynamic in funding companies, often referred to as “herding cats,” a/k/a the Syndicate from H*LL. Companies on the prowl for more investors than they can naturally attract will show up at any number of angel networks. They often pay a premium to present to “qualified investors”, and even endure a vetting process to get into the room. But once they present, something troubling occurs: many of these angel investors don’t have the resources or the confidence to take down the entire round themselves. And so, the company attempts to set the valuation and the terms of the placement. The results are often disastrous, with unwieldy expectations and no one investor to keep them in check. The typical result, especially in a frothy market, is that the angels do deals with terms that are not negotiated with any sort of leverage, and no hopes of control or influence on the future of the company. While some companies do get funded this way, and some angels actually emerge with decent returns, the odds are stacked against it.

The Angel Alliance [or, “Buddy Deal”] there’s one significant advantage to a small group with the resources to do an entire round: leverage. If an SFO is fortunate enough to align itself with a group capable of filling every round, it offers the entrepreneur a solid financial partner that allows them to focus on growing the business. This typically results in enough equity for the angel group to share some with the member stewarding the deal, and still leave room for attractive valuations and reasonable governance structures. If the economics aren’t there, most groups have the benefit of enough deal flow to move on to the next opportunity in the sector (as opposed to the EIR), while still maintaining their leverage.

So, while many angels are wondering how they arrive at better terms on more interesting deals, what they sometimes fail to realize is if they look in all the same places, they are likely to see all the same deals, and all the same types of structure.

Said another way: get out more often!

For a complete copy, visit the FOA website.

Ride share with this gang?

I’ve been spending some time learning more about the sharing economy and some of its players. As an angel investor accustomed to clearly defined problems, grand solutions and natural revenue models, it seems like the beginning of the story. Kinda like a lot of people showing up in munchkin land- somewhat disoriented, terribly excited, not sure of the path forward.

Dorothy was pioneer when it came to couchsurfing (wimdu perhaps?), but she woke up in a terribly different world. She had to make snap judgments about people, and she had very little context to help (The Good Witch of the North notwithstanding). She was taking very real risks with herself, her dog, and her ruby slippers. But she had to rely on her wits: no help from web 2.0 and social media to help her make big decisions on risk  (one of the great segues of all time folks).

Nowadays, there are more ways to make an assessment about people. People vouch for each other on sites like LinkedIn, Honestly, and Connect.me. People accumulate likes and helpfuls from sites like TripAdvisor, Facebook and Yelp. And some products go further, combining those elements plus offline verification to develop multi-layers scores, like TrustCloud (I’m an investor). Through all these inputs, we have begun to infer things about people based on their actual behavior over time. Here’s how a well-designed trust solution might have helped with her key judgments:

1. The Scarecrow- great domain expertise and happy to assist. Probably a contributor to Yelp or TripAdvisor and frequently tagged helpful.
2. The TinMan- experienced and analytical, probably has people vouching for him like the static inputs of Honestly and Connect me
3. The Lion- I have this guy tagged as a reputation guy. Very proud and looking to clean up what people think of him. Uses Reputation.com a lot.
4. The Wizard- He’s all about influence, which means he spends most of this time on klout.
5. Dorothy- a teambuilder and leader. Probably destined for LinkedIn. But having trouble verifying place of residence!

The point is (and I have taken a veritable yellow brick road to get there) that we no longer live in Oz. There is real, relevant data out there that when properly gathered, weighted, and presented can really help the sharing economy navigate their challenges. (Here’s a great blog from Charles Greene on Trust). But no single point of reference and no rigid formula will serve the Trust needs of every community, let alone every situation.

This is a challenge and a journey that requires multiple layers, great heuristics, and the power of the network effect. (which is one super reason for all these layers to work together). I look forward to watching how this evolves, and who gets to the Emerald City first.