So you are passionate to pursue an innovative idea that can make a real impact. But you can’t do this in a vacuum. You need to have some vision of world in which your venture will operate that includes two key issues of economics. You also can’t do it alone; you need a network of family, friends, colleagues, and/or partners. We will also take the funding ideas from topic 4 and weave them into a proposal for your innovative venture. NOTE: some of these ideas may not be easy to understand because we are used to thinking of the future in terms of our personal experience. Expect to be confused and concerned as your thinking changes its paradigm.
Economics of Scarcity and Abundance
The concept of scarcity is the foundation of all traditional economics. The more scarce and desirable a resource is, the more it costs (and the more your company can charge for it). Since you are somewhat familiar with scarcity, check out this Khan Academy video (5-min) designed to teach the concepts to school children (middle and high school). Sal Khan, himself, narrates the video, and if you watch most of it, you can get a small feel for why he’s popular with kids. That’s important to us because Khan has created a non-profit organization that has had a massive impact in education! (I also like him because he speaks as slowly as I do, speed him up if you like): https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/basic-economics-concepts-macro/introduction-to-the-economic-way-of-thinking-macro/v/scarcity
SCARCITY and the Law of Diminishing Returns
Part of the economics of scarcity is the Law of Diminishing Returns, first described by an 18th century observer. Examples will explain it. Imagine you are a farmer, and you spend money on expensive fertilizer. A naïve view is the-more-fertilizer-the-better to make plants grow faster and bigger. But the crops can only need a certain amount for their health, so the extra either goes to waste or provides just a marginal improvement. Past a certain point, each dollar you spend on fertilizer yields a “diminished” or smaller increase in crops. Similarly, if a project is behind schedule, say for building a new road, impatient drivers may clamor for more workmen and equipment to be used. In fact, after an ideal number of workers and equipment is supplied, they get in each other’s way, diminishing the value expected from the added scarce resources. This happens to be an acute problem in programming projects, an observation that Fred Brooks turned into a classic book titled “The Incredible Man-Month.” He found that more programmers often were COUNTER-productive, causing further delays than if the team stayed small. (no need for link to further information here.)
ABUNDANCE and the Law of Accelerating Returns (especially for those in 20’s and 30’s!)
But there are cases where the ideas of scarcity don’t seem to hold true, cases where the goods or services are “information.” Recorded music and film used to be expensive because they took time to copy, transport, store, and display in stores that had to employ salespeople. Now the marginal cost to create and sell one additional song, album, or video is nearly zero. Even though we may have to pay $10 for an album or video, it’s much less than the $20 it used to cost ($40 in today’s dollars). The cost to obtain music or video that is out of copyright is nearly zero. We live in an abundance of music and video. The cost of a powerful computer, record player, DVD player, and camera added to thousands of dollars, but it’s all available now in the phone in your pocket. Your phone may be expensive, but cheap phones that do those jobs can be under $200. We live in a world of abundant technology. Apply that to encyclopedias: Britannica cost about $1000, but the much superior Wikipedia is essentially free. The marginal cost of additional storage memory, processing power, and network bandwidth is approaching zero—another example of abundance. Solar power and wind power are emerging examples. Slightly different causes may bring abundance in physical processes and services.
The U.S. and the world are seeing a manufacturing renaissance because the increasingly-expensive human labor is being replaced by less-expensive (over long term) automation and robotics. This is what happened when farm automation with tractors and reapers one hundred years ago dramatically increased the amount of food and lowered its cost. This effect is now happening with “white collar” jobs as artificial intelligence and machine learning systems take over the jobs of buying/selling stocks, determining who qualifies for a loan, scheduling, planning, and a host of other activities that used to take human intelligence. The cost to the consumer for these goods and services has dropped dramatically. A stock broker used to charge 2% on a transaction. So buying or selling $100,000 of stock would cost $2000; it now costs about $5 online.
Here’s a 15-minute synthesis of abundance and some of it possible effects, positive and negative. Think of the video as a conversation between two of the leading thinkers of our day: you know Elon Musk of Tesla and SpaceX; the other is Peter Diamandis, creator of the XPrize (if you heard Anshul’s web talk, he was a finalist in the Education XPrize). Many of the ideas may seem farfetched. In coming topics, these ideas will be revisited, because you can’t understand the future of business, culture, and education without familiarity with ideas of abundance and the Law of Accelerating Returns (15-min): https://www.youtube.com/watch?v=AgkM5g_Ob-w
The Law of Accelerating Returns, as described by futurist Ray Kurzweil suggests that “information” technologies like computer storage, processing, and Internet operate by yet different rules. Cars and airplanes, even with automated manufacturing are still expensive. But expensive watches, clocks, and calculators now are made for pennies (built into so many devices as chip components). With the advent of artificial intelligence and machine learning, we can expect advances in these areas to increase in power AND IN RATE OF ADVANCEMENT at no increase in cost! This violated all traditional economic theory. Healthcare is increasingly based on our understanding of cell biology, based on DNA and other biological “information” technologies (the human brain is the apex of this—still being deciphered). The cost of sequencing your DNA is now under $100 (used to cost millions) and will be free as part of insurance if you want. To the degree that manufacturing will increasingly be automated through “information” technologies, we can foresee ever-faster increases in advances along with dramatic decreases in cost.
What Does That Have to Do With Innovative Entrepreneurs?
A LOT! Every new proposal, product, company, and non-profit needs time to build its products and services to a scale where they have impact. But during that time, information-driven technologies and enterprises will advance and costs will decrease. So savvy entrepreneurs plan for this. Elon Musk started Tesla when batteries were too expensive to be economically practical. But he knew that by the time he was ready to sell hundreds of thousands of cars, the costs of these batteries will have dropped and their power increased (greater range). So, entrepreneurs can design their products and services TODAY for the costs and market environment they expect to find tomorrow. This takes time to think through, but it can make the difference between huge success and the opposite. These ideas WILL determine much of our future. Educators, think about Khan Academy and the MOOC phenomenon as harbingers of dramatic educational change. To put these big ideas together, watch ALL of Peter Diamandis’s 2012 TED Talk on the “The Future of Abundance” (17-min): https://www.youtube.com/watch?v=BltRufe5kkI
Your Personal/Professional Network
Which is more important, WHAT you know? or WHO you know? Actually, it’s a bad question, because, like exercise and sleep, you need both to be successful. WHO you know is your personal/professional network. It may hold hundreds of Facebook friends or LinkedIn connections. It may just be a stack of business cards, rolodex, simple database, or the contacts in your phone and email address book. It may arise from your blog, Twitter, or YouTube followers. The quickest way to meet with a venture capitalist, for example, is to be referred by someone who knows you, someone in your network. Your network is your outreach to the world and your colleagues’ outreach to you. Here’s how it works.
In 1997 I got a phone call out of the blue. The caller asked if I knew about educational uses of the internet, and if I did, would I come to Shiprock, New Mexico, to train teachers on the Navajo Reservation? (I did) I recently got a message from a distant colleague asking if I would be interested in keynoting two educational conferences in Egypt. (I agreed) I didn’t seek these opportunities. In both cases, I was referred by someone in my personal/professional network. I am a poor networker, but even my limited network pays off. All of my four positions I’ve held in the last 5 years have been unsolicited referrals. I was invited to apply … people in my network knew of an opening and knew that I would fit. Networking opens doors for you that you didn’t know existed like my personal examples above. Each of you readers can build a better network than I did. The secret?
Start NOW to Begin Your Network
Start now and never stop building your network. Many of my friends have high-school classmates as valuable network contacts. Many networkers get serious in college as they work closely with people of similar interests. Colleagues in your first job(s) are network prospects. Start with the people you know and the people who know you. Ask them about their interests and future plans. Record their PERMANENT contact information so you can stay in touch as you and they move through life. Your family may be your primary network, including family friends and in-laws. Speak seriously to them, and let them know of your own interests, plans, dreams, and skills. Ask them of theirs. Ask if it’s OK to stay in contact. A personal reference from a respected person is invaluable. I’m regularly thanked by former students for serving as a reference for their job interviews and advancement. I get calls claiming that my recommendation made the difference. Teachers/professors and their students are natural network nodes that must be fed in order to grow.
Feed and Grow Your Network
LinkedIn is an awesome professional network system because it notifies all of your connections of your promotions, job changes, and messages. It invites you to congratulate the colleague. When you do that, you have updated or strengthened your network node. Share your accomplishments through LinkedIn, a blog, or other way to communicate to your network. Or you can be more overt: A few years ago I shared a TEDx stage with a real professional networker, Shawn Kent Hayashi. After the TEDx event, Shawn invited me to speak to her “Business Banter” dinner group. Since then, I’ve been on her mailing list and have received regular invitations to join her group to network with strong members of our business and intellectual community. As an individual, you can foster your own networking group to feed and grow the network. You can meet in person at a bar, restaurant, coffee shop, or library. Meet virtually in a Zoom session or in virtual hangouts like Second Life was or that Fidelity may become. Seriously, all you need is a coffee or a beer. Watch this 12-minute TED talk on “An Introvert’s Guide to Networking:” https://www.youtube.com/watch?v=Cj98mr_wUA0 — START TODAY!
Composing your “Funding Pitch”
Your funding pitch is just like a job interview, except shorter. Your pitch may be written as in a grant application, or in person to a bank loan officer, a venture capital firm, or an angel investor. It’s not like talking to your family or wealthy friends for investment. It must be planned carefully, delivered well, and be better that many other similar funding pitches by hopeful entrepreneurs. My “pitches” in job interviews resulted in firms cancelling their remaining scheduled interviews; my written pitches in grant and similar applications have resulted in about 20 successful awards totaling about $13 million. Here’s a very brief article on how to think of your pitch and the elements that would be expected: https://articles.bplans.com/how-to-pitch-to-investors-in-10-minutes-and-get-funded/
Pitches can be made to corporate foundations, government officials, as well as venture capital firms. Here’s an 11-min discussion of two venture capital interviewers discussing their recommendations for YOUR pitch. It ends with the introduction of their winning pitch — actually from a university student! https://www.youtube.com/watch?v=CUP2o-8sXrQ
If you have 11 more minutes, watch these short clips of Master pitchman, Guy Kawasaki. Best known as the man who sold the world on the Macintosh Computer, Guy is an angel investor and runs a venture capital firm. Listen to the friendly conversational TONE of his talks. He conveys his messages through story while he gives tips to entrepreneurs to think big to make an impression, to show their passion to change the world: https://www.youtube.com/watch?v=X8H4YwVkdhQ
The web is full of sample slide decks, but it may not be best to copy very much. Investors want you to be yourself. They do want to know key elements, but you need to give them your core ideas. What makes you different, how will you succeed, why should they believe you, and, oh, by the way, HOW MUCH WILL YOU NEED!