Quotulatiousness

April 25, 2013

Interpreting what NFL coaches and general managers say leading up to the draft

Filed under: Business, Football, Humour — Tags: , , — Nicholas @ 00:02

It’s a time of the year when pretty much nothing coming out of the mouths of team officials can be taken at face value … GMs and coaches don’t want to tip their hands in advance of making their selections on draft day, so lots of misinformation is spread. For example, the Daily Norseman‘s Ted Glover goes through yesterday’s press conference by Vikings general manager Rick Spielman and tries to give us an interpretation of what was said (and not said):

Vikings GM Rick Spielman has become known for his amazing ability to fill up a notebook saying anything…unless one is willing to read between the lines.

Here at DN, I got drunk one night and started posting, I was tasked with deciphering what we’ve come to know as Rick Speak, and take his paragraphs of nothing, non- denials, and unequivocal statements that really are equivocal, and turn them into some useful information.

[. . .]

    Rick Says: I think this is going to be one of most intriguing drafts I’ve been associated with because of the depth of the draft.

What that means: There’s not a lot of top shelf talent, and GM’s across the league would cut their grandma’s achilles tendons if they could get a good deal. We’re moving up to get an impact player, because he’s got two draft picks and and they’re BURNIN’ A HOLE IN MAH POCKET WOOOOOOOOOO!

    Rick Says: And to be honest with you (Ed note: LOLWUT), where we’re picking at 23 and 25, we’re looking at all our needs, from the whole defensive side of the ball to needs on the offensive side of the ball, trying to distinguish what makes this potential receiver better than this corner, better than this linebacker, better than this defensive end, better than this defensive tackle.

What that means: None of our scouts agree on anyone, and that means no matter who we draft, a sizeable portion of our fanbase is going to be disappointed and call for my head on a platter. If we stay where we are many of you will IMMEDIATELY draw comparisons to 2005. But hey…new uniforms WOOO!

[. . .]

Rick also talked about a couple positions and position players, and how that might relate to the upcoming draft.

    Tom P says Rick says: Asked if Erin Henderson was strictly considered a weak-side linebacker at this point, Spielman said, “No, that’s flexible. That depends on what happens in the draft. If we go outside, Erin can slide inside or if we go inside Erin can play outside. That’s what is great about this linebacker thing. We have the flexibility to go either way.”

What that means: We’re so gooned at linebacker right now. There’s nothing great about not having a starting MLB on the roster, and we have to be so flexible because we’re currently gooned. Did I mention we’re gooned at the linebacker position right now?

April 24, 2013

Copyright terms are almost certainly too long already

Filed under: Books, Business, Economics, Law, Media — Tags: , , , — Nicholas @ 11:59

At Techdirt, Mike Masnick makes the case for reducing the swollen length of time current copyrights are protected:

We’ve pointed a few times in the past to a chart from William Patry’s book, looking at how frequently copyright was renewed at the 28 year mark back when copyright (a) required registration and (b) required a “renewal” at 28 years to keep it another 28 years. The data is somewhat amazing:

Copyright renewal rates 1958-59

As you can see, very few works are renewed after 28 years. Only movies, at 74% are over the 50% mark. Only 35% of music and only 7% of books tells quite a story. It makes it quite clear that even the copyright holders see almost no value in their copyrights after a short period of time. It appears that the Bureau of Economic Analysis is coming to the same conclusion from a different angle. As Matthew Yglesias notes, as part of its effort to recalibrate how it calculates GDP, the BEA is considering money spent on the creation of content an “investment” in a capital good, which needs to be depreciated over the time period in which it is valuable. Frankly, I’m not convinced this is the smartest way to account for money spent on the creation of content, but either way, the BEA’s analysis provides some insight into the standard “economic life” of various pieces of content, which match up with the chart above in many ways.

A call to abolish the draft … the NFL draft, that is

Filed under: Business, Football, Law, Media — Tags: , , , — Nicholas @ 00:02

S.M Oliva calls for the abolition of the NFL’s annual offseason TV mega-event in Reason:

The sports draft is an anomaly of the American labor market. In most industries new hires are free to seek employment wherever there’s an opening. Even promising high school athletes may accept a scholarship offer from any college. But the NFL shield has stood resolutely against labor freedom since 1935 when Bert Bell, then the struggling owner of the last-place Philadelphia Eagles, convinced the rest of the nine-team league that poorly performing clubs should be rewarded with first choice of promising college talent. Under this new system, a “drafted” player could only negotiate a contract with a single team.

[. . .]

Regardless of how players come into the league, they are all subject to a salary cap that fixes total compensation as a percentage of football-related revenues. The present collective bargaining agreement further constrains rookie salaries, and roster limits prevent a team from simply stockpiling players. All the draft does is increase the likelihood that the most promising new talent — the players taken at the top of the first round — will go to teams with a demonstrated history of mismanagement.

This should concern the league as it faces a rising tide of concussion-related lawsuits brought by former players. While the NFL tinkers with playing rules in an effort to make the game “safer,” there’s been no effort to question the role of the draft system in promoting unsafe working conditions. Let’s say Player X is a highly touted quarterback prospect drafted by Team A. What if Team A has a poor offensive line and a coach prone to recklessness with his quarterbacks? Player X can’t turn around and negotiate with Team B, which offers a better line and a coach with a stronger record of developing young quarterbacks. Player X is stuck with Team A, and if that means he’s out of football after four years, a record number of sacks and a half-dozen concussions, then so be it.

April 22, 2013

Not news: nearly 90% of all spreadsheets have errors

Filed under: Business, Economics, Technology — Tags: , , — Nicholas @ 08:02

I’ve said it before, spreadsheets are great organizing tools and provide opportunities for both financial whizzes and ordinary folks to make splashy, expensive errors:

Microsoft Excel makes it easy for anyone to do the kind of number crunching once reserved for accountants and statisticians. But the world’s best-selling spreadsheet software has also contributed to the proliferation of bad math.

Close to 90% of spreadsheet documents contain errors, a 2008 analysis of multiple studies suggests. “Spreadsheets, even after careful development, contain errors in 1% or more of all formula cells,” writes Ray Panko, a professor of IT management at the University of Hawaii and an authority on bad spreadsheet practices. “In large spreadsheets with thousands of formulas, there will be dozens of undetected errors.”

Given that Microsoft says there are close to 1 billion Office users worldwide, “errors in spreadsheets are pandemic,” Panko says.

Such mistakes not only can lead to miscalculations in family budgets and distorted balance sheets at small businesses, but also might result in questionable rationales for global fiscal policy, as indicated by the case of a math error in a Harvard economics study. By failing to include certain spreadsheet cells in its calculations, the study by Harvard economists Carmen Reinhart and Kenneth Rogoff may have overstated the impact that debt burdens have on a nation’s economic growth.

There’s a reason I nominated Microsoft Excel as “The Most Dangerous Software on Earth“.

April 17, 2013

New frontier in crony capitalism – public-policy profiteering

Filed under: Business, Economics, Government, Technology — Tags: , , , , — Nicholas @ 08:47

Timothy Carney explains why the big companies that made ordinary incandescent lightbulbs were among the groups pushing to make those lightbulbs effectively illegal. It’s a classic case of using government power to reduce competition and increase profit margins for certain companies:

Absent barriers to entry, light-bulb profit margins had to stay low. GE could make superior bulbs — soft white, etc. — but people are only willing to pay so much of a premium for those. After all, we’re dealing with light here, which is kind of a commodity.

So, where to find barriers to entry? Maybe higher-tech bulbs? LEDs, CFLs, or other bulbs that offer longer life and greater efficiency. GE, Osram, and Sylvania jumped into those high-tech bulbs, got some patents. R&D expenses, higher manufacturing costs, proprietary information — these created barriers to entry and allowed heftier profit margins.

But what if you made a super-efficient long-life bulb — and nobody wanted it? What if you couldn’t convince consumers that these bulbs were good for them? Well, that’s when you thank your lucky stars that you are GE, with the largest lobbying budget of any company in America.

You “heavily back” legislation that will “effectively outlaw … the traditional incandescent light bulb.” Now all consumers are forced to play in the world where you have greater barriers to entry, and thus bigger profit margins.

The negative consequences here aren’t mere Tea Party concerns about “crony capitalism” or, say, freedom of choice. One cost is the erosion of competition. GE in this case has found a way to divorce profit from the delivery of value – and I call it public-policy profiteering.

Sure, these high-tech bulbs have value. But I think consumers, rather than politicians, should be the ones who determine what value they assign to energy efficiency and longevity. So, through government intervention, capitalism starts to resemble the Marxist caricature of capitalism — Big Businesses making profits while denying consumers what they want.

April 16, 2013

Andy Baio: Copyright is the new Prohibition

Filed under: Business, Law, Media, Technology — Tags: , , , , — Nicholas @ 13:58

Techdirt‘s Mike Masnick explains:

Andy Baio has an absolutely fantastic video presentation that he did recently for Creative Mornings/Portland on what he’s calling The New Prohibition. It’s half an hour long, but absolutely worth watching.

[. . .]

This video lets him talk a bit about the aftermath — to explain the true chilling effects of the threat and the eventual settlement. Baio is a creator. It’s in his blood. It’s what he’s always done, but after this he was afraid to create. Being threatened with a lawsuit, even if you believe you’re right, is a scary and possibly life-altering moment. Lots of people who have not been in those shoes think it’s nothing and that they could handle it. You don’t know.

As he notes in the talk, copyright law is probably the most violated law in the US after speeding and jaywalking (and I’m not even sure copyright infringement is really in third place in that list). But getting rung up for one of those gives you a “bad day” situation, not a ruined life. Copyright, on the other hand, can ruin your life. And chill your speech and creativity.

And this is the worst part: so many people, especially kids, are at risk. Baio also famously highlighted the prevalence of the phrase “no copyright intended” on YouTube. Tons of kids uploading videos use clips of music and videos with a phrase like that. Or with statements about fair use. Or with copyright law quotes. All, as he notes, to try to find that magic voodoo that wards off a possible lawsuit. Most of those people aren’t being sued.

But they could be.

April 14, 2013

Competition and co-operation in a free market

Filed under: Business, Economics, Liberty — Tags: , , , , — Nicholas @ 10:15

Sheldon Richman suggests that some people’s objections to free trade and free markets isn’t so much ethical as aesthetic:

Market advocates tend to respect the intellect of their fellow human beings. You can tell by their reliance on philosophical, moral, economic, and historical arguments when trying to persuade others. But what if most people’s aversion to the market isn’t founded in philosophy, morality, economics, or history? What if their objection is aesthetic?

More and more I’ve come to think this is the case, and I believe I witnessed an example recently at a lecture I gave at St. Lawrence University. During the Q&A a woman asked, in all sincerity, why society couldn’t do without money, since so many bad things are associated with it. She also suggested that cooperation is better than market competition. I replied that since money facilitates exchange and exchange is cooperation, it follows that money facilitates cooperation — a lovely thing, indeed. Government, I added, corrupts money.

I also said that competition is what happens when we are free to decide with whom we will cooperate. I don’t know if my response prompted her to rethink her objections to the market, but I am confident her objection was aesthetic. For her, money and competition are ugly. Perhaps I didn’t respond on an aesthetic level; it’s something I have to work on. But I tried, and so must we all when we encounter these sorts of objections.

Like that nice woman, many decent people dislike markets because they find them unattractive. And they associate markets with other things they find unattractive besides money and competition: (rugged, atomistic) individualism, selfishness, and profit. F.A. Hayek noticed this, writing in “Individualism: True and False”, “the belief that individualism approves and encourages human selfishness is one of the main reasons why so many people dislike it.” If that’s the case, philosophical, moral, economic, and historical arguments may fall on deaf ears. The objections must be met on an aesthetic level.

April 12, 2013

The nasty phenomenon of “revenge porn” websites

Filed under: Business, Law, Liberty, Technology — Tags: , , — Nicholas @ 11:19

In the Guardian, Adam Steinbaugh looks at the legal side of fighting against “revenge porn”:

A jilted ex-paramour seeks vengeance on a former lover. His trump card is a nude photo he acquired in happier times. In the dark corners of the internet, revenge porn sites are happy to help out, posting these photos alongside the subject’s full name, address and even phone number. The result for the victim can be anything from terrible embarrassment to potential job loss, and all accompanied by threats and harassment from people whose greatest contribution to society is usually surpassed by the average YouTube comment.

While ex-lovers act out of malice, the site operators act with sociopathic greed. With embarrassing photos often featuring prominently in Google results, the sites often advertise “independent” takedown services charging upwards of $300 (£195) to quickly remove photos — cheaper and faster than hiring a lawyer. Those extortionate services usually turn out to be fronts run by the site owners themselves. One even concocted a fake lawyer (“David Blade III, Esq”) to give his business a more legitimate face.

While the people who upload the photos can almost certainly risk significant civil liability, revenge porn sites are protected in the United States by the Communications Decency Act. The CDA requires that responsibility for tortious acts online (like defamation or invasion of privacy) lie with whoever created the content, not those who facilitate its dissemination.

April 11, 2013

Ontario’s Green Energy Act is pushing the province to the top … of the retail electricity price table

Filed under: Business, Cancon, Economics, Government — Tags: , , , , — Nicholas @ 08:57

Ontario loves to be at the top of rankings, but Ontario electricity users should be upset that we’re surging to the top of this particular ranking:

Ontario’s Green Energy Act (GEA) will soon put the province at or near the top of North American electricity costs, with serious consequences for the province’s economic growth and competitiveness, concludes a new report from the Fraser Institute, an independent, non-partisan Canadian think-tank.

“Already, the GEA has caused major price increases for large energy consumers, and we’re anticipating additional hikes of 40 to 50 per cent over the next few years,” said Ross McKitrick, Fraser Institute senior fellow and author of Environmental and Economic Consequences of Ontario’s Green Energy Act.

“The Ontario government defends the GEA by referring to a confidential 2005 cost-benefit analysis on reducing air pollution from power plants. That report did not recommend pursuing wind or solar power, instead it looked at conventional pollution control methods which would have yielded the same environmental benefits as the GEA, but at a tenth of the current cost. If the province sticks to its targets for expanding renewables, the GEA will end up being 70 times costlier than the alternative, with no greater benefits.”

[. . .]

The study shows that the GEA’s focus on wind generation is particularly wasteful: 80 per cent of Ontario’s wind-power generation occurs when electricity demand is so low that the entire output is surplus and must be dumped on the export market at a substantial loss. The Auditor General of Ontario estimates that the province has already lost close to $2 billion on surplus wind exports, and figures from the electricity grid operator show the ongoing losses are $200 million annually.

The wind grid is also inherently inefficient due to the fluctuating nature of the power source. The report calculates that due to seasonal patterns, seven megawatts of wind energy are needed to provide a year-round replacement of one megawatt of conventional power.

“Consequently, the cost of achieving renewable energy targets for the coming years will be much higher than the Ontario government’s current projections,” McKitrick said.

April 10, 2013

Despite government denials, the iPod duty is alive and well

Filed under: Bureaucracy, Business, Cancon, Government — Tags: , , , , — Nicholas @ 08:13

Expect to pay more for your iPods and similar devices, says Mike Moffatt in the Globe and Mail:

Last week, I wrote that the federal government’s changes to tariffs in Budget 2013 would result in new import duties on models of MP3 players and three of four models of Apple iPods. The tariff changes involve changing the tariff status of 72 countries, so music devices manufactured in China, Indonesia and Malaysia will pay a 5 to 6 per cent tariff rather than their “preferential” rate of zero, starting in 2015.

The article caused quite a stir, and the government denied it was true. A spokeswoman for Finance Minister Jim Flaherty said the article was wrong. “Music devices like iPods are imported into Canada duty-free under a long-standing special tariff classification from 1987,” she wrote. That classification, which was unaltered by the recent budget, is known by its number: 9948.00.00. (We’ll call it 9948 for short.)

However, a close reading of the relevant document, Tariff Item 9948.00.00 (9948 for short), shows that to qualify for the special classification, the importer must meet strict criteria.

My position that importers cannot meet the requirements of 9948 rests on three straight-forward premises:

1. It appears that sellers of iPods and MP3s are required to collect “end use certificates” from the final consumer on each sale, and be able to present these to the CBSA if audited.

2. The 9948 requirement for “end use certificates” appears to be actively enforced by the CBSA.

3. Retailers cannot reasonably collect these certificates from consumers when they buy an iPod.

These three, put together, make retail sales of iPods and MP3 players ineligible for 9948 and therefore subject to an iPod tariff. What follows is my evidence.

The importer must maintain a database (what Moffatt calls “an iPod registry”) of personal information on the final purchasers of the devices, but there is no matching legal requirement on the consumer to provide this personal information (which would probably violate privacy laws in any other context).

The CBSA’s Memorandum D10-14-51 requires that consumers attest that they will use the iPod in a manner in which it is “physically connected” to a computer (though not necessarily permanently so, according to the memo) and will “enhance the function” of that computer. The consumers must attest that their devices will be “solely used for the purpose for which they were imported.”

If a consumer uses a device in a manner not covered by 9948 during the first four years of ownership, the importer is required to “make a correction to the declaration of tariff classification and pay any applicable duties and taxes.”

This rule is not trivial. CITT Appeal No. AP-2008-023 discusses the need for sellers claiming the tariff reduction (here Code 2101, the predecessor to 9948.00.00) to show that the end consumer is using the goods in the manner described on the certificate.

But there is no practical way an importer could possibly verify and ensure that that the retailer’s customers have not changed how they are using iPods and MP3 players.

April 6, 2013

An unusual hero for a modern TV show

Filed under: Britain, Business, History, Media — Tags: , , — Nicholas @ 07:41

Virginia Postrel briefly reviews a British show that just made its way across to North America:

When the British drama Mr. Selfridge debuted on PBS this week, American viewers saw two things rarely on display in contemporary popular culture: a businessman hero and, more remarkably, a version of commercial history that includes not just manufacturing but shopping.

The show, which is also streamed on PBS.org, stars Jeremy Piven as Harry Gordon Selfridge, the American-born founder of the London department store. In the first episode, he arrives in 1909, determined to shake up U.K. retailing with the techniques that made him a success as a partner at Chicago’s Marshall Field’s: showmanship, tons of advertising, and displays that let customers easily handle the merchandise. In the second, he puts perfumes and powder on display right by the store’s front door and introduces an affordable house fragrance concocted with new chemical processes.

Ambitions that an American drama might treat as self- centered greed become, in a British context, a bold strike against class privilege. “You show great potential,” Selfridge tells the talented shop girl Agnes Towler (played by Aisling Loftus), the show’s working-class heroine. “You remind me of myself when I started out — grasping for every chance, keen as mustard to learn. You love it, don’t you? The customers, the selling, the feeling of the merchandise under your hands …”

[. . .]

Yet like railroads and telegraphs, the department stores of the late 19th and early 20th century were socially and economically transformative institutions. They pioneered innovations ranging from inventory control and installment credit to ventilation systems, electric lighting and steel construction, along with new merchandising and advertising techniques. They brought together goods from all over the world and lit up city streets with their window displays. They significantly changed the role of women, giving them new career opportunities and respectable places to meet in public. They popularized bicycles, cosmetics, ready-to-wear clothing and electrical appliances. They even invented the ladies’ room.

April 5, 2013

Northern Quebec is the home of the world’s best gin

Filed under: Business, Cancon — Tags: , , — Nicholas @ 00:02

Or so Maclean’s says. Thanks to Canada’s odd patchwork of post-Prohibition trade restrictions between provinces, Ungava by Domaine Pinnacle is only available in Alberta, BC, and Quebec itself:

It is a difficult gin to miss. When Ungava won a Best of Show award at the prestigious World Spirits Competition last week, a judge noted its “unusual colour that helps grab your senses.” It’s perhaps the most polite way of drawing attention to Ungava’s yellow tint, about which Pinnacle president Charles Crawford is slightly more blunt. “It’s a bit like morning’s vitamin-enriched urine,” he says. His PR people prefer “sunshine yellow.”

The process by which Ungava gin is made is even more peculiar than its colour. An ice cider producer by trade, Crawford has a history of wonky tinctures — Pinnacle also produces maple-infused whiskey and a cider-brandy concoction. “Ice cider is a good product, but you can only make so much of it,” he says. “We decided to get into spirits, because there aren’t many that are uniquely Canadian.” In fact, Crawford wanted the gin to be truly, pre-colonially Canadian. He whittled down a list of 40 indigenous herbs, berries and flowers (“Nothing planted by Europeans”) to six ingredients, all found on the Ungava Peninsula in Nunavik: cloudberries; crowberries; Labrador tea; a Labrador tea cousin known as Ukiurtatuq, or “Arctic blend”; wild rosehips, which lend the gin its yellow colour; and of course juniper, without which Ungava wouldn’t be proper gin.

Every year, Crawford hires “these two guys from Kuujjuaq” (he’s unsure of their names) to pick the botanicals during Ungava’s four-week harvesting season, which usually begins in late August. The pair pack “a couple hundred kilos” of their pickings into clear, pillowy bags and send them 1,500 km straight south to Ungava’s production facility in Cowansville, about an hour’s drive east of Montreal. A neutral spirit made with locally grown corn is infused with the botanicals.

April 4, 2013

Canadian public sector workers earn between 9% and 12% more than private sector workers

Filed under: Bureaucracy, Business, Cancon, Government — Tags: , , , — Nicholas @ 09:12

Once upon a time, back in the far-distant past, public sector workers got lower wages but better job security, benefits, and pensions than their private sector counterparts. Over the last few decades, the public sector wages caught up and surpassed the private sector, and if anything the benefits and pensions got better. The Fraser Institute calculates that currently there is between a 9% and a 12% premium paid to public sector workers for similar jobs (and that understates the overall differential):

Comparing Public and Private Sector Compensation in Canada examines wage and non-wage benefits for government employees (federal, provincial, and local) and private-sector workers nationwide. It calculates the wage premium for public-sector workers using Statistics Canada’s Labour Force Survey from April 2011, after adjusting for personal characteristics such as gender, age, marital status, education, tenure, size of establishment, type of job, and industry. When unionization is included in the analysis, the national public-sector “wage premium” (i.e., the degree to which public-sector wages exceed private-sector wages) declines to 9.0 per cent from 12.0 per cent.

Aside from higher wages, the study also found strong indications that Canada’s government workers enjoy more generous non-wage benefits than those in the private sector, including:

  • Pensions: 88.2 per cent of Canadian government workers were covered by a registered pension plan in 2011 compared to 26.4 per cent of private-sector employees.
  • Early retirement: Government employees retired 2.5 years earlier, on average, than private-sector workers between 2007 and 2011.
  • Job security: In 2011, 0.6 per cent of government employees lost their jobs — less than one sixth the job-loss rate in the private sector (3.8 per cent).

To ensure public-sector compensation is fair to both taxpayers and government workers, the report argues that better data collection is needed and suggests that Statistics Canada should gather data on wages and non-wage benefits more regularly and systemically than it does now. In addition, comparisons between the public and private sectors should focus on total compensation, not just wages or specific benefits such as pensions.

About one in five Canadian workers is in the federal, provincial, or local government civil service or related organizations, and only 15% of Canadians are self-employed. The vast majority of government workers are unionized, while the reverse is true in the private sector.

March 30, 2013

All those manufacturing jobs are never coming back

Filed under: Britain, Business, China, Economics, USA — Tags: , — Nicholas @ 08:37

Tim Worstall explains why this is at the Adam Smith Institute blog:

I’m always rather puzzled by those who shout that we’ve got to bring manufacturing back to the UK. Apparently this will solve all our problems over what to do with dim Northern lads or something. Once they’re all hammering out whippet flanges then we just won’t have a problem with unemployment ever again. The problem with this idea is that modern manufacturing simply doesn’t provide many jobs. And if it were to provide mass employment it would be very badly paid employment too:

    Americans working to produce traded goods and services earn, roughly, according to their productivity. If low-skill workers in America aren’t much more productive in manufacture of traded goods and services than low-skill workers in China, then they can’t earn much more than workers in China while being employed in manufacture of traded goods and services. They can earn a rich-world wage in production of non-traded goods and services, like sandwiches and haircuts, so long as there is sufficient local demand. In other words, the only way to get less-skilled Americans a good wage in a manufacturing industry is to significantly raise their skill and productivity level. If that can’t be accomplished, they can only hope to find good wages in non-traded industries. At least, that is, until wages of less-skilled workers across the developing world come much closer to converging with those in America.

Of course, that’s all about America but the same logic pertains here as well. Chinese manufacturing wages are around $6,000 a year at present. Meaning that if we had mass employment in manufacturing, as they do, then wages would need to be around that level. Or, alternatively, UK based manufacturing would have to be much more productive to support higher wages. And “more productive” is the same as saying “uses less labour”. Thus you can have few well paid jobs (in the Rolls Royces etc of this world) or you can have many badly paid jobs (Shenzen). It isn’t actually possible to mix and match between the two.

Looking at crowdfunding as a replacement for venture capital

Filed under: Business, Economics, Technology — Tags: , , , — Nicholas @ 07:43

ESR looks at where crowdfunding fits in the traditional tech start-up food chain:

In How crowdfunding and the JOBS Act will shape open source companies, Fred Trotter proposes that crowdfunding a la Kickstarter and IndieGoGo is going to displace venture capitalists as the normal engine of funding for open-source tech startups, and that this development will be a tremendous enabler. Trotter paints a rosy picture of idealistic geeks enabled to do fully open-source projects because they’ll no longer feel as pressed to offer a lucrative early exit to VCs on the promise of rent capture from proprietary technology.

Some of the early evidence from crowdfunding successes does seem to point at this kind of outcome, especially near 3D printing and consumer electronics with a lot of geek buy-in. And I’d love to believe all of Trotter’s optimism. But there’s a nagging problem of scale here that makes me think the actual consequences will be more mixed and messy than he suggests.

In general, VCs don’t want to talk to you at all unless they can see a good case for ploughing in at least $2 million, and they don’t get really interested below a scale of about $15M. This is because the amount of time required for them to babysit an investment (sit on the company’s board, assist job searches, etc.) doesn’t scale down for smaller investments — small plays are just as much work for much less money. This is why there’s a second class of investors, often called “angels”, who trade early financing on the $100K order of magnitude for equity. The normal trajectory of a startup goes from friends & family money through angels up to VCs. Each successive stage in this pipeline is generally placing a larger bet and accordingly has less risk tolerance and a higher time discount than the previous; VCs, in particular, will be looking for a fast cash-out via initial public offering.

The problem is this: it’s quite rare for crowdfunding to raise money even equivalent to the low-end threshold of a VC, let alone the volume they lay down when they’re willing to bet heavily. Unless crowdfunding becomes an order of magnitude more effective than it is now (which seems to me possible but unlikely) the financing source it will displace isn’t VCs but angels.

« Newer Posts — Older Posts »

Powered by WordPress