The startup network effect and Al Gore’s gaping hole
In SWSX last weekend I watched a very passionate talk by Al Gore where he spoke mostly about (guess what?) global warming, nicely mixed in with a bit about his book on (guess what?) global warming, and a bit more about his book and global warming !
His main thesis is that we should put a tax on carbon to ‘internalise the externality’, in economic jargon terms. An externality is where a free market fails to allocate resources according to their true cost or benefit. In other words there are ‘external’ costs or benefits that the system doesn’t cater for so we have market failure. Adam Smith’s invisible hand is hacked.
Of course this theory is not new. The big question is measuring that externality and implementing the right fixes in tax policy which in practice is no small feat. And doing it without hampering long term growth.
But speaking of externalities – and at SWSX no less ironically – no mention was made by Mr. Gore of the external benefits today’s startups bring to the economy. That if anything is the mother of all externalities and so much more relevant to the audience. Startups today add a hell of a lot more value to the ecosystem than the collective value to their individual stakeholders (employees, customers and shareholders). There is a knock-on effect and a symbiosis, which created a startup community we could have never dreamt of even 5 years ago
Think for a minute about how much easier it is today to both start and scale your startup? When we started PeoplePerHour less than five years ago we had to get servers, server cabinets, IT managers to hook it all up, IT fees to pay whenever we needed something new added to those servers, and so on.
Today, thanks to the cloud and all the great apps that are built on it you are up and running in days with little or no capital expense. And the point here is that every new company that’s set up in the cloud makes all the rest more valuable not just itself. Its much like a network where the value of the network grows exponentially by each additional note. There is a startup network effect at play.
Any type of platform exhibits similar behaviour. Take the microsoft platform. Windows spurred a whole ecosystem of software development since the 80s, and became more valuable every time a new piece of software was built on it for doing virtually nothing. Only in the windows case its just Microsoft that profits! In today’s startup world the ecosystem is the one that wins, by making it easier and faster for new startups to get off the ground. Which in turn create stakeholder value (employment, profits, customer value) PLUS the external benefit which they don’t capture… so the virtuous cycle is perpetual.
How about this externality Mr Gore? How do you internalize that ? How do all these great innovations that have made it ever so easy to start, create employment, develop new technologies, upgrade the skills of the labour force etc, how do hey get rewarded fairly? How is tax policy favoring them proportionately to the true value they create? If carbon tax is an example of capitalism faltering, what’s this?
So whilst im not taking a view as to whether a carbon tax is right or wrong, I do take the view – quite strongly – that if we are to go down the route of fixing market failures we cant be one sided and just levy taxes that hamper growth. We have to also look at the external benefits created by innovators, and do a hell of a lot more in terms of providing grants, subsidies, tax breaks (free Yoga sessions and massages would be nice too, my neck gets stiff in front of the computer all day!:) and infrastructure to support them.
Incidentally this past week we’ve been invited by No10 and BIS to a kick off meeting at chaired by Lord Young at No10 putting together an e-commerce cross border task force. The mission of this task force is to improve cross border online commerce and brings together european leaders in the space. This is very refreshing to me, finally the government is looking to do something about it to help businesses start and scale online. I hold my breath to see what will come of it.
Speaking of breath. Amidst catching his breath from talking about global warming Al Gore made reference also to another industry that I am a big fan of: online education (of course not surprisingly he did disclose at the end that he is an investor in Corsera which is one of these companies ). Companies like Coursera, Codecademy, Udemy, Udacity,Lynda,com are out to disrupt an $80 billion market by delivering (in many cases FREE) quality education online across the world to people and children who in many cases don’t have the luxury that others do. Do we need to even talk about externality here?
Education is the pillar stone of civilisation and progress. So if these companies are even MILDLY successful, they will capture a tiny TINY portion of the true benefit they create in years to come. And Al Gore is an investor! Yet no mention at all of how we ought to help these companies in grand ways to achieve their mission. None at all! Its all about carbon tax. And his book !
Do we have to wait for Al Gore to write a book about online education to address this? Whilst I admire and advocate his cause around global warming I also condemn the one-sidedness of the pitch. Especially surrounded by the worlds top entrepreneurs, if you’ll talk about externalities and market failure, for the love of God acknowledge- at least acknowledge – that you are sat in the middle of one of the biggest market failures today! The allocation of the right resource for disruptive entrepreneurs to complete their mission and make the world a better place for all of us.
I will just mention PeoplePerHour at the end here as i did not want this to be about my company. But if we take PPH as just one case in hand – this is what we do for a living. We fuel the startup network effect! In many more ways than one! We allow people to set up and grow their business from the ground up, faster and cheaper than otherwise possible. Those companies then go off and create employment, stakeholder value and add to the startup network effect. What help have we or any of these startups received from all of this?
I’ll let you take a wild guess 😉
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