What I’m Reading This Sunday Morning

A Capitalist's Dilemma by Clayton Christensen

The Money Quote:

The answer is that efficiency innovations are liberating capital, and in the United States this capital is being reinvested into still more efficiency innovations. In contrast, America is generating many fewer empowering innovations than in the past. We need to reset the balance between empowering and efficiency innovations.

The Doctrine of New Finance helped create this situation. The Republican intellectualGeorge F. Gilder taught us that we should husband resources that are scarce and costly, but can waste resources that are abundant and cheap. When the doctrine emerged in stages between the 1930s and the ‘50s, capital was relatively scarce in our economy. So we taught our students how to magnify every dollar put into a company, to get the most revenue and profit per dollar of capital deployed. To measure the efficiency of doing this, we redefined profit not as dollars, yen or renminbi, but as ratios like RONA (return on net assets), ROCE (return on capital employed) and I.R.R. (internal rate of return).

 

The Return Of The Capital Intensive Startup by Albert Wenger

The Money Quote:

Historically startups were capital intensive because they had to spend a lot of money to build the product and bring it to market before they were able to generate revenues.  Now it seems that everyone believes in network effects and the capital intensity comes from trying to build the biggest network faster than the competition.  The use of capital has thus shifted to customer and/or supplier acquisition or maybe more generally towards network growth.

 

The Network Effect Isn't Good Enough by Nir Eyal and Sangeet Paul Choudary

The Money Quote:

Creating a network effect is not what it used to be. Today, stored value created by the users reinforces the power of the network effect to retain users and grow market share. This dynamic makes creating user habits all the more important as investments of stored value only occur through successive passes through the user experience (see Nir’s previous article and video).

With the portability of the social graph and the fall of upfront costs to join a network, companies must leverage new ways of acquiring and retaining users. Business models that leverage a network effect plus stored value, hold the keys to the kingdom.

 

Show Me Your Badge by Kevin Carey

The Money Quote:

One of the most important functions of college degrees is signaling knowledge and skill to potential employers. Yet degrees and certificates often do a poor job of communicating detailed information about graduates. Grade inflation has steadily obscured the meaning of G.P.A.’s, and there’s no easy way to know what someone who got, for example, an A-minus in Econ 206 actually learned. A badge, on the other hand, is supposed to indicate specific knowledge and skills.

Stack Overflow, an Internet forum with 1.4 million registered users, awards members “reputation” points and a variety of badges based on answers to questions posed by fellow computer programmers. Some members devote hundreds of hours to writing and editing posts that are judged by the Stack Overflow community to display high levels of expertise. Tomasz Nurkiewicz, an Oslo software engineer and one of only 88 users to earn a “Legendary” Stack Overflow badge, writes, “I received numerous job offers from people who either saw my profile with reputation and all the badges, or were particularly impressed by one of my answers.”