The Mutual Company
I remember a time when I was growing up when many of the savings banks and insurance companies were mutual companies. A mutual company is one where the customers own the company, more or less. It seems like the concept lost favor and many of these banks and insurance mutual companies were “demutualized” in the 80s and 90s. I don’t really profess to understand all the reasons and history behind mutualization and demutualization. I suspect some of you may know a lot more than me about this stuff.
I started thinking about mutual companies after reading Joe Nocera’s column in the New York Times which was based on his read of Jaron Lanier’s “Who Owns the Future?”
Joe asks in the title “Will Digital Networks Ruin Us?” and here is the money quote:
the value of these new companies comes from us. “Instagram isn’t worth a billion dollars just because those 13 employees are extraordinary,” he writes. “Instead, its value comes from the millions of users who contribute to the network without being paid for it.” He adds, “Networks need a great number of people to participate in them to generate significant value. But when they have them, only a small number of people get paid. This has the net effect of centralizing wealth and limiting overall economic growth.” Thus, in Lanier’s view, is income inequality also partly a consequence of the digital economy.
At USV we invest in digital networks, so this is a fundamental question that we think about a lot. We would not want to be investing in something that “will ruin us” and we don’t think we are investing in something ruinous. But we do talk about this issue all the time.
I will come back to the mutual company thing in a bit, but first I want to say that Joe and Jaron are leaving out the notion of consumer surplus in their analysis. The newspaper costs money. Twitter is free. In a world where “we” create the newspaper instead of the NY Times Company creating it, the newspaper can and will be free. That is happening all over the place, because of the efficiency of digital networks, and the result is a large amout of consumer surplus that is landing in all of our laps.
But maybe that is not enough. Maybe the creators of these networks ought to mutualize so that their users, who are creating the value, can participate in the upside. We have not seen anyone do this to date. We have talked to a number of startups and networks about the idea. We have not seen any takers yet. But we will continue to have the conversation because this is worth trying and seeing how it would turn out. The result could be a much more sustainable and lasting network. Something for everyone to think about this morning.
UPDATE: My partner Brad wrote a long and thoughtful comment on usv.com about Joe’s column. You can read it here.
Been thinking about this a lot too since reading the book.Seems like financial services could be first to see this trialled – e.g. you could argue that Bitcoin already has the characteristic that users participate in the upside. That is the rare example of a decentralised fast growing new network though.Another way to look at it is the extent to which large centralised networks give back in the form of technology (e.g. major open source initiatives) which creates further surplus from the ‘siren server’ (Lanier’s term) gain.
bitcoin is a great example. you can buy bitcoin and participate in the growth in value of the network
What’s in it for the company to mutualize? My life insurance company is a mutual company, and I like that because they don’t have to succumb to public market pressure – perhaps have my interests at heart.
lol. we’re thinking the same thing.
Use NYSE as a model?
But that’s like B2B…the mutual owners are other businesses. Kinda different than what Fred was getting at, I think.
well it could cause the customers/users to be incented to stay involved for the long haul
True. Loyalty if I’m happy with them. But I feel loyal to other brands/companies because of their product quality, experience. Not sure mutualization is enough.
See, I’d disagree with that. I cringe when the insurance company with the name that escapes me says “we can do the right thing for you because we don’t have shareholders.”Find me a shareholder who wants a company to be anti-customer. They don’t exist. Capitalism works.
I don’t disagree with your 2nd paragraph.But not sure I find that that makes your 1st paragraph quote troublesome.
What is it about shareholders that they feel makes it difficult to do the right thing for their customers?My shareholders tell me constantly to keep our current customers happy and find new ones. Something about increasing their share value. Greedy bastards.
Your company is not public. It’s different.
The horizon for value would probably be the biggest difference between a mutual member and a shareholder in this case? This approach (arguably) is also meant to promote product and help you keep current custs happy by attracting new one;s (with non-traditional value proposition)
It’s a worthy idea, but mutualization seems like it would be hard to the reconcile with the risk-taking culture of young technology companies. Forming as a benefit corporation is one way to pursue sustainability and other social goods. Great companies will always focus on delighting their customers one way or another.
i wonder if you can do it after achieving some sort of critical mass
So much to comment on! But the lingering thought I have is, “What does the company get out of mutualizing and allowing users to participate in the upside?”I’m building a marketplace where small businesses sell direct to consumers. While reading the last paragraph, I stared to think, “What if I give vendors shares in Wander&Trade?” Which immediately prompted the question, “What does the company get out of that?”If you have a good network, people will join and contribute for free. I have zero problem getting vendors as the platform itself is enough of an incentive for them to sell their goods on it. They also already share in the upside — the bigger the network of small businesses gets, the more customers it attracts, and the more everyone sells.However, **what else** could I squeeze out of the vendors to create **more** upside? If they had shares in the company, could I get them to promote the platform more to their own audience, which would help them and the other vendors, too? Could I get them to take less of a profit upfront in exchange for the value of their equity? Could I get them to be less annoying when dealing with them (seriously, vendor relations is one of the most taxing parts of this business)?And the big question that follows all of that is, “Will the equity the business grants to users be **more than** made back by what the users give to the business in return?”I’m not sure what the answers are, but these are definitely good questions. This will definitely swim around the brain for some time to come.
sustainability, alignment of incentives
But you got to be careful that the new incentives don’t alter the good behaviour of users/customers. Quantifying the value that translates into ownership is tricky.
Yep. Its the quantification part that I’m hung up on. But it’s also the most interesting part to figure out.
Flip the script. If Etsy came to you and said they wanted to take 5% of the company’s value, by taking back 5% of the equity everyone owns, to put it into a pool that sellers can buy into like a mutual fund, would you sign off on that deal if they Etsy gave the rational of “sustainability and alignment of incentives?”I think you’ve got to quantify what the company gets back in return, in some sort of concrete way.
i am not sure that is enough. i might argue for more. but this is not a decision i can make for Etsy or any other company. there is management, there is a board, there are other shareholders. frankly it is easier to figure this stuff out early on.Etsy is already a B corp so they are thinking about this issue generally.
Maybe “Botiques” a la islands in Second Life?
.When you want to encourage certain behaviors, you arguably have to incentivize those specific behaviors.JLM.
If they had shares in the company, could I get them to promote the platform more to their own audience, which would help them and the other vendors, too?Depends on the size of your vendors. If they are small business people they have no time to do anything but keep the ship floating.Small business owners are shiny ball based and putting out fires all the time. They don’t have reliable people that they can offload projects to that will keep on top of them and execute.Larger companies are combinations of people. So that’s hit or miss with the number of people that need convincing and have to actually make an idea like this work. (So if you give up equity to 100 businesses how many will end up actually doing something that creates the benefit you seek?)In theory I think it sounds like a good idea. But I question whether what you would get in return would in any way make up for what you gave up. At least that’s my seat of the pants feel on this one.The best rewards are ones that are given in a way that you monopolize someone’s time to your benefit. So I was recently dealing with a real estate salesman who was working on something for me. It was the last 3 weeks of the year. I told him if he closed the deal I would pay $X cash to him personally (without his boss knowing who is actually a friend) knowing that that money would make him focus on my deal in that short time period. (Both the money and the time period was key by the way).
I’ve actually been thinking about this all morning, and came to some of the same conclusions.In my case, I think its only worth it to “mutualize” for top selling vendors. Not that that’s a bad thing at all. And I also believe the benefits would be mutual (pun totally not intended).First off, the top vendors would be allowed to “buy into” the program, just as anyone would do with any mutual fund. The price: W&T could offer the vendors shares in exchange for them taking a smaller share of the up front profits from the products they sell on the platform. Right now, we take 25%, so if we could take 30% from vendors in the mutual fund program, this is a number they’d still be comfortable with (they’re used to 50% at retail) and it would put a (more than) considerable amount of extra cash in W&T’s coffers.If it’s a dollar-to-dollar transaction, i.e. the amount in shares they own is equal to the amount they gave up in upfront profits, it’s a good deal for the vendors because (theoretically) those shares will appreciate in value, whereas the immediate profits just go into their bank account.The question is, can we afford a dollar for dollar exchange like that? We’d have to be a big company with a big valuation. But maybe the key is planning for it now, setting the mutual pool aside, and activating it some years down the road (not saying I’m going to do that, just thinking it through).And now that the value has been accounted for, there’s the added benefit of having our top vendors be shareholders. The emotional connection that creates probably has a ton of positive side effects. As we grow, they grow — that’s’ got to make them feel good.In addition to your thoughts, @domainregistry:disqus, I’m curious what @fredwilson:disqus and @pointsnfigures:disqus think about this…
The heart of the problem is loss of representation. Democracy should have been “mutual ownership” too. The value of the reps and government comes – like instagram – from the citizens and their product and taxes. The major problem of almost every institution now it that the management/reps represents themselves and not the people they should have served. This includes public owned companies. The mechanism of representation in large groups totally failed. And any “mutual” institute will eventually need some “management” or “representation” and without new way to do it, the same problems will appear again and again.
does that problem exist in wikipedia, reddit, AVC?
I think not, because all founders succeeded in what Franklin called “Doing well by doing good” (he was a shrewd business man, and still pushed for the right values) . But in AVC, Reddit and Wikipedia, I think, it’s a personal achievement, not a feature of the system. There is nothing in the system which **prevents** a rep in a mutual owned institution to say to a Big-co: listen, I **can’t** help you because I’m not representing your inner circle/management interests. Your lobbyist was not elected, I’m committed to the people who vote for me. Or – to the users of my application, or the clients of my company (which, incidentally, their money funds the lobbyist too)
User Labor Markup Language (ULML) http://userlabor.org (proposed in 2008) can be utilized for a “mutual company”.
What is the role of a VC in a company having a mutualized corporate structure? What is the exit? I remember as a kid following the share price of a seat on the NYSE. Its reached its high water mark in 1929! If mark zuckerberg had taken the mutualization route would the members have been the schools or the students? The challenge is coming up with an algorithm for the size of one’a membership interests. Interesting!
VCs could be owners along with the customers
.Now you are talking about categories of ownership similar to preferred v common stock.JLM.
The exchange of value for attention has been interesting question for a long time. The question is what is the “right” exchange of value.For instance there are sometimes where there is little exchange of value. I’ll call out one company but there are many: Acxiom. They basically collect all sorts of information on you and then resell it. Really no value to you tons to them.I would argue that Instagram does in fact exchange value with its customers in that they find the service useful. When they try to monetize, then that becomes a question.But this has been around since at least radio. There would be no value to an advertisement if you didn’t have the right audience.There have been different attempts at it. One is the traditional “loyalty” program where in exchange for your information you get better treatment/value.Google is another example. They provide tons of value in return for your attention in search, which they monetize like crazy.
my suggestion would be the mix of the 2 systems = x% for pure Investors and y% for users & mutual owners. That way, the wealth produced by users will finally have an economic value per se.
Fred – what you’re thinking of is like the old “retail coop” or “consumer coop” model pioneered by REI, I think. I’m pretty sure they’ still call themselves a consumer coop, though I’m not sure 100% what that means or what the implications of it are…or if there’s such a thing as a hybrid of it and a normal shareholder-owned corporation.
exactly. are there a lot of them?
I think there used to be a bunch in the old world of retail and catalog. Not sure that exists so much any more, but most good ideas have a few different lives. Matt
The key problem with co-operatives is management / governance.Coops do not distribute their profits and so financial performance cannot be used as a key metric. Add in the fact that governance is spread over the entire base of members and we have a recipe for guaranteed management under-performance.
Dave, Federated Coop distributes cash back to members.
This would work best rising up thru crowd funding. That way, someone could spread assets. One commentor mentioned $140 not being enough payout, but doing $140 in multiples would be best.
Great insight Dave.Most mutual structures come from people who have a mutual connections (remote location, niche interest in high margin goods, working life, etc.).The juice for founders would have to be control over assets though. It is likely hard to raise $20M to start something you think will eventually own $2Bin assets.That’s why financial services is so mutual friendly (asset scaling).
REI has a CDN cousin called MEC (Mtn Equip Coop). They started as a group buying service and sort of morphed into crunchy granola staffed high end outdoors stores.What about credit unions?Western Canada still has Federated Coop – http://en.wikipedia.org/wik… . Its a serious retail player in that region.
Apologies for the long comment:I was part of a group that demutualized a company. In 1996, we started down the path to demutualize the Chicago Mercantile Exchange. It took a long time. We finally accomplished the task in 2001, and went public in 2002. There were a lot of reasons to do it at the time. Survival was one. In 1994, Seats traded close to a million bucks. By 1998, that same seat could have been bought for $280,000. I owned a full seat, and doubled down, buying the absolute low tick on a small seat for $115,000.The exchange had become too bureaucratic. We were run by committee with a 40 member board. Lots of political constituencies and battles. Common knowledge among those that were smart was our exchange was a thing of the past. Horse and buggy. (We insiders knew differently)There were also other reasons to change. If a firm blew out, members were on the hook for it if they couldn’t pay. “Good to the last drop”. We had seen that almost happen in 1987. As a board, we took out insurance to cover potential losses and protect members, but good to the last drop remained. Today, they have insurance and thanks to Dodd-Frank, they can borrow at the Fed window. (Aren’t you taxpayers happy Dodd-Frank put you on the hook for derivatives? but I digress)Budgeting was highly politicized in a mutual organization. We were not spending enough on cutting edge technology. Our competitors were killing us, and we were in danger of losing business.We emerged, retooled, got rid of bureaucracy, demutualized(thanks IRS and SEC for dragging your feet and making it take so long), went public in Nov of 2002 at $35 and hit an all time high of $714 in 2007. The stock split 5:1 and trades around $80/shr today.On the flip side, an exchange is the ultimate network. It’s buyers and sellers interacting through a variety of paths to discover a price. Networks are great at that and they build tremendous value. Networks are right more often than individuals or centrally planned programs. But, they can be messy.The writer misunderstands networks, and the value in them. Fred’s Twitter example is a great one. I no longer need a newspaper. I no longer need TV. I just have to follow the right people on Twitter and I get a customized stream just for me in stuff I want to know about, laugh about or whatever. If I feel like interacting I can, and I can add to the stream if I want. Twitter one of the best listening devices in the world if you use it right.
do not apologize for this comment. it is exactly what should happen in the comments.question – do you think mutual ownership is flawed in all cases, or just in some specific cases (like the one you cite)?
It depends. For the exchanges, it was a matter of survival. If they would have stayed as mutuals, many would have died. They needed to raise outside capital to build computerized infrastructure. They also needed to combine to create economies of scale and scope-and in a mutual format there was no way to do that easily (We tried on a number of occasions and even today 5 years after merging there are still separations) There are hiccups and externalities rife within the trading ecosystem on both the SEC and CFTC sides of the business-but those aren’t the fault of exchanges but the fault of poor regulation.I think it depends on the business model for mutual ownership. Frankly, offhand I cannot come up with an example where I would see it as beneficial-unless you were a business catering to a closed network within a niche. But, those are not blow out investable businesses by VC in my opinion. My mind is open to be proven wrong.I love networks. They create so much value. There is an amazing amount of ancillary value and data that stream off of well developed networks. They are sticky.I have participated in networks, developed them and studied them for the better part of 25 years.They are incredibly hard to create. Once they get mojo, they are incredibly hard to break away. Who will take the bond contract away from the CBOT? Not happening. Who will rise and take Twitter away from Twitter. Not happening. Network effects are too strong.
you can’t raise capital as a mutual company and dilute the mutual owners?
You could. But, would the owners want to be diluted? In the exchange case we thought there was “surplus” tied up in the value of our memberships. The only efficient way to unlock it was go public and sell shares. We converted the memberships to shares and listed.We could have sold more memberships, and diluted ourselves, but it would have been arduous, and we still would have been left with a governance problem. Plus, we could raise more capital with stock than memberships. Exponentially more.
Just had a thought, let’s use an example. What if Foursquare became a mutual company? Foursquare could sell memberships to all the places people check in-and the sale of those would buy out the equity invested. It could also sell each user a low yearly fee (commission). How much would they charge all the locations in order to break even for investors? How many users would pay a fee of say $3 per year to be a member of a network? Does it unlock value by making check in sites partners? Do memberships come with any value other than being a part of the 4Sq network? Is there a way to knit that network together and create network effects from being a part of it? Not sure you could sell enough memberships at a high enough price point to break even-but it’s interesting to think about-and then brainstorm how it evolves.
I’d like to think this through (but won’t at the moment :-)another question is how to address startup costs — I guess in this example the idea would be to bootstrap a network with a corporate model, and then execute a community buyout once the value proposition was made clear.In the foursquare case that’s complicated because the investors are expecting a certain return. If investors went into building a network expecting a community buyout at some point, maybe those expectations would be different. Maybe it wouldn’t be possible to raise capital with those expectations; I’m not sure.
The VC could get mutual interests wherein future mutual interests would be proportionally spawned (and sold) from the initial interest.
the problem with the foursquare model is that 1) “places” (unlike seats to an exchange) are not really fully fungible, 2) the value of the seat on an exchange is inversely correlated with its scarcity while the value of a seat at the foursquare table is inversely correlated with its lack of scarcity.
I had an idea for dwolla that they needed to get their users to be the salesforce for the product with establishments that didn’t accept dwolla.When it first came out, and Fred wrote about it, I told the owner of the chinese restaurant about dwolla and he really like it.  The reason that he listened though (which is the part of sales that is difficult) is because he had to to be courteous because I was a customer.I can go into any restaurant that I am a customer of and get the manager to come over to my table if I want. I only have to say “can I speak to the manager” and in a minute he is there all ears. Then I start out telling him how wonderful the meal was (the anesthetic applied to numb) and then slip in the pitch. It’s really easy. Doesn’t mean he will go for the pitch but he will listen and that’s what you want.So I say enlist the users to pitch the product and to be your sales force. (They are already doing this obviously (the “connectors”) so the idea is simply to make it more of a program). Dwolla completely dropped the ball on this. The website was poor at the time so the owner was totally confused and there was no easy way for him to sign up and take advantage. The iron was hot but the owner moved on to other things.
I introduced a couple of my contractors to Dwolla, but they were software programmers, so it was an easier sale.
Really shows how the subset of users (and people) that are “connectors” are so important. Some people actively push the products and services of others. Not everyone is like this of course. (I’m not talking about how someone might tell another person about a great restaurant they went to. I’m talking about people who actively seek to make connections).Gladwell talked about this in one of his books. Connectors may gain from connections they make but they do it independent of any other reward.
This is a great comment. Want to bring this comment to @awaldstein ‘s attention. We were just talking about this same connector concept (and the power of it) offline.
retracted. we can’t delete comments on disqus?
@andrew_kennedy:disqusNicely said but just because there are no monetary rewards in almost every case the motivation is not completely altruistic.Understanding the behavioral motivations of connectors is the key to program and often network success.
I’m not a big believer in strict altruism anymore than I believe Warren Buffet is a great simple guy because he lives in the same house that he did 50 years ago.It’s just a matter of degree.Buffet doesn’t need to spend money because his currency is getting smoke blown up the ass. God knows that is much better than a nice house or car. It’s a drug. And drugs are much better than a nice house or car. Except this drug doesn’t cause apparent medical problems.The guy who donates money to get his name on a college building is neither 100% altruistic or 100% doing it to get smoke blown up his ass. It’s a combination of both mixed in different percentages depending on the individual.Even the guy who donates money to a college anonymously still gets smoke blown up his ass by the people who know about it.And even the guy who drops off a $10,000,000 check payable to the college (or sends it by anonymous bitcoin) still gets to feel good about himself by being anonymous and blowing smoke up his own ass. By feeling that he is so superior because he didn’t need his name on the building. “See I did this and I don’t even need credit!!!”Sorry for being so crass but to me these things are a matter of degree which is more or less what you are saying.As you said behavioral motivation and understanding is key. Sometimes people are motivated by a positive feeling and sometimes they are motivated by avoiding a negative feeling. (Like when you tip someone that you will never see again and in fact (like a hotel maid) you never even see.About tipping there are cases where you tip because you are truly appreciative. In other words closer to, I guess, altruism or appreciation. (I find that I do that at the tail end of a manic state when someone has really just done a wonderful job. Like the service guy at the hotel who ran out to the repair cart and gave me his USB micro connector which I needed. I was like “wow thanks” because he saved me pain. Except that he said “no I don’t need the money just tell my boss”. And by the end of the trip I had lost the mania and had a really hard time telling his boss.
The original social network is your own customers bringing you new customers. I didn’t say that Richard Duchossois did. (Acquaintance of mine; 92 and still going strong.)
In my opinion that’s how all successful businesses are built.
The name is hard to pronounce/remember… real issue in my mind.
Agree. It does fail many naming tests. Also ripe for typos. Which they don’t have covered either.
it’s a major problem re: customer acquisition.the other real hurdle I see is the federal requirement to disclose your SS# to set up an account.if the value prop is clear ie i can use dwolla lots of places a la paypal then i am all about it bout it, but i need to understand the value prop. i think 501(c)3 donation space is stronger place to focus re: customer acquisition as the 501(c)3 can say, “HEY! USE DWOLLA (THIS LINK HERE) and avoid costly fee that we pay, which is upwards of 5% (insert graphic example of what 5% can do for cause).”Saving a coffee shop 5pts on a $2 coffee ain’t worth it to me (just one mans perspective).
sounds amphibious actually.
I think mutual ownership works with non-voting shares, or with voting shares and clear decision making power in leadership (CEO/board) with potential for broader elections.I also like the idea of owning a little bit of a lot of different businesses that I believe in. Shares work in those situations. I can’t be an expert in everything though, so it helps to have folks you can trust running a diversity of companies.
I think this is straying a bit from the point that Nocera was trying to make in his column. A better analogy would be users getting payed for check-ins that eventually generate revenue for Foursquare (and maybe the establishment would be paid as well).And I think you would have to pay the check-ins more than the establishment because the check-ins are what have value.In the exchange world, this would be like an exchange paying an E*Trade customer for buying shares on that exchange, rather than charging him like it would today. Presumably, he would be paid from the exchange’s market data income associated with that trade.Alternatively, Foursquare could come up with a mechanism to give equity to valuable users, but I have no idea what a good mechanism would be for thatAlso, you would have to build logic into the network to prevent users from gaming the system much like Google does with its search algorithm. This could end up costing a lot of money, pissing off your customers, or both…
One problem I see with mutualizing certain networks like instagram and twitter is that the value of these businesses is based on future cash flow. This money needs to come from somewhere, namely the advertising to the network of users itself. If businesses are paying let’s say $3 per user per year they are expecting to extract more than that per user per year in profit. Either the users aren’t benefiting financially from thwir ownership stake or the company isn’t delivering ROI to their advertising clients, in which case the business is overvalued. There are no perpetual motion machines.The problem with the critique on concentrating wealth a la instagraminstagram is that it misses the fact that instagram offers paying clients a cheaper customer acquisition cost (in theory) which drives productivity and frees up funds for other business improvement initiatives that ostensibly drive job growth.The income inequality gap is a canard. The gap is being driven by a skills gap as no skill work becomes cheaper globally due to normal supply and demand factors. Meanwhile the very wealthy are seeing asset values rise dramatically due to low interest rates, while the less wealthy are being enticed to spend beyond their means and squire cheap debt.
got it, thanks
What about a mutual country (or a publicly traded country)?
The perfect illustration of the struggles a collective approach offers.This isn’t a black and white issue at many levels. My sales team needs to work together to close deals, so our comp system is a mix of team and individual incentives.But if it was purely team based, why would any one team member work harder than the slowest of them?The same is true for these networks. One user doesn’t deliver the same value as another. And yes, the creators of these networks drove the vast majority of the value. They took the risks, worked the long nights and gave up time with their families and friends to build it.
Who bears the cost of failure? That is critical. When it’s clear, then the network polices itself to keep everyone in line.
Agreed. re:financial risk anyway. One could argue that users who invest in a service (dogvacay for example) and then see it fail feel loss, albeit not financial.
Isn’t decision making the other big constraint?
Very clear example, thanks
Love this exchange and the comments to and fro. I have been considering an adjacent model. Something like instead of credit bureau we have credit cooperative. Positioning or literally the legal model. Had not looked at the mutual company for constructs. Don’t know what path we’ll take just yet but this whole discussion was so helpful. Thanks for investing the time!
Jeff, saw you were on the bd of Natl WWII museum. We’re down the street on Magazine!Thought I’d throw out our shop as a willing guinea pig for this. We fit some of what Jeff laid out about potential profiles (niche, small, controlled group) where this could work.4.0 is a non-profit, early-stage education incubator working in New Orleans and NYC. We have a community of about 300 members that hang out with us and who’ve completed training on running experiments in education. A subset of about 40 members have launched 25 startups – a mix of schools, non-profits, and for-profits (lifestyle and ed-tech).Gates Foundation has challenged us to raise 75% of our $2M budget from new sources.A mutual structure could be cool for us or for one of our new startups. We could raise money from the community itself, a maybe offer two levels of ownership – small stake for each of the 300 members, more shares if you launch a startup.Members already in could decide what they invest in each new startup that we launch. Side note: we’ve learned a ton about potential ways to do this from Ross Baird at Village Capital in Atlanta ((http://www.vilcap.com).We’d be down to try this out Fred, maybe with our next launch class this summer. If anyone wants to learn more, we’re at http://4pt0.org
I will try to visit you when I am down on January 23rd for my friend Robert Edsel’s movie premiere. Monuments Men. He wrote the book, George Clooney made the movie. Should be fun. Love your town.
Awesome story. Please come by the lab. In the IP bldg, 643 Mag.
Great comments. Many Blue Cross Blue Shield’s are mutual comapnies, some have changed to C corps. Other blues will never tackle the big deal you did. Wonder what the competitive advantage will be for mutual co in an ACA reg environment
Good comment overall. One quibble re: “The writer misunderstand networks and value in them.” I believe Lanier’s main point is that today’s networks replace existing monitizable businesses that distribute rewards to to many, generally in a more bell curve like distribution, whereas our new networks distribute the money a select few individuals.It’s not that we don’t get value from these networks, its that the percentage of people who get monetary benefits becomes tiny and that tiny percentage earns extraordinary returns, whereas the rest are compensated via non monetary means.This phenomenon pushes value off the books and into the non monetary economy, which, I believe Lanier argues, actually shrinks the economy long term.
So you mean like the Green Bay Packers? Aren’t IPO’s essentially a version of this as well (and so aren’t *most* of your investments working towards this path already?)…this also feels a bit like the promise/hope for what crowd funding will bring about…so I do think things are already moving in this direction on various levels…
Is this a digital MLM and a pyramid scheme?Isn’t this Bill Ackman’s Herbalife argument?
Fascinating question. The only example of this that came to mind to me (although not exactly spot on) is Wikipedia. Subject to the voluntary donations, to me, the network owns it and derives its value from it.
yeah, wikipedia is one model, but it is a non profit funded by donations i wonder if there is an even better model out there
Bitcoin will be that better example. No one owns Bitcoin, yet every participant benefits the minute they enter it.
maybe…i’m not sure i know exactly how amway works.
Pump the brakes a little Billy!I am sure there are some folks who bought high and sold low on the Bitcoin. Then never touched it again.Where’s the benefit there?
It took me a while to fully understand Bitcoin and its potential. You need to dissociate the currency fluctuations from the underlying network and capabilities it is enabling by virtue of it being a “new peer to peer platform for money”. Then, you’ll understand Bitcoin’s potential.it’s still early days.
How did you dissociate the two?A Bitcoin has to have a value?
Try to understand the power of a peer-to-peer network of money, first. Regardless of the currency underlying it. if you have a chance/time, chip away at the content on this page: http://antonopoulos.com/
This is going to be **the** question of the 21st century
wow. then a timely post
Seat of the pants I say it’s a non starter.People who contribute and/or make comments do it for the way it makes them feel about themselves.  Either they need to feel smart or maybe it’s simply they never got much positive reinforcement from friends and family or in school. It’s also good writing practice and because it’s voluntary there is no pressure which adds to creativity. (Similar to how you just wake up and decide what to write..)If you tie money into it you create a totally different dynamic.  With wikipedians it’s a power trip, right? On Hacker news one of the top commenters justifies his involvement by the fact that he thinks he gets good hackers to work for his company because he is well known  and also the fact that he holds this belief that Paul Graham will make him a partner at HN because he is so “smart”. As you might be aware an attorney will do something pro bono that he won’t do if you pay him $50 per hour. If you tie money into something, then people will shift their focus to the money they gain and they will think they are being underpaid (and you will create a negative). Which doesn’t of course explain how he got enough karma to be well known, does it?
Good one. Wikipedia is a good example where there is no “owners” at the top. The owners are the people in the network.
But they don’t bear the cost of failure as they would in a mutual organization. Insurance company or member owned exchange.
Fred, the same could be said about AVC. Commenters/readers help you be that vibrant community and network, therefore they would expect to receive part of the proceeds from what you benefit from it, no?That passage from Lanier’s book is interesting: “Web businesses exploit a peasant class, that users of social media may not realize how entrapped they are, that a thriving middle class is essential to keeping the Internet sustainable.”There’s a successful restauranteur friend of mine who owns multiple high-end restaurants. He used to say to me half-joking, “Feed the poor, Eat with the rich.”But…what this line of thinking is missing, is that each player benefits, but differently. Commenters meet one another, Readers get educated, Social Media participants get exposure, Diners have a fine meal. But the owners/operators always benefit more. That’s the way it is.That said, maybe a small percentage of ownership could be reserved to patrons/users/customers, enough to increase their leverage, but not enough to control the operation. I thought about doing that when I started Engagio. I wanted to reward each one of the most active 500 users with some share ownership.
so the way i monetize AVC is to act on the insights i get from the network since those insights are public and available to all, i would suggest that i am already doing that
True, but your readers/commenters aren’t benevolent “part owners” of what you end-up benefiting from.The bigger question is whether this model is sustainable. Will users/participants continue to come back based on the current value received, or will they expect more in the future?
This is an excellent point. Should engaged users on AVC receive something back from the network or is it up to them to act on the insights shared amongst the community? Should instagram users get something for posting photos that generate likes, are shared and help grow the community?I don’t think it’s possible for users to directly benefit from a network like instagram as part owners. Celebs probably generate the largest followings on networks in America so any system to benefit users would be skewed heavily in their favor. This does not solve the problem.I do think the current model is sustainable. Engaged users will continue to come back based on the current value received and anything else is extra. Unfortunately, great networks will continue to contribute to the increasing income disparity in America. Perhaps, if we can educate Americans about the value that can be generated through insights + engagement more people will benefit from these networks over the long run.
I’m just a barnacle on the ship – I get all the value of the posts and comments, regardless of any personal contributions. As soon as I stop getting value, I’m off to somewhere else. Seems like a pretty good deal.
straight punch … +1
We are all pions on someone else’s board.
I steal them. Heh.
there is no stealing here. it is a commons
agree. knowledge sharing. powerful drug.
I shouldn’t be sarcastic in the comments, shame on me.
I think what will.i.am is referring to is sharing of the investment proceeds not sharing of the information.
‘”Feed the poor, Eat with the rich.””Heard that one in college from a builder that I invited to talk to entrepreneurship class. (Herb Barness). “Serve the masses, eat with the classes”.
Ah…didn’t know the origin. Same intent. And true. thx.
I wanted to reward each one of the most active 500 users with some share ownership.I could argue either side of this. I will take the negative side.As a reason not to do this is that in an opinion based community, if people have a financial interest in the outcome, they will be less likely, to state their true opinions (similar to advertising controlling editorial at a newspaper). Even if they start out (before the financial benefits) as 100 honest and genuine.And it’s well know (to me at least) that if you have salesmen calling on you that you end up liking them because they are always friendly and nice and never do anything to disturb that relationship.  They almost always agree and never tell you you are wrong.  Even my hairdresser is like this. I can say the most outrageous things to her and she will almost never tell me what she really feels. It’s almost a game at this point to see how outrageous I can be to get her to react.And of course if you didn’t wait and started the rewards in the beginning you would draw a different set of users who were motivated by different things. (Previous argument was after the fact.) The volume of smoke up the you know what is tremendous. I’ve told the story of my first wife selling and two guys making lewd comments about her to her. It didn’t bother her and all I said was “did you get the order?”
It is a double edge sword, but not far from what might be possible if it’s well done.
I thought sites like mahalo, hubspot, squidoo all offer this at some level?
that is rev share, i am talking equity ownership
A great example of the mutual company structure is The Vanguard Group (www.vanguard.com), the giant mutual fund company. Vanguard is unique in the world because it’s owned by its investors, not a management company. This has a couple great results… First, Vanguard pays better returns because what would usually come out as a management fee, instead goes to the investor. Secondly, the interests of the Company and the investors are totally aligned. If Vanguard does something contrary to their interests, the investors move their money and Vanguard looses revenue. Third, Vanguard doesn’t really advertise, why, because why should they spend the existing investors money to attract new customers?The combination of mutual owners and passive investing have been amazing. In the past year they had net cash inflows of something like $138B with virtually no advertising. When you serve your customers, the customer development tends to itself.
do you know anything about the governance of Vanguard?
According to Vanguard, the company is owned by the mutual funds that they operate. The board is 11 in size, and all but the CEO are independent directors. The board also serves as trustees for each of the mutual funds.
Founder has written several books – http://www.vanguard.com/bog…
Northwestern Mutual also – $200B in assets, $2T in life insurance policies, as a mutual company
Secondly, the interests of the Company and the investors are totally aligned. If Vanguard does something contrary to their interests, the investors move their money and Vanguard looses revenue.Where does that not happen with investing?
Quick answer: Everywhere else. Because everywhere else, management fees, and other fees, exceed the cost of doing business and create profits for management company shareholders at the expense of fund investors.
I know the arguments for no load funds (which is what I believe you are saying (from investopedia):The justification for a load fund is that investors are compensating a sales intermediary (broker, financial planner, investment advisor, etc.) for his or her time and expertise in selecting an appropriate fund. It should be noted that research shows that load funds don’t outperform no-load funds.The research they are talking about (and anyone please free to correct me here) relates to the entire universe of funds. Not to any one specific fund.First, I don’t gamble on this type of stuff preferring to put my money into things that I have some control over, or expertise in, or can gather information to gain an edge.That said if I did do this type of investing I do believe that having to pay for someone’s expertise is entirely appropriate. After all you are betting on one horse not a class of horses. Assuming they have expertise and you are able to determine that.On a broad basis there are many things that can be viewed as incorrect “does it pay to go to a private vs. a public college let’s look at the earnings of the graduates”.But that thinking fails to take into account the effect of the item in question on an individual basis. Being an entrepreneur means you think and do things differently from the crowd. So off the top the fact that the management company is earning fees doesn’t bother me. As an outlier example how many people would like to be able to tag onto Fred’s investments, for even a high fee?
From a consumer side, Naked Wines in the UK let’s you buy shares, and that ownership is paid back in wine, and special access. Not pure ownership, but an interesting model nonetheless.
KindaThis is an ancient post I wrote on it–http://arnoldwaldstein….Didn’t scale for a bunch of supply chain issues and their attempt in the US is not very interesting.
I didn’t know Naked Wines had got to the US Arnold, shame it’s not a success over there. I really like them.
I was careful to say’ not interesting to me’ as i don’t have data on the $$$I know Romley a bit and was a big fan when they first got started.Wine at retail in the UK is finally changing with lots of artisanal shops opening to compete with the dreck of unassisted buying at the supermarkets. As that change happens, the why of NakedWines changes and I think lessons.Their push in the US was towards the bottom of the middle market. Just not interesting in general although big buck if you can build a brand.
My observation Arnold in the UK is its not changing that much, I welcome any diversity in the wine market but at the middle/mass end it is dominated by the supermarkets, increasingly so actually as Lidl and Aldi who have enormous buying power in Europe have taken hold here.At the top end you have some select brokers and Berry Brothers ( who have been around forever but continue to adapt) which is why I like Naked because they do offer something different and are accessible. Smaller shops at the high end will find it really difficult to survive outside of London. Majestic probably are the only sustainable national chain and I doubt there is room for anyone else.The market is probably just too small, we are big drinkers in the UK buts discerning we are not, I am ashamed to say!
You are the expert as I’m sitting here in NYC, hands down the very best place on earth to be a wine lover.I don’t know outside of London but there are some pretty cool shops in Brixton (a friend lives there) and another friend just opened one as well (need to check the address).But you are correct and that is why Naked took off there.Weird market for wine–I am friends with many of the major wine bloggers there and when they start to talk about distribution, I simply glaze over and walk to my local shop here and have the best selection sold to me personally by just great and informed people.Sorry–I love shopping for wine and probably stop in a shop 4-5 times weekly.
Nothing to apologise for its the beauty of living in one of the greatest cities on earth my friend 😉
Certainly.Do note that even though Europe is way behind the $2B direct to consumer business here in the states for wine it is starting.Doing a bit of consulting for someone who is starting some DTC in spots. It will grow quickly.
I still am confused by economic models of network effect businesses especially social ones. If I understand correctly, using twitter as an example, twitter is free to use and in exchange you can consume/produce content, give up your usage data, and of coarse can be marketed to via ads. The thing I don’t understand is someone who provides more value to the network, someone with a million followers tweeting 5x a day gets nothing in return relative to someone who strictly consumers information without creating. Isn’t someone producing content and generating followers more valuable to the network? How is that person compensated? Basically, the real question I have is, why is the economic model the same for all users when they each provide different amounts of value to the network?
It’s about how a person monetizes outside of the Twitter network. Everyone engages there for a different reason. Some for news-and they monetize the info they get, some to create connections to monetize. As many reasons as I could type are as many ways there are to monetize it. Twitter monetizes via ads.
I understand how Twitter makes money. What I am curious about is people using Twitter and the value they are able to capture from the platform being that they are the ones who ultimately make up the network. Someone follows 100K people and consumes five hours of content a day versus someone with a ton of followers tweeting all the time – do they bring the exact same value to the network? If you believe so there is not much more to discuss. If you think in the previous example one person provides more value than the other, my question is how is the user being compensated?
Do you care? To me it doesn’t matter. Twitter is a river of information. I dip my cup in to see what’s there at no cost, and it costs me nothing to dump it out and look again. If I choose to act, I do it with my own free will. If it costs me to act, I make that decision independently from my activity on Twitter.
Yes. Twitter is a combination of the software plus the network. People who create the software/invest are the only people who economically benefit. The network should benefit as well awarded by people who add the most value. I do much more consuming of content then creating. Valuable, interesting, and funny content drives the platform, even interaction is driven by content. Twitter gets the most engagement I’m assuming through content creators and those people should get rewarded somehow?
Twitter is free because it was financed by VCs, then bankers, then the public,- all on a promise that future value will be greater than current value. It’s as if the markets gave them a loan, until they become self-sustainable. Same with Facebook, and others.Nothing wrong with the way capital markets work.
Agreed, but with lower technical barriers to entry, this might be a differentiation factor/stickiness factor for a company that uses it well.Sort of a feature, especially if a company hopes that I opt-in with my data for commercial use? 23andMe?
Twitter is very significantly compromising its potential upside by committing itself to advertising – letting people pay to infiltrate user streams. It’s a huge mistake.I love seeing this discussion because it could encourage social media entrepreneurs to apply more imagination to potential business models.
What other revenue model do you think they should have?
I think there is plenty of room to experiment. One idea would be to set a value that a particular user represents to advertisers (and the number could float), multiply that by a significant factor (5x? more?), and give the user the opportunity to opt out of being exposed to promotions by paying that price.
That’s an interesting idea, but I’m not sure if the implementation isn’t tricky.
I know you know designing and building social networks. I’d be interested in what you think, generally, about the feasibility of Lanier’s idea of hyper micro-transactions, where credit is given for (value assigned to) virtually every user picture, status update or post.
I like the idea of incentivizing loyalty in users of a network by giving them skin in the game. How would a for-profit company go about this structurally. Would it make sense/be legal to allocate a user equity pool? Perhaps more active users would be allocated a greater percentage of the pool over time and if successful everyone gets to participate in the upside for their contribution?I think hypothesizing a “mutually” beneficial structure might get more companies to consider it more seriously. User acquisition and engagement are by far the hardest challenges to solve in any startup these days and a fresh approach is desperately needed.
Posted this above as a stand alone comment before I saw yours:In 2005, I experimented with a similar idea with my startup. We were a successful student to student marketplace at one university and wanted to expand to other universities. I wanted to give one share in each new campus’ version of our platform to the first 1000 users who joined and listed an item, for free. That way they’d have some skin in the game and it might give them an incentive to get their friends to sign up. I wanted to align their incentives with my own and make them owners. I never got to try it out, outside of focus groups, as my attorneys told me it wouldn’t pass accredited investor and max shareholder requirements, even though I was giving the shares away for free.I’d love to see some more experiments along these lines.
As would I..
Mutual ownership of massive networks means the value of the enterprise is distributed over huge numbers of people. FB’s $140b market cap means the billion or so users would own something like $140 worth each, which simply is not meaningful to most people.
that is a great pointbut that is today’s valuewhat if it becomes worth a trillion dollars in five yearswould that change your view?
Touché. Assuming the sevenfold increase was without dilution from more users, the per-user value becomes more meaningful, but I don’t think you can “buy” an individual’s constant best efforts regarding day-to-day behavior (posting, sharing, commenting, liking, etc.) to any degree that it’s an effective replacement for the organic demand a great network service creates.
By nature the mass of people (not any one individual) are into current rewards not future rewards of dubious value.
I agree with your overall point which is basically exchanging value. It would be interesting if Google or others did this. I thought Bing’s reward system was really innovative (surprising coming from Microsoft), Credit Card companies do it with rewards, and there are some affiliate shopping malls that do it too.I don’t know that you have to do it with ownership you can do it with credits.But the one point that is missed is that yes Instagram’s 13 people did drive that much value. Same for Facebook.From an economic perspective the question is whether that makes labor more expensive or less expensive. Right now on the low skill side it makes it much less expensive and on the high skill side much more expensive.
“Credit Card companies do it with rewards”I label my credit cards with words (from a label maker) such as “dining”, “electronics” etc. (Now if they built that into the credit cards they’d have a real winner).For me the motivation for doing this is not so much the $$ earned but to avoid a negative.One thing I will say about those cards where they make a mistake (to me anyway) is where they put caps on things. I just got one where I was ready to label the card but saw “earn up to $300”. To me that was a turnoff and disincentive to change my buying behavior.By the way the best rewards are gaming the amazon associate system. Setup a page and get paid back by amazon in referral fees for everything you buy from amazon. Takes a bit of work and not totally legit but has worked for me for several years. I’m actually surprised that they have nothing in place to prevent this behavior.
This valuation was made by the number of users, to have a trillion dollars valuation he would have trillion people which continues with the same point.
Touché. Assuming the sevenfold increase was without dilution from more users, the per-user value becomes more meaningful, but I don’t think you can “buy” an individual’s constant best efforts regarding day-to-day behavior (posting, sharing, commenting, liking, etc.) to any degree that it’s an effective replacement for the organic demand a great network service creates.
What constitutes the true economic “VALUE” inherently created via global digital-network synchronizing-efficiencies ?Historical ownership-extraction “VALUE” ?ORPublic digital-infrastructure utility “VALUE” ?Perhaps the organically accelerated cost-efficiencies of global digital networks is about to existentially force us into reevaluating the set-point in that “VALUE” distribution equation.Apparently Lanier speaks to the feedback loop by which historically centrolized-network owners ultimately collapse their own extraction base via over centralizing health until it stalls cyclical economic homeostasis.Or in Marxist terms- capitalism(like everything) contains the seeds of its own destructionOr in McLuhan’s termspush a process too far into an evolving environment, for which it was not designed, and it flips from tool to impedimentThe long historical cycle-times on this economic feedback process have always made centrolized-network ownership very profitable, economically/socially defensible and probably even an evolutionary economic necessity.If one buys into the concept that overly centralized wealth is not so much immoral as it is a mathematically unsustainable formula for economic cyclical equilibrium, then at some point global-digital-network synchronizing-efficiencies accelerate that counterproductive central-network-ownership, wealth-consentrating, boom-bust, feedback cycle into economic obsolescence.Surely a new atomic-table of competitively recombinant, purpose built, network-topography components will emerge as the base platform for building out a modern social/political-economy.How long before we see a network-topography component construction kit for building out simple end-user defined social-network exchange structures.Remember Blackberry’s CEOs said they didn’t build an iPhone like device because they thought that putting a computer into a handheld phone was not possible !
I responded to this question, twice, but Disqus said both were automatically marked as spam (despite having no links or spam-like content)
I will pull those messages out
Gracias (especially for the one linking to that great deal on Viagra)
done. there was a lot of legit comments in the spam folder. disqus must have cranked things up a bit recently
thats assuming the value of each mutual interest is equal.
Exactly.Charlie gets $0.14. Aston Kutcher gets $14M.
“The newspaper costs money. Twitter is free. In a world where “we” create the newspaper instead of the NY Times, the newspaper can and will be free.”I disagree that “we”are creating the newspaper – a lot of the posts on Twitter are links to mainstream media like the NYT and I’m not aware of any Twitter users doing investigative journalist pieces such as those found in quality newspapers.
maybe this is how the investigative stuff gets done http://www.contributoria.com/i bet most of the links on twitter are not to “mainstream” media
it will be interesting to see if initiatives like Contributoria gain much traction and have influence. I agree that most of the links on Twitter are not to mainstream media but a lot are. Who knows how it will all pan out but I do feel it is too early to see Twitter or any social platform as a viable alternative to traditional media – however, I can see the day may come.
.Like a lot of things there is no one easy answer and there are situations which scream out for a particular solution.A great example of a mutual which works very well is USAA in San Antonio. Started out in 1922 as a mutual insurance company to enable 25 Army officers to get automobile insurance. USAA Insurance Company History: https://www.usaa.com/inet/p…I have been a member for over 40 years.They recently jumped into the health insurance business through a joint venture.The services they provide — insurance, banking, investment management, brokerage, buying services (best new car buying service in the world), travel, catalog buying — are targeted only on the needs of their customers/members.You receive a Subscriber Savings Account into which an annual deposit of their operating surplus is made and at a certain age an approximately 15% refund of your premiums.Their claims administration is superb — who ever says such a thing about an insurance company? Their digital presence is excellent.The reason I belabor this description is because the owners and the customers are completely aligned in several lines of business that are typically a pain in the butt.JLM.
my dad is a USAA customer and has been for sixty yearsi am not because they refused to insure me when i was youngscrew them. they missed out on a great opportunity. i would never ever do business with them now.
.Fred, you’re so sensitive. I am sure it was not personal.I suspect you were not eligible for membership. The membership has only recently been opened up to blood relatives of members. Mutuals have rules that screen the gene pool on purpose.Originally it was only Army officers on active duty. In 1996, they added enlisted men.Give them another chance.JLM.
nah. i use Chubb and really like them.
“I am sure it was not personal.”In the end you can’t get to wrapped up in thinking that your business matters to people more than it does. It doesn’t. My saying is “they need everybody but they need nobody”.It’s a corporation obviously. And even when you deal with people when push comes to shove they will do what is in their best interest. Of course it does tend to happen less when someone can’t hide behind a front line of customer service people.There was a case where the gas station across from my old office overfilled the tank and “mr owner guy” literally told me to go scratch he wasn’t going to do jack squat and that it wasn’t his fault. It was the way the filler on the car was designed.So after that I refused for years to go there.You know who lost out? I did.Because I needed that gas station more than it needed me. It was convenient and now I had to go elsewhere to get my gas. I finally got over it and used it for a few more years before moving.I look at all of this as a game. With an insurance company all bets are off. They are organizations that follow rules and so to get anything from them you have to game those rules.
I have to say that I normally read AVC on feedly and don’t engage in the comments here but this article is one of the most interesting and open-to-conversation pieces that I’ve read in a while.To me the challenges in shifting from a rev sharing model to an equity sharing model are:the need/cost of expense transparency (server costs and SG&A),the necessity to align user incentives to company incentives/removal and management of perverse incentives (reward equity for a profile’s completeness, but make sure people don’t create multiple profiles and that they stay active with those profiles)and the overall offsetting of the fact that these users of the mutualized networks are investing time, getting financial upside and probably not risking financial downside.
and also to provide a way for the company to continue to raise capital which means dilution to the mutual owners
.Mutual “ownership” is allocated in accordance with some measurable participation such as deposits or premiums.Mutuals can raise funds by using a “capital call” in much the same way that a partnership uses a capital call or a corporation would issue a rights offering.An insurance company can also simply raise their rates.Mutuals are very tricky because depending upon the state mutual owners may be liable for the losses of their company in much the same way that Lloyds “names” are liable for the losses of their syndicate.In the case of a company like USAA, they are technically a “reciprocal insurance exchange” under Texas law and conduct their other businesses through wholly owned subsidiaries. Some of the subsidiaries — banking — are also subject to other regimes of regulation.Under applicable Texas law, a member is not liable for any losses beyond their invested premiums thereby shielding them from huge losses. There are almost 10MM members which is quite impressive given their military screen.USAA creates enormous reserves which should bridge any catastrophic losses for a sufficient period of time for them to recalculate their premiums.An insurance company is sitting on huge amounts of money. This is the reason Warren Buffett likes the industry. He gets a chance to invest that money.JLM.
At the exchanges, there was always a threat of a capital call. Generally though, we just raised commish. Since we were non-profits, when we hit our revenue numbers we’d have fee waivers as well. Couldn’t build up a surplus because of taxes.
.The ability to steady up the enterprise’s finances by raising commissions (exchange) or increasing premiums (insurance) or lowering/raising interest rates (S & Ls) is the key screen as to what businesses are most attractive for a mutualization approach.When the value of ownership cannot be reached or accessed, such enterprises have found it attractive to de-mutualize to unlock equity values.In the case of many S & Ls, the management had the equivalent of stock options and restricted ownership which drove the decision to de-mutualize.Most big de-mutualizations are accomplished by a combination of equity in the new ownership vehicle (swap), cash and notes. In this way, the deal is not hugely capital — real cash — intensive.JLM.
Perhaps something like a share repurchasing where the new capital investors are purchasing existing equity from the network at some value re: an auction system.Alternatively, by creating a shielded tranche of equity for users (would have to be very small, but I’d think that is a fair assumption).I’d also note that users should probably expect to get diluted over time by network growth. I’d probably recieve some more favorable equity calculation b/c of seniority (be that time or klout or whatever), but I’d expect my % of this equity pool to be calculated as a percent of total network value which would innately decrease as product grows and as (in theory) valuation grows.The question that I struggle with is why would this equity approach be favorable to rev sharing?
I’d be happy with some loyalty micro-shares..or the occasional vacation gift 😉
Big issue here in the UK at the moment because the largest mutual has just gone through a major scandal at its banking arm (The Cooperative Bank – see http://www.theguardian.com/… for some of the details). Have to admit it’s put me off mutuals and co-ops and made me think that legal status and ownership are a bit of a red herring in looking for ‘good businesses’.
This is actually the point of MakeLoveNotPorn’s revenue-sharing business model:’MakeLoveNotPorn.tv believes in rewarding you for what you create. I feel particularly strongly about this because my background is theater and advertising: two industries where ideas and creativity are massively undervalued, even by the creators themselves. Anyone who creates something that gives other people pleasure (in this case a LOT of pleasure!) deserves to see a financial return. So half of what you pay to rent each video, net a small amount to cover hosting/bandwidth/transaction fees, goes to its creator(s). The more a #realworldsex video is enjoyed, the more its creators stand to make.’http://talkabout.makeloveno…
A great idea. I’ll give it my “if it doesn’t work it’s because of you and the execution not the idea” award.You need a way to offer the free peek w/o signing up though. I would suggest simply blurring out anything objectionable and then giving the actual free peek if someone progresses to signing up.
Thank you!Our membership approach is to do with the fact that with a venture like this we have to be more legal than legal :)And by the way, per your earlier comment, we are big fans of Dwolla because they are just about the only new world order payment company that actively welcomes, supports and will work with a venture out to change the world through sex. Every piece of business infrastructure any other startup can at least take for granted, we can’t because the small print always says ‘No adult content’ – my team and I fight this battle every single day:http://www.nerve.com/featur…
When I started taking credit cards in ’96 I couldn’t even mention “internet”. Had to say it was a land based business and run things through a credit card machine. (Same with getting insurance coverage).
I think this is a very interesting idea, especially when coupled with something that potentially both creates and destroys like automation. Something that makes things much more efficient, at the cost of destroying existing systems and processes.What if there was a company whose purpose was to automate businesses, but that gave equity stakes to those that provided data and the know how required to automate some task. I think this could be very interesting, and could have some profound effects. We are at a stage where there are some very high value tasks that are going to be automated, and within reasonable time frames. Take radiology for instance, what if there was a system that made radiologists 2x as efficient (all things being equal that means we need 1/2 as many radiologists). If the data and know how was provided by instrumenting existing radiologists, perhaps the revenue stream from the system that replaces the radiologists can pay them in equity for their contribution to the system. What I’ve been working on for awhile now has implications that it will make businesses much more efficient, but it needs input data to do so. I think potentially having the people that provide the data own some quantity of the resulting business is very interesting. I was already planning for something like this, but maybe some sort of mutual company arrangement could be interesting. I’m going to think about this some more, thanks Fred for the post it definitely makes me think.
The best example of the contributors getting some upside to me is Stack Exchange and stack overflow. http://stackoverflow.com/The content, questions and answers are totally user generated. Site activity gains users points and badges. The points don’t mean anything really, but they show programming expertise. A high Stack Overflow ranking can get you a job or contract.It is not a direct financial gain, but they have a good model for developing the community, and keeping people from gaming the system.
A large amount of consumer surplus landing in our laps is certainly encouraging. However, it is discouraging to see the NYT redesign focused on improving its digital advertising picture at the expense of 700k paid subscribers interested in high quality content. Since when is a richer website one that is full of deceiving ads designed to trick users and generate more clicks? I love the NYT but this worries me. And if I were a journalist, I’d be wary too.
I wonder whether a simple profit share with the user base might achieve the same benefit wtihout all the complexity of mutualization. That’s how I perceive my relationship with REI or my mutual insurance company – I pay them for a service, and at the end of the year I get a modest check (or credit).
How would this look in practice in tech networks?Following on what Scott Sill said earlier, the advantage of a mutual insurance company is that 1) without the pressure of the stockmarket they can invest their portfolio with longer view and take more near term risk. Presumably this enables them to profit from crises as they can buy on the low and wait it out. Also 2) their premiums should be cheaper as there is no profit to be earned.Now would that mean that Facebook Mutual Co would operate with fewer ads and without the need to collect and sell personal data? That would be a benefit to users regardless if they get some profit distribution or not.
Love the idea, Fred….and make the underlying economy “Bitcoin” only? My thought process has a “mutual” bias…always has. Thanks for planting the seed. I’ll be lost in this idea for some days to come (and I consider that a gift received.)
Jarod Lanier’s 2006 essay on Digital Maoism is worth reading:* http://www.edge.org/convers…My friends and I discussed the ideas and issues of digital networks rewarding users with equity a few years ago because of our own experiences as beta testers-power users of a network.Those discussions have influenced my commitment to apportioning some equity to users.
There’s this new but not-so-popular social network called Zurker. It’s mutual. Check it out.
Totally a wrong assumption that rewards means only Money …You can’t measure rewards always in $ and Rs (!!)…but rewards are measured/felt/seen at different levels by the brain.What instagram founder got benefited is in $ terms …. what the users got benefited is the pleasure of sharing ….Why does someone donate Billions of $ in charity? She/he gets multi Billion dollar worth of returns on something else….
@kagilandam:disqus – True, but the problem is when technology squeezes out the opportunity to make a living for the non-tech person. I think that’s what Fred and the NYTimes was discussing.
There are both ‘producer’ and ‘consumer’ ‘cooperatives’that might be considered ‘mutual’ companies.As I recall, the key to a PBJ sandwich, that is,Welch’s grape jelly, is a producer cooperative!There have long been the Farm Bureau Coop producer cooperatives.The Rural Electric Membership Cooperative (REMC) is for consumer electric utilitycooperatives.Some of these cooperatives appear to havebeen popular and successful. Yes, the REMCsdid get some low interest loans subsidized byDC. But otherwise, lots of rural America wouldhave been in the dark much longer.And there long was Mutual of Omaha!
Ah, don’t worry: If wealth gets too concentrated, thensoon Melinda Gates will call up, or have Bill do it, andmake you an offer you can’t refuse: Join our littlecircle of 50% pledge makers or be an outcast,ostracized, chastised, insulted, humiliated, sociallyeviscerated, excoriated, isolated, etc. Now whatwill that be, our $5 billion minimum or our usual$10 billion or more? For $20 billion, Melinda will ask Warren to call and thank you!
Fred, Fully support this idea. That said what are the legal and/or legislative hurdles for this become reality, what with the limitation of investing to “accredited” investors, et, al? Or am I thinking about it wrong?
I’ve worked for a bunch of mutual banks as a consultant. There is a big governance problem that essentially leads to the employees extracting any surplus in the form of stable jobs, better hours, longer holidays, free food etc. The big benefit of a corporate structure is the governance provided by the investors/Board as a profit motive is good for focusing decision making – I see big problems in getting a mutual network like instragram to make decisions, eg long term investment.
Interesting to note that many credit unions are tied to unionized public services. Alignment of interests.
The Bitcoin betting site just-dice.com lets its users invest in the site. I believe other companies don’t allow their users to invest due to legal barriers.
This might have already been mentioned in the comments, but I think there are rules around how many owners an entity could have, even fractional.
From a UK perspective, I think it would be possible to trace many of the current problems with the financial systems to the removal or reduction of regulation of the sort which allowed many mutuals (i.e. building societies) to de-mutualise.On your other point, does this not actually match Lanier’s whole argument?”In a world where “we” create the newspaper instead of the NY Times Company creating it, the newspaper can and will be free. That is happening all over the place, because of the efficiency of digital networks, and the result is a large amount of consumer surplus that is landing in all of our laps.”The problems with these assumptions are two-fold:First – Twitter, with the best will in the world, is not the newspaper because the content still has to be created. There have been plenty of studies to show that most of the popular links shared on Twitter are created by mainstream media companies and these require money to create the content linked to.Second – The New York Times used to hire thousands of people, and there was an osmosis of revenue to everyone from news-sellers to delivery-boys to ink factories to the people making the lunch. The fact that those people no-longer pay for their news (ignoring the fact that it still costs money to create) isn’t a consumer surplus if it is off-set by the collapse in their overall earnings.I guess I would summarise with this (admittedly rather extreme) comment:What point is there in building businesses that rely on advertising if no-one can afford to buy the products being advertised?
With consumer surplus, it’s worth considering the differences between physical vs digital multiplier effects.Twitter’s ecosystem is highly leveraged on digital technology and little else.Print’s ecosystem is diverse – raw paper, printing, local delivery, recycling. A decrease in one (deliveries) is a loss to many (truck leasers, truck insurers, truck fixers, truck fuelers, truck drivers).The disruption from physical to digital leads to a net decrease in both the number and diversity of jobs. While many digital platforms in USV’s portfolio cater to the maker/sharer economy, these platforms leave out the population who are unwilling or unable to participate in it. The consumer only cares about a surplus if she has an income in the first place.Perhaps creators can think of ways to involve the biggest mutualizer we have – the government – in ways to ensure that economic opportunities are available to the both the disruptors and the disrupted.
“Digital Maoism” is how Lanier originally called it in 2006:* http://www.edge.org/convers…My friends and I explored ideas of giving equity to users as far back as 2009. I remember saying to them, “Investors won’t buy into it because it’ll trigger all manner of dilution concerns, accounting & reporting requirements and how would users be differentiated wrt how much stock/options they should get.Time on site? Volume of content produced? Number of up votes?”An unpopular President who tweets once every week wouldn’t get as much equity skin in the game as a spammer who posts cat gifs that gets tons of “likes”.This issue of “Who Owns our Future” is connected with the issue of who owns our data on the privacy side.Users may decide that they want to monetize access to their private data and thoughts differently from the model that’s in place at the moment, post-Snowden.
Glad to hear that you talk about mutual companies in USV!We are in fact setting up a customer data cooperative in the UK. An online Industrial and provident Society. It is quite a “humble” project, but we hope that will grow little by little.The risk that you have mentioned about centralizing wealth is specially unfair in my opinion when we talk about data. Personal data should be owned by users, but most of its wealth is captured by intermediaries with main buyers (advertisers and retailers).That’s why we are setting up a cooperative that will help users to effectively own and enjoy the value of their data. More info here: http://bit.ly/TGDCorporatePrezFeedback is more than welcome!
Aside from the regulatory/governance issues. Is this some thing that would be interesting to users (ie real people)? I had this idea 3 years ago when FB raised at a $50bn val from GS because of the first time, the value of a network was widely publicised.So I posted on my Fb the story and asked my friends, shouldn’t we – as users – have shares? I had about 100 ‘likes’ and 59,60 comments saying ‘yes!’ But then I got thinking, are network users ready to be commercialised?Would they not think, is another user only using the network / sharing because of the ownership (they own a share of the network) rather than they’re sharing because they like, value, care about what they’re sharing.I agree the concept is worth a try and rather start with shares could be tested with some other unit. To the point that the share not be much much because of the dilution, this can be overcome with an income distribution so that users see a regular benefit.Just a thought.
Isn’t equity crowd-funding at the angel stage a form of mutualisation? Often the investors there are also the first user-adopters who drive the startup through proof of concept and market validation.
In 2005, I experimented with a similar idea with my startup. We were a successful student to student marketplace at one university and wanted to expand to other universities. I wanted to give one share in each new campus’ version of our platform to the first 1000 users who joined and listed an item, for free. That way they’d have some skin in the game and it might give them an incentive to get their friends to sign up. I wanted to align their incentives with my own and make them owners. I never got to try it out, outside of focus groups, as my attorneys told me it wouldn’t pass accredited investor and max shareholder requirements, even though I was giving the shares away for free.I’d love to see some more experiments along these lines.
Great discussion everyone.I’m an entrepreneur working on a network product, and I had a serious think about adopting a mutual structure last year. I’d like to share some of the things I learned through that process.Firstly, the legal tools used to structure co-operatives are terrible. While the corporate form has had years to evolve in the law, and thousands of lawsuits to flesh out a clear and stable definition of all the rights and responsibilities of corporate parties, co-operatives are generally only included in statutes to support the few dozen large co-operatives operating at any given time in a state (usually old financial and agricultural co-ops). The law surrounding them is unclear, and this makes financing very difficult. Which leads me to my second point.It isn’t clear how you attract financing for a co-operative. There are models in the United States where people have sold shares to external investors, but how these investors ‘exit’ is totally unclear. Do they have to sell the shares back to the co-operative owners, or can they sell them publicly? The poor liquidity means that the asset is discounted and the valuations are worse. This is why most co-operatives take on debt financing. Which leads me to my third point.Debt financing, which is the dominant means of financing co-operatives, is a bad option for fast-growing networks, which usually experience a long period of unusually low (or zero) revenues and high expenses, followed by a long period of usually high revenues and low expenses. Furthermore, the turbulent growth of these startups leads to investors needing to take some kind of control of the asset to ensure it grows properly, utilizing their own experience to change the managers at different points. Both of these needs point towards the use of equity over debt. I think any hybrid debt-equity product would probably be interpreted by a court as an equity instrument if it were to truly reflect what a growing technology company needs. Which leads me to my fourth and final point.Co-operatives are created to mitigate against the excesses of capitalism prevalent in an era where there was a clear delineation between workers, capital (and management as its agent), and the customer. The era we are faced with shatters that paradigm completely. Is Justin Bieber a worker of Twitter just because he contributes more value to the company than the average employee, or is he a customer? Is he remunerated in another, non-financial way? Does the profit these companies make come from the hands of their employees, as it did in the past, or their users, or both? When Marx wrote Das Kapital, he did so under the erroneous assumption that the gains of the industrial era would usher in an era of post-scarcity, where nobody would need money to play the role of mediating scarcity, and they would use reputation as a means of incentivizing people to do good. While Marx was wrong then, it seems to me like he might have just been a bit early. Modern social products seem to operate under this assumption, namely that its users will contribute content without remuneration in search of reputation. The users who tend to contribute do generally live in post-scarcity conditions, where they have ample time available to them to do so thanks to the conveniences afforded to them by modern society and technology. However, social entrepreneurs and investors are still living in a world which follows the same structure as the companies of eras past.Which leaves the question of where we are going. I don’t think that mutualisation is the right solution to the problem. I think the more likely scenario is a future powered by open source *applications*, not just open source software. The first example of this happening is the Bitcoin network. Users are actually giving over their computing power to run the Bitcoin application, rather than the software itself being open source. Over time, I can see applications like this proliferating in all kinds of different areas. Most notably, personal social networks like Facebook. In exchange for their privacy back, users could donate the computing power, money and time required to run a Facebook clone. A system could be devised to have users vote on changes to rules. The software wouldn’t be as good, but it would disrupt the Facebook network over time in the same way that Bitcoin will over time disrupt financial applications like Stripe and Paypal.So don’t worry about the criticism, I think it is right (networks do unfairly pick winners), but I think the solution isn’t to be found in anything that resembles the current system at all. In the meanwhile what we need is a government that is ready to take on the challenge of redistributing income while these changes take place – the transition could take a very long time. We also need a community of scholars and technologists to form an opinion about where we are going and how we can leverage technology to take us to places we’ve never been before.PS For an interesting example of where mutualisation worked extremely well in the past (and continues to work well), watch this fascinating BBC documentary entitled “The Mondragon Experiment”. Mondragon still today is a great example of mutualisation working well, they employ over 10,000 people in a variety of worker and consumer co-ops.http://www.american.coop/co…
Are you thinking of mutualizing USV and sharing some of the carry?Couldn’t resist.Interesting topic but likely a non-starter.
There was a famous case of a mutual insurance company that demutualized — the hired managers made themselves the owners and pocketed many millions of dollars.
You caught my full attention with Jaron Lanier. I’ve followed his writing closely for some years.Jaron is a deep thinker on many of these topics, as I also find you are as well Fred. I always learn a lot from your blog, and I agree, I don’t think these technologies “will ruin us” either.Btw, for those interested, Lanier is best known for an article he wrote for Edge.org called One Half of a Manifesto, which argues against much of the prevailing wisdom in computer science about how the mind works.http://www.edge.org/convers…
One statement I completely disagree with:”Maybe the creators of these networks ought to mutualize so that their users, who are creating the value, can participate in the upside. “I think the users are participating in the upside. Money is not the only thing of value in the world. Imagine a world where these networks don’t exist. I think most people would agree that would be bad – the users of those networks would lose out.We shouldn’t be upset that the network creator wins big financially because their creation is a benefit for us all.PS: It’s great to see Disqus finally working well on a smartphone.
If you’re going to discuss consumer surplus, than you should also talk about the negative externalities related to the environment–particularly with regard to data center energy consumption, pollution related to manufacturing, and e-waste. How do these balance against any positive externalities related to innovation? What are the long-term impacts that these products are going to have on the environment? Who is accruing the benefit and who is incurring the cost?
this is my religion
Imagine your $140 (or even $1,000) share of ownership was in Friendster or MySpace 6 years ago.Would that equity have kept you and your best participation efforts there, instead of moving on to newer and better emerging services like Facebook?I think there’s a tipping point where enough of your network is engaging elsewhere and it doesn’t matter whether you own even $100,000 of equity, your personal free time will be spent elsewhere if the service in which you own equity is less than great compared to alternatives.Of course it’s unknown whether all users owning a share in Friendster or MySpace would have prevented Facebook from ever catching hold in the first place.