The importance of SMBs, solar is cheapest power source in history, and stock ownership plans
The future of innovation is global. We discuss it here. May 2021 Edition.
News of the month
There are 30M Small and Medium Sized Businesses (“SMB”) in the US, accounting for 99% of US businesses, and growing. Covid-19 has shown us two simultaneous and seemingly opposite truths about this segment.
1. SMBs are fragile — massive external shocks can cause devastating effects.
2. SMBs as a sector are the future — they have proven to be one of the most resilient aspects of our economy.
While the pandemic has certainly been one of the most challenging times for SMBs, a recent survey from Facebook, the World Bank and the OECD show that most (57%) remain optimistic and resilient when it comes to the the future of their businesses with only 10% expecting to close should current conditions persist.
The growth in SMBs across the country in the last year has been unexpected and is bringing significant benefits. But to support them, innovation needs some new tools.
In my most recent Forbes column, I explore the growing fintech toolset that will catalyze this space.
Capital can unlock innovation. One of the catalysts of the technology industry was venture capital, and the symbiotic relationship it created between investors and entrepreneurs. The same dynamic powered the whaling industry before it (upon which the VC model is based): 70% of all whaling ships were based in New Bedford, which had pioneered this funding model. Finding capital structures that work may also finally unleash cleantech as: Green finance is going mainstream. The punchline is that “after years of intermittent excitement and fizzled expectations, environmental-oriented investing is no longer just a niche interest.” One of the reasons, unsurprisingly given my long techno-centric preamble, is the growth and formalization of the funding ecosystem.
By the way, that’s good news for the world. Solar is now the cheapest electricity in history (for new builds) according to the International Energy Agency.
In my recent mid-month edition, together with Allen Taylor, we explored the power of SPACs for emerging markets. One of the concerns we flagged was that the market was still young and unregulated. In that vein, interesting piece calling for just that. '“U.S. public markets, one of the greatest generators of wealth in the history of capitalism, should not exclusively be a place where early, connected investors get liquidity. They should be a place for all investors, on a level playing field, to participate in the growth of the economy…The good news is that the markets have, as usual, adapted and transformed. In this case, via new avenues for companies to go public, including direct listings and special purpose acquisition companies. While direct listings are relatively new, SPACs have been around for decades…there needs to be better oversight on projections and underwriting.” The piece also has suggestions on price discovery and the process. Personally, I think one critical piece will be aligning the economics of SPACs between the sponsors and the investors over a long-term horizon.
Capitalism can be a source for social impact. But not all opportunities offer the same risk return potential. And not all investors have similar return thresholds, or motivations for investing. Interesting piece offering a new equity solution. “For social enterprise to reach the scale and ambition of modern corporations we must find ways to fill those gaps and allow dynamic flows of capital similar to conventional equity markets…In a conventional corporate structure, equity holders are the owners of all residual value after liabilities are repaid. The potential value is unbounded…By contrast, when purchasing interests in Athletes Unlimited, investors agree to a limit on the financial return they might receive on their investment…In the capital structure, the mission equity as a class is still the residual owner of the value of the company, but unlike the unlimited upside of conventional equity the financial benefit each investor may receive from this security is limited by the cap they agree to up front. Instead of dividends, all distributions to investors take the form of a share repurchase at a price established at the time of issuance, and the repurchased shares are set aside as a pool to further the mission.” While this model certainly doesn’t work universally, it could be a creative way to engage a wider range of investors.
Venture capital firms often start like startups, with a founding team. The challenge for many is how to build an institution that stands the test of time. I have long admired Emergence’s strategy in this regard. Great piece covering Jason Green’s (one of the founders) transition. It includes some advice for other firms, including on culture: “At a lot of firms, it’s a little bit more of an eat-what-you-kill kind of mentality. I think in the venture business that’s a little bit misplaced, because there’s so much luck involved in the business. You never know which partner is going to have that big home run. It can take 10 years to actually figure out what were the big wins [in a fund], so you’re going to judge somebody based on the deals they’ve done in the first two years or three years of the business? We tend to focus a lot more on the inputs than the outputs because the outputs are very variable and have a lot of uncertainty associated with them, but the inputs you can control.”
In previous editions, I explored employee stock ownership in emerging ecosystems, particularly in ecosystems where there is limited knowledge of or desire for stock options. Great piece exploring one startup’s journey. “Employee stock ownership plans are uncommon at African startups, where a common arrangement is for only founders and some top executives to have equity in their companies. But as more startups attract funding, increase their valuations and grow into giants, questions are emerging about equity and fairness and how much of these benefits flow back to employees building the startups.” To make it feel real for employees, a secondary market was created early on inside a supportive culture. These evolutions I believe are powerful to catalyze ecosystem development.
What does it take to build a tech hub? As you know, I’m a huge proponent of the rise of innovation outside Silicon Valley. Yet, appreciated this perspective about what makes Silicon Valley still so relevant. That won’t stop other ecosystems though, like Atlanta, which is becoming a powerhouse in the South East.
Fun to sit down for the Brave podcast with Jeremy Au, to discuss the rise of startup ecosystems around the world, including in South East Asia.
Book of the month
This month I read Siddhartha Mukherjee’s The Laws of Medicine: Field Notes from an Uncertain Science.
As Colombia Magazine reviews it: “Modern medicine derives its mystique from dramatic cures: consider the miracle of defibrillating someone in cardiac arrest or injecting insulin to restore metabolism in a child with type 1 diabetes. Yet medicine is not a straightforward science, and most treatments are far from home runs…doctors and patients have to make complex decisions using imperfect information based not on facts but ‘the spaces that live between facts.’”
Mukherjee describes medicine as the “youngest science.” And it is an imperfect one at that. But we are learning. To make the most of it requires three laws. “Mukherjee asks us to imagine medicine as a ‘machine that modifies probabilities.’ You give it an input probability — a patient’s medical history or a test result — and it furnishes an output probability. You give it garbage, it returns garbage. The first law of medicine is to avoid feeding the machine garbage and to accept [AL: paradoxically to science] that ‘a strong intuition is much more powerful than a weak test.’” Yet, “Mukherjee’s second law of medicine is that there will always be patients who beat the odds, and they hold important lessons.” Lastly, he argues that the right answer on average is not the right answer for every patient.
What do you think?