Tuesday, November 17, 2009

Reputation and Social Entrepreneurship

Economists know a lot about entrepreneurship and have more or less even settled on a defition for the field. Auerswald (2009) writes: "For all the different notions of entrepreneurship that have been floated over the past century, the most fundamental and enduring is the definition of the entrepreneur as the “residual claimant” in a new venture—the person who walks away with, or (alternately and importantly!) is liable for, whatever is left over when the accounting is done—plus or minus."

He then goes on to define a social entrepreneur as the residual claimant for an enterprise, but that in this case one prime residual is reputation and not financial gain. He cites some good examples and goes on to flesh out the idea more fully. Along similar lines I was just reading the Cathedral and the Bazaar (yes, my geek credentials are weak) and one section on Linus Torvalds and the creation of Linux really seemed to capture this point:

The "utility function" Linux hackers are maximizing is not classically economic, but is the intangible of their own ego satisfaction and reputation among other hackers. (One may call their motivation "altruistic", but this ignores the fact that altruism is itself a form of ego satisfaction for the altruist).

Voluntary cultures that work this way are not actually uncommon; one other in which I have long participated is science fiction fandom, which unlike hackerdom has long explicitly recognized "egoboo'' (ego-boosting, or the enhancement of one's reputation among other fans) as the basic drive behind volunteer activity.

[...] We may view Linus's method as a way to create an efficient market in "egoboo"—to connect the selfishness of individual hackers as firmly as possible to difficult ends that can only be achieved by sustained cooperation.

[...] Many people (especially those who politically distrust free markets) would expect a culture of self-directed egoists to be fragmented, territorial, wasteful, secretive, and hostile. But this expectation is clearly falsified by (to give just one example) the stunning variety, quality, and depth of Linux documentation. It is a hallowed given that programmers hate documenting; how is it, then, that Linux hackers generate so much documentation? Evidently Linux's free market in egoboo works better to produce virtuous, other-directed behavior than the massively-funded documentation shops of commercial software producers.

I'm sure this is all really well known to people by now, but I still find it fascinating and certainly worth sharing and talking about during Global Entrepreneurship Week.

Tuesday, November 10, 2009

Godin on Upside vs Downside Risk

Seth Godin has a good post about the change that occurs when a firm achieves economies of scale and ceases to be entrepreneurial:

A new restaurant might rely on fresh vegetables and whatever they can get at the market. The bigger, more established fast-food chain starts shipping in processed canned food. One is less reliable with bigger upside, the other—more dependable with less downside.

Here's a rule that's so inevitable that it's almost a law: As an organization grows and succeeds, it sows the seeds of its own demise by getting boring. With more to lose and more people to lose it, meetings and policies become more about avoiding risk than providing joy.
This is another way of saying that firms become less entrepreneurial and it's the reason scholars care so much about hi-growth firms, or so-called gazelles - those companies that go from zero to IPO faster than Tony Stewart's stock car gets up to speed. Once they hit the IPO stage they face a whole different set of problems and usually become more risk averse and boring, as Godin says.

This is also one of the reasons it's been so difficult to find good reprenentation for entrepreneurs in Washington. The people running the most entrepreneurial firms are very busy and are focused on bringing their dreams to reality. They simply do not have time to come to DC to talk to politicians about the cancellation of indebtedness issue, or some other specific and arcane bit of tax policy. Several initiatives from the Kauffman Foundation have tried to alleviate this problem, but it remains. Nevertheless, their latest initiative, Build A Stronger America, will hopefully broaden the audience and stir up the debate about the importance of entrepreneurhsip. And let's not forget that next week is Global Entrepreneurship Week.