Sean Park Portrait
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A physical analogy for working in the Silicon Valley system is this: step one: build the most beautiful object you can. ... [hover]
- Don Marti, Linux Journal

Articles tagged 'networks'

Manufacturing Serendipity: Networks, Communities & Ecosystems

“Which path do you intend to take, Nell?’ said the Constable, sounding very interested. ‘Conformity or rebellion?’
Neither one. Both ways are simple-minded – they are only for people who cannot cope with contradiction and ambiguity.”
― Neal Stephenson, The Diamond Age

The

At Anthemis Group we believe that the key to (business) success in the Information Age lies in building strong, vibrant, inter-connected networks of smart people and businesses. The digital tools of the 21st century allow us to do this with a depth, breadth and speed hardly imaginable only a decade ago. And yet however powerful, these tools do not replace the value of face-to-face connections.

Every community needs to ask itself, “Who are the people that are going to drive this community forward in the next 10 years?” and figure out how to support them. – Charlie O’Donnell

With this in mind, last week we hosted our 2nd (annual) Anthemis #HackingFinance retreat (#AHFR13) gathering 60+ amazing individuals – startup founders and executives, investors, designers, senior financial services executives, thought leaders and the Anthemis team – in the magical alpine setting of Meribel.* We asked them to take a step back from their busy professional lives and connect. With each other. With the environment. With the future. And for at least a few fleeting hours, think about how this community, this ecosystem might contribute to the re-invention of financial services. Think about how together we can build better business models, create better products and services, shape better regulation. Think about how we can clear a path that takes us from the manifest obsolescence of industrial age finance to a new paradigm for the provision of financial services that is natively aligned to the technological, economic and cultural realities of the 21st century.

Hackers believe that something can always be better, and that nothing is ever complete. They just have to go fix it – often in the face of people who say it’s impossible or are content with the status quo. – Mark Zuckerberg

Anthemis is still a very young company. The resources and effort – time, money, people – required to organise and host this retreat were material to us. Like a startup company, it’s hard to build a traditional financial model to gauge the value or to try to quantitatively measure the RoI. And yet it is abundantly clear to us that the value created by such an event is very real – not just for Anthemis or our portfolio businesses, but for the wider ecosystem. Value that arises directly from the energy, passion and engagement that each and every participant brought with them. For that I am incredibly grateful. We’ve tried to build Anthemis as a substrate: fertile soil from which wonderful businesses can grow, seeded by talented people who share a common passion and sense the manifest opportunity that exists to create a better financial future.

In the language of flowers, anthemis (chamomile) means patience in adversity. It was known as the herb of humility because, as a lawn plant, the more it was trodden on, the faster it grew…In Biodynamics, the chamomile preparation promotes a good breakdown of the proteins in the compost to humic plant nutrients, and prevents the protein breaking down to ammonia which would be lost to the atmosphere. It helps soil to retain nitrogen and calcium, keeping them in the living realm and preventing loss to the atmosphere. Chamomile preparation strengthens the plant’s regenerative life activity and reunites this with the physical. This ability has led chamomile to be referred to as the “plant’s physician” in folklore. It has been said that if you have a failing plant, simply plant chamomile next to it and it will revive. (from Chamomile – The Plant’s Physician)

It hasn’t always been easy for us, building a business is hard. Raising capital is hard – especially when you deviate from the status quo in any way. But we knew that going in. I don’t think there are too many things in life that are truly worth doing that aren’t hard. And being surrounded by incredible people who trust and support you** – the entrepreneurs we’ve backed despite our modest resources, the early investors who have backed our vision, the people who have helped us in a thousand different ways just because they thought what we were trying to build was worth building – makes all the tough moments just that, moments. And makes it clear that “the juice is worth the squeeze.”

Over the coming weeks, we will do our best to distill the learnings that emerged from the many conversations that echoed across the alpine meadows and peaks. And where relevant we’ll help encourage and assist with implementing many of the ideas and potential collaborations that arose. And stay tuned to our YouTube channel for a taste of what transpired (and in the meantime you can get a glimpse of last year’s event below.) Although it’s a year away, we’ve already started dreaming about next year’s event, maybe we’ll see you there!

You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” – Buckminster Fuller


* It’s no coincidence to us that some of the most productive and creative gatherings are hosted in the mountains: Allen & Co.’s Sun Valley conference, the Aspen Ideas Festival (and numerous others), Dialog, Davos (before it jumped the shark…) etc. – one can not help but to gain a new perspective and think big thoughts when faced with such a majestic landscape. Also the effort required to get to these locations helps to reinforce the disconnect from one’s day-to-day concerns and routine.

** I cannot thank enough all the #hackers – so many of whom traveled from the furthest reaches of the globe to join us. In particular I’d like to thank Kirsten Dunlop and Suncorp who not only travelled all the way from Sydney to join us but who kindly sponsored our opening dinner. I’d also like to thank the entire Anthemis team for their positive energy and willingness to do whatever was asked of them to make our retreat a success, but in particular would like to thank Simrat and Pascale and my dear wife Sandrine without whom the retreat simply would not have been a success.

The Connected Company

Last week I was away with my family for a few days. In a location where there was no working internet connection and a very sketchy 3G signal. As a start-up founder with a never-ending to do list, this was quite disconcerting (especially as it was unexpected.) So aside from freaking out for a couple days, I had no choice but to catch up on both sleep (I hadn’t quite realized how big my sleep deficit had become!) and reading. Which ended up reminding me that disconnecting from time to time can pay dividends.

On the way out the door, from my pile of literally dozens of books “to read”, I had happened to grab two books to take with me: Tim Harford‘s The Undercover Economist and a pre-release copy of Dave Gray‘s The Connected Company.

The Undercover Economist is a terrific account of how economics drives behaviors and his view on how a change in our underlying economic drivers is fundamentally undermining our existing (traditional) organizational and institutional frameworks particularly resonated with me:

…economists believe there’s an important difference between being in favor of markets and being in favor of business, especially particular businesses. A politician who is in favor of markets believes in the importance of competition and wants to prevent businesses from getting too much scarcity power. A politician who’s too influenced by corporate lobbyists will do exactly the reverse.

At the end of the book, he includes the introduction to a later book Adapt: Why Success Always Starts with Failure. He tells the story of a young Russian engineer Peter Palchinsky who challenged the top-down, hierarchical thinking of first Tsarist and then communist Russia over a hundred years ago:

What Palchinsky realized was that most real-world problems are more complex than we think…His method for dealing with this could be summarized as three “Palchinsky Principles”:

  • first, seek out new ideas and try new things;
  • second, when trying something new, do it on a scale where failure is survivable;
  • third, seek out feedback and learn from your mistakes as you go along

…Most organizations and most forms of politics have the same difficulty in carrying out the simple process of variation and selection…if we are to accept variation, we must also accept that some of these new approaches will not work well. That is not a tempting proposition for a politician or chief executive to try to sell…

…There is a limit to how much honest feedback most leaders really want to hear; and because we know this, most of us sugar-coat our opinions whenever we speak to a powerful person. In a deep hierarchy, that process is repeated many times, until the truth is utterly concealed inside a thick layer of sweet-talk…Traditional organizations are badly equipped to benefit from a decentralized process of trial and error…(yet) the more complex and elusive our problems are, the more effective trial and error becomes, relative to the alternatives. Yet it is an approach that runs counter to our instincts, and to the way in which traditional organizations work.

Building on these principles, he suggests the recipe for successfully adapting is comprise of three essential steps:

  • Try new things, in the expectation some will fail;
  • Make failure survivable, because it will be common;
  • Make sure you know when you’ve failed.

What you want to do as a company is maximize the number of experiments you can do per unit of time. -Jeff Bezos


Much as I enjoyed Tim’s book, I was blown away by The Connected Company. Simply stated, I suspect it will go down as one of the most important management books of the early 21st century. It is a remarkable treatise on the new optimal organizational framework for businesses of the Information Age. I’ll admit to some bias as I don’t think I could have written a more articulate or complete account of the philosophy and theory underlying our approach to building Anthemis.

We are reaching a complexity tipping point, beyond which organizations will not be able to succeed without a change in structure.

…And if the world is constantly changing, the only sustainable competitive advantage is to be the one most responsive to change. That means that the speed at which you can learn is the only thing that can give you a long-term sustainable advantage. The problem is that while today’s companies are very good at processing information and producing outputs, they don’t know how to learn.

Indeed the fractal (Dave uses the term “podular”) nature of how we are building Anthemis is a direct attempt to create a more adaptable – and ultimately more resilient – company fit for the challenges of the 21st century. By explicitly embracing a networked rather than hierarchical structure we have built in the ability to experiment and fail while at the same time giving us many more chances to succeed. Dave also highlights that this new type of organization is in essence a complex adaptive system and some of you might recall from previous posts and presentations that the work of Herbert Simon on this subject has had a profound impact on our thinking.

To design connected companies we must think of the company as a complex set of connections and potential connections, a distributed organism with brains, eyes and ears everywhere, whether they are employees, partners, customers or suppliers. Most importantly, a connected company must be able to respond dynamically to change, to learn and adapt in an uncertain, ambiguous and constantly evolving environment.

A connected company is a learning company.

We see Anthemis as a network, an ecosystem where our main responsibilities are (1) to articulate and evangelize a robust vision – re-inventing finance for the Information Age – and (2) to create a fertile environment where passionate, talented individuals, teams and companies pursuing various components of this vision are provided with the tools – capital, talent, connections – that materially improve their chances of succeeding. Anthemis as a city (as opposed to a traditional company) is another interesting metaphor for our approach that Dave also explores:

Taken together, agile teams, service contracts, composability and loose coupling allow the creation of complex service clusters and networks that operate in a peer-to-peer, citylike way. In fact, these kinds of “service cities” can sometimes be so complex that the only way to manage them is not to manage them. Instead, the company focuses on creating an environment within which they can thrive.

The key to creating a successful organization in an era of unrelenting (and often accelerating) change is to build for agility. However the traditional organizational structures that were so successful in the Industrial Age are fundamentally unable to respond to this challenge:

Many business systems are tightly coupled, like trains on a track, in order to maximize control and efficiency. But what the business environment requires today is not efficiency but flexibility. So we have these tightly coupled systems and the rails are not pointing in the right direction. And changing the rails, although we feel it is necessary, is complex and expensive to do. So we sit in these business meetings, setting goals and making our strategic plans, arguing about which way the rails should be pointing, when what we really need is to get off the train altogether and embrace a completely different system and approach.

Dave highlights Amazon.com as one of today’s leading companies that has already adopted many of the tenets of the connected company. He describes their approach as breaking big problems down into small ones; distributing authority, design, creativity and decision-making to the smallest possible units and setting them free to innovate. At Anthemis, we take this one step further as most of the teams focused on each of these “smaller” problems are actually companies in their own right with their initial connection into the Anthemis ecosystem being forged via a financial investment. Aside from our legal structure however, the important distinction between ourselves and a venture capital fund is our clear long-term vision of creating a new leader in financial services: the vision is the glue.

The way we think about it is, on those big things, we want to be stubborn on the vision and flexible about the details. -Jeff Bezos

Essentially our job (at the Anthemis Group node) in this context boils down to designing and building the structure and system that supports the people and businesses in our network and then operating that system. Further we have a key role in creating and supporting a broad and diverse portfolio of experiments in order to maximize our chances of discovering and building the best and most sustainable financial services businesses in a context of rapid technological change and an evolving competitive landscape.

And perhaps in a future updated edition of his book, Dave will be able to point to us as a great example of a successful “connected company”!

Power in networks comes from awareness and influence, not control. -Dave Gray


Update: In this video, Gary Hamel talks about many similar themes, highlighting that our existing management and organizational paradigms are 100 years old and increasingly anachronistic in a world of accelerating change.


Gary Hamel: Reinventing the Technology of Human Accomplishment

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Spilling dirty secrets.

Luke Williams, author of Disrupt: Think the Unthinkable to Spark Transformation in Your Business, lays out a roadmap for developing disruptive hypotheses:

To meaningfully differentiate yourself from everyone else in the same space, you have to define the situation in the industry, segment, or category that you want to challenge. Here’s what a list of what you want to challenge might look like:

  • This is an area in which everyone seems to be stuck in the same predicament and nothing has changed in a very long time.
  • This is an area where profit performance is average—it really should be more successful than it is.
  • This is a category where growth is slow and everything seems the same.

Once you have a situation to focus on, describe it in one sentence: “How can we disrupt the competitive landscape in [insert your situation] by delivering an unexpected solution?”

I guess if you had to boil our mission statement at Anthemis Group down to one question,

How can we disrupt the competitive landscape in financial services by delivering an unexpected solution?”

would probably do the trick quite nicely.

Of course, our approach to answering this question is perhaps not to answer it directly but rather to seek out and support a constellation of passionate, brilliant, “what if?” thinking entrepreneurs who are asking this question with respect to specific sectors, products and geographies in financial services (banking, payments, risk management, identity, investing, etc.) and contribute our intellectual and financial capital towards amplifying their vision and improving their chances of success. For all you capital markets geeks out there, we think this approach generates (as close as you can get to) pure “alpha” in that our returns are pretty much divorced from general market movements as the impact on valuation of success (or failure) in building these new businesses far exceeds the second or third order impacts on valuation of prevailing overall public (or even) private market conditions. Clearly, our success is not guaranteed – not by any stretch of the imagination – but at least the input parameters, the choices we make, are the key drivers and within our control. (And not subject to the vagaries of a co-hosted blade pumped up with algos in New Jersey…cf my last post.)

This in our opinion is a much better set of reference terms. Even more so because it doesn’t rely on our unique genius, but rather structurally taps in to a deep and expanding pool of talented people, pursuing their own visions and goals, loosely-coupled through the ecosystem and networks we strive to nurture and grow. We don’t have to make all the decisions. We don’t have to have all the brilliant ideas. We don’t have to do all the heavy lifting. Which is certainly a relief to us and I suspect to our investors as well. If you want to take the ecosystem metaphor a bit further, I guess it would be fair to say that our position is akin to dirt in forest. Or swamp water in a wetland. ie Trying to provide a fertile and supporting substrate upon which the wonders of evolution and life can flourish and grow. Perhaps not a very sexy image, but ask any farmer and she’ll tell you there is nothing as wonderful as a field of deep, dark, steaming dirt.Soil.

And coming back to Luke’s three foundational criteria, I think it is clear to all that you can take pretty much any sector of financial services and it would emphatically tick each box. It’s an incredibly fertile environment for disruption. So you know, we’ve got that going for us. We just need to make sure we plant the right seeds.

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Platforms, Markets and Bytes (video)

A couple of months ago, I had the privilege to have been invited to speak at eComm 09 in Amsterdam. I have posted on this previously but recently the video of my talk was posted and perhaps will make it easier to understand my accompanying presentation. If you can spare 20 minutes (there is an additional 10 minutes of q&a at the end) and are interested in understanding how Nauiokas Park defines our opportunity space, please have a look as it is probably the most succinct expression of the worldview we bring to investing and analyzing potential investment opportunities.

And here is the presentation again, in case you would like to follow along as you listen to the video:

Well-built developer platforms are the future of every industry. (-ReadWriteWeb)

The future of business is in ecosystems. (- Jeff Jarvis)


Note: Their is a small glitch around 7:40 where the video skips over a few seconds; funnily enough (for the conspiracy theorists out there) this is exactly where I say that had ZSIN’s existed, the extent of the disasters that occurred in the mortgage securitization markets would have been at least an order of magnitude smaller…)

UPDATE: Thanks to eComm, you can now find a complete transcript of my presentation online (including the missing minute!)

Platforms Markets Transcript) Oct09

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Wisdom of (this) crowd?

Renault 14
Image via Wikipedia

I was very kindly invited by Paul and Lee to attend my first ever eComm conference, which will be in Amsterdam from October 28th to 30th.

The Emerging Communications (eComm) Conference & Awards was created to promote and accelerate communications innovation. Telecom, mobile and to a lesser extent, Internet based communications, had been innovation stagnant for far too long. Yet the opportunities for innovation had never been greater. Those opportunities are only going to grow as drastic changes further impact the multi-trillion dollar a year telecom industry.

The speaker line up looks fantastic and I’m the spare tire on an otherwise star-studded panel Thursday afternoon, that is if they still want me after my plenary talk that morning at 9:30:

Platforms, markets & bytes: the economic landscape of the 6th paradigm(?)
In a world where everything can be expressed as 0s and 1s, are the traditional ways of defining sectors and industries (as verticals) still relevant? If not what new business models and industry structures are likely to emerge? Oh and what’s the difference between a bank and a telecom company really?

Now at the risk that tumbleweeds blow through the comment section, proving once and for all that all my dear readers are in fact spambots (but in which case no one will see this and no embarrassment suffered), I thought I’d take a page out of the legendary Fred Wilson‘s book and ask you all for thoughts and comments on this theme that I might incorporate them into my presentation. (Or not!) So fire away!

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On financial networks.

I was cleaning up my office a bit this afternoon and came across my copy of Andy Haldane‘s brilliant paper “Rethinking the Financial Network (April 2009). People (including me) like to complain about the lack of leadership and insight at the commanding heights of the financial system, but based on this paper alone, I’m not sure the UK could ask for a better Head of Financial Stability at the Bank of England. (He was appointed to that position in late 2008, once the horse had not only left the stable but the country…)

If you are interested in the workings and health of the financial system, you simply must read this paper if you haven’t already. I won’t attempt to summarize it here, it is worth reading in its entirety but will excerpt his conclusion:

Through history, there are many examples of human flight on an enormous scale to
avoid the effects of pestilence and plague. From yellow fever and cholera in the 19th
century to polio and influenza in the 20th. In these cases, human flight fed contagion
and contagion fed human catastrophe. The 21st century offered a different model.
During the SARS epidemic, human flight was prohibited and contagion contained.

In the present financial crisis the flight is of capital, not humans. Yet the scale and
contagious consequences may be no less damaging. This financial epidemic may
endure in the memories long after SARS has been forgotten. But in halting the spread
of future financial epidemics, it is important that the lessons from SARS and from
other non-financial networks are not forgotten.

I’m fairly certain he is not a reader so I can take no credit, but it is very rewarding to see someone in his position with such a firm grasp on the concepts I’ve been trying to articulate (much less completely and articulately) for some time now. (see The science of Financial Regulation (June 2009) and Averting (financial) ecological disasters (August 2008)) I hope his voice is listened to and his insight and intellect used to help us build a better, more resilient financial system for the future.

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The science of financial regulation.

Scale Free network generated by Barabasi-Alber...
Image via Wikipedia

Last summer I wrote a post highlighting the fact that the global financial system is a scale-free network. This in itself is not particularly insightful – although I wonder how many of the most senior executives, regulators and politicians understand this explicitly and more importantly use it as an intellectual framework on which to base their ideas on systemic risk management and regulation. This is important because understanding the mathematical underpinnings and topology of such networks is crucial if we ever hope to construct a system of monitoring and regulation that is robust and well adapted. I was reminded of this late last night as I was re-reading an article written in 2003 by Albert-Laszlo Barabasi and Eric Bonabeau published in Scientific American on scale-free networks where they (presciently) note that:

Understanding how companies, industries and economies are interlinked could help
researchers monitor and avoid cascading financial failures.

For anyone wanting an introduction to scale-free networks this paper is an excellent place to start but basically as a reminder (via John Robb):

A scale-free network is one that obeys a power law distribution in the number of connections between nodes on the network. Some few nodes exhibit extremely high connectivity (essentially scale-free) while the vast majority are relatively poorly connected. The reason that scale-free networks emerge, as opposed to evenly distributed random networks, is due to these factors: Rapid growth confers preference to early entrants. The longer a node has been in place the greater the number of links to it.

This in a nutshell is why some financial institutions are ‘too big to fail’, or (as we heard much chatter about when first Bear Stearns, then Lehman Brothers went down) more accurately, ‘too connected to fail’. Scale-free networks are extremely resilient to random failure but highly vulnerable to specific failure of the most important hubs (Barabasi and Bonabeau):

In general, scale-free networks display an amazing robustness against accidental failures, a property that is rooted in their inhomogeneous topology. The random removal of nodes will take out mainly the small ones because they are much more plentiful than hubs. And the elimination of small nodes will not disrupt the network topology significantly, because they contain few links compared with the hubs, which connect to nearly everything. But a reliance on hubs has a serious drawback: vulnerability to attacks.

…The Achilles’ heel of scale-free networks raises a compelling question: how many hubs are essential? Recent research suggests that, generally speaking, the simultaneous elimination of as few as 5-10% of all hubs can crash a system.

Hopefully readers will recognize in this why the failure of ‘hubs’ like Bear Stearns or Lehman Brothers was potentially so damaging, setting off a cascading epidemic throughout the financial system. It is also why the Madoff failure in and of itself was not at all systemically threatening, whereas LTCM was – the key difference being ‘connectedness’ not size per se. A further consideration – based on the application of diffusion theories used to predict the propagation of a contagion throughout a population – is that the critical threshold (for propagation of an ‘infection’) is effectively zero for a scale-free network. That is all ‘viruses’ no matter how weakly contagious, will spread and persist in the system. In other words it is mathematically impossible to eradicate such sources of failure from a scale-free network. More bluntly, any attempt to eradicate or prevent financial viruses, say for instance poorly conceived sub-prime mortgages, is an act of futility.

Why is this important? Because most financial regulation, is conceived and implemented with this objective as a founding principle and worse ignores the topology and structure of the network it is trying to protect. Not only does this vastly increase the probability that the regulatory framework will ultimately fail to achieve it’s goal, but it imposes severe additional costs on the system for no greater gain in stability or robustness. Current financial regulation distinguishes far too little between the different nodes in the network, the vast majority of which are of no consequence to the overall robustness of the system. Fifty percent of financial firms could probably fail without any risk of catastrophic systemic failure as long as none of those firms were important hubs. I’m exaggerating of course (but not as much as you think.) That is why for instance the EU’s recent draft legislation on alternative investment funds – with rules uniquely predicated on size and leverage – is so wrong-headed: it misses the point. Not completely, but this is mainly due to the fact that correlation between size and connectedness is not zero (all other things being equal, bigger firms are likely to be more connected.)

However wouldn’t it make much more sense if the regulatory framework focused explicitly on the root cause of systemic vulnerability rather than accidentally or obliquely? Before any agitated readers get too excited, I realize that what I have outlined has been grasped (belatedly) to some extent by the regulators, bankers and politicians and has started to shape the discussion on the reformation of financial regulation, especially in the US where it seems increasingly likely that the new regulatory proposals will be much more concerned with the effective systemic impact of a market participant rather than their legal or organizational structure. The recognition that the fact that an organization is a bank or insurance company or hedge fund or whatever is less important than the exact types of activities it undertakes and its connectedness to the rest of the system is obviously a welcome development but it doesn’t go far enough.

Wouldn’t it make much more sense to build a set of rules that explicitly addresses the vulnerabilities of a scale free network and as such focuses disproportion attention and resources on protecting the hubs from attack or failure. The beauty is that the digital global financial system of the 21st century and advances in the science of networks actually now allows us to do this: we can empirically and quantitatively observe, measure and manage the ‘connectedness’ of institutions. Forget the rating agencies, companies like Bonabeau’s IcoSystems and others could help the regulators create, maintain and monitor network ‘maps’ and score each market participant in terms of their connectivity. This should be the defining core metric of financial regulation and mirroring the power law distribution of the underlying network, financial regulation should focus its attention and resources in geometrically increasing fashion.

This would have a number of (self-reinforcing) beneficial effects:

  • It would impose (geometrically) increasing costs on institutions as they grow in complexity and systemic connectedness creating a natural optimal equilibrium that balances the benefits (to the institution) of such growth against the external costs it imposes on the system. It effectively puts a price on the negative externalities and avoids the tragedy of the commons without needing to dictate to firms how big or complex they are allowed to become (which is doomed to failure due to the law of unintended consequences and the problems of quantum thresholds (ie clustering just below the threshold.) I doubt very much that a firm like Citigroup would have come into being under such a regime.
  • The size of a financial institution would not be a driver and so simple, relatively unconnected firms could operate with a very light regulatory touch. This would allow the system to naturally exploit economies of scale that don’t give rise to incremental systemic risk.
  • Innovation would be allowed to flourish without anyone – regulators, executives, politicians, super-intelligent alien forces – needing to decide which innovations were toxic and which were beneficial. As long as the key players in the system were vaccinated against these viruses and protected against mutations, you could let Darwinian evolution progress more or less unimpeded in the long tail of systemically unimportant firms. Indeed by allowing an increased rate of failure in the overall network, you would be able to more quickly and less painfully identify dangerous risks as they emerge in the network.
  • Resource allocation for regulators becomes much easier and more transparent. The amount of regulation and regulatory attention each firm would receive would become directly proportional to their systemic importance.

We can’t prevent dangerous risks from developing in the financial system but we can work with the grain of the underlying structure to mitigate the systemic danger instead of against it, or at best ignoring it. The robustness of scale-free networks to accidental failure has many advantages in that it allows our financial system to operate very efficiently and robustly most of the time. And by explicitly recognizing the mechanisms by which catastrophic failure can occur in our approach to regulation we will be much less likely to suffer such failures in the future and the costs of regulation will be appropriately borne within the system creating a virtuous circle that drives the system to self-organize into the optimal configuration of complexity and connectedness.

If you know Tim Geithner or Charlie McCreevy or Lord Turner, please send them this link. Hopefully it’s not too late! ;)


And if you are looking for the perfect Father’s Day gift for the financial regulator or Senate Banking Committee member in the family, you could do worse than Bonabeau’s book Swarm Intelligence: From Natural to Artificial Systems.

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The coming “intergrid”.

The always interesting Bill St. Arnaud pointed me in the direction of this interesting speech by Jeremy Rifkin who talks about the convergence of a quantum advance in communication and energy technologies leading to a “third industrial revolution”. Clearly talk of the “smart grid” is not new and we may actually be well on our way to the “peak of inflated expectations” but this does not take away from the much much bigger picture that this convergence will be fundamentally transformational:

The same design principles and smart technologies that made possible the internet, and vast distributed global communication networks, will be used to reconfigure the world’s power grids so that people can produce renewable energy and share it peer-to-peer, just like they now produce and share information, creating a new, decentralized form of energy use. We need to envision a future in which millions of individual players can collect, produce and store locally generated renewable energy in their homes, offices, factories, and vehicles, and share their power generation with each other across a Europe-wide intelligent intergri

And although it is probably too early for us, I am extremely optimistic about the very exciting investment opportunities I see coming down the pipe because of this revolution. No we aren’t planning to add to or change the investment focus of Nauiokas Park to green tech or clean energy. What I am alluding to is the opportunities that will emerge to create new markets, market structures and participants when the world’s energy becomes a truly networked, digital commodity. Imagine a world (not so many years away) where tools like Google PowerMeter are as widely adopted as Google Search or Skype. And distributed micro-generation (solar, wind, micro-generators, etc.) and micro-storage. All connected, all digitized. Generating vast amounts of data and transactions. And you’ve got yourself a market. Sure, I here you say, energy markets already exist and by the way are pretty big. No big deal here, move along. Well, it’s not perfect but I would suggest comparing the financial markets of the 1970s to the financial markets of today, to get a sense of the quanta of change we should expect in energy markets – with the concomitant risks and opportunities this will present. And I suspect it will all happen a bit more quickly: one decade instead of three(?)

I hope we’ll have the opportunity to invest in the Weatherbill of power markets. Or the Aleri of power trading. Oh wait – we’d better hurry(!): “Home Energy Programs Getting Smarter With Software”

I know it’s not the done thing, but despite all the doom and gloom I can’t help but to get more optimistic every day about all the truly exciting opportunities that are bubbling up in harmony with the new industrial and economic paradigm that is dawning. (Which is not to disagree with the doom and gloom – for those people, companies and industries stuck in the old paradigm there isn’t much to cheer about, and it must be especially galling for those who were leaders in this old world order.)

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Smarter finance.

I finally got the chance this weekend to take a closer look at IBM’s Smarter Planet initiative and I was impressed.

We can make our world smarter.
Intelligence can be infused into how we manufacture and sell… move goods, people and money…
The world is ready for a smarter planet.
Find out how to build it together.

If you would rather avoid wading through the inevitable corporate speak on IBM’s website, a good place to find out about what they are doing and how they are thinking is this recent article “IBM’s Grand Plan to Save the Planet” from Fortune:

In the parlance of the information technology industry, these situations all represent “dumb network” problems. The term sounds pejorative, but it simply means that we don’t truly understand commuter traffic or electricity flow or the inner workings of the cacao genome, and as a result our highways, utility grids, and cash crops are not managed as effectively as they could be.

The good news is that we now have the technology to convert these analog distribution systems into multidirectional “smart” networks. Readily available sensor technologies like RFID chips and digital video can track movements in granular detail. Cheap data storage, powerful analytics software, and abundant computing capacity give us the ability to warehouse and make sense of all that information. With the knowledge we’re gaining, we can remake our world in a more efficient way…

…So Palmisano is encouraging his employees to think even bigger, to scout out any dumb network that can be made smarter. Because, as any self-respecting capitalist knows, in great pain lies dormant profit. “We are looking at huge problems that couldn’t be solved before. We can solve congestion and pollution. We can make the grids more efficient,” he says. “And quite honestly, it creates a big business opportunity.”

IBM Smarter MoneyBy now, you probably understand why this resonated with me; there is significant congruence with the themes explored here and that underpin the foundations of out investment thesis at Nauiokas Park. In particular applying the amazingly powerful computing technologies that exist today to make sense of highly complex systems and networks, and of course to analyze and extract meaning from enormous and growing data sets. (Of course it’s also nice that they seem to have been inspired by our logo when designing their icon for ‘Smarter Money’!) On their website, IBM describes the opportunity they see for Smarter Money for a Smarter Planet:

Money, in other words, has been reduced to zeros and ones. It’s intangible, invisible. It’s information. Which is central both to the problem we face and to its solution.

Without question, the replacement of physical money with electronic money — and the spectrum of financial innovations that have accompanied it — have helped the world’s economy grow and prosper. But our technical and management systems haven’t kept pace. They couldn’t provide warning signals of risk concentrations, over-leveraging or underpricing. Banks could repackage risk and sell it, but they couldn’t value an individual loan in order to unwind the debt when needed. However, the same digitisation that has helped create this challenge is starting to provide the means to solve it. Intelligence is being infused into the way the world works, including our financial systems.
We’re all aware of advances like online banking, but the transformation happening underneath is far more profound.

Unprecedented computing power and advanced analytics can turn oceans of ones and zeros into insights, in realtime. Which means we could potentially have a more transparent, predictable and intelligent financial system for a smarter planet.

While it is very exciting to see a giant like IBM get behind such an intelligent and forward thinking strategy, I must admit I was a little disappointed not to find more substance on the Smarter Planet websites. It’s not that I suspect this is just a nice marketing campaign, rather that the communications department needs to work a bit harder to plug in to the projects and ideas IBM is working on in the trenches so to speak to make this vision a reality. And I think they could do more to engage a wider community through their Smarter Planet Blog and/or other social communication tools. Again as it is now it seems a bit sterile and very much a one-way broadcast, as opposed to a two-way dialog. Indeed one of the things I’ve tried to do – both through this blog and with our company – is to help to build a community of people interested in debating and shaping the future of financial services and markets. I think we have had some success, however I have nothing like the reach or resources of a giant like IBM and so it would be fantastic if they were to join the conversation and amplify it far beyond our modest community.

The Fortune article concludes:

Leadership positions, as the company knows all too well, come and go. But with luck, the tone of “Smarter planet” will remain. The message – that technology can be deployed to greater ends than creating the next fetishized cellphone – is bigger than any single company. And so, too, is Palmisano’s epiphany. He deftly led IBM out of the dotcom doldrums. Perhaps more important, he has revealed a model for monetizing scientific research in a way that benefits humanity.

Sure, not everyone can afford $6 billion a year for R&D. But real innovation rarely comes from big, rich companies. With luck, IBM’s ad campaign, coupled with its blowout 2008, will call scientists and entrepreneurs to arms. They’ll see our archaic global shipping infrastructure, a dilapidated educational system, disappearing honeybees, the fraud on Wall Street, and think, I know how to fix that. And I can make a killing doing it.

Exactly.

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Markets in everything: p2p education

It will come as no shock to most readers that I think one of the key opportunities of the next decade or so is to harness the possibilities unlocked by the advances in ICT – most notably the continuing march towards a ubiquitous, high-speed internet – to vastly lower transaction costs and enable robust, distributed marketplaces to emerge in sectors and activities where heretofore the (informational and transactional) costs of organizing such a market would have been prohibitive. While it is certainly an oversimplification, I think such opportunities can be broadly categorized into two groups:

  • those that make the transactional mechanisms of existing markets more efficient – either incrementally or by a quantum shift to a new market structure – by reducing informational friction and arbitrage and eliminating parasitic intermediaries while at the same time massively improving the productivity of ‘intelligent’ intermediaries; and
  • those that enable markets to emerge where previously none existed at all (or only in the broadest economic sense, but where transactions were previously ad hoc and opaque), often (but not always) these are markets for services (rather than goods or financial instruments) where the nature of the service is highly heterogeneous and in data terms is “unstructured” rather than “structured”*

Putting my money where my mouth is, I’ve taken the opportunity to invest in two exciting start-ups that fall into this second group: last year in seedcamp ’07 winner MyBuilder.com and just now in (seedcamp ’07 finalist) School of Everything. Both have passionate, energetic and visionary founders that have been able to translate their ideas into robust and well-executed platforms for organizing and ‘trading’ specialist services. As for any pioneering start-up, neither can be sure of success, however the combination of a fundamentally sound idea, in harmony with the inevitable secular change in how economic activity will be organized in a networked world, married to a strong committed team is as good a place as any to start. School of Everything logo

I must admit in the case of SoE, part of my motivation to invest was driven by a more emotional and/or intellectual interest in what they have set out to do:

Our current education system was designed in the industrial revolution to prepare people for factory work. The world has changed a lot since then – and the time has come to rethink education from the bottom to the top.

At School of Everything, we believe that learning is personal, and starts not with what you ‘should’ learn but with what you’re interested in. So we’re building a tool to help anyone in the world learn everything, and teach anything, how and when suits them – by putting people in touch with each other, not with institutions.

Not only is education and learning the lifeblood of our modern economy and an important social good, but by creating a marketplace for people to ‘distribute’ and acquire skills and knowledge, SoE is providing another very useful output for harnessing what Clay Shirky has identified as society’s “cognitive surplus.”

Now, the interesting thing about a surplus like that is that society doesn’t know what to do with it at first–hence the gin, hence the sitcoms. Because if people knew what to do with a surplus with reference to the existing social institutions, then it wouldn’t be a surplus, would it? It’s precisely when no one has any idea how to deploy something that people have to start experimenting with it, in order for the surplus to get integrated, and the course of that integration can transform society.

The early phase for taking advantage of this cognitive surplus, the phase I think we’re still in, is all special cases. The physics of participation is much more like the physics of weather than it is like the physics of gravity. We know all the forces that combine to make these kinds of things work: there’s an interesting community over here, there’s an interesting sharing model over there, those people are collaborating on open source software. But despite knowing the inputs, we can’t predict the outputs yet because there’s so much complexity.

The way you explore complex ecosystems is you just try lots and lots and lots of things, and you hope that everybody who fails fails informatively so that you can at least find a skull on a pikestaff near where you’re going. That’s the phase we’re in now.

So if there is something you’ve always wanted to learn, or something you’d love to teach to others, School of Everything is a pretty good place to start. I wonder if anyone is giving courses on how to run a bank…you’d think demand for that might be pretty high these days… ;) Given these tough economic times I suspect that SoE is even more useful, whether it’s to learn a new skill to keep an existing job (or find a new one) or to earn a bit of money and/or social capital by teaching if you’ve suffered the misfortune of losing your job or are working reduced hours.

In any event, I’m very excited to become a small part of this and congratulate Paul and his team on this follow-on funding and wish them great success in building SoE into a wonderful global marketplace for learning.

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