An Antipoverty Nudge

Category : Political Science & Economics
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A charity in New York City is trying an innovative approach to helping people below the poverty line.  Modeled after a program in Mexico that pays poor people to do things like immunize their kids, send them to school and make healthy food, Groundwork brings a similar approach to New York’s poverty stricken communities.  Here’s how the program works:

This modest community-based nonprofit is one of six neighborhood partners in the experimental Opportunity NYC program, which pays poor people — mostly single moms — for a broad range of health, education, and work-related activities, everything from taking their kids to the dentist to getting a new job to attending parent-teacher conferences.

Since its September 2007 launch, the New York initiative has paid $10 million to 2,400 families living at or beneath 130 percent of the poverty line — about $22,000 for a family of three. The typical participating family earned just under $3,000 during Opportunity NYC’s first year.

I’ve been interested in nudges, small behavioral changes that can create big changes in society, since I read Nudge by Richard Thaler and Cass Sunstein.  I love learning about these nudges, whether its ways to increase the tips that tour guides receive or ways to help students retain more information over summer vacation, so this program caught my attention.  I think its an interesting experiment that could be very successful with enough testing.  Currently, the program has spent over $25mm on 2,400 families, which doesn’t seem like that great of a return.  I’d like to see the program focus on 2-3 of the most important tasks that people were being paid to do and expand the program to more people.  If they could show that going to parent teacher conferences, taking your kid to the doctor for a checkup and cooking a healthy home cooked meal once per week had the most impact, the program could invest in the tasks that had the highest benefit with the lowest cost, all the while helping more people.

Some anti-poverty workers are not a fan of the this program.  One worker said thinks the program is almost offensive:

Opportunity NYC borders on offensive — the idea that a person can be bribed into doing better in school or being a better parent,” says Mark Winston Griffith, executive director of the Drum Major Institute for Public Policy in New York City. “It sort of suggests that poverty is a lifestyle choice, that somehow if we’re just given a nudge, that we can choose not to be in this condition, or choose for our children to do better in school, or choose as parents to provide better child care. It comes out of the idea that poor people are almost sort of culturally and inherently dysfunctional. Not because of structural circumstances but because of their own personal failings.”

David Jones, the President of the Community Service Society in NYC, is not a fan because he thinks the project it too small to combat the huge problem that is poverty in NYC.

“In New York City, almost 50 percent of African American men are not currently employed. We have nearly 200,000 young people who are neither working nor in school,” he says. “Those numbers can’t be addressed with incremental incentive programs. Not because the ideas are bad but because the scale of the problems is huge.”

While I understand where both of these critics are coming from, I can’t agree with their thinking.  We know that the current anti-poverty programs are not working very well, so we might as well try something new.  Just because a problem is huge does not mean that a small solution can’t be successful.  In the startup world, many small solutions have solved huge problems, even when the founders were simply trying to change a small part of the big problem.  If the program doesn’t work, then end the program, but if it does work to make people’s lives better, then by all means continue it.  I’d love to see more innovation and entrepreneurial thinking in the charity space.  I think there is probably room for a great deal of innovation and improvement.

August Book Reviews

Category : Books
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I read three very different, but interesting books in August.  All were non-fiction, but had to do with completely different areas.

Soccer Against the Enemy– Simon Kuper.  Kuper is an English journalist who covered soccer at the start of his career, moved to finance and economics but got bored and moved back to soccer.  This book is similar to Franklin Foer‘sHow Soccer Explains the World: An Unlikely Theory of Globalization, one of my favorite books from last year.  Kuper travels around the world attending soccer matches right after the fall of the Berlin Wall.  Each chapter could stand alone as a short story, but they flow together well enough to create a narrative about soccer around the world.  My favorite chapter in the book was the one about Dynamo Kiev, the biggest and most successful club in Ukraine.  Dynamo has turned into a huge business, not just a soccer club.  Any foreign company that wants to do a joint venture in Ukraine tried to partner with Dynamo for tax reasons and because everyone in Ukraine knew Dynamo and would be more likely to support the project.  It’s interesting to see how sports teams become bigger parts of an economy and become “Més que un club” or more than a club, which is FC Barcelona‘s motto.  If you like soccer, check out this book.

The 4-Hour Workweek – Tim Ferriss.  I had skimmed this book a year ago, but had not gotten a chance to read it carefully.  Whatever you think of Ferriss, the book contains so some worthwhile time management skills, business strategies and ideas that make you reexamine your lifestyle.  Ferriss tells the story about how he went from an office job where he worked many hours per week to creating a product that lets him travel the world and only requires him to work as little as four hours per week.  I agree with his ideas that “mini-retirements” should be spread out throughout life, rather than working your entire life to retire when you are in your 60s and I enjoyed hearing how he has used the new global supply chain to launch a product with minimal up front costs, but he lost me with his story about how he won a gold medal at the Chinese National Kickboxing Tournament and has a world record in Tango.  While Ferriss comes across as a bit of a loner who believes that the ends justify the means in pretty much all facets of life, it would be a mistake to completely dismiss the book because of the arrogance of the author.  I’m confident that if you read the book, you’ll find at least a few of his ideas worthwhile.

A Pint of PlainA Pint of Plain: Tradition, Change and the Fate of the Irish Pub – Bill Barich.  I started this book because I had just gotten back from a week in Ireland, visiting, among other things, a few Irish pubs.  The book is about Barich’s attempt to find a traditional Irish pub to be his “local.”  The book starts off well, but is pretty slow and delves too much into each pub’s individual history for my taste.  His chapters on how Ireland has changed in the last 5-10 years as a result of globalization are interesting, but the most interesting take away from the book was his stat that bars in the UK that change formats to and Irish pub see 3x greater turnover than from before the format change.  There is something powerful about the Irish pub that makes it successful all over the world.  I wouldn’t bother reading this book.  Instead, check out your local Irish pub or go take a trip to the real thing in Ireland.

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Revenue vs. Growth

Category : Entrepreneurship
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There are two paths that entrepreneurs go down when they are starting a company.  They can try to grow as quickly as possible without regard to revenue so that they can sell out or they can focus on cash flow and revenue, while still trying to grow the business.

I’ll call the first one the Facebook Method.  For companies that subscribe to this thinking, their goal is to add users, traffic, page views or some other metric as quickly as possible.  After reaching a certain critical mass, the goal is to try to be acquired by a larger company that will figure out how to make money from their success.  If no other company will acquire the startup for fair value, the startup will look for a good revenue model.  In order to reach this goal, theses startups usually have to take on large amounts of angel or VC funding.  This method was most popular during the tech bubble years of the 90s, but still is popular with many startup founders, as its the easiest way to start a company.

The second method is to start with a well defined revenue model and try to become “ramen profitable” as quickly as possible.  Companies that start with well defined revenue models expect to become profitable much more quickly than the companies that subscribe to the first model.  Many times, they will be profitable within 6-9 months, rather than a few years.  These types of companies do not necessarily have to bootstrap or eschew VC funding, but they generally have stronger footing when they do go to raise money.  They can get better terms because they do not need the money to stay in business.

Both Paul Graham and Mark Cuban have written about these two competing strategies in the recent months and it seems that both fall into option two rather than option one.  Graham’s recent article titled “Ramen Profitable” is about the necessity to have a revenue model that actually generates revenue from the start, rather than hope to grow big enough and then find a revenue model.  Graham explains Ramen Profitable this way:

Ramen profitable means a startup makes just enough to pay the founders’ living expenses. This is a different form of profitability than startups have traditionally aimed for. Traditional profitability means a big bet is finally paying off, whereas the main importance of ramen profitability is that it buys you time. [1]

In the past, a startup would usually become profitable only after raising and spending quite a lot of money. A company making computer hardware might not become profitable for 5 years, during which they spent $50 million. But when they did they might have revenues of $50 million a year. This kind of profitability means the startup has succeeded.

Ramen profitability is the other extreme: a startup that becomes profitable after 2 months, even though its revenues are only $3000 a month, because the only employees are a couple 25 year old founders who can live on practically nothing. Revenues of $3000 a month do not mean the company has succeeded. But it does share something with the one that’s profitable in the traditional way: they don’t need to raise money to survive.

Graham believes that companies that can become ramen profitable quickly have a better chance of success in the end.  So does Mark Cuban.  Cuban puts a huge emphasis on cash flow and profitability and getting there quickly.  Cuban says:

Business is a very simple concept.  You have to pay your bills.  If you have anything left over, you get to smile and spend it as the principals of your business see fit. If you don’t have enough to pay your bills, you either have to raise money to cover the deficit, file bankruptcy and try it again, or go out of business.Simple.

…[I]f you talk to any company I have ever invested in, the only thing I care about are profitable sales. What are you selling?  How hard are you working at selling? What are your revenues ? Why are you paying yourselves a salary rather than a commission ? What unique initiatives are you working on to generate sales TODAY.

When I invest in companies, I expect 100pct of them to be successful and grow and QUICKLY be profitable.  I may  not hit many homeruns, but I sure hit a lot of singles and doubles and rarely strike out.

Both Graham and Cuban put an emphasis on having a clear revenue model from the start that is designed for quick profitability.  This attitude puts them at odds with many VCs who are happy to invest large sums of cash in companies that are not going to be profitable for many years or do not have a revenue model other than “ads.”  This is not to say that a VC will not fund a company because it has a well defined plan to become profitable and has a revenue model from the start. VCs are mostly interested in upside, ie how big will it grow at exit, rather than can it be profitable from start to finish.

Ramen profitability is a great goal for startups to have at their inception.  It forces them to think long and hard about their revenue model and how they will actually get customers to pay for their service.  It’s a delicate balance between profitability now or growth now.  I see it as a continuum.  On one end is the Facebook Method of extreme growth without much time spent on the revenue model.  On the other end is trying to be profitable from day 1 and believing that growth will come with a good product.  Founders should balance quick growth with a revenue model that generates profit as quickly as possible.  I know this sounds like having your cake and eating it too, but it is possible.

If you are thinking about starting a company or have started a company, take a step back and think about how you will actually get someone to pay for your service and how you plan to get that money into your bank account.  I know it seems simple, but many startups raise round after round without thinking about how they will become profitable, until the funding dries up and you are done.

Gmail’s Down…Now What?

Category : Technology
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I’m sure most people who depend on google for their email have noticed that gmail has been down for the past hour or so.  Its not that big of a deal for me today, since I can do most of my work offline today, but it has to be quite the inconvenience for lots of people.

I’ve seen seven Facebook statuses in the last 10 minutes bemoaning the fact that gmail is down.  It just reminds me how much we are all dependent on Google and of one of my favorite South Park Episodes, Over Logging.  Since you can’t work without access to email, you might as well go outside and enjoy the beautiful weather, or check out the South Park episode.

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