Monthly Archives: January 2012

Rich People Create Jobs!

And five other myths that must die for our economy to live.

Rich guy

 Illustration by Zina Saunders.

In the movie Groundhog Day, Bill Murray‘s character is forced to relive a single day over and over and over—waking up to the same song every morning, meeting the same people, having the same conversations—until, after thousands of repetitions, he finally realizes what a shmo he’s been his entire life. With that epiphany, the calendar starts to flip forward again. His life reboots, and he once again gets to hear new songs, meet new people, and have entirely new conversations.

When it comes to the economy, we’re stuck in our own version of Groundhog Day—and this one doesn’t seem to be coming to an end. America is in a deep and persistent slump, and unemployment is mired at more than 9 percent. Yet when you turn on the TV, all you hear are the same manufactured sound bites delivered in the same apocalyptic tones from the same pack of talking heads—over and over and over. Groundhog Day has turned into the eighth circle of hell.

Unfortunately, these zombie talking points aren’t just wrong; they’re dangerous. If we’re ever going to revive the economy, we’ve got to tackle them head on. Here are six of the worst.


For the first four years of his presidency, Franklin Roosevelt tackled the Great Depression with inflation, easy monetary policy, and government spending. But in 1937, FDR’s advisers persuaded him to reverse gears. After all, interest rates had been close to zero for years, commodity prices were climbing, and fear of inflation was on the rise.

Bust or Boost?

What happened next is now called the “Mistake of 1937” (PDF). Federal spending was cut and monetary policy was tightened up, with disastrous results: GDP immediately began to plummet, and industrial production fell by a third. Within a year everyone had had enough. In 1938 the austerity program was abandoned, and the economy started to grow again.

The truth is that stimulus worked in 1933 and it worked in 2009. So why is our economy still in such bad shape? For one, partly due to political considerations and partly because it was rushed through Congress, the 2009 stimulus wasn’t as well designed as it could have been. It was also sold badly. If the bill passed, administration economists predicted, unemployment would peak at 8 percent and then start declining (PDF). But the recession was far worse than the White House originally thought. Unemployment peaked in the double digits, and that’s made the stimulus a fat target for Republican critics ever since.

But as awkward as it is to argue that things would have been worse without the stimulus—”Not as bad as it could have been!” isn’t a winning slogan—well, the truth is that things would have been a lot worse without the stimulus. Everyone from the nonpartisan Congressional Budget Office (PDF) to private-sector forecasting firms have concluded that it increased economic growth, reduced unemployment, and put millions of people back to work. It just wasn’t big enough, or long-lasting enough. Unfortunately, this has given conservatives an opening to demand tighter money and lower spending—exactly the same mistake we made in 1937.


If your credit card company offered you $30,000 interest-free to buy a car, would you take the deal? Sure you would. It’s a three-way win: You replace your clunker, the auto industry keeps its assembly lines humming, and the credit card company is happy to have made a safe loan, even at no interest. Apparently, they think you’re a pretty good credit risk.

The Bush Effect

This is pretty much the situation the US government is in now. If our national debt were really at dire and unsustainable levels, as conservative economists and Republican leaders have taken to arguing, nervous investors would be driving up interest rates on federal borrowing. But just the opposite has happened: As I’m writing this, 10-year real treasury yields are at 0.00 percent. The seven-year rate is actually negative. Apparently, the financial markets think we’re a pretty good credit risk.

It’s true that the United States needs to address its long-term deficit problem—a problem almost entirely due to Medicare and other health care expenditures. (Domestic, defense, and Social Security spending have actually decreased as a percentage of GDP over the past 40 years, and there’s no reason to think that’s about to change.) But that’s in the long term. Right now, our problem is a sluggish economy and too many people out of work. The real answer to future deficits is to spend money now to get the economy growing again.

America’s infrastructure is crumbling, there are people who could be put to work fixing it, and banks are practically begging us to take their money. A trillion dollars in infrastructure spending would be good for our economy today, good for economic growth tomorrow, and thanks to those low interest rates (and the increased revenue that would come from growth), it wouldn’t even increase our debt much. As they say, only an idiot turns down free money.

Only an Idiot Turns Down Free Money


There’s no greater orthodoxy in the Republican Party than unconditional fealty to tax cuts. In a recent GOP debate, when the candidates were asked whether they’d walk away from a deficit deal that included just $1 in tax increases for every $10 in spending cuts, every single hand shot up.

Taxes have been the third rail of American politics ever since the California tax revolt of 1978. Even Democrats are nervous about touching them: President Obama has famously called for letting some of the Bush tax cuts expire, but he’s always careful to make it clear that he wouldn’t change rates for anyone earning less than $250,000 per year. In other words, he’d repeal less than a quarter of the Bush tax cuts.

This fear is easy to understand. No one likes paying higher taxes. But do lower taxes actually spur economic growth? Bruce Bartlett, an economist in the Reagan administration, has compared tax rates in various rich countries in 1979 to each country’s growth rate since then. His conclusion? There’s virtually no correlation.

Recent US history backs this up too. Bill Clinton raised tax rates in 1993, and Republicans insisted it would cripple the economy. Instead, the economy boomed. In 2001 and 2003, George W. Bush lowered taxes and Republicans insisted the economy would flourish. Instead, we got the weakest expansion of the past century. Republicans are simply wrong about taxes: Within reason, high tax rates don’t hinder growth, and low tax rates don’t stimulate it.

But don’t high taxes reduce the incentive for people to work? Actually, no: For ordinary wage earners, participation in the job force and total hours worked barely respond to taxes at all. (According to tax specialists Joel Slemrod and Jon Bakija, this is “a rare example of a question on which there is a broad consensus among economists.”) The same is true for rich people. As a trio of prominent economists concluded last year after reviewing the literature, “there is no compelling evidence to date of real economic responses to tax rates” (PDF).

Even capital gains rates have virtually no impact: During the past few decades, they’ve bounced up and down from 40 percent to their post-Depression low of 15 percent. The effect on business investment is nil.

If a Tax Rate Falls…

Will the Economy Notice?



Are American businesses paralyzed by fear of a tidal wave of new regulations? When McClatchy  reporter Kevin Hall went out and asked small-business owners about this, he got a clear answer. “Absolutely, positively not,” said one. “Government regulations are not choking our business,” said another. In its most recent quarterly survey (PDF) of small-business trends, the National Federation of Independent Business reports that sales—i.e., lack of demand—is the No. 1 concern, beating out taxes, regulations, inflation, and everything else.

The Bottom Line Is the Bottom Line

In any case, regardless of what the Wall Street Journal editorial page says, the Obama administration has hardly been a whirlwind of regulatory activity. Its health care reform will have very little effect on either small businesses (which are exempt) or large businesses (which mostly offer health plans already) and only a modest effect on medium-size businesses (PDF). Its financial reform bill affects only the financial sector. Its proposed new air-quality regulations will mostly affect old coal-fired electrical plants that would have shut down anyway (PDF).

Dumb and outdated regulations are no friends to the economy—and the Obama administration has undertaken a regulatory review that’s projected to save an estimated $10 billion during the next five years. But as welcome as that is, our economy’s biggest problem right now isn’t regulatory uncertainty. It’s economic uncertainty.


In one of the most infamous moments of his young candidacy, Republican presidential hopeful Rick Perry decided to tee off on Federal Reserve Chairman Ben Bernanke last summer. “If this guy prints more money between now and the election,” he told an enthusiastic audience in Cedar Rapids, “I don’t know what y’all would do to him in Iowa, but we would treat him pretty ugly down in Texas.”

Bernanke’s sin? Pumping money into the banking system after the collapse of 2008. Although this is widely credited with helping prevent a second Great Depression, tea partiers and gold bugs are convinced that Bernanke’s actions have debased the dollar. There are two problems with that claim. First, it’s not true. Second, we’d be better off if it were.

 First things first: Has the dollar lost value under Bernanke and Obama? No. The usual measure for the strength of the dollar is called “trade-weighted value.” In July 2008, just before the financial crisis erupted in earnest, the greenback’s value stood at 95.4. As of this writing it is sitting at 96.1. Taking a longer view, the dollar lost value under Reagan and Bush I, gained value under Clinton, lost value under Bush II, and has mostly stayed steady under Obama. There’s just no basis to the claim that Obama and Bernanke have debased the currency.

And that’s unfortunate. As economist Dean Baker is fond of pointing out, if we want to get our national savings rate up and our long-term budget deficit down, there’s only one way to do it: by fixing our massive trade deficit. We have to import less and export more, and one way to make that happen is with a weaker dollar. A weaker dollar makes foreign goods more expensive, so we’ll buy less of them, and makes American goods cheaper, so others will buy more of them.

The truth is that we’d be better off if we ditched the loaded “strong/weak” terminology and just talked about an “export dollar” (weak) and an “import dollar” (strong). Sometimes one is good, and sometimes the other is. The Chinese, for example, have done well for decades with an export Yuan. Likewise, an export dollar would be our friend right now.

Bad News for Tourists…

Is a Holiday for Manufacturers


Think of this as the supermyth—the one underlying so many other fallacies. For decades, America’s economic policies have been based on the notion that catering to corporations and the wealthy is the way to stimulate the economy. Republicans routinely insist that we need to bail them out, lower their taxes, allow them to repatriate hundreds of billions in overseas profits, and free them from annoying government meddling. If we don’t, the “job creators” will stay in a funk, and the economy will stay in a rut.

But here’s a pesky fact neither corporate America nor the GOP establishment is trumpeting: After-tax corporate profits are currently at an all-time high. The problem businesses face isn’t lack of cash but rather a lack of confidence that consumer demand will pick up in the future. So they’re not expanding or hiring at the rate they should be.

Rich people don’t create jobs when we hand them big windfalls. They create jobs when the economy is growing and they have customers for their businesses. And the key to solving that problem, at least during a deep economic slump like the one we’re in now, is to focus like a laser on more stimulus, easier money, higher inflation, and a weaker currency. Unless we want to relive 1937 over and over and over again. As Bill Murray said, “Anything different is good.”

Wall Street’s Gain…

Main Street’s Pain

This November, please vote responsibly!


Crowdfunding: The Next Big Disruptor!

Social networking comes to finance

Crowdfunding may be a big disruptor. The arcane world of Wall Street and the City of London have kept a tight grip on world of finance for so long and has become so incestuous and expensive (in the US, the legal fees alone for a ‘direct public offering’ could run to $100,000), it is no surprise that people who want to start an enterprise are finding many ways to side-step them. Crowdfunding, sometimes called crowdfinance or crowdsourced capital, is in the process of reinventing finance $100 at a time.

Rather than imagining that you can develop a fat business plan to convince a single investor, crowdfunding allows you to pitch to a large number of people simultaneously and get small dollops of investment that can add up to the amount you seek. But there are some limitations.

SEC Restrictions: The SEC 502(c) Rule prohibits issuers from general solicitation and general advertising for private placements, but one method of demonstrating that the sale of a security through a private placement is not the result of general advertising or general solicitation is for there to be a “documented substantial and pre-existing relationship” between the issuer and the prospective investor, such as ‘friends and family.’ This is a way that crowdfunders can avoid sanction. The interesting thing is that there is no definition of what constitutes a “pre-existing” relationship. “Substantive” means that if the company (or a person acting on its behalf) has reliable knowledge or information regarding the prospective investor it should be sufficient that it can evaluate the investor’s financial circumstances and level of sophistication.

The SEC has given little guidance on using the Internet as a tool for raising capital, but may soon change as crowdfunding sites become more creative using their own online social network of “substantial and pre-existing” friends among the crowd. For now, it seems that many crowdfunders are not offering ‘securities’ as such. This is the case with Profounder (see below) that remunerates lenders by paying a royalty on sales.

In 2010, the Sustainable Economies Law Center petitioned the SEC to allow crowdfunding, within certain limits. Their submission makes interesting reading. As do the responses. It’s a matter of ‘watching this space’. Chances are high that the SEC will make a pronouncement before too long. If you want to keep up with the discussion, one way you can follow it is on Change Crowdfunding Law.

Nonetheless, it may be that the noose is tightening around crowdfunding platforms. Prosper, a closely held corporation based in San Francisco, was formed in March 2005 to operate, an online platform to connect borrowers and lenders. By late 2008, over $170 million in loans had been processed through the platform.

On November 24, 2008, the Securities and Exchange Commission (SEC) imposed a cease-and-desist order against Prosper because the SEC determined that the loans offered on the Prosper web site were securities and Prosper had never registered the offering of loans on its web site.

In a decision published on May 4, 2011, Hellum v. Breyer, the California appeals court in San Francisco held that members of Prosper’s board of directors who were not employees of the company could be held personally liable for the securities law violations committed by the company under California law.

The website was still operating the following day and with over 1 million members and now with $230 million worth of loans handled, it will be interesting to follow developments.

Commenting in May 2011, the Wall Street Journal said, “With regulators considering easing fund-raising rules for start-ups, social-networking sites that link entrepreneurs to large pools of donors are gearing up for a boom.”

By November 2011, the US House of Representatives had passed HR 2930: Entrepreneur Access to Capital Act. It now needs to pass in the Senate, but it’s unlikely it will fail.

HR 2930 amends the Securities Act of 1933 to exempt from the prohibitions against use of interstate commerce and the mails for sale or delivery after sale of unregistered securities, including unregistered security-based swaps, any transactions involving the issuance of (crowdfunded) securities for which:

  1. the aggregate annual amount raised through such issue is $5 million or less; and
  2. individual investments in the securities are limited to an aggregate annual amount equal to the lesser of $10,000, and 10% of the investor’s annual income.

HR 2930 authorizes an issuer to rely upon certifications provided by investors. It amends the Securities Exchange Act of 1934 to exclude persons holding crowdfunded securities under this Act from application of “held of record” requirements with respect to mandatory registration of securities. It also amends the Securities Act of 1933 to exempt such crowdfunded securities from state regulation of securities offerings.

A shot across the pondEarlyShares, a UK crowdfunding platform has readied itself for a US launch, just as soon as the ink is dry on the Entrepreneur Access to Capital Act.” Crowdfunding is working well in the UK. It is time for the U.S. enjoy the same success,” says Maurice Lopes, the company’s CEO, having already raised over $2.5M for six companies from hundreds of small investors in only a few months.

Raising money–a blastWindowfarms, the open source hydroponic farming system and social network, has raised over $223,822 dollars on Kickstarter. This is $173,822 more than their goal, making Windowfarms Kickstarter’s most successful food project to date and one of their more successful projects period.

Obama led the way: As lawyer Tom Kappel from Nashville wrote in a law review article, “Barack Obama’s campaign raised nearly three-quarters of a billion dollars largely in small amounts over the Internet. The campaign’s ability to mobilize and monetize supporters using the Internet is often cited by pundits of all political stripes as a principal factor in Obama’s victory. If nothing else, Obama’s fundraising figures are evidence of people’s willingness to give financial support to someone they believe in—sometimes referred to as ‘crowdfunding’.”

Loan Guarantee Fund: IndieGoGo (see below) is supporting a loan guarantee fund (like the loan guarantee fund of the SBA) for small crowdfunded businesses. The money will be used as a guarantee for a loan to an entrepreneur selected by his/her peers. The Entrepreneur Commons Mutual Guarantee Fund is a project of Community Ventures, a 501(c)3 nonprofit organization.

Kiva microfinance: I am a huge fan of Kiva, the P2P micro-lender and will soon have made my 100th loan to microfinance individuals and small teams, largely in the developing world. It has used the Internet to connect small businesses in the Third World with philanthropically minded lenders in the First World. Only five years old, $74,235,600 in loans were posted on Kiva in 2010–in 54 countries.

Kiva’s marketing has been excellent and combined the use of both old and new media, to huge effect.

Crowdsourcing is itself and really rampant phenomenon now. It makes good sense when you are wanting to share your story. Or have others share theirs with you. Or both of you wanting to pool resources to some extent. So it’s not surprising that crowdsourcing is being used to get ideas, offer services, find skills–and in this case, find money. The best way into understanding crowdsourcing is to read Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business.

In the innovations field, probably the best known example of crowdsourcing is InnoCentive. It’s a place where organizations—corporations, large and small, not-for-profits and governments—turn when they have important problems that need solving. Their expertise is in Open Innovation (OI). They help expand companies’ innovation capabilities by building a more collaborative approach to problem solving, and providing the means to tap into the best minds within the company as well as creative problem solvers throughout the world.

A really interesting experiment has been mounted in Washington State: a group of East Jefferson County, Washington, citizens who are interested in facilitating financial investments to help local businesses and individuals has formed a Local Investing Opportunities Network, or LION. LION creates opportunities for local individuals and businesses to connect with local investors to build prosperous local businesses, keep investing money in our community, and help build a more resilient and sustainable economy in East Jefferson County.

LION is not a bank, lending institution, or financial consultant. In effect it’s a form of crowdfunding and its membership consists of local citizens who want to invest their money locally, thereby putting their investing money to work within our community. Keeping funds local facilitates greater economic self-sufficiency, job growth, economic development, and a dollar-multiplier effect whereby a dollar kept within the community can be spent many times over for a far greater benefit than a dollar invested away from our community.

Raising funds meets brand marketing

One of the advantages of raising money for your business through crowdfunding is that it provides the opportunity to engage customers, prospective customers as well as just plain friends, family and fans directly. If you tell people on your mailing list (from the SEC perspective, they have to be people you know–though the word ‘know’ is open for discussion) about your pitch, you may be surprised at how they will want to engage with you.

Thus you can raise money and promote your brand at the same time. Supporters will find it easier to commit small amounts of money, especially if you make it easy, for example by paying them back through revenue sharing in place of dividends or interest. In that way, once the business is up and running and making sales, they get paid out on a regular basis–monthly for example.

If you want to understand more about crowdfunding, then I highly recommend The Crowdfunding Revolution: Social Networking Meets Venture Financing.

The point about the marrying of finance and marketing is that it is entirely in your interest, whether you are raising funding or not, to develop a wide circle of relationships in connection with your venture.

Crowdfunding is coming center stage. I recommend it to anyone who needs seed money to start their business. I am sure there will be more books appearing, but right now the only one is The Crowdfunding Revolution: Social Networking Meets Venture Financing by Kevin Lawton and Dan Marom, who self-published it.

Crowdfunding has arisen in part, as a natural consequence of social networking, and in part to fill a void in seed money raising not filled by the traditional banking and finance world.

If you want to follow a campaign in favor of crowdfunding in Congress, go to Startup Exemption. And lend your vote to get this passed.

Crowdfunding first; loan and equity later

If you use your own money, coupled with crowdfinance to get off the ground, your business will be much more convincing to bankers and investors later.

Let’s assume that you put in $5,000 of your own funds and raise another $5,000 from 20 members of your ‘crowd’ who each put in $250. Then you get going and make sales of $5,000 a month. Now lets assume you were prepared to offer a royalty on sales that would have amounted to 10% on lenders’ loans had the money been put up on that basis.

Your ‘crowdbackers’ would each get paid out about $2 a month (10% on $250 over a year is $25 ÷ 12 months = $2.08). In this way you would be paying out just over $40 a month on your sales of $5,000 and so the royalty you’d be paying would be just about 1%. This could be easily managed.

Now that sales would be going well, an approach to a bank for a loan or an investor for equity would be doubly convincing because your business is

  1. generating enough revenue to pay back the loan and grow the business value;
  2. trusted by 20 people who are already getting a return on their money.

If you are going to do it on a simple basis with just a handful of friends, then make sure you use a formal promissory note vehicle to protect both parties and the relationship between them.

Cutting Edge Capital–a new approach

Cutting Edge Capital is a new approach to funding that helps ventures and organizations to raise moeny in creative ways through Fan-Based Funding; Cooperatives; Direct Private Offerings; Grants and Public Private Partnerships; Direct Public Offering. Their basic philosophy is based on the idea that there is no reason why a venture should go for the 4% of funding that is available through private equity, when they could have access to 96% that is available through public equity.

Cutting Edge Capital provides small and mid-sized businesses with the information, tools, and expertise they need to raise capital in a way that fits with their unique business model and long-term goals. As experienced business lawyers, entrepreneurs, and finance experts, the CEC team has identified capital raising strategies that allow businesses to solicit non-traditional sources of funding.  In addition to being a great way to raise capital, these strategies allow businesses to build public support and recognition at the same time they are raising funds.

Before you read much further, you may want to see the advice of Cutting Edge published on their blog: Capital on Tax on Money Raised Through Crowdfunding.

Crowdfunding replaces venture capital

Times are not good for the venture capital industry. According to Deloitte’s, the VC Industry expected to contract in traditional markets (U.S. & Europe) although to gow in emerging markets (China, India & Brazil). In 2010, they also reported that in 2009 there were 12 venture-backed IPOs and 26 through the first half of 2010 compared to 86 venture-backed IPOs in 2007.

Not surprising to learn therefore, that Trampoline Systems an enterprise software vendor based in the UK became the world’s first technology business to raise finance through equity crowdfunding. The company announced a programme to raise a total of £1 million spread over four rounds. The first round of £260,000 was completed in October 2009 and a second round of £350,000 opened in August 2010.

Trampoline has worked closely with legal advisors to ensure its crowdfunding process complies with Financial Services Authority (FSA) regulations. The company is only inviting expressions of interest from people certified as high net worth individuals or as sophisticated investors, plus Trampoline’s existing shareholders.

A development that seems to be particularly significant is AngelList–a community of startups and (over 1,000) investors who make fund-raising efficient, by direct matching. To see what users think about, the reviews are well worth reading and following up. Here’s how AngelList works:

  1. First, you create a startup profile and pick which investors can see your startup. If your profile isn’t ready to share with investors, just pick zero investors. You can update your profile and investors anytime.
  2. Every investor on AngelList sees 10-20 new startups in their feed every day. Plus they have their own non-AngelList dealflow. So you may get a few intros this way and they’re working on ways to increase the rate of these spontaneous intros.

This kind of social networking is dynamic and the founders are changing the way the system works almost every day. By the time you read this, things may well have moved on.

Crowdfunding Meets Banking

The basic idea of crowdsourcing led to crowdfunding, but it now seems also to be moving into banking. Imagine the banking revolution that could result. Take a look at Civilized Money that uses people-to-people networks to create an ethical, transparent alternative to the existing financial services industry. No gambling with your money, no fractional reserve lending, no monster bonuses. It’s banking with people, not banks. Eventually Civilised Money will offer all the services that you currently associate with traditional banks, and some you don’t. You’ll be able to choose what happens with your money, whether you participate in lending, borrowing, investing, donating, fundraising or transacting.

You can set up a crowdfunding site, too

Launcht crowdfunding platform

Launcht is a company that has produced what’s called a ‘white label’ crowdfunding platform. White label means that you can use their technology and brand design your own site for fundraising, or going into the crowdfunding business.

All the tools are there and you do not need to be a systems person to set up on your own. Based in Vermont, they’ll help with the design and configuration. They can get you started with your sales, marketing and operational plans. Launcht is one of the new breed of Benefit Corporations that are equally responsible to their three main stakeholders.

Crowds of crowdfunders

There is a fast growing list of crowdfunding sites in many industrialized countries. Each has its own particular slant and limits to the amounts that can be raised or means of repayment/rewards to lenders. The formula used by each one is different and there are differences by country, too. In the US the SEC regulates the field, but other countries are more permissive, or risky, depending upon how you see it. A crowd of crowdfunders are shown here and more are being added, almost daily.

SeedUpsSeedUps aims to plug the funding gap for early stage start-up companies raising up to $250k and allows you to gain access to a growing pool of investors, while getting a fair equity valuation and secure seed funding in your idea. You pay a low transaction fee only if funded, with follow-on growth funding. SeedUps was set up by Michael Faulkner, initially in the UK and Ireland, Seed Ups has now arrived in the US. He says, “After months of preparation and following the set up of an office in Silicon Valley, we’re really looking forward to working with tech start-ups in the US.”

Kickstarter: A fast-growing social funding site is Kickstarter. It is for creative projects rather than people starting a business as such, but some creative projects are businesses, too. Creatives pitch their idea and backers make bids to support them. An example business startup is Vere Sandal. Take a look at theirpitch on Kickstarter. The bidders generally get something back–either product, kudos or prizes.

Rockethub: Another very similar site to KickStarter is RocketHub. Describing themselves as a grass roots crowdfunding site, Rockethub’s focus is again within the creative arts, with the two audiences for the site split into ‘Fuelers’ – those providing financial assistance to cool projects, and ‘Creatives’ – those coming up with the concepts, artwork and music and in need of funding. RocketHub calls itself a community for Creatives by Creatives and as a purely indie outfit, not backed by any venture or corporate money. RocketHub is accountable to the user, they say, not bankers or the old guard.

Profounder: The Web is allowing an increasing number of innovative crowdfunding to see the light of day. The co-founder of Kiva, the first P2P microlending platform, Jessica Jackley has moved on to establish Profounder.

At Profounder you make your pitch–not a great fat business plan– and set your investment terms.

What is original is that instead of seeking capital or loans, you enter into a revenue-sharing agreement with your backers. You make money, then they do too. The web page that gets created is where you receive your funding and each quarter you post your revenues and then share them with the investors for the duration of the the investment.

Loans of up to $2m can be raised and the entrepreneur sets the terms for the royalty repayment and the term. When ‘investors’ take their money out, they can either take it as cash or divert it to a cause.

Venture Bonsai: Based in Helsinki, Venture Bonsai is a crowdfunding service for European startups looking for funding (direct investments) less than € 1m. Venture Bonsai enables entrepreneurs building what it calls online trust in order to attract investors as well as facilitates the whole investment process. The tools and processes offered include for example building the trust network, using the standardized documents and making a vendor due diligence and have it verified.

PeerBackers: It is an online funding platform that allows business owners to raise capital from their “peers”—in small increments—in exchange for tangible rewards to those who contribute. Peerbackers is led by two founders – Sally Outlaw and Andrew Rachmell, who have partnered in the past to create and produce The Next Wave with Leonard Nimoy, a television series airing on CNBC, devoted to exploring innovative technologies for both start-ups and existing companies. Peerbackers is for raising smaller sums and payback is both in kind and towards the cost of what’s being sold.

GrowvcGrowvc calls itself the Virtual Silicon Valley. Bringing a global, transparent, community-based approach to seed-funding, Grow VC can help startups secure initial funding of up to $1M US for their businesses. Grow VC will not only connect startup entrepreneurs with investors to help them discover common interests, but also provide tools for processes and transparent, new ways of doing things. Grow VC International headquarters is located in Hong Kong, with offices in the UK and Finland.

EnviuEnviu develops innovative solutions to environmental and social issues and introduces these to the market. We collaborate with a large group of young entrepreneurial people, senior executives, corporate partners and universities to co-create these innovative businesses.

Funding Circle: An online marketplace where people can lend directly to small businesses in the UK,Funding Circle eliminates the high cost and complexity of banks. People get higher, stable returns for the long term, businesses get lower cost finance to expand and develop. They trust this simple idea makes an easy to use website that hope can have a big impact. Lenders can earn annual returns estimated at 6 – 9%. Borrowers pay lenders a fixed amount each month which includes interest and a repayment amount. Loans last for 1 or 3 years.

LendFriend: here is another site where you can organize lending from friends and family. LendFriendwas founded by entrepreneurs who have had loans with friends and family. We’ve purchased our first computer with a loan from grandparents, invested in a friend to fund their first company, and helped a sister consolidate debt. By default, our Loan Management Tool is entirely free. It maintains an online record of the terms of your loan and its projected repayment schedule for your personal reference. Additionally, borrowers will receive email reminders when payments are due to their loan partners. However, if you prefer more financial security, you can also add a legally binding agreement – a Promissory Note – to your loan for a fee. LendFriend will automatically draft your selected loan terms into this document.

Raise Capital: A sort of selective Craigslist for funding, RaiseCapital allows people with business ideas to post text, photos, and videos about their projects to attract some money. That kind of funding is helpful at a time when bank loans are hard to get. Entrepreneurs can log in after paying a one-time $99 fee, and they receive a unique URL on the site as well as a visit counter to track how many people have viewed their posts. The network of investors who are interested in a particular category receive a daily update showing all the new businesses registered the day before. features new businesses in a video presentation. Charities and nonprofits are allowed to post for funding, as well.

Innovatrs: is an international, crowdsourced partnering platform. Innovatrs source the world’s most innovative entrepreneurs so people can partner with or invest in them. Innovation officers, business development or partnership directors and investors use Innovatrs to efficiently discover the most relevant entrepreneurs and ideas.

FundaBrandFundaBrand is the trading name of Crowd Source Capital Limited and is a crowd sourced funding platform where project owners can showcase their projects and raise funds to start and/or grow their businesses. Based in London, with a California office, FundaBrand offers project owners seeking funding the possibility to raise start up and/or expansion capital from a sale and lease back of their brand whilst still holding onto 100% of their equity. This is yet another variant of crowdfunding that obviates the need for compliance with SEC and equivalent rules in other countries.

CoFundIt: Based in Switzerland, CoFundIt is in Beta and already has raised quite substantial sums for projects. Members join and seek funding by making pitches in which they can have links to products or websites. The English language of the site may lead to questions.

33needs: A new crowdfunder, 33needs focuses on social enterprise. 33needs allows people to invest, make a social impact, and earn a return. Social entrepreneurs begin by applying to the 33needs investment committee, providing information and an introductory video on their project. If they are accepted, they can select a 30 or 60 day period in which to raise the chosen amount. If the goal is reached, the pledges are turned into investment, minus 5% for 33needs. Like Profounder, 33needs sidesteps restrictive US securities legislation by offering revenue sharing rather than an exchange of security.

Start Something Good: social enterprise is burgeoning–StartSomethinGood empowers people from around the world to become social innovators. By connecting social entrepreneurs with the financial and intellectual capital they need to transform an idea for improving the world into a reality, together we can turn ideas into action and impact.

Crowdrise: Like 33needs, Crowdrise is in the non-profit field. Crowdrise is about raising money for charity and having the most fun in the world while doing it. Crowdrise is way more fun than anything else aside from being all nervous about trying to kiss a girl for the first time and her not saying something like ‘you’ve got to be kidding me.’  They call it sponsored volunteerism: simply create a project page on Crowdrise to show the amazing volunteer work you’re doing and then message all your friends and family and ask them to sponsor you.

On GreenOnGreen focuses on business ideas and patents that are a part of the green economy–tries to bring inventors, entrepreneurs, and investors together by creating a “social marketplace” to connect startup businesses with the funding they need and the new technology that might help them move forward

FirstGiving: The purpose of FirstGiving is empowering passionate nonprofit supporters to raise more money than they ever thought possible for the causes they care with nonprofit organizations to allow them to plan, execute, and measure successful online fundraising campaigns. For individual fundraisers, they aim to make the process simple, effective, and even fun!  More than 8,000 non-prfoits have used them, raising over $1bn from 13 million donors. If that fails, try SocialVibe!

Supporter WallSupporter Wall gives you the ability to collect donations for any cause or project. Supporters purchase squares on your Supporter Wall. The square then displays their chosen photo and link. As squares are purchased, the proceeds go directly to you.

Catwalkgenius: On Catwalk Genius, based in UK and Ireland, you can invest in a public-funded fashion collection. You find a brand you love and buy a share for the chance to earn profits and perks. UK and Irish fashion fans can get involved for as little as £11, the price of one share. When the chosen designer makes a new collection with their public investment, supporters share in the revenues from sales.

FashionStake: is another crowd-curated fashion marketplace–FashionStake is based in New York. Along with shopping top emerging designers, you can pre-order exclusive fashion at special prices and vote up your favorite pieces. FashionStake was conceived to bring exclusive fashion from top designers directly to the public, without the large markup, restrictive choice and hassle of traveling to stores.

Indiegogo: Founded in 2008 because there are so many people in this world, with great ideas and big dreams, who are looking for the opportunity to get funding. IndieGoGo offers anyone with an idea – creative, cause-related, or entrepreneurial – the tools to effectively build a campaign and raise money. Read about Emmy’s Organics of Ithica, NY who raised $15K for their business through IndieGoGo.

Pozible: is a new crowdfunding platform and community for creative projects and ideas. Based in Sydney, Australia, Pozible has been developed for artists, musicians, filmmakers, journalists, designers, entrepreneurs, inventors, event organizers, software developers and all other creative’s, to raise funds and give project creators the break they need to realize their goals and aspirations.

SellaBand: Based in Munich and Amsterdam, SellaBand was launched in 2006 and has coordinated recording sessions for 42 artists or acts who had their albums funded by their fans. Over $3,000,000 has been invested in independent bands. Artists retain ownership of the works created and have the flexibility to determine which incentives they will offer their fans who fund them. The funding engine also allows artists the freedom to enter into deals with any label, management company, or publisher and there are no advances to pay back. is a music sponsorship platform where brands and bands can find each other. Musicians publish a new album with sponsorship from brands. No corporate sell-out – musicians take full control over choosing sponsors.

FansNextDoor: This is a Europe-based platform that empowers creatives into funding their projects, thanks to their fans’ contributions. With FansNextDoor, you submit your project online; you promote it in every way you can (online and offline); you get your funds.

CofundosCofundos helps to realize open-source software ideas, by providing a platform for their discussion & enrichment and by establishing a process for organizing the contributions and interests of different stakeholders in the idea. Cofundos is based at the Department of Business Information Systems at the Institute for Computer Science of Universität Leipzig.

CrowdCube: Based at the University of Exeter in the UK, CrowdCube is unlike many other crowdfunders in that UK-based entrepreneurs offer equity. The founders want to emulate Kickstarters, where they report the tictok venture that raised nearly $1m from 13,000 backers in a matter of weeks.

MicroVenture Marketplace: This is the financial industry’s first organization which merges peer-to-peer lending with the venture capital industry. The Austin, Texas-based MicroVentures also provides an exclusive opportunity for investors: to offer funding resources to entrepreneurs and early-stage organizations that need capital to accelerate company development.

WealthForge: Coming soon WealthForge will open new capital markets to entrepreneurs, while creating new investment opportunities for qualified investors and provide exposure and networking prospects to all users. Entrepreneurs can seek capital funding by showcasing business concepts to a network of accredited investors. Investors can easily view the best new business ideas for funding consideration. There’s also room for General Users who want to contribute services or aide in ventures.

Quirky: You might just find a product of interest on Quirky, but you can submit an idea and have it worked on by the crowd. If it wins, quirky will sell it. You might even find helpful people you’d like to link up with. Most people have earned nothing, but some have earned tens of thousands of dollars.

Starters Fund is now in Beta in Europe. It is owned by SeedFunding International Ltd, a private Limited by Shares Liability Company established in Nicosia, Cyprus. The Company belongs to the creators of, as well as enthusiast angel investors who financially supported the project through the early stages. offers the opportunity for collecting funds through the two most common methods of crowdfunding, combining also a Virtual Business Incubator (VBI), a Business Accelerator and a specialized marketplace, in order to fully support start-up birth, growth and acceleration.

Freddie Mac Profiting From Your Distress? You Betcha!

Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates. Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.

No evidence has emerged that these decisions were coordinated. The company is a key gatekeeper for home loans but says its traders are “walled off” from the officials who have restricted homeowners from taking advantage of historically low interest rates by imposing higher fees and new rules.

Ah, the old Chinese wall. I remember it well from the dotcom bubble days, when investment banks supposedly erected an impenetrable barrier between the bankers who helped go public and the analysts who told clients whether was a good investment. After it all blew up, of course, it turned out the wall wasn’t quite as impenetrable as everyone thought.

So how is Freddie doing this? After telling me the story of the Silversteins, who want to get a refi on their current high-interest loan but can’t because of Freddie Mac policies, the authors explain:

Here’s how Freddie Mac’s trades profit from the Silversteins staying in “financial jail.” The couple’s mortgage is sitting in a big pile of other mortgages, most of which are also guaranteed by Freddie and have high interest rates. Those mortgages underpin securities that get divided into two basic categories.

One portion is backed mainly by principal, pays a low return, and was sold to investors who wanted a safe place to park their money. The other part, the inverse floateris backed mainly by the interest payments on the mortgages, such as the high rate that the Silversteins pay. So this portion of the security can pay a much higher return, and this is what Freddie retained.

In 2010 and ’11, Freddie purchased $3.4 billion worth of inverse floater portions — their value based mostly on interest payments on $19.5 billion in mortgage-backed securities, according to prospectuses for the deals. They covered tens of thousands of homeowners. Most of the mortgages backing these transactions have high rates of about 6.5 percent to 7 percent, according to the deal documents.

So as long as homeowners have to keep paying high interest rates on their loans, Freddie’s investment is gold. If they refi into a lower-interest loan, the value of the inverse floater goes down and Freddie is in trouble. Naturally, it’s all just a big coincidence that Freddie is simultaneously making it hard for families to refi into lower-interest loans. Chinese wall, you know.

It’s good to see that the American finance industry hasn’t lost a step just because of that whole financial collapse thing a couple of years ago. Isn’t it?

What Happens When You Walk Away From Your Home?

It was just last summer that Charlotte Perkins made the hardest decision of her life as she and her husband Jim were caught in the vise of the housing bust.

Wanting to downsize their lives as they headed toward retirement, they bought a new house in Mesa, Arizona, before they sold the old one, also in Mesa. Their previous home had been appraised at nearly $400,000 at the height of the market, but as the housing crisis ravaged Arizona, they were told they’d be lucky to get $200,000 for it.

They were carrying a loan of $260,000 on their original home alone, meaning they were well ‘underwater,’ owing much more than it was worth. Combined with the mortgage on the new house, their housing payments had become an “anchor around our necks,” she says, threatening to gobble up all their retirement savings and leave them with nothing.

The couple made a difficult call: They would do a ‘strategic default,’ and simply stop paying the old mortgage. “We really had to wrestle with it,” said Perkins, 60. “We had worked all of our lives to build good strong credit, and we’re proud people. But it came down to, ‘Can we keep doing this?’ We had to say ‘No.'”

As the housing bust drags on, many homeowners are thinking like Perkins. Almost 11 million homes are now underwater, says financial information provider CoreLogic. Around 3.5 million homeowners are behind in their payments and another 1.5 million homes are already in the foreclosure process, according to online marketplace RealtyTrac.

As banks start to work through their backlog of distressed properties, the New York Federal Reserve estimates that 3.6 million foreclosures will take place during the next couple of years.

So, the question is: Does it make sense to keep paying a massive mortgage, knowing that it might be decades before a home regains its prior value? Or is that akin to – as columnist James Surowiecki recently wrote in the New Yorker – “setting a pile of money on fire every month”?

“I constantly get the saddest e-mails from people saying, ‘I’ve exhausted all my life savings, my retirement is gone, and now I have to default,'” said Jon Maddux, CEO of,

a foreclosure agency that helps clients with strategic default (and charges a fee for it). “But if they had seen the writing on the wall a couple of years earlier, stopped paying the mortgage and stayed in the home throughout the whole process, they would be in a much better financial position.”

Moral Quandary

There’s a moral component to that decision, of course. People naturally feel embarrassed about breaking a contract and not paying their bills; no one wants to be branded a deadbeat. But remember that companies default on their obligations when it makes financial sense for them to do so, via the bankruptcy process. Even the Mortgage Bankers Association itself, in a flourish of irony, arranged for a short sale of its Washington headquarters.

It’s not personal; it’s business. So think of strategic default as a business decision, and do a cold-eyed cost-benefit analysis of whether it makes sense for you, advises Carl Archer, an attorney with Maselli Warren in Princeton, New Jersey.

“People think it reflects on their integrity, and say ‘I wasn’t raised this way,'” said Archer. “But the more businesslike attitude is to say that there’s a contract, there are penalties for violating that contract, and sometimes it just makes financial sense to break it.”

The penalties largely revolve around your credit record, which admittedly gets blown up in the near-term. For a few years you can likely forget about qualifying for a mortgage or a car loan. When lenders are ready to take a chance on you again, you’ll have to pay for the privilege, with stiff interest rates due to your default history.

What Happens to Scores

Charlotte Perkins watched her credit score go from a pristine 800 to 685, dropping every time she missed a payment. Credit-scoring firm FICO estimates that someone with a 680 score would see that number sink between 85-100 points after a strategic default, and someone with 780 could crater 140-160 points.

Not desirable, of course, but not the end of the world either. For Perkins, for instance, she already had a loan on her Ford Escape, and the mortgage on her new house, before she even started the default process. She hasn’t seen any changes on her credit cards since, in terms of limits or interest rates.

Now that the previous home was auctioned off in December, she can start slowly rebuilding her credit, a process that should take about seven years. But, at iSellerFINANCE, our proprietary credit scoring model would discount the strategic default and not penalize the mortgage holder’s credit score.

Strategic default isn’t a decision to be taken lightly, of course. If everyone did it, the housing market — and the banks — would be in much worse shape than they already are.

The following are some of the issues to keep in mind:

1. Strategic Default may be your best option. However, your financial troubles could be alleviated with a simple refinancing, especially since 30-year mortgage rates are near record lows of below 4 percent. If the banks are hesitant to rework your loan, look into the number of government programs designed to keep you in your home, which can be researched at But, if these avenues aren’t available to you, execute the default now before you throw more cash away. This houding market is not coming back anytime soon.

2. Location, location, location. Each state has its own rules and regulations regarding foreclosures, which affect both the length of the process and what you could be liable for in the end. In so-called ‘non-recourse’ states like Arizona, California and Texas, a lender cannot come after you for any deficiency (for instance, if your mortgage was $300,000 and they’re only able to sell the property for $200,000). In other states they can pursue the difference, and depending upon the state, it can be very expensive to defend in court – which is why some homeowners opt to file for bankruptcy, to free themselves from those potential obligations as well.

3. Use the interim to save like a demon. If you’re in a state like New York or Florida, which require a judicial review of every foreclosure, it will be a couple of years before you actually have to pack up. In the meantime, be extremely disciplined about stockpiling cash. That will help you with a down payment for a rental, to pay for a car in cash if you need to, or to clear up other debts you might have. “Save money as if you were still paying the mortgage,” says Archer. “If you don’t, then you’ll run out of both time and money, and then you’ll be in a real tough spot.”

4. Know the tax implications. Historically, if you have a debt that’s forgiven, the canceled amount is considered taxable by the IRS. In the wake of the housing bust, though, the Mortgage Forgiveness Debt Relief Act was drafted to spare you those taxes. That legislation expires at the end of 2012, though – so if it’s not extended, you could potentially face a tax bill for the difference. Which is why, if you are making a strategic default decision timing is important.

5. Talk to a professional. A bankruptcy or real-estate attorney can help you through a very tricky process. The National Association of Consumer Bankruptcy Attorneys, for instance, has a searchable database of lawyers at

“Strategic default is not an easy decision, and there’s a cost either way,” said Gerri Detweiler, director of consumer education for “Would you rather be $200,000 underwater, or would you rather have seven years of damage to your credit report? It depends whether you’re finally at the point where enough is enough.”

Zidisha Turns Microfinance on its Head.

99.5% Repayment rate!!!

While conducting fieldwork for a microfinance organization in West Africa in 2006, founder Julia Kurnia noticed something startling. Loans that were funded at zero interest by well-meaning participants at popular microlending websites were costing the impoverished beneficiaries more than 35% on average in interest and fees. The exorbitant rates were charged by the local intermediary organizations that administered the loans, in order to cover their operating costs.

It is generally assumed that such high interest rates are a necessary cost of making small loans in isolated and impoverished areas. Microlending websites that administer “crowd-funded” loans through local intermediaries assume that the borrowers not only lack the necessary computer skills to communicate with lenders themselves, but also that they cannot be trusted to repay loans without constant visits by loan officers.

Kurnia believed these assumptions were outdated, and to test her theory she founded, a peer-to-peer microlending platform that turns the traditional approach to microfinance lending on its head. First, there are no intermediaries: instead, the entrepreneurs themselves post loan applications and communicate directly with lenders via facebook-style profile pages. Zidisha does not outsource loan disbursements and repayment collection to local organizations either, but rather uses grassroots technology like mobile banking to conduct financial transactions with borrowers directly. The result? Radical transparency, and lower cost to borrowers than has ever before been possible in the developing world – even though lenders earn interest as well.

Zidisha is tapping into the growing population of computer-literate, but still economically disadvantaged, small business owners and explosive growth of internet access that have transformed developing countries in recent years. Borrowers log in to to share business updates with lenders from cheap internet cafés, old laptops donated to local schools, and solar-powered smartphones shared by entire villages.

Today, loans funded through surpassed the $100,000 mark. Since making their first microloans – to three nomadic herders in Kenya’s remote Masai Mara – in October 2009, Zidisha lenders from around the world have financed 181 small business ventures in Burkina Faso, Indonesia, Kenya and Senegal. Zidisha’s average lender interest rate is 2.96%, and the repayment rate to date is 99.5%.

Zidisha believes in transparency. So ask questions, meet their remarkable entrepreneurs, and become part of the conversation.

Join them at

Europe’s Debt Crisis: A Bubble Ready to Burst!

THIS grotesque map of the world, depicting Europe as a bloated balloon, caught my eye this week, and powerfully illustrates one of the factors in Europe’s debt crisis. It depicts the countries of the world sized according to the amount of government spending.

In the words of the World Bank, which published it in a report issued this week (“Golden Growth: Restoring the lustre of the European Economic model“, here), Europe is the world’s “lifestyle superpower”. As opposed to America, which spends almost as much as the rest of the world put together on defence, Europe spends more than the rest of the globe combined on social policies.

In many ways this is an admirable aspect of Europe’s economic model, which combines high living standards with high standards of social welfare. The trouble is, such spending is helping to bankrupt governments—not least because those very same caring policies ensure that Europeans live longer, requiring more expenditure on health care and the payment of pensions for more years.

Anybody who wants to understand the strengths and weaknesses of European economies in this time of crisis would do well to read the report.

First the strengths. Europe, say the authors, invented a unique “convergence machine” by admitting successive waves of poorer countries and quickly raising their standards of living. Convergence has been accelerated by the free flow of trade and capital within the European Union. As the report puts it:

Between 1950 and 1973, Western European incomes converged quickly towards those in the United States. Then, until the early 1990s, the incomes of more than 100 million people in the poorer southern periphery—Greece, southern Italy, Portugal, and Spain—grew closer to those in advanced Europe. With the first association agreements with Hungary and Poland in 1994, another 100 million people in Central and Eastern Europe were absorbed into the European Union, and their incomes increased quickly. Another 100 million in the candidate countries in Southeastern Europe are already benefiting from the same aspirations and similar institutions that have helped almost half a billion people achieve the highest standards of living on the planet. If European integration continues, the 75 million people in the eastern partnership will profit in ways that are similar in scope and speed.

Yet this convergence machine is spluttering, and deep reforms are needed. Much effort has been expended on explaining the nature of the financial crisis of the past two years. The sharpest and most concise analysis I know of is a recent policy brief by Jean Pisani-Ferry, director of the Bruegel think-tank in Brussels (“The euro crisis and the new impossible trinity”, here). This argues that the problems are deeper than a lack of fiscal discipline: there is a flaw in the way the euro zone was designed, without a lender of last resort, without joint bonds and with a vicious feedback loop that weakens both sovereigns and their banks. There is a tendency in Brussels to think that, if only the euro zone were to make the leap to federalism, all would be solved. Far from it.

The World Bank report shows that Europe has deep structural flaws to contend with. Perhaps most worrying is the slowdown in labour productivity, the underlying driver of economic growth over the long term. This chart (right) shows how Western Europe had almost closed the productivity gap with America by 1995. But thereafter it started to lag ever farther behind the United States (and kept losing its lead over Japan).

The effect is most alarming on the Mediterranean rim. These next two charts show that, as expected, in 2002 northern Europe was more productive than southern Europe, which in turn led the new member states of eastern Europe. But between 2002 and 2008 something strange happened. The convergence machine went into reverse for southern Europe. While the easterners were roaring ahead to catch up with the northerners, prroductivity in Mediterranean countries actually fell.


Part of the reason is contained in this chart (right). It shows how foreign direct investment was abruptly redirected from southern countries to the new member states in the east. Mediterranean members faced a triple challenge: they were hit hard by globalisation and the loss of low-tech industries such as textiles; they faced competition from cheaper labour in ex-communist members; and the adoption of the euro made it harder for them to adjust through devaluation. Yet Club Med has only itself to blame.

A premature adoption of the euro by southern economies is sometimes blamed for this reversal of fortune. Others say that letting the formerly communist countries into the European Union so soon did not give the south enough time to become competitive. But perhaps the most likely explanation is that of all the economies in Europe, the entrepreneurial structures of Greece, Italy, Portugal, and Spain were least suited for the wider European economy. For one thing, a sizable part of net output in southern economies is generated in small firms—almost a third of it in tiny enterprises (with fewer than 10 workers). This is not an entrepreneurial profile suited for a big market. Unsurprisingly, with the expansion of the single market in the 2000s, foreign capital from the richer economies of Continental Europe quickly changed direction, going east instead of south as it had done in the 1990s.

Did the south need more time to adjust, or did it squander opportunities? The latter seems more plausible. Ireland has shown that EU institutions and resources can be translated quickly into competitiveness. The Baltic economies are now doing the same. The chief culprits for the south’s poor performance were high taxes and too many regulations, often poorly administered. While these mattered less when its eastern neighbors were communist and China and India suffered the least business-friendly systems in the world, they are now crippling southern enterprise.

All is not lost. Northern European states, especially Nordic countries, show it is possible to innovate, raise productivity and maintain generous social welfare at the same time. This is the World Bank’s explanation for their success:

What has the north done to encourage enterprise and innovation? Much of its success has come from creating a good climate for doing business. All the northern economies are in the top 15 countries of 183 in the World Bank’s Doing Business rankings; at 14th, Sweden is the lowest ranked among them. They have given their enterprises considerable economic freedom. Their governments are doing a lot more. They have speeded up innovation by downloading the “killer applications” that have made the United States the global leader in technology: better incentives for enterprise-sponsored research and development (R&D), public funding mechanisms and intellectual property regimes to foster profitable relations between universities and firms, and a steady supply of workers with tertiary education. Tellingly, Europe’s innovation leaders perform especially well in areas where Europe as a whole lags the United States the most. These features make them global leaders; combining them with generous government spending on R&D and public education systems makes their innovation systems distinctively European.

Even so, there are reasons to worry, even in northern Europe. For instance:

What has been more perplexing is Europe’s generally poor performance in the most technology-intensive sectors—the Internet, biotechnology, computer software, health care equipment, and semiconductors. Put another way, the United States, the Republic of Korea, and Taiwan, China, have been doing well in sectors that are huge now but barely existed in 1975. Europe has been doing better in the more established sectors, especially industrial machinery, electrical equipment, telecommunications, aerospace, automobiles, and personal goods. The United States has young firms like Amazon, Amgen, Apple, Google, Intel, and Microsoft; Europe has Airbus, Mercedes, Nokia, and Volkswagen.

The productivity gap is especially important in Europe, given that Europeans tend to work less than Americans, while spending more on social protection.

The hallmark of the European economic model is perhaps the balance between work and life. With prosperity, Americans buy more goods and services, Europeans more leisure. In the 1950s, Western Europeans worked the equivalent of almost a month more than Americans. By the 1970s, they worked about the same amount. Today, Americans work a month a year more than Dutch, French, Germans, and Swedes, and work notably longer than the less well-off Greeks, Hungarians, Poles, and Spaniards.

And on top of fewer working hours in the day, and taking longer holidays, Europeans have tended to retire earlier—even as they lived longer. By 2007, the French could expect to draw pensions for 15 years longer than they did in 1965. On current trends for immigration and participation in the workforce, says the World Bank, the 45 European countries in its study will lose 50m workers over the next 50 years. Which brings us to that spending bulge.

Europe’s states are not big spenders on either health or education. The variation among countries stems from a difference in spending on pensions and social assistance. Europe’s countries also differ how they tax these benefits; Northern European countries tax the social security benefits of people with high incomes more than others in Europe. After taxes are considered, the southern periphery is the biggest social spender in Western Europe. But the reason why Europe spends more than its peer on public pensions is the same in the north, center and south. This is not because Europe has the oldest population (Japan’s is much older) nor because of higher pension benefits (annual subsidies per pensioner are about the same in Greece as in Japan). It spends more because of easier and earlier eligibility for pensions.

So the outlook is gloomy. Even with greater productivity, even if governments can reduce unemployment and bring more women into the workforce, Europeans will have to stay in work for many more years. Even so, the workforce will decrease. So Europeans will have to rethink migration policies too.

No Apologies Needed!

GM CEO: No Apologies For Accepting U.S. Bailout

General Motors CEO Daniel Akerson, shown at the Detroit auto show earlier this month, tells NPR: "We want to produce the world's best vehicles, improve our margins, cash flow and profitability, but we have a long, long road to walk."

Paul Sancya/APGeneral Motors CEO Daniel Akerson, shown at the Detroit auto show earlier this month, tells NPR: “We want to produce the world’s best vehicles, improve our margins, cash flow and profitability, but we have a long, long road to walk.”

Just a few years ago, America’s auto industry was on the verge of collapse. When President Obama took office, he had to decide whether to bail out General Motors or let it die. He chose to send them a lifeline, to the tune of $50 billion. In this week’s State of the Union speech, President Obama said that decision paid off.

“Today, General Motors is back on top as the world’s No. 1 automaker,” Obama said.

Good news on GM’s profits is expected next month. (Ford has already reported its best earnings since 1998, and all of the Big Three gained U.S. market share for the first time since 1988.)

Daniel Akerson, chairman and CEO of GM, has been reluctant to trumpet the good news about being the top seller.

“That wasn’t a goal we set out. It’s a metric, it’s a milestone toward a broader agenda,” Akerson tells weekends on All Things Considered host Guy Raz. “We want to produce the world’s best vehicles, improve our margins, cash flow and profitability, but we have a long, long road to walk.”

Akerson explains that he dislikes the termgovernment motors and believes it gives people the wrong impression.

“It implies that somehow the government is calling us on Monday and telling us that we’re going to paint models that are coming off the production lines a certain color, or that we’re going to develop or prioritize vehicle development differently than we would if we were a profit-oriented organization,” Akerson says. “The objective of the government was not to act as, if you will, a private equity firm and try to maximize returns.”

Akerson says the government’s objective was a broader agenda for the industrial policy of the United States and “for the well-being of its citizens, and that, I think, has been an unqualified success.”

To have uncertainty surrounding a company of this size and this magnitude for a long period of time I think would have been just devastating, and probably have condemned it to the heap.

He adds that he doesn’t believe it will be a long-term assist, and that the government will eventually sell its shares — about 26 percent of the company — when officials determine “their mission has been accomplished.”

Hybrid Capitalism

“Sometimes people stylize the image of how the economy works because we have never been a truly 100 percent, unadulterated capitalist system,” Akerson says. “Otherwise, your mother, as she aged in time … and could not produce, you don’t kick ’em to the curb.”

Akerson says he believes the U.S. has a form of hybrid capitalism.

“There are times when government has a role, in my opinion, and there are times it should let the market ultimately determine winners and losers,” he says.

Akerson cites the real estate crisis of the late 1980s, when the government stepped in to stabilize the market and eventually withdrew. In the case of GM, he explains, to have let it go through a complete bankruptcy would have been disastrous.

“To have uncertainty surrounding a company of this size and this magnitude for a long period of time I think would have been just devastating, and probably have condemned it to the heap,” he says.

Defending The Volt

Akerson tells Raz that the Chevrolet Volt electric car is an important part of GM’s strategy.

“This is a critical decade or two for the transportation industry because of social needs,” Akerson says. “Do we want to leave an environment, a planet that’s better than the one we inherited from the prior generations? I have children and grandchildren, and indeed I want that.”

Akerson adds that GM has been spending $7.5 billion a year on advanced engineering and research on advanced propulsion.

“We never abated on that,” Akerson says. “And it’s all in an effort to prepare for the future where you are propelling different forms of transportation and there’s no carbon footprint.”

The government’s recent investigation on whether the Volt’s battery could catch fire was closed and cleared GM, but Akerson concedes it has affected the firm’s image.

“It did have some collateral damage because it was a situation that ran on for 45-60 days, and [there was] a lot of negative press,” Akerson says.

But he stresses that throughout the investigation, GM maintained the highest safety ratings possible.

Overall, Akerson says he thinks GM is doing well. It has sold 2.5 million vehicles in the U.S., and 9 million internationally.

“We are a great exporter of technology, we have good diversified operations around the world, and indeed I think we are producing, designing, building and selling some of the world’s best vehicles,” Akerson says.

OK. Here’s a Positive Banking Story.

In the Era of Greed, Meet America‘s Good Bank: USAA

Highly profitable while conservative with lending, and not publicly traded, the United Services Automobile Association is a model for the financial services industry

615 usaa bank desert building.jpg

It didn’t take a penny in federal bailout money. It grew throughout the financial crisis. It has consistently garnered top customer service rankings. And Fortune magazine just named it one of the 20 best companies to work for in America. Meet America’s good bank: USAA.

USAA is a San Antonio, Texas-based bank, insurance, and financial services company with 22,000 employees, serving 8 million current and former members of the military and their families. The company’s roots go back to 1922, when 25 army officers agreed to insure one another’s cars when no traditional companies would. Since then, USAA, or the United Services Automobile Association, has steadily grown.

By its very definition, USAA serves the middle class. It does business only with current and former members of the military and their families. Studies have shown that the U.S.’s all-volunteer military is dominated by members of the middle class, not the elite.

While other financial and insurance companies flirted with collapse, USAA’s net worth grew from $14.6 billion in 2008 to $19.3 billion in 2011. And it has continued lending money while other banks have tightened their loan operations despite billions in government funding to encourage liquidity. It has a free checking account, has been at the forefront of electronic banking, and reimburses up to $15 in other banks’ ATM fees. Its credit rates are 43 percent lower than the national average.

The firm’s structure is one of its most interesting attributes. Unlike nearly every other Fortune 500 company, USAA is not a corporation.  It is an inter-insurance exchange made up of the people who have taken out policies with the firm. As a group, they are insured by each other and simultaneously own the company’s assets. Instead of paying stockholders, USAA distributes its profits to its members. In 2010, it distributed $1.3 billion.

“USAA is not publicly traded,” Nicole Alley, a company spokesperson, said in an email. “And we take a conservative approach to managing our members’ money.”

The firm is not perfect. A long list of consumer complaints can be found here. Standard& Poor’s lowered their rating of USAA from AAA to AA+ last August but still rates the firm above its peers. And my colleague Felix Salmon correctly criticized USAA’s initial reaction to the Volcker rule, which could force the company to change its structure. It’s likely, though, that a simple restructuring of its own could avoid that.

The reason I’m focusing on USAA is because it represents a different idea about the purpose of companies. It’s also run by former military members, who the last time I checked weren’t considered European style socialists.

Howard Rosen, a Visiting Fellow at the Peterson Institute for International Economics in Washington, points out that the role society expects banks to fill has changed over the last few decades. For example, the share of bank lending devoted to mortgages doubled from 30 percent to 60 percent between 1980 and 2009, squeezing out consumer loans and other bank loans. Mortgage lending by commercial banks grew on average by 12 percent a year between 2001 and 2007 while bank lending for business purposes, i.e. not mortgages or consumer loans, grew on average by only 3.6 percent a year. Total commercial bank assets grew on average by 8.6 percent each year over the same period.

In the two years since the end of the recession, bank lending for mortgages and business loans have actually declined, despite a slight increase in bank assets.

“It used to be that we wanted banks to be good corporate citizens with strong ties to local communities,” Rosen says. “Now all we ask is that banks just do what they  were initially designed to do — provide capital to companies who want to invest in plant and equipment in order to create jobs — any jobs, anywhere in the United States.”

Stephen Green, the C.E.O. of the British bank HSBC, makes a related argument in his new book “Good Value: Reflections on Money, Morality and an Uncertain World.” Green is the only ordained minister who is also the chairman of a major global bank, one that dwarfs USAA and controls more than $2.5 trillion in assets worldwide.

As Stephen Fidler of The Wall Street Journal recently wrote, Green says that “finding real peace,” involves accepting three uncertainties: that the world is imperfect; that we can’t be sure of human progress; and that hope endures.

“As a matter of fact the ethics of the marketplace are almost by definition universal,” Green writes in his book. “Everyone knows about the importance of truth and honesty for a sustainable business.”

Green, the banker, is trying to decode what makes a business good. Perhaps he should look to USAA for advice. USAA isn’t a model for an entire economy. But it is an example of technical innovation and thinking outside the box. We desperately need more of that. And more good banks in any form as well

You Want New Lending? Not from Banks, and Not Anytime Soon.


Big Banks “Killed” in 4Q Mortgage Results

If you expect the banks to start opening the credit spigot anytime in the next two years, forget it!

The big banks’ mortgage expenses keep piling up, in a backlog that is likely to drag down their profits — and a broader housing recovery — for the foreseeable future.

As the largest banks reported quarterly results this month, they took charges for repurchasing soured loans, complying with federal mortgage servicing standards, paying for an upcoming settlement with state attorneys general and resolving significant foreclosure and litigation costs.

The mortgage woes at big banks have been so dire for so long that Jamie Dimon‘s comment this month that JPMorgan Chase & Co. was “getting killed in mortgages” became a footnote rather than the main story.

Even Wells Fargo & Co., which posted the strongest fourth-quarter mortgage results and now controls a third of the U.S. mortgage market, had significant costs for loan repurchases and mortgage servicing failures. It posted about $300 million in costs related to mortgage servicing and foreclosures.

The worst problem, analysts say, is that the banks’ fourth-quarter charges do not necessarily signal any sort of resolution to the litigation and regulatory risk for banks with significant mortgage exposure.

“The optimistic view is these are one-time charges and they will be over and done with,” says Brian Foran, an analyst at Nomura Securities. “But some of the charges are not big enough to cover everything.”

Foran singled out U.S. Bancorp and PNC Financial Services Group Inc., which both took charges in the quarter related to the pending settlement agreementwith state attorneys general and to the cost of complying with federal consent orders for past mortgage servicing failures.

US Bank took a $130 million charge for the settlement and $34 million for servicing compliance; PNC disclosed a total of $240 million in expenses for both, including foreclosure costs.

But those expenses might not be enough to cover the banks’ exposure from the settlement, which has been negotiated for months. Foran cites some concern that banks will have to “dig deeper” by giving borrowers principal reductions beyond the upfront costs of a settlement. Because banks cannot talk in detail about the settlement before it is finalized and announced, they have not been able to explain what the payouts would actually cover, he says.

Though mortgage banking profits are up and origination volume increased for some banks in the fourth quarter, mortgage loan growth has fallen from a year ago. Bank of America Corp.‘s pullback in correspondent lending continues to remake the overall mortgage landscape as banks try to bolster their capital levels.

At B of A, mortgage origination volume dropped 77% from a year ago to just $18 billion at Dec. 31, a dramatic retreat. Though Wells Fargo appears to be the main beneficiary of B of A’s withdrawal from mortgages, the San Francisco bank had a 6.2% decline from a year earlier in fourth-quarter mortgage originations, to $120 billion.

JPMorgan Chase’s mortgage origination volume dropped 24% from a year earlier to $38.6 billion, while Citigroup Inc.‘s fell 3% to $21 billion from a year ago.

Banks saw some signs of life in consumer and especially corporate lending, but analysts were still largely unimpressed.

“Loan growth was tepid,” says Frederick Cannon, a co-director of research and chief equity strategist at Keefe, Bruyette & Woods, Inc. “Solid organic loan growth is very difficult to achieve when consumers and corporations are deleveraging and economic growth is moderate.”

Banks are having a tough time growing revenues or earnings “meaningfully,” Cannon says, particularly when balance sheets are shrinking.

Each bank is facing unique hurdles in its mortgage operations. Wells Fargo, for example, is trying to liquidate a $112.3 billion loan portfolio, which Cannon says “may present a challenge to loan growth in the coming quarters.”

But the challenges for Bank of America are far more acute, he says, because the bank’s pullback in mortgages is likely to overshadow any potential gains for the foreseeable future.

“Mortgage accounting is not friendly when you’re shrinking your mortgage operations,” Cannon says. “They’re more and more just going to be servicing bad loans for a long time, which means the cost of servicing is going up.”

High servicing expenses are expected to be a drag on the top banks for some time to come. JPMorgan Chase’s mortgage servicing expenses totaled $925 million in the fourth quarter, down 4% from a year earlier, but chief financial officer Doug Braunstein told analysts during a conference call that servicing costs will continue to be high in the first half of 2012. He attributed 75% of those expenses to costs for defaulted loans and foreclosures. (JPMorgan Chase posted a $258 million loss in its mortgage unit, compared with a profit of $330 million a year earlier.)

A drop in mortgage volume and high servicing costs are not the only reasons behind industry members’ pessimism. Some of the biggest hits in the quarter came from mortgage repurchase requests, which remain elevated and show no signs of abating.


The high level of repurchase requests in the fourth quarter “indicate that repurchases are not going to go away any time soon,” Pfeifer says. “There is still a substantial amount of repurchases requests out there. The tail of the litigation risk is very long.”


Wells took a $404 million provision for mortgage loan repurchase losses; JPMorgan Chase took a $390 million provision; B of A set aside $263 million for repurchases and Citigroup took a $200 million hit.

Meanwhile, SunTrust Banks Inc. said Friday it had to increase reserves for mortgage repurchases to $320 million.

Fannie Mae and Freddie Mac are being “hyper-aggressive” in pursuing repurchase claims, because they have a statute of limitations of between four to six years to do so, says Michael Pfeifer, a managing partner at the law firm Pfeifer & DeLaMora LLP in Orange, Calif., which defends mortgage lenders and banks against repurchase requests.

He adds that some banks are quietly settling repurchase claims with the Federal Deposit Insurance Corp., which has a longer statute of limitations.

B of A, which has perhaps the most exposure to mortgages from its ill-fated acquisition of Countrywide Financial Corp., said it ended 2011 with $15.9 billion reserved to address potential representation and warranties mortgage repurchase claims, up from just $5.4 billion at the end of 2010

The Disruption of Venture Capital.

“…most often the very skills that propel an organization to succeed in sustaining circumstances systematically bungle the best ideas for disruptive growth. An organization’s capabilities become its disabilities when disruption is afoot.” – Clayton ChristensenThe Innovator’s Solution

In November 2005, Paul Graham wrote an essay titled “The Venture Capital Squeeze.” It had been over five years since the Nasdaq peaked in March 2000, and it was becoming apparent that VC firms were having trouble deploying the tens of billions of dollars they raised during the boom years. Graham argued that the proliferation of money combined with the decreasing costs to start a business were making the VC job more difficult, prophesying significant changes for the industry. He was right.

Over the years, venture capitalists have been some of the most ardent students of disruptive innovation. Large pools of capital have been funding risky ventures since antiquity (for example, when the wealthy Marcus Crassus backed an upstart Roman general named Julius Caesar). The industry was born in its current form, however, when the first venture capital firms were founded in the middle of the twentieth century. In a relatively short time, venture-backed companies have grown to account for over 20% of US GDP today. The best VCs have successfully identified major industry disruptions before they occur. Nevertheless, recent attention garnered by start-up accelerators, micro-VCs, and angel investors has led to a new debate: is there a wave of disruption in venture investing itself?

A key constraining resource in traditional venture is a VC investor’s time. This means that a performance metric every investor must consider is time spent / capital invested. Hedge fund investors who deploy capital in large and liquid markets can scale their time well. Bill Ackman‘s hedge fund Pershing Square, for example, has $9 billion in assets under management and fewer than ten investment professionals. VCs, on the other hand, are finding it increasingly harder to scale because the declining cost to start a business means that VCs must invest in more companies just to deploy the same amount of capital. In response, they can choose to participate in more deals or bigger deals. Often, the latter wins because most VCs will spend a substantial amount of time evaluating a deal, regardless of deal size. Money scales, time spent on analysis does not.

The business model innovation of accelerators is that they have a systematized selection process that is akin to the application process for college. Because of the limited investment that accelerators offer companies (usually less than $40,000), they can evaluate business plans and founding teams more quickly than traditional venture investors with arguably less risk. Accelerators with a handful of full-time employees and no limited partners will accept dozens of companies each year. Where accelerators fall short is in leading investment rounds deep into the company’s lifecycle, the purview of traditional venture funds. However, accelerators are capitalizing on thedecreasing costs of starting a business, new thinking on how to run startups, and the increasing importance of mentorship to take companies further down the path towards success — even with smaller check sizes. Organizations such as Y Combinator and TechStars have become magnets for some of the most talented US entrepreneurs by providing expert guidance with limited funds. Additionally, being anointed by a top accelerator is a mark of achievement, similar to attending a top university, that propels the credibility of the founders.

Ultimately, industry disruption will be measured by the ability of accelerators to capture an increasing proportion of industry returns. This entails accelerators moving upmarket. Y Combinator and TechStars have demonstrated that systematized programs are highly effective for startingcompanies, but it is unclear whether they will ever be effective for growing companies. By nature, accelerators will be able to place more bets than traditional venture firms, but accelerators cannot yet place the big bets that generate the lion’s share of industry returns.

Companies that successfully graduate from an accelerator program still need significant amounts of additional capital to grow. Though a VC might invest in hundreds of companies, most returns come from finding and growing a handful of startups, such as Facebook, Groupon, Zynga, and LinkedIn. There are parallels with the music, publishing, and movie industries where returns are still largelydriven by blockbusters rather than the long tail. Firms with the appetite to maintain their ownership stake through follow-on investments will capture significantly higher aggregate returns (though lowerinternal rates of return) on the blockbusters, even if they enter in later, higher valuation rounds.

To disrupt the larger ecosystem, accelerators will need to evolve their models to push companies through later stages of the business lifecycle. Accelerators might be able to accomplish this task by raising internal funds (which can be tricky) or establishing non-traditional funding partnerships. On the latter, we will be carefully observing how developments such as Yuri Milner’s Digital Sky Technologies — and, more broadly, the entrance of hedge funds and large institutional investors — will affect the landscape of startup financing.

In classic cases of industry disruption, such as in steel or airlines, incumbent firms have tens of thousands of employees. But VC firms are small places, and even the largest ones only have a few dozen investment professionals. They are acutely attuned to disruptive innovation, and their size makes them nimble. Still, being astute and agile does not guarantee immunity to disruption. Darwin puts it best: “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”