Reid Hoffman and Micro-Bailouts

Reid Hoffman, founder of LinkedIn, has been getting a lot of press this week.  He was interviewed on Charlie Rose and also had a column published in the Washington Post. (please check them out to understand the context below)

The start-up/entrepreneur community linked the heck out of Hoffman (like at TechCrunch), so his name kept getting more and more traction.

Although Hoffman is right about making the US hospitable to immigrants (immigrants are shown to very positively impact economic growth), I do not agree with much else of what Hoffman does or says.  Why?


Listening to Hoffman peddle LinkedIn on Charlie Rose was kind of sad.  Really?  A popular founder posted a question on a forum on LinkedIn and a bunch of people responded?  Wow, you can post recommendations of people on LinkedIn?  That’s amazing!  Only on LinkedIn can you use forums and post things about people!

This probably works pretty well if you’re popular and have a lot of fans willing not only to read you but also to contribute.  But how does this help individuals with little prominence get a job or promote themselves?

Can anyone not affiliated with LinkedIn honestly say it’s helped them professionally at all?  The more people join LinkedIn, the more their job listings become like Monster or other clearing houses for jobs.  i.e. they’re totally useless.  Naturally a lot of bloodsucking headhunting/recruiting companies leech onto LinkedIn and bulk post listings, diluting the value even more.  Now there’s a 6-figure salary professional networking site, TheLadders, which I’m sure looks upon LinkedIn with disdain but is also pretty much useless to most people.

Hoffman dismisses Facebook as a place mostly for photo-sharing.

Uh, what?  That’s a pretty big red flag that he either was making a small off-the-cuff comment, or he has no clue what he’s talking about when it comes to social networking.  Facebook is massive; it’s vibrant, explains who people are, and allows people to be creative.  LinkedIn is stuffy.

It’s unfortunate, too, because LinkedIn could totally become a standardized resume service so that you don’t need to hand someone a resume, they just go to LinkedIn and find you.  Then your resume never goes out of date.  You know, like how the web is supposed to work…

The Future of Social Networking

LinkedIn is an added layer of redundant social graphs on top of something really useful like Facebook.  I’d be more likely to meet people I want to work with and communicate with through Facebook than on the staid LinkedIn.

Hoffman talks about people in the future needed two social networking sites.  One professional, one personal.  I completely disagree.  I think one thing to come out of this Great Disruption and crashing down of old business models is that personal and professional lives will be combined.

It’s unsustainable to live a dual life of your professional self and your personal self.  One should reinforce the other.  People create value when they’re employed in a way that allows them to self-actualize and be creative.  They are useless as drones.  People aren’t comfortable with this yet (privacy concerns) but it’s the only way a future information/service/networking economy is going to work.

Hoffman’s world of two separated social networks is ridiculous.  Most of us play with the people we work with, or at least socialize to some degree.  Our networks overlap quite a bit even though we try to control the degree of convergence to “protect” our reputations.

Identity layer protocols in production right now like OpenID and OAuth and Facebook Connect and Yahoo! Open Strategy and OpenSocial are going to jailbreak our social graph data.  We will be able to use multiple sites simultaneously.  Likely there will be an aggregator through which we use those other sites (Facebook hopes it will be the aggregator), but each site will cater towards specific hobbies and interests (that is, specialization of Facebook into social networking, Yahoo! into social media, Twitter into micro-messaging).  Our daily internet use will look more like a meshy ecosystem of different sites and brands.  Companies will have to fiercely build their brands so that their data doesn’t get absorbed into a ghoulash you see when you open your browser.

Stimulus Plan

So then Hoffman argues passionately in his WaPo column that the stimulus plan should earmark money for giving micro-loans to small businesses.

There’s a canard that the Republicans love to use that the lifeblood of the economy is in small businesses and start-ups.  Now, as someone who wants to start my own company, you’d think that I’d be all in favor of this talk.  But it’s not really true.

Yes, there are far more small businesses than big businesses.  Duh.  You can start and close a business fairly easy in this country (see the World Bank’s Doing Business report).  Obviously the aggregation of human capital into firms is going to consolidate into larger and larger companies, which will be fewer than small businesses.

But those large firms are also usually fairly successful (to have gotten that far), require massive administrative/financing/etc. support and logistics and clustering and supply chains and their own mini ecosystems.  That is why they generate far more actual productive jobs than a small business with a handful of people could.

Small companies far more often than not fail to make money.  They churn quite a bit.  Hoffman of course would like to boast about Google and Amazon and Microsoft (he cites Microsoft in his article) as examples of how small businesses drive the economy.  But these companies are outliers that actually had different, revolutionary ways of doing business.  They don’t represent the majority of small businesses.

In short, most small businesses are trash and will never make it.  They will barely employ anyone.

So Hoffman recommends giving loans to small businesses.  Is this a government function?  To fund businesses?  No.  What Hoffman seems to be advocating is a lot of mini-bailouts for small businesses that can’t monetize or succeed in an open market.  He seems to want to subsidize failing businesses.  How are these people going to pay back their loans if their businesses fail?  Will they blot out their credit records early with a bankruptcy?  Does this funding come along with better bankruptcy/business exit regulation that’s more conducive to entrepreneurial endeavors?

Hoffman says, “The stimulus finances important development of infrastructure, renewable energy and scientific research, which is great for jobs in the short term but doesn’t guarantee the vibrant economic ecosystem required for sustainability.”

What?  How does research and infrastructure only lead to short-term jobs?  Doesn’t he have it backwards?  Research and infrastructure create long-term ecosystems and new sectors for jobs, while micro-loans create short-term jobs?  I’m confused.

To dispute this, let’s take a look at how some companies came about, through small business loans:

FedEx (from “FedEx History”):

“In 1965, Yale University undergraduate Frederick W. Smith wrote a term paper about the passenger route systems used by most airfreight shippers, which he viewed as economically inadequate. Smith wrote of the need for shippers to have a system designed specifically for airfreight that could accommodate time-sensitive shipments such as medicines, computer parts and electronics.

“In August of 1971 following a stint in the military, Smith bought controlling interest in Arkansas Aviation Sales, located in Little Rock, Ark. While operating his new firm, Smith identified the tremendous difficulty in getting packages and other airfreight delivered within one to two days. This dilemma motivated him to do the necessary research for resolving the inefficient distribution system. Thus, the idea for Federal Express was born: a company that revolutionized global business practices and now defines speed and reliability.”

Burger King:

From “Food Metrics”:

“When you think of McDonald’s in San Bernardino and later Des Plaines, Wendy’s in Columbus, Burger King in Miami, and KFC in Corbin, Ky., the one element that combines all these concepts is food. Colonel Harlan Sanders sells the first KFC fran­chise in 1952. Burger King opens its first restaurant in 1954 in Miami. Ray Kroc sees the success that the McDonald brothers are having in their restaurant in California and immediately starts to sell the brothers on the idea of opening other restaurants, first to sell his Multimixers and then to run them himself. He opens his first McDonald’s in Des Plaines, Ill., in 1955. Along the way, Pizza Hut starts up in Wichita in 1958. The common thread? Food—the American equalizer.

“With the development of the interstate highway system through the 1960s and into the 1970s, we’re on the road, and we find a growing number of meals are being eaten away from home. By using franchise and license systems of development, food vendors are able to develop chains of (continued from page 35) restaurants, thus leveraging purchasing power for all of them and using those franchise and license agreements to leverage standards of operation across franchise net works. McDonald’s is a strong proponent of mandatory standards and leads the way for other chains to develop quickly. McDonald’s targets television advertising to children and drives sales by reaching out to the youngest members of the family. All this occurs at a time when mobility and suburb growth are exponentially expanding.”

I think if you read a lot of histories of successful companies, you will not really read a whole lot on how they got financed.  I mean, some have interesting stories like Charles Ferguson’s company, Vermeer, that he eventually sold to Microsoft.  But mostly these companies were about people, and about ideas.

Hoffman mentions MTV and CNN as start-ups…really?  Too bad he didn’t mention Google and Yahoo!, both started out of a very generous Stanford computer science school that put up with the massive resources they ended up using.

Similar to Malcolm Gladwell’s point in Outliers that people do not just happen to be successful, new firms are very often products of large agglomerations of human capital.  Fast food, as Eric Schlosser discusses in Fast Food Nation, came about after WW2 and the Federal Aid Highway Act of 1956 under Eisenhower, that created a market for food on the go — it is no mystery why all of our greatest fast food chains were created at about the same time in the 50’s-60’s.  FedEx was the product of university research and experience in the military through Fred Smith.  Heck, even Reid Hoffman is a Stanford-born and Berkeley-raised Stanford and Oxford grad, all pillars of human capital agglomeration, a key driver of innovation and growth as Richard Florida describes in his latest book, Who’s Your City?.

Human Capital

Hoffman belittles Obama’s investments into human capital.  Funding university research, private research, improved education systems and schools, technological and logistical infrastructure, these are all keys towards building human capital so that it can continue to innovate.  Green energy research is going to at the same time lower the cost of energy inputs into development and production and consumption, while providing new jobs and new sectors for continued economic growth.  It will also wean us away from having to work long hours to create value, as we transition to a lifestyle where we value living as much or more than working for someone else.

Hoffman’s cute but pithy quote that everyone will be an entrepreneur is quite frankly offensive.  Not everyone has an entrepreneurial spirit.  Certainly most entrepreneurs are not social entrepreneurs, people who seek not just to own a business or make lots of money, but to also (and primarily) to help a lot of people.  Entrepreneurial literature carefully discusses how entrepreneurs are NOT like other people, most of whom just want to earn a comfortable salary and raise a good family.  Far different to take responsibility for your life (as we all should do) than to work on a completely untested, unproven idea (as true social entrepreneurs do).

The money for financing new ideas will always be there.  Forcing investors and financiers to fund bad businesses is just like the Big 3 bailout on a smaller scale.

What we should be doing is investing in people, building their intellectual and creative capacity, while giving them the health and social security to take risks.  Start-ups are most constrained not by lack of funding (except for large capital expenditure ideas like nano or bio research), but by not having the time and living money necessary to dedicate to an idea without having a regular job.

We should invest in training and mentoring people to build their human capital that way, too.  We should encourage people with opportunities to do what they really enjoy to do, to find a way to apply their talents and skills towards something that might be valuable or profitable.  We should invest more into organizations like the National Science Foundation and DARPA and joint partnerships between universities and businesses and government.  We should invest in universities all the way down to K-12, but focus mainly on high school, where most American children fall behind internationally.  We should invest in common areas for knowledge (public centers, co-working, etc.) and internet infrastructure.  We should free companies from having to fund health care for their employees, by universalizing health care.  Why do Republicans support businesses having to pay for health care instead of concentrating on their core businesses and making money?  We should guarantee college for students but also have public schools compete against private schools, as Stanford’s president John Hennessy just told Charlie Rose in a recent interview.

A recent study released by the Information Technology and Innovation Foundation, entitled “The Atlantic Century:  Benchmarking EU and US Innovation and Competitiveness” (PDF file warning), ranked the US #6 overall out of 40 states/groups of states, and dead last (!) out of all 40 in improvement in innovation and competitiveness in the last decade.  The indicators?  Human capital, innovation capacity, entrepreneurship, information technology infrastructure, economic policy, and economic performance.  Vencap and small business creation, two things Hoffman values, are only small parts of the whole picture.  And even in this downturn, privately funding and ease of starting a business is still something the US does really, really well.  So why is he so focused on that stuff when there are deeper structural problems in our government funding and education systems?  Is it because he’s a financier?  Hmm.

Can we just get rid of this idea of “economic incentives” as the only way to spur growth?  Incentives mean distortions at some level, and what Hoffman wants would be tantamount to nationalizing start-ups and innovation.  The government should invest with human capital, not with money.

Money doesn’t lead to ideas…ideas lead to money…please don’t buy into this crap.  At some point, ol’-money-bags-America will run out of ideas and will have nothing worthwhile to fund.  Then it will cease to have money.  That will happen if we don’t invest in human capital.

I think Obama’s stimulus and budget proposals see the value in this and have provided a lot of money to raise human capital.  I have no idea if the amount of money proposed is enough, but the initiative is there.  I want the US to be competitive and innovative, and therefore I must sharply disagree with what Reid Hoffman had to say.  I hope you feel the same way.