Collaborative Consumption

Sharing and Caring towards Entrepreneurial Success

‘Collaborative consumption’ may not have caught your attention yet but one day soon it will.  This is a general trend in entrepreneurship, which aims to do good for the environment, by utilizing more effectively existing resources.  It has been around for a while but it jumped out at me most recently when I encountered a new business launched by moms in Brighton (UK).  The venture called Unihomeswap is the idea of Herimone Pask and allows moms to literally ‘swap’ their children when they go away to college.  The idea is that parents who have a spare room while their child is away might be able to take a student from the city where their child is studying.  An organized swap of this nature saves families money and allows them to get to know the people their children are staying with.  The website allows families to explore swapping options while paying nominal membership fees ($40) for the site.  This is a great example of collaborative consumption – which is the idea that society can utilize more effectively the resources that we have under our control if we find more effective ways to share what we already have.

The more you look for examples the more evident it becomes that this is a wider phenomenon that offers a host of entrepreneurial opportunities and is set to become a trend that will grow.  Take for example parkatmyhouse.com in the US.  Here home owners can generate a second income by renting out parking spots and drivers who want to park near difficult to park places like busy stations; airports and sports venues can find an unusual way to fulfill their parking needs.  The site brokers relationships and generates fees and it has become a particularly useful source of extra income for churches and synagogues.  If you want to swap a house for a vacation you can now do this at a host of sites (e.g. homeexchange.com and homeforswap.com) and a range of other swapping sites have grown recently.  Now you can swap: books; baby goods; clothes; kitchen equipment; makeup; and, tools.  You can also share bicycles and cars.

One might reasonably ask though – all this sharing and swapping is great but is there money in it?  To best illustrate the entrepreneurial potential you need only look at ZipCars.  ZipCars has been described as a, ‘nouveau car-rental company’, but really it is one of the first collaborative consumption companies to IPO.  It launched its public offering in April 2011, debuted 60% up on its IPO price and closed the day at a value of $1.2billion.  ZipCar’s IPO raised around $174million dollars for investment some of which was used to acquire its UK rival Streetcars.  Its model has also changed the rental industry and now many of the rental companies are offering alternatives, for example, WeCar (Enterprise Rent-a-Car) has just teamed up with Georgia Southern University to offer a car sharing service across the campus in Statesboro.

Such sharing and swapping – is also ‘caring’.  It enables all of us to save money as an incentive but ultimately we are using fewer resources because by sharing and swapping we are using our resources more efficiently.  At the vanguard of this movement is Freecycle; here you can give items away that you don’t want and would have thrown out and receive items you need for free.  If you’re bootstrapping a new venture, even one that has nothing to do with collaborative consumption, this is one site you need to know about.

Death of the Lemonade Stand

There are few things that are more important to the American entrepreneurship psyche than the lemonade stand.  Kids across the country learn their first lessons in entrepreneurial behavior and capitalism when running one.  Some of America’s most successful entrepreneurs gained their ‘spirit of enterprise’ from their first greenback gained from one.  And yet if you have spotted recent stories the lemonade stand is under threat.  There can be no greater metaphor than this for what might be going wrong with American capitalism and economic governance.

It started in Montgomery County where a county inspector ordered the Marriott and Augustine kids to shut down their stand after they had ignored a couple of warnings and then fined their parents $500 because the kids didn’t have a vendor’s license[i].  The kids in this instance were raising money for paediatric charity.  Later after much negative press the county permits director allowed the children to move the stand to another location and waived the fine.  Then in Midway police shut down a lemonade stand ran by three girls trying to make money for a trip to a water park in Savannah because the girls didn’t have the license and permit required for their enterprise[ii].  In the words of the children, “They told us to shut it down,” 10-year-old Skylar Roberts reported. “It’s kind of crazy that we couldn’t sell lemonade,” said Casity Dixon, 14. “It was fun, but we had to listen to the cops and shut it down.”  Then Forbes reports a nationwide ‘inexplicable war on the lemonade stand’ citing examples from Iowa and Wisconsin, as well as, these two from Georgia. Of course Forbes announced August 20th its unofficial National Lemonade Freedom day[iii].

Most of the reports of this phenomenon came over as ‘perplexed’ or ‘mildly amused’ but the truth is these examples should worry us all and are perhaps a metaphor for what might be going wrong with the American spirit of free enterprise.  It eventually happens to all successful nations.  There are great periods of endeavour, a sense of purpose and a desire for freedom that drive new nations and their economic intensity.  People create, they build and they hope for a better future for their children.  As nations become more mature though they create ever increasing bureaucracy, laws that all nations need to govern get increasingly complex until they suck the life-blood from that spirit of innovation, creativity and enterprise that the nation needs to succeed.  The ability to create new jobs dies as the weight of compliance becomes too heavy and the spirit of enterprise buckles under the complexity of the law.  We might be perplexed or even amused by these reports but we should be worried about the future of entrepreneurship in this country if a few young kids, who are harming nobody, get their lemonade stands closed.  It is a symbol that the bureaucracy governing enterprise has become too heavy and too inflexible.  Not only does such enforcement damage the ‘fun’ that these kids are gaining from their enterprise, it damages the aspirations they may have gained for entrepreneurial endeavour.   If this is how we are treating our kids’ lemonade stands then how are we treating our entrepreneurs?  And where do we think the new jobs will come from?

New tax credit for start-ups in Georgia

The Angel Capital Education Foundation and the Kauffman Foundation have both announced recent changes to Georgia’s start-up tax credit.  Apparently more than twenty states currently have tax credits for early stage investment; from 10% to more than 50%.  Angel investors have been lobbying to make their states more attractive to investors and Georgia thanks largely to the support of Atlanta Technology Angels and the Technology Association of Georgia has enacted a 35% income tax credit up to $50,000 per individual per year.  The credit went into effect on January 1st 2011 and will be in place for three years (capped at $10 million per year).

Prizes drive innovation and entrepreneurship

An interesting article in Slate Magazine was just passed on to me by Jim Williams the Chair of our Center Advisory Council.  The article ‘Prize winning policy’ notes that at the end of 111th Congress in December the America COMPETES Act went unnoticed.  The act changes the way the federal government supports private-sector R & D and they hope to do this through prizes.  As the article notes “So-called “inducement prizes” (as opposed to “recognition prizes,” like the Nobel or the MacArthur or the Pulitzer) make up a major part of the Obama administration’s grand strategy”. 

Such prizes have a long history and do appear to work. The British government in 1714 offered £20,000 measuring longitude at sea, Napoleon offered a prize for innovations in food preservation which led to the develop of canning and the $25,000 Orteig Prize encouraged Charles Lindbergh to make his trans-Atlantic flight.  The X prizes are the most recent private sector version, for example, the 1996 Ansari X Prize for advances in commercial spaceflight.

Read the full article here

Corruption and entrepreneurship

What a great focus for a paper.  The September 2010 edition of Entrepreneurship Theory and Practice has a number of interesting papers, the first of which is work that examines how institutions in transitional economies impact on corrupt practices.  The authors are principally from the University of Mannheim in Germany and focus mainly on post-Soviet Union, Central-Eastern European and Western Industrialized states.  The authors’ state: “We look in-depth at the East-West gap in corruption, and why entrepreneurs and small business owners become engaged in corrupt deals”[i].   

The paper draws its theoretical foundations from institutional economics and points out that economic activity cannot be analyzed without consideration of the institutional context within which it occurs.  This is a key point of sociology in general and any small business owner will tell you – it does matter how external factors impact on your business and this does affect business performance.  The institutions and culture within which businesses grow also guide the norms and behaviors which are deemed acceptable in a society.  The paper reviews the literature on transitional economies and institutional frameworks but highlights that study has not focused very much on informal mechanisms like corruption.  The study draws a number of hypotheses from current research about an entrepreneur’s likeness to get involved in corruption. 

i)                    Excessive red tape will increase corruption.

ii)                   Less business-friendly financial institutions will lead to greater corruption. 

iii)                 Inefficient court systems and law enforcement will lead to corruption.

iv)                 Chances of engaging in corruption will decline when entrepreneurs have legal alternatives to bribes.

v)                  Widespread informal social norms and illegal business ethics which justify corruption will lead to an entrepreneur’s chances of engaging in it.

vi)                 When entrepreneurs belong to closed social networks corruption increases

vii)               The reputation that a public bureaucrat will stick to a deal after a bribe will likely enhance the chances that the entrepreneur will engage in corruption.

The researchers used the existing data from the ‘The World Business Enviornment Survey (WBES) 2000 and used a sample of 2.576 firms in 20 transition and mature market economies.  The 20 countries were classified into different regions and the data were analyzed in a comprehensive way.  The researchers draw the following conclusions.  First, they observe major differences between the levels of corruption in the different regions.  The highest level of corruption was observed in the Trans-Caucasus (Armenia; Azerbaijan, Georgia), followed by Central Asia (Kyrgyzstan, Kazakhstan, Uzbekistan), Russia and Central-Eastern Europe (Czech Republic, Hungary, Poland, Slovakia, Slovenia, Estonia and Lithuania), with much lower levels of corruption demonstrated in North America (USA and Canada) and Western Europe.  The study identified that transaction costs resulting from compliance with legal rules and regulations are lowest in the West.  In Russia and Central Asia entrepreneurs spend the most time on dealing with ‘red tape’.  Companies not paying duties or not observing trade regulations are most common in Trans-Caucasus and least common in the West.  The results showed that the more companies have to spend time on interpreting regulations the more likely they are to engage in corruption, likewise efficient financial institutions that are supportive of businesses can also be linked with lower rates of corruption.  A weak or inefficient legal system with poor enforcement of property rights was also found to impact on the levels of corruption found in the different countries.  Where entrepreneurs can seek legal alternatives to bribery (they use the example of being able to go to an honest superior) there are lower rates of corruption.  Finally, if corruption is endemic in society or if competitors are corrupt entrepreneurs are more likely to use this as a strategy.

The authors discuss the outcome from a research perspective but what does all this mean for entrepreneurs and policy makers?  The somewhat obvious point is that corruption varies significantly between transitional economies and the West and those seeking to do business in these economies will need to be realistic about this.  That while entrepreneurs and small businesses in the West often complain about red tape we should perhaps be grateful that we do not operate businesses in the Caucasus.  For policy makers there is clear message.  Be careful how difficult you make bureaucracy for small businesses in an economy – the more red tape there is the more likely you will increase corrupt practices.  Failure of the financial system to address the need of businesses is also a concern as this to can lead to greater levels of corruption.  A concern here for the West may be the credit crisis for entrepreneurs and the impact this might have on tax avoidance.  Another key message here is that if entrepreneurs have to compete with corrupt competitors they are more likely to engage in corruption themselves.  One assumes in order to be able to compete on level playing field.  Clearly, then enforcement and the quality of enforcement not only discourages corrupt practices it also prevents them filtering across an entire industry.


[i] Tonoyan, V., Strohmeyer, R., Habib, M. and Perlitz, M. (2010), Corruption and Entrepreneurship: How Formal and Informal Institutions Shape Small Firm Behavior in Transition and Mature Market Economics, Entrepreneurship Theory and Practice, 34 (5): 803-831.

Trade credit and entrepreneurship

As this blog is dedicated to entrepreneurship and as I read the published journals in the subject it seemed reasonable to start reporting on this research and what it means in practical terms for entrepreneurs.  The first article is published in the most recent edition of the International Small Business Journal (Vol. 28; No. 3) by two professors from the University of Murcia in Spain.  It looks at what influences the availability of trade credit and studies over 47,000 small businesses across Europe (Belgium; Finland; France; Greece; Spain; Sweden; UK). 

The paper runs some rather complex models on a large dataset and certainly seems like a robust piece of work.  We all know that trade credit is important for small firms and this research confirms its value as a means of supporting the viability of businesses.  During recessionary periods trade credit, like other forms of credit, can decline and this can negatively impact entrepreneurial businesses that are already struggling.  They show little variation between different European countries in terms of the availability of trade credit, which contradicts findings of other studies.  It shows that firms who have greater access to capital markets are more likely to grant their customers credit.  This means that larger more solvent firms are more likely to be more generous when working with their counterparts.  It seems that access to external financing is often leveraged on behalf of smaller firms by larger firms so as to help them purchase products and services.  Also firms with higher profit margins and firms facing a reduction in sales are more likely to provide trade credit.  Firms also provide more credit to other firms when they appear to offer the potential to grow and hence purchase more goods and services.

What does this mean though for your typical entrepreneur?  Well it appears it would be wise to choose larger suppliers and check out their ability to borrow, as their creditworthiness may impact on the credit terms they are willing to offer you.  It may also suggest that those great credit terms might in fact betray a supplier who is making wonderful profit on what they sell you.  You might even want to bargain on price a little harder and worry a little less about the credit; ultimately those nice credit terms might be costing you.  Finally, if you’re growing, or can at least make the supplier think you are likely to grow, you will ultimately become a more valuable customer and get better credit.  Frankly, if you are growing rapidly your cash flow challenges may well demand those improved terms.  None of this is rocket science but it is nice to have a large well researched study confirming the logic behind some of these issues.

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