Everyone knows burn rate is really important for startups so that they don’t run out of money.  But its also important for startup founders, as it tells you when you will need to have generated revenues (and how much) or found investment or else when you need to get a job.  It also helps you and co-founders have discussions around when you need to get a salary or how much that needs to be.

I’m in the process of setting up Senstore with a co-founder, and she was having trouble working out how long they have till we need to raise investment – so I created this nifty spreadsheet to help her.  Hopefully others in the startup community will find it useful as well.

You can download it here: Download Personal Burn-rate Calculator

Please let me know if you find any errors or have comments/suggestions for how to improve it.

1. It leads to highly unstable economic system as interest rate mechanism is blunt tool leading to boom and bust cycle
2. Interest means that system requires continual economic growth to avoid collapse. This is incompatible with sustainability
3. Money as a scarce resources pre-desposes the system to competition rather than cooperation as with limited amount of money in circulation people and firms have to compete for it to survive
4. Money is created outside of where it’s needed, meaning people have to either earn or borrow it in order to use it. This undermines local self-reliance
5. The money is supplied to the system by profit-seeking entities rather than as and when it’s needed. This creates shortages which prevent people meeting their needs, eg in Africa
6. The money does not represent anything real, therefore a system based on its use is not an effective way of allocating scarce resources, nor does it naturally lead to incentives to conserve scarce resources

Imagine this scenario. An American tourist is visiting a small village in the South of France. He arrives at a hotel and wants to checkin. The hotelier, distrusting foreigners, asks him to leave a deposit of 20 euros while the American goes to check out the room.

As soon as the American is out of sight the hotelier rushes out to the local florist and purchases 20 euros of flowers for his wife’s birthday. The florist heads shortly thereafter to the butcher to buy 20 euros of sausages for dinner. The butcher, flush with the cash, heads over to the hotel with his mistress for a few hours naughty fun returning the 20 euro note to the hotelier. At this point the American comes down stairs, decides he didn’t like the room after all, and collects his 20 euros back from the hotelier.

The net effect is that everyone has the same amount of cash as they started with but everyone in the village has gained from trade: the hotelier with his flowers, the florist with his sausages and the butcher with his mistress. So whats gone on here? Well this story illustrates how money facilitates the gain from trade and enables the creation of value for everyone. This is essentially what happens with a mutual currency – participation of everyone allows trade to happen.

But it’s not actually what happens in the ‘normal’ reality. In that situation the American tourist is actually a rather crafty banker who insists on earning a 10% interest rate on his money while it’s on deposit with the hotelier. This time money can still pass round the circle as before, but when it gets back to the hotelier its still worth only 20 euros. Imagine the American actually lent 20 euros to each of the three participants, then there is a total of 60 euros issued but the America n wants 66 back when he returns. The only way an individual can therefore fulfill his obligation is therefore by getting 2 extra euros from his fellow village men. This system then becomes competitive rather than cooperative as money is a scarce resource which the participants have to try to capture and own for themselves. Not only do we then lose some of the benefits from trade but the ties that build the community are damaged in the process.

This second example is of course the real world, fiat, currency situation in which we live. It’s also the situation that millions of poor and unbanked people around the world find themselves in – they can’t trade even with each other because they lack the means to earn money from the outsiders who control it.

Isn’t it time we started to explore alternative systems?

I’ve been reading Bernard Lietaer’s amazing book “The Future of Money” which has opened my eyes to some very interesting alternative ways to look at the economy.  I’ve been interested in alternative currencies for some time, but he makes a very convincing case for them and gives some very practical guidance for how to structure them to make them succeed.

Microfinance has struggled with rural agricultural loans for many years.  Loans to farmers have a very high development impact as they enable farmers to buy better quality seeds, fertilizer or pesticide.  However farmers cashflows are exactly the opposite of what you want for a traditional MFI loan as farmers have regular small expenses (while the crops grow), with occasional large ones (when they need the loans) but their income is extremely lumpy – a situation further stressed by the concentration risk that lending to farmers brings as a drought hits all farmers equally, and thus defaults are highly correlated.

The ideal cashflow for an MFI loan is exactly the opposite of this: you want single, focused expenses followed by a regular cashflow stream.  Of course few micro-entrepreneurs cashflows look like this as most are extremely volatile which is one of the reasons MFI loans don’t have the impact you might hope for*.

Reading Lietaer’s book I was struck with an alternative: what about a complementary currency backed by the farmers future production?  Farmers could pay their laborers with an IOU redeemable at harvest time – saving their limited financial resources for the high value inputs.  These IOU’s could then be traded by the laborers in local towns injecting money into the local ecosystem which would create new economic opportunities for trade.  The farmers increase in yield would allow these IOU’s to be issued at a discount, say of 15%, which would reduce closer to harvest time providing a high saving rate to anyone who holds onto the scrips and a low borrowing rate for the farmer.  Furthermore local people would be insulated from rising food prices as they would be paid at the rate when the scrip was issued

We would need to put a few things into place to make this work:

1. The community would need to publically share overall debit balances to ensure farmers didn’t issue more credits than would be redeemable at harvest time – a web enabled computer or smartphone could do this job
2. There would need to be a simple way for people to exchange credits – perhaps this could be done by SMS or with shared smartphones
3. Would require community leadership to stand behind the currency and encourage businesses and services to accept the script

*Real micro-entrepreneurs cashflows are well explained by “Portfolio’s of the Poor” which demonstrates how what the poor really need are much more flexible products which combine savings and loans into single products, being closer to a currant account with overdraft facility than unsecured loan.  Lack of technology infrastructure and customer financial education has inhibited development of flexible products like this to date, however new mobile technologies may be changing this.

Recent research has shown that the case  for microfinance improving the lives of it’s clients is at best mixed – several studies have shown statistically insignificant different in quality of life indicators between clients with access to microfinance and a control group.  Some leading thinkers in the industry think that this means we should be focused more on savings than credit – that this will lead to the desired improvements.

I’m sure research is currently ongoing to test these conclusions , but I’d like to posit an alternative position – that the greatest achievement of these banks is in building a sustainable distribution channel to rural parts of the world.  A significant number of the worlds poor now lie within a reasonable distance of an MFI branch, and those branches typically have agents who travel out into the countryside around the branch.  These MFI’s also have useful data on their clients income and expenses.

MFI’s then could become powerful vehicles to distribute products on behalf of other organizations, products which could perhaps significantly improve the clients lives such as cheaper stoves or mobile phones.  The MFI’s are also in a position to finance these products making what might seem unaffordable quite reasonable – and bringing their clients access to efficiency generating technology.

I was in the British Library recently doing research to locate potential funding for Singularity University (where I’m headed later this month) when I decided to spend a visit to their treasures collection.  The library is one of the worlds major repositories of global knowledge and my visit reminded me of the amazing power that knowledge has to beget more knowledge in an accelerating fashion.

The oldest parchment I found dated from around 300BC, when books were reserved solely for the most revered of religious texts.  This lack of ability to share knowledge meant that even 1000 years later, when the Magna Carta was being signed, they were still using the same technologies.  Paper was so expensive that scribes were trained to write in tiny, barely legible script, to conserve resources.  Imagine how hard it must have been to be a scholar, squinting to read these ideas by candle-light – and that was only if you were privileged to have access to books at one of the worlds most elite libraries – books really did have the key to power and knowledge could take decades to flow around Europe*.

Then suddenly you get the Gutenburg bible, and the 180 copies printed would have taken 30 scribes 300 years to produce.  The dramatic reduction in the cost of accessing knowledge lead to the Renaissance and an explosion in the rate of knowledge being produced.

I was struck standing there, having spent the afternoon pouring over paper listings of grant making bodies (why these aren’t digitized yet is unknown to me) and feeling the tremendous power of the internet.  In my pocket was a device which could connect to the building’s free wifi and access almost any kind of knowledge from anywhere on the planet.  Knowledge that used to require a trip to a highly specialized library is now available to anyone from anywhere with a few clicks – and yet again the cost of that access has plummeted.  This access to knowledge can only accelerate the worlds technological progress.

If you are passing through London I highly recommend a trip to the treasures room – it’s free – to marvel at the history of the worlds knowledge.

*A similar story is true of maps.  These used to be so rare and valuable that errors introduced by one map-maker could persist for several centuries.  Now all I have to do is whip my phone out of my pocket and Google will show me the whole world for free.

A friend of mine was approached by an investor to launch a website, and was wondering how many shares he should negotiate.  I thought my answer would be interesting to more people.

Some interesting announcements from Google yesterday as they announced their strategy for going into the mobile payments space: The Google Wallet.

Obviously everyone has been expecting a significant move from Google in this space for sometime, but this is a bigger move than I was expecting this year.  I’d thought that they would spend most of this year running small test schemes but this is more ambitious.

I also noted the ‘free’ aspect of this – despite being told by a googler at Future of Money in February that there was no way they could launch a free payments platform.  This is probably a good strategy for them, as the data on who spends what and opportunity to push their deal platform is very large.

Despite the hype, and the huge brand value of Google, this is going to be a long slog though.  The payment world is littered with stories of people with lots of cash and brand value struggling to get customer traction – just look at all the struggling attempts to imitate M-Pesa.  They key for Google will be to focus on the consumer and deliver something they really want to use.  Good luck Google!!

There’s a great video here on the bbc’s technology site which show’s how innovators are tackling the problem of mapping Nairobi slums:

http://www.bbc.co.uk/news/technology-12164081

Another example, from Nigeria this time, is Gyst who employ armies of kids on motorbikes to collect the data (much like Google’s streetcar’s I guess!!).

This information is very important and traditionally has been difficult to obtain.  It’s useful for all kinds of reasons, for helping locate clinics and emergency services, helping companies distribute goods to their stores and helping in an emergency.

But there’s a more important trend here.  The development of this data can be combined with Smartphones to create new types of business models.  You could imagine a local version of Groupon starting up, or microfinance banks using the data to locate and recruit new clients or Africa’s version of the yellow pages or … or …

A friend recently shared with me a new site called superfluid which uses an alternative currency to promote barter between users.

I like the concept, but I think it is poorly explained when you land on the webpage, I had to read the FAQ before I understood what the site was and how it works.  I also think that the ‘pints’ currency actually confuses what is essentially a simple barter exchange – this might be linked to their poor communication skills or maybe it is just confusing.  I strongly believe a virtual currency needs to be simple and transparent and clearly add value to the process and I’m not sure this does.  Their split between P2P and business is also confusing and awkward – I think there could be a better way of handling the regulations on this.

In general I think that pureplay transactional currencies like this are of limited value, they are essentially a substitute for dollars and it’s not clear what value they add to a community beyond barter  - why would I offer my services on this site rather than oDesk for instance?  I prefer what sites like hackernews and stackoverflow are doing with reputational currencies which measure contribution to the community and provide structured rewards for participation rather than transaction, so many points for going to an event, more for hosting or leading sessions or something like that.  I’m open to exploring transactional currencies as well though if the value added problem can be clearly solved.