As an economist at heart and by training, I found the following article in The Economist fascinating as economists are finally starting to measure to value of entrepreneurs.

Click here for the full article (http://www.economist.com/PrinterFriendly.cfm?story_id=5601890).

Here are selected portions (admittedly not too selected as they represent about half of the article):

THE French, according to George Bush, have no word for them, economic theory has surprisingly little room for them, and it is a mystery why anyone would choose to be one of them. Entrepreneurs are the leading men of capitalism, the venturesome protagonists who move the plot forward. But economic theory gives them few if any lines to read.

Translated literally, entrepreneur means one who undertakes—one of life’s doers. To start a firm you need gumption, and to succeed you need an eye for a gap in the market. That in turn demands alertness, as Israel Kirzner, of New York University (NYU), has pointed out.

…

Most innovations are merely incremental improvements on something that already exists: a slightly better mousetrap, as Mr Baumol puts it. A rare few represent discontinuous breakthroughs, such as the incandescent lamp, alternating electric current or the jet engine. All of the above, according to Frederic Scherer, professor emeritus at Harvard, were introduced not by the regimented R&D of established corporations, but by scrappy new firms, twin-born with the invention itself. Mr Baumol ventures that most breakthroughs arise this way—the offspring of independent minds not incumbent companies. He has two explanations for this. First, radical innovation is the only kind lone entrepreneurs can do; and, second, they are the only ones who want to do it.

The first explanation seems paradoxical. Breakthroughs are, by definition, more difficult than routine innovations. Surely, they should be beyond the meagre means of the independent entrepreneur? But as Mr Baumol points out, building the Kitty Hawk was much cheaper, and less complicated, than upgrading the Boeing 737 to the 747. Genuinely new ideas are often breathtakingly simple. They grow more elaborate as improvements and modifications are laid on top of them. If you are the first to discover a tree, you get to pick the lowest-hanging fruit.

The second explanation is more intuitive. Revolution is a risky endeavour. Of 1,091 Canadian inventions surveyed in 2003 by Thomas Astebro†, of the University of Toronto, only 75 reached the market. Six of these earned returns above 1,400%, but 45 lost money. A rational manager will balk at such odds. But the entrepreneur answers to his own dreams and demons. Mr Baumol thinks a “touch of madness” is probably one of the chief qualifications for the job.

Economists have little to say about madness, of course. But they can point out its economic implications. If money isn’t everything to the independent inventor, he is likely to be cheap. Indeed, he will be the lowest-cost provider of the kind of risky, painstaking endeavour that lies behind the breakthrough inventions. Big firms could pursue the big ideas, but since they would be employing professionals not amateurs for these quixotic ventures, they would have to pay them in money, not love.

Thanks to Mr Baumol’s own painstaking efforts, economists now have a bit more room for entrepreneurs in their theories. But it remains a mystery why anyone would want to be one.

– End of Quote

As for why anyone would want to be one, well that’s the easy part – what else could we be? As amazingly ambitious dreamers with no time for the rules and bureaucracy of corporations we would not function well in traditional organizations. We are much happier pursuing our dreams – and if we fail – while disappointing, it’s ok because we will have enjoyed the process and learned invaluable things in the process – besides there is always another dream to pursue 🙂

While summarizing my trip in Argentina in January, I did not mention that I spent 10 days in Buenos Aires investing in one company and building the tech team for another.

I made a small investment in DineroMail. DineroMail is a Latin American Paypal equivalent allowing person-to-person payments in Argentina, Mexico and Chile. Like Paypal it is mostly used for auction payments.

The company was created during the bubble days but has withstood the subsequent Internet and Argentinean crashes. It is break-even and has been growing 10-15% month to month for the past 18 months.

What’s interesting is that it’s not just a carbon copy of Paypal. In Latin America credit cards are far and few between and ACH transfers are not common either. As these represent more than 95% of the funds into Paypal, adapting the model required creativity. DineroMail ended up doing partnerships with local convenient and retail stores allowing you to put money in your account and withdraw it from thousands of retail locations.

The company is also rolling out a program by which it gives a debit card to all its customers with a non-zero balance in their account. It also provides shopping carts to over 1,000 Internet sites in Latin America.

The fee structure is somewhat higher than Paypal’s – DineroMail charges 5-8% of the retail price for the transaction, as a result of the added costs of allowing funds to be obtained and deposited at retail.

Combined with a further Latin American roll-out and continued increases in Internet and ecommerce penetration in the region, I am reasonably optimistic on the fate of the company even though it may take a fair amount of time (5-10 years?) before it reaches a respectable scale. However, for me it’s a project worth doing no matter what as DineroMail is an enabler and complement to my core project which I will be describing shortly!

Conclusion: If you are looking for a Latin American billing system, contact me 🙂

Life is essentially a large prioritization exercise – how much time you allocate to work, your significant other, your friends, your family, etc. Even within companies as there is only so much a team can do, a manager’s single most important task may be setting the right priorities for the people reporting to him.

This is even more true when selecting business ideas. I am a big believer that we can only do a few things well. It’s hard to be fully committed to a project if you are working on five projects simultaneously. In other words, I would rather put my eggs in a few baskets and watch the baskets carefully than invest in many different projects.

That is why I am only an investor in 4 companies. Even then, 2 of the companies are complements and the other 2 companies are partial substitutes trying to solve a single problem. In other words, I only have two underlying markets to think about.

Within those 4, my capital and time is allocated in direct proportion to my perceived market opportunity and my personal opportunity (e.g.; at what valuation can I invest, how much of the company can I own). My time commitment is then directly correlated with the size of the potential outcome.

In other words, of the 4 companies I have 2 small investments where I help out a little on strategic thinking and business development, but spend no more than 5 hours a week total for both companies. I have one investment where I am large investor and chairman of the board. I defined the product specifications, managed the fund raising, hired the key team members and set the direction, but again, at this stage that requires less than 10 hours per week. Finally, I am co-founder and co-CEO of a new startup where I am spending the bulk of my time trying to get the company off the ground.

I already spoke of my small investment in Phanfare, I will speak of the other three companies soon especially as I need the community’s creative juices to crack two of the very difficult problems two of the companies are facing.

On another note, all of the above does not mean I would not invest in 1 or 2 more projects or be on the board of 1 or 2 more companies so keep sending me business plans and ideas! At the very least I will give you honest feedback. Besides I love the intellectual stimulation of meeting new entrepreneurs and talking through new ideas! However, it does mean that the bar is set very high. Good luck 🙂

To date, I have not really talked about what I am working on – partly because I was figuring it out and partly because I felt it was better to have something substantive to talk about before going public with an idea – e.g.; a product launch. However, as the community can bring significant value in shaping the products and ideas, I have decided to change that philosophy and will shortly start describing what I have been up to in the past few months – other than traveling for fun 🙂