Using Artificial Intelligence to Humanize Management and Set Information Free

This essay originally appeared on MIT Sloan Management Review as part of their Frontiers Essay Series. Each essay is a response to this question: “Within the next five years, how will technology change the practice of management in a way we have not yet witnessed?”

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Artificial Intelligence is about to transform management from an art into a combination of art and science. Not because we’ll be taking commands from science fiction’s robot overlords, but because specialized AI will allow us to apply data science to our human interactions at work in a way that earlier theorists like Peter Drucker could only imagine.

We’ve already seen the power of specialized AI in the form of IBM’s Watson, which trounced the best human players at Jeopardy!, and Google DeepMind’s AlphaGo, which recently defeated one of the world’s top Go players, Lee Sedol, four games to one. While these specialized AIs can’t pass a Turing test, they can process and manipulate enormous quantities of data at a rate our biological brains can’t match. Herein lies the parallel to management: Within the next five years, I expect that forward-thinking organizations will be using specialized AIs to build a complex and comprehensive corporate “knowledge graph.”

Just as a social graph represents the interconnection of relationships in an online social network, the knowledge graph will represent the interconnection of all the data and communications within your company. Specialized AIs will be ubiquitous throughout the organization, indexing every document, folder, and file. But they won’t stop there. They’ll also be sitting in the middle of the communication stream, collecting all of our work product, from emails to file shares to chat messages. They’ll be able to connect when you save a proposal, share it with a colleague, and discuss it through corporate messaging. This may sound a bit Big Brother-ish, but the effect will be to give knowledge workers new and powerful tools for collecting, understanding, and acting on information.

Specialized AI will even help us improve that scourge of productivity, the meeting. Meetings will be recorded, transcribed, and archived in a knowledge repository. Any time someone in a meeting volunteers to tackle an action item, AIs will record and track those commitments, and automatically connect the ultimate completion of that item back to the original meeting from whence it sprang. Sound far-fetched? The AI techniques for classification, pattern-matching, and suggesting potentially related information are already part of our everyday lives. You encounter them every time you start typing a query into Google’s search box, and the autocomplete offers a set of choices, or every time you look at a product on Amazon, and the site recommends other products you might like.

The rise of the knowledge graph will affect the practice of management in three key ways:

1. Meaningful organizational dashboards

Right now, organizational dashboards — the sets of information executives monitor and use to guide decision making — are limited to the structured data that is easy to extract or export from existing systems — things like revenues, app downloads, and payroll information. These backwards-looking metrics do have value: They help managers understand what has happened in their operations and identify hotspots for troubleshooting. But AI-generated knowledge graphs will dramatically expand the scope of these dashboards. For example, managers will be able to access sentiment analysis of internal communications in order to identify what issues are being most discussed, what risks are being considered, and where people are planning to deploy key resources (whether capital or attention). AI-powered dashboards will provide forward-looking, predictive intelligence that will deliver a whole new level of insight to managerial decision making. Computers won’t be making decisions for us, but they can sift through vast amounts of data to highlight the most interesting things, at which point managers can drill down using human intelligence to reach conclusions and take actions. This is an example of what Joi Ito, director of the MIT Media Lab, refers to as “extended intelligence” treating intelligence as a network phenomenon and using AI to enhance, rather than replace, human intelligence.

2. Data-driven performance management

Current performance management processes are terribly flawed. A Deloitte study found that just 8% of organizations believe that their annual review process is worth the effort! One of the big reasons for this dissatisfaction is the lack of data to drive objective performance management. In order to manage performance, you have to be able to measure it, and in most organizations, this simply isn’t possible for the majority of their people. Senior leaders might be evaluated based on the company’s overall performance, and certain functions like sales have objective, quantitative performance metrics, but almost everyone else is relying on subjective criteria and analysis. In the absence of data, internal politics and unconscious bias can play a major role, resulting in performance management that is biased and inaccurate. The knowledge graph will allow managers to identify the real contributors who are driving business results. You’ll be able to tell who made the key decision to enter a new market, and which people actually took care of the key action items to make it happen. If performance management were a movie, it will become less “Gladiator,” and more “Moneyball.” Yet even as the knowledge graph reduces the role of guesswork and intuition, the human manager will still be in the loop, exercising informed judgment based on much better data. The result will be much more efficient allocation of human capital, as people are better matched with projects that suit their strengths, and the best people are deployed against the highest-leverage projects.

3. Increased talent mobility

As we get better at allocating human capital, organizations will need to do a better job of supporting increased talent mobility, both inside and outside the organization. In the networked age, talent will tend to flow to its highest-leverage use. Each such “tour of duty” will benefit both the company and the worker. But people are not plug-and-play devices; they need time to become productive in a new role (largely because it takes time to build the needed connections into a new network). The knowledge graph will make onboarding and orientation far more rapid and effective. On the very first day on the job, the worker will be able to tap the knowledge graph and understand not just her job description, but also the key network nodes she’ll need to work with. Rather than simply being handed a stack of files and being introduced to her colleagues, an onboarding AI will be able to answer questions like, “Who do I need to work with on the new office move? What were the meetings where it was discussed? When is our next status meeting?” She’ll also be able to ask how things were done in the past (i.e., “Show me a tag cloud of the topics my predecessor was spending his time on. How has that allocation evolved over the past 12 months?”). AIs might even ask outgoing employees to review and annotate the key documents that should be passed on to their successors. The tacit knowledge that typically takes weeks or months to amass in today’s workplace will have been captured and processed in advance so that within the first hours of accepting a new role, an employee will be able to apply that knowledge.

For all its potential benefits, some very smart people are worried about the potential dangers of AI, whether they lie in creating economic displacement or actual conflict (such as, if AI were to be applied to weapons systems). This is precisely why I, along with friends like Sam Altman, Elon Musk, Peter Thiel, and Jessica Livingston, are backing the OpenAI project, to maximize the chances of developing “friendly” AI that will help, rather than harm, humanity. AI is already here to stay; leveraging specialized AI to extend human intelligence in areas like management is one way we can continue to progress towards a world in which artificial intelligence enhances the future of humanity.

Expertise in scaling up is the visible secret of Silicon Valley

The visible secret of Silicon Valley

Silicon Valley and the surrounding Bay Area has become a global leader in innovation, technology and new industry creation. This small region, with only 7m residents, boasts more than 150 technology companies valued at more than $1bn.

Most observers instinctively conclude that Silicon Valley is great because it has a unique ability to create start-ups. Most observers are wrong. Many parts of the world now have the necessary ingredients to create start-ups. There are brilliant technical graduates everywhere. Venture capital has gone global.

This even applies to more subtle elements once unique to Silicon Valley, such as broad first-hand knowledge of the start-up process and a cultural acceptance of failure as a necessary byproduct of risk-taking. Through the internet, this essential start-up knowledge is available anywhere. Meanwhile, belief in entrepreneurship is spreading, creating receptive cultures in many regions (from “Silicon Alley” to “Silicon Glen”).

Why does Silicon Valley continue to produce a disproportionate share of industry-transforming companies like Google, Facebook and LinkedIn? Or the next generation of companies like Airbnb, Dropbox, and Uber? The answer, which has been hiding in plain sight, is Silicon Valley’s ability to support scale-ups.

When you examine the history of the best Silicon Valley companies, they quickly increase the number of their customers, revenue and raise organisational scale to fit a global market. Most of the impact and value creation in Silicon Valley actually occurs after the start-up phase ends and the scale-up phase begins.

Building great, world-changing companies requires more than just building a cool app and raising money. Entrepreneurs need to build massive organisations, user bases and businesses, at a dizzyingly rapid pace. That’s how Mark Zuckerberg built Facebook from dorm-room to the world’s most popular internet service in just six years.

So what makes Silicon Valley so good at scale-ups? The obvious answers are talent and capital. Both offer a scale-up positive feedback loops. The competitor that gets to scale first nearly always wins. First-scaler advantage beats first-mover advantage. Once a scale-up occupies the high ground in its ecosystem, the networks around it recognise its leadership, and talent and capital flood in.

Top professionals understand that they can have the greatest impact working for the market leader. Meanwhile, joining a scale-up that is clearly a “rocket ship” offers many of the financial rewards of working for a start-up, with more certainty and less risk. By attracting the best, scale-ups increase their ability to build and bring to market great products, which in turn increases their ability to scale.

A parallel calculus applies to investors. Achieving scale makes it easier for venture capitalists to decide to invest. And because networks disseminate this information quickly and broadly, a rapidly expanding scale-up can raise massive capital. This can fuel explosive, self-reinforcing growth.

Yet talent and capital are necessary but not sufficient. The key success factor is actually a comprehensive and adaptable approach to scale. A scale-up grows so fast that conventional management approaches are doomed to fail. For example, the conventional wisdom is to hire senior management with relevant experience. But if you’re Uber or Airbnb, you can’t simply put up a listing that states: “This job requires at least five years of management experience running a sharing economy service.” The only candidates that can meet that requirement already work there.

With each order of magnitude of scale, you must rethink and rebuild your organisation and processes. Sometimes through existing team members; sometimes by recruiting outside talent, such as when Mr Zuckerberg hired Sheryl Sandberg. Sometimes this means building new products internally, like Google with Gmail, and other times it means acquiring breakthrough technology like Android.

Change, not stability, is the default state at every stage and in every facet of the company. Continually reinventing yourself, your product and your organisation won’t be easy, but it will allow you to use rapid scaling as a strategic weapon to attain and retain market leadership. This is the visible secret of Silicon Valley.

This post originally appeared on Financial Times.

Acquiring proven entrepreneurs is a smart way to innovate

Proven Entrepreneurs

Nearly every company understands the urgent need for innovation. Technology and globalisation have so accelerated change that scale and power — once the greatest strengths — have become weaknesses because they impair an organisation’s ability to adapt. The problem is, the term “innovation” is used so broadly that it has become virtually meaningless.

Consider the typical initiatives that companies pursue: some create labs to innovate, yet most labs fail to help companies adapt to the future. Others try methodologies such as the “lean start-up”, but find it difficult to act on potential breakthrough ideas. What these failures have in common is that they do not focus on the right talent.

To innovate successfully requires entrepreneurial talent, which is not simply being creative, smart and flexible. What sets entrepreneurs apart is that they envision a future that defies conventional wisdom, then assemble (and reassemble) the plans and resources needed to make it a reality.

You cannot teach this by sending your people to a two-day workshop; these skills come from months and years of hard-won experience. It is also incredibly difficult to hire this kind of talent; no entrepreneur worth his or her salt is looking for a traditional job.

In Silicon Valley, we have overcome these issues by using acquisitions to bring in innovative, entrepreneurial talent. I am not necessarily talking about “acquihires”, in which technology companies acquire start-ups as a recruiting strategy. Rather, you are trying to acquire leaders who have proven their ability to build a new business. Unlike most other skills, there is no academic degree or job title that can accurately predict this.

Even when you have identified one or more great entrepreneurs you want to acquire, you need to adopt a different approach to M&A. It is not simply a matter of buying the “right” company at a good price. The real challenge is finding talented entrepreneurs who are aligned with your mission and can function within a larger organisation. You have to make sure that the body does not reject the transplant.

At LinkedIn, we used acquisitions to fuel innovation when we acquired Pulse and Newsle. Both had built killer products. But we also wanted to transplant their entrepreneurs (and the future innovations they would create) into LinkedIn — Ankit Gupta and Akshay Kothari at Pulse, and Axel Hansen and Jonah Varon at Newsle.

Similarly, our business lines — talent, marketing and sales solutions — are run by acquired product leadership (Eduardo Vivas from Bright.com, Russell Glass from Bizo and Sachin Rekhi from Connected).

To retain acquired entrepreneurs, you must build strong alliances with them based on closely aligned values and missions. In my book, The Alliance, my co-authors and I wrote about the importance of building open, honest and mutually beneficial relationships with employees. Each key employee should be on a “tour of duty”, which includes a clear objective (with agreed success criteria) that would help transform the company and the employees’ career. The same principles apply to any entrepreneurs you acquire, though their “signing bonuses” may include a few extra zeros.

When LinkedIn acquires a company, we work with the entrepreneur(s) to define a tour of duty that advances their career. Given the financial rewards they have already received, these tours focus less on compensation and more on learning opportunities.

For example, Ankit, Akshay, Axel and Jonah all came to LinkedIn with relatively little work experience; Ankit and Akshay had just finished their graduate degrees at Stanford, while Axel and Jonah were Harvard dropouts. Eduardo had jumped right into the start-up world after high school, and sold another company before building Bright.com, but had never worked at a business of our scale. Working at LinkedIn gives these entrepreneurs the opportunity to manage a far larger team, with a far greater user base — experiences that will help them advance to executive roles or to start new businesses, whether inside or outside LinkedIn (preferably inside).

Executed properly, bringing in entrepreneurial talent via acquisition can be a major win-win. Your business gets a much needed infusion of innovation, while the entrepreneurs you ally with benefit both economically and by gaining valuable experiences that advance their careers.

This post originally appeared on Financial Times.

The Information Age to the Networked Age: Are You Network Literate?

It’s said that when architects walk through an office, they see ceiling ornamentation, light sources, building acoustics. When psychologists walk through an office, they see unresolved father issues and avoidant personality disorders. When I walk through an office, I see networks. I know that makes me sound like the kid from The Sixth Sense. But I don’t see dead people. I see networks.

When you truly see networks, it changes the way you plan and strategize. You move differently.

Take job hunting. The Networked Age has radically changed this activity, and yet when you ask people how they look for a job, a surprising number continue to say they “search the job listings.” That’s the Information Age approach! In the Networked Age, you should look for people with connections to companies you’re interested in, trace the best path from those connections to people who can share useful intelligence, and then ask for introductions to those people.

Or consider investing. In my work at Greylock Partners, I don’t form an investment theory and then go search for a startup that fits this theory. Nor do I purchase ad space in the Yellow Pages and hope that talented entrepreneurs let their fingers do the walking until they find me. Again, those are Information Age approaches.

The Networked Age approach? I focus on being a great ally to my network, and developing strong relationships where the information flow is highly reciprocal. I put myself at as many key intersections in my networks as I can. As a result, my network inevitably ends up connecting me with great entrepreneurs and great investments.

A decade ago, John Battelle stressed the importance of “search literacy.” What he meant was that people who were skilled at using Google to find information had an edge over those who had yet to acquire this aptitude. In the Information Age, if you couldn’t make sense of an increasingly information-rich world through effective search capabilities, you’d be culturally marginalized, just like a person who couldn’t read street signs.

Now, those who can conceptualize and understand networks – both online and off – have an edge in today’s fast-paced and hyper-competitive landscape, where the speed with which we can make informed decisions is critical. To wit, the subtitle of my forthcoming book is “Managing Talent in the Networked Age” — I think the networked age changes everything.

I like to use the word “literacy” in this context because it suggests a fundamental skill, a capability you must possess in order to effectively navigate the world. An illiterate person, a person who can’t read street signs or complete job applications, has limited opportunities compared to others who possess these skills. A literate person moves freely and capably through the world.

So how do you know when you’re network-literate? I think in terms of three levels that signify ascending competency:

Apprentice: Using network technology

Journeyman: Establishing a network identity

Master: Utilizing network intelligence 

Apprentice: Using network technology

At this most basic level of network literacy, you’re part of some networks. You have a Facebook profile, a LinkedIn profile, etc. You’re using these networks to keep in touch with people you know, and on occasion, you may even use them to facilitate new connections.

While you may not be completely fluent yet, you understand that Facebook is more than just a place to announce what you had for lunch – it’s a place to strengthen personal relationships. Similarly, you know that LinkedIn is more than just a repository for your digital resume. You use phrases and keywords with deliberate intention, to maximize your discoverability by the kinds of people you want to be found by.

In the case of my own LinkedIn profile, for example, my headline isn’t “Executive Chairman of LinkedIn.” It’s “Entrepreneur. Product Strategist. Investor.” That’s because my LinkedIn profile is targeted primarily to entrepreneurs who might want financing from me.

(You’d be surprised at how many people simply use their current job title as the headline of their LinkedIn profile. This isn’t wrong per se. But ultimately the headline on your LinkedIn headline is the first thing many people will see about you in a professional context – so it’s an excellent place to choicefully craft your network identity. And your network identity is larger – or at least it should be larger — than your current position and company affiliation.)

Another way to make yourself more findable by the kinds of people you want to be found by are to join the same LinkedIn groups that they’re participating in, or to follow relevant companies and individuals within the domain of your industry. Once you start thinking in terms of how the people you want to be found by might in fact find you – and tailoring your profile to maximize such potential discoveries – you have begun to think in a network-literate way.

Journeyman: Establishing a network identity

Once upon a time, we exercised unchecked authority over our identities, verbally air-brushing our resumes into highly idealized portraits of ourselves, carefully vetting the references we chose to vouch for us. In the Networked Age, however, we’re all visibly and enduringly enmeshed in networks – even the so-called “self-made man” is a highly annotated specimen, with readily apparent links to the colleagues, mentors, institutions, and other entities that have helped shape the contours of his identity.

Indeed, we’re all the sum of an ongoing conversation that we initiate and propel, but which colleagues, customers, and even competitors contribute to as well. And while we once relied upon the broad strokes of resumes to define us, now we’re often judged by far more granular, network-derived metrics of influence and authority: Who retweets our tweets? Who comments on our Medium posts? Who shows up on LinkedIn as a 1 degree connection?

In the Networked Age, your professional identity expands well beyond your job title and the company you work for. You’re not just “you” anymore. You’re also who you know,how they know you, what they know about you, who they know, and so on. At the Journeyman level, this way of thinking is becoming second nature to you. You understand that your identity is multivariate, distributed, and partially out of your control – your network helps shape your identity too.

Increasing your network literacy also means understanding other people’s network identities. Tell me the name of a person, and I’ll think of the network around them. I always see a person as part of a larger web of relationships. When I met Jeff Weiner, LinkedIn’s current CEO, I’d already had conversations with many of my own trusted colleagues about him. I had relationships with people that he had relationships with, and these strong points of network connectivity gave me a clear signal about Jeff and the kinds of people he trusted and valued most. I had a network portrait of him. And based on that portrait, I knew I wanted to build a strong relationship with him.

Master: Utilizing network intelligence

Spend five minutes watching your LinkedIn feed or Twitter timeline, and it’s clear that information proliferates even faster in the Networked Age than it did in the Information Age. Consequently, the ability to extract the right information at the right time is more crucial than ever. Search literacy is an important starting point, but in today’s high-velocity world, network literacy is increasingly crucial too.

In the Information Age, the New York Times, the Wall Street Journal, CNN, and eventually Google were typically people’s “first reads,” i.e., their default sources of new information and intelligence. Now, if you’re fully network-literate, your networks are your first reads – because you’ve consciously built up pipelines of people who reliably deliver information that is highly significant and relevant to you.

There is a whole “dark net” of critical-edge information that hasn’t made it into newspapers and blogs, information that exists only in people’s heads. In the past, such information was difficult to access for all but the best-connected and most persistent individuals. Now, it’s often just a few keystrokes away.

And if you’re fully network literate, you’ve taken the time to understand the information flows within any given network. You know who the news breakers are. You know the thought leaders, the critics, and skeptics within a particular domain. You’re familiar with their preferred sources and biases.

While platforms like LinkedIn, Facebook, and Twitter certainly qualify as information Costcos, one-stop shopping for data en masse, the quality of your connections – and the strength of the relationships you have with them — generally matters more than the quantity. Ten extremely informed individuals who are happy to share what they know with you when you engage them can tell you a lot more than a thousand people you only know in the most superficial way.

But remember, using networks well is always a two-way street. People who exhibit the highest levels of network literacy know that the more relevant, high-quality information you share with others, the more such information you’re likely to receive. To be truly network literate is to always be thinking of how you can add value to the networks you’re a part of, and to make it a priority to turn connections into relationships, and relationships into alliances.

What Do You See When You Enter a Room?

These days, it’s not just Internet entrepreneurs who should see networks everywhere they look. When architects walk into a room, they should see networks. When psychologists walk into a room, they should see networks. In the Networked Age, we’re all like the little kid from The Sixth Sense. If you’re not seeing networks when you enter a room, you might want to check your pulse.

Learn how to support the development of network literacy inside your own company in my forthcoming book (with Ben Casnocha and Chris Yeh) titled The Alliance: Managing Talent in the Networked Age.

Photo: Rawpixel & HunThomas / shutterstock

Remix: LinkedIn

The World’s Bank: How Crowdfunding is Disrupting Old Banking

4 Crowdfunding - Rocio Lara

By Julie Hanna and Reid Hoffman

In San Francisco, Teresa Goines is breaking down deeply entrenched cycles of poverty and crime, one bowl of peanut butter stew at a time. Old Skool Café, the 1940’s supper club she started, gives jobs to at-risk and former gang youth. When banks turned her down, 41 people she’d never met crowdfunded a $5000 loan, putting their faith and money in Teresa, a former corrections officer with no restaurant experience in a city where most new restaurants fail. Their bet paid off. She repaid her loan in full. Each year, 25 troubled young people, most who have tangled with the law, get their lives back on track. Today, Teresa has an even bigger dream of opening Old Skool Cafes across the nation and revitalizing communities everywhere.

As high-tech investors, both of us obviously value high-impact, fast-growth companies that attract massive global user bases. Such companies can scale quickly, create thousands of jobs, and help the U.S. improve its export economy at a time when its share of global economic output is falling. But we also recognize that most businesses are small businesses. Indeed, out of the roughly 27 million businesses in the U.S., 21 million of them have no employees – they’re sole proprietorships. And approximately 4.6 million of the 5.9 million businesses that do have employees have nine or fewer.

Thus, small businesses are a crucial component of the American economy. Yet when people like Teresa Goines try to create new businesses and jobs, banks shy away. According to Biz2Credit, an online devoted to small business funding, big banks currently reject more than 8 out of 10 loan applicants, and small banks reject 5 out of 10. Some estimates suggest that investment in small businesses has dropped as much as 44 percent since the Great Recession in 2008. That’s tens of billions of dollars that fueled the economy and helped our communities thrive – gone, completely eviscerated. Meanwhile, twenty-one million people are underemployed or unemployed. Globally, it’s far worse, with half the planet’s population living on less than $2 a day.

While talent is universal, opportunity is not – even in the land of opportunity. The greatest threat to our long-term prosperity goes far beyond the financial crisis and the health of a few banks on Wall Street that have been deemed “too big to fail.” The real threat we face is a global opportunity crisis. In both the developing and the developed world, billions of people don’t have access to jobs and capital.

That’s why we’re on the board at Kiva, the pioneering crowdfunding platform where citizen lenders invest small sums in micro-entrepreneurs all over the world. Nearly 1.3 million borrowers like Teresa Goines, living in 76 countries, including the U.S., have received more than half a billion dollars in loans. 99% of these loans have been repaid in full, flying in the face of traditional banking assumptions about credit and trust.

Kiva is no longer unique. Today, an exploding crowdfunding sector is making billions of dollars of capital accessible to upstarts and entrepreneurs. Over 700 crowdfunding marketplaces, led by the likes of IndieGogo, Kickstarter, and Lending Club, are democratizing access to capital, fueling entrepreneurship and innovation, and profoundly changing the face of philanthropy at unprecedented scale and impact.

Citizens Lenders Democratizing Access to Capital

One of the best ways to fuel widespread prosperity is by helping Main Street invest in itself. Crowdfunding relies on the wisdom of crowds to identify fund and unleash entrepreneurial innovation far more efficiently than the credit rules of banks can.

Call it the emergence of a “world’s bank” – a system built by and for the people, delivering credit in America and across the globe in a radically decentralized, highly scalable, and crucially equitable way.

The World Bank funds institutions. The world’s bank funds people. For decades, the World Bank has existed as a top-down mechanism to spur economic growth in developing nations. In contrast, the world’s bank picks up with a nimble, bottoms-up model that is far more attuned to on-the-ground needs of micro-entrepreneurs and their communities worldwide.

The motivations for citizen-lenders run the gamut from altruistic to creative to financial. Kickstarter and IndieGogo funders typically get some type of reward in return for their capital. Kiva lenders are paid back by micro-entrepreneurs, albeit with no interest. Services like Lending Club offer lenders a way to earn interest on personal loans.

In the same way that citizen journalists have shaken up Old Media, citizen lenders may upend Old Banking. Already, Lending Club has made $4 billion in personal loans in the U.S. alone. Kickstarter lenders have applied over $1 billion to more than 60,000 projects in just five years. More than 60 projects obtained at least $1 million in funding, and one attracted over $10 million. There are over 1 million Kiva lenders residing in 198 countries. Finally, a new change in federal regulations has opened the market for equity crowdfunding, further empowering innovative entrepreneurs via marketplaces like AngelList and CrowdFunder.

Still, it’s easy to underestimate the impact of crowdfunding, dismissing these purpose-driven marketplaces as a simplistic way for do-gooders to easily support pet causes, yet incapable of driving massive structural change that can improve prosperity for all, not just a select few. The opposite is true.

The Surprising Sophistication of Crowdfunding Platforms

Crowdfunding can easily go where traditional banks cannot. Take Erastus Kimani, a 73 year old schoolteacher turned entrepreneur, who lives in a remote part of Kenya without indoor plumbing, much less indoor banking. Erastus attracted lenders from all over the world. They crowdfunded $1700 which allowed him to triple the production of his ceramic stove liner business. Using just his mobile phone, Erastus applied for, received, and paid back his loans in full. He did it all without bank officers, ATMs, or even a computer.

More broadly, crowdfunding is a sophisticated and pragmatic expression of democratic values and ideals. It recognizes that person-to-person connections are the essential fuel that powers the Internet. Just as Old Media behemoths struggle to keep up with the growth of people-powered content, traditional financial institutions can’t scale like crowdfunding platforms can. Imagine what it would cost a traditional bank to hire enough loan officers to match the network intelligence that millions of citizen lenders provide.

As technology continues to virtualize money, brick ‘n mortar banks have become as superfluous as traditional bookstores. Ornate buildings designed to convey trust and dependability just make loans look more costly. Meanwhile, the world’s bank lending infrastructure is increasingly made up of people like Erastus Kimani and his mobile phone. His status as a dependable borrower qualified him to join a growing network of trustees and vouch for other micro-entrepreneur borrowers in his village of Maragua, Kenya.

2 Erastus

Networks of Trust

Remember George Bailey from It’s a Wonderful Life, the small-town banker who helped local entrepreneurs achieve self-sufficiency and resilience? Or the stories of Bank of America founder A.P. Giannini, who in the wake of San Francisco’s devastating 1906 earthquake and fire famously made loans to distraught home and business owners on the basis of a handshake?

Crowdfunding multiplies George Bailey and A.P. Giannini. It uses early 21st century technology to return us to early 20th century ideals of loyalty, reciprocity, and community. The result is highly efficient trust networks based on reputation. It replaces credit score-based lending by faceless institutions with a person to person character-based lending model. It creates connections and stories that intermediary institutions are hard-pressed to facilitate. 34 individuals put their faith in Erastus Kimani. Not surprisingly, he paid back both of his loans in full.

Wall Street is evermore focused on creating increasingly exotic, abstract, and toxic instruments of speculation with little to no societal benefit. Our financial institutions are becoming less and less tied to producing tangible goods and services. In contrast, crowdfunding re-humanizes our economy. It makes the act of lending more fulfilling for both lenders and borrowers, brings meaning to commerce, and creates tangible social and economic value at a mass scale.

Philanthropy Exponentialized

While many traditional attempts to address poverty often set up recipients for a vicious cycle of dependency, crowdfunding platforms tie opportunity to innovation, accountability, and self-reliance. They create an ecosystem where debt, applied to entrepreneurial ends rather than mere consumption, can create value for people rather than simply becoming a millstone around their necks.

In the case of Kiva, lenders invest again when their loans are repaid. Over time, $25 has the impact of $250. $100,000 has the impact of $1 million. $1 million has the impact of $10 million. It’s philanthropy exponentialized.

Google and a growing number of companies and results-driven philanthropists have begun creating multi-million-dollar evergreen loan funds that are tapping the power of this leverage. Imagine if the Small Business Association, the Fortune 500, the World Bank, and even Wall Street followed suit and began directly supporting those three billion overlooked micro-entrepreneurs like Erastus Kimani and Teresa Goines through the world’s bank movement. It would profoundly accelerate our quest to end the global opportunity crisis.

Every technology revolution has its early adopters and its laggards. The early adopters fueling the world’s bank and democratizing access to capital understand that the true path to prosperity lies in recognizing the critical role that micro-entrepreneurs and small businesses play in establishing healthy and resilient economies. They understand that crowdfunding starts with individuals but quickly scales. First, it changes a borrower’s life. Then, a family’s. Then, a community’s. Finally, it changes the fate of nations.

juliereid

Julie Hanna is an entrepreneur, investor, and chairperson of Kiva.org. Reid is a board member at Kiva.org.

This post originally appeared on LinkedIn.

(Photo credits: Crowdfunding logo via Rocio Lara. Erastus photo via Kiva