In part I of this two-article series, I have presented a mathematical model of entrepreneurship, along with the incentives and obstacles for entrepreneurial action. In this article, I want to dissect this model in order to demonstrate how we, at a-Qube and also as a society, can help people to implement their ideas.
First, let us recap the model. The utility u gained from implementing an idea is…
u(t) = v(t) * e(t) * s(t) * √(x) — Δ * t
…with the following parameters:
- v: The valuation of an idea, or respectively, the valuation of a company that implements the idea.
- e: The entrepreneur’s equity share of the valuation.
- s: The success rate of the company.
- x: The entrepreneur’s personal preferences, which includes entrepreneurial spirit and time-preference on a scale from 0 to 1.. Scales
- Δ: The monthly salary that the entrepreneur has to forfeit in order to implement his idea.
- t: Time in months that have passed since beginning the implementation process. Note that u, v, e, and s are time-sensitive functions, meaning that their value has to be estimated depending on t.
I will now go through the parameters and analyze if and how they can be tweaked to increase the utility.
Despite what opposite, radical opinions state, ideas are largely undervalued in our society. In order for your idea to gain value, you must invest time and/or money. Oftentimes, you need to know the right people who can help you, as you are not able to implement an idea on your own. Finally, in order for your idea to be evaluated, it must be embedded in a corporate structure of some sort.
If you are already an employee of a company that can use the idea, it is easier, as your company can provide you with the necessary support. The flip side is that once your idea is implemented, your company will likely try to secure the intellectual rights to your idea. This means that you’re not the owner of your own idea and, more often than not, your compensation will be rather measly.
Sure, you can always found a startup to implement your idea, but this means that you not only have to put in the maximum effort into building your business, but, you will also have to forgo your regular monthly salary for at least some time. Needless to say, you are running a great risk when you choose this path. Let’s be honest, most startups will inevitably fail, meaning that there is a good chance that your efforts are all for nothing.
Sometimes, established companies or organizations will sponsor Hackathons, i.e. events that let you implement your idea in a quick-and-dirty way, which additionally gives you the chance to win a prize, if your idea convinces the sponsors. These Hackathons have quite a few advantages, for example, you can keep the intellectual rights over your creation, receive market-validation by presenting your idea to a wider audience, and end up with a viable MVP.
At a-Qube we want to give ideas value right from the get go and to help ideas gain value through cooperation and cooperative problem solving (CPS). The marketplace of ideas, as a metaphor for free speech, has provided us with the basis for a free society. It is our vision that an actual marketplace of ideas, where ideas are a hard currency, can provide us with the basis for free entrepreneurship.
When you rely on help from others in order to implement your idea, each party needs to be compensated, typically with an equity share. Therefore, as you progress, you will most likely witness your own equity share diminishing, as you onboard team members and investors. This is not always a problem, as these people help you increase the value of your idea. However, it is important that contributions are rewarded in a fair and structured way.
a-Qube relies on game theory and smart contracts to solve this problem of fairly rewarding contributions. This enables the trustless cooperation between users and automates the compensation process.
The free market is extremely efficient at distributing resources. While this magical property allows urgently needed ideas and products to prosper, this also translates into a higher risk of failure for startups whose products do not exactly match the demands of the market. Moreover, the market sentiment may change while the product is still in R&D phase.
This is not necessarily a bad thing, as ideas that are not needed should disappear over time, to make room for better ideas. Since ideas at a-Qube receive a valuation early on, contributors get an early feedback whether their idea is a fit for the market or not.
In our model, x can be comprised of many things, with the most important ones being personal entrepreneurial spirit and time-preference. As for a demonstration of how these can be influenced, Europe is currently right in the middle of a social experiment. Since the economic crisis of 2007, politicians, central bankers, and Keynesian economists have artificially kept interest rates low.
The rationale for this economic policy is to create a stimulus to the economy: since inflation rates are higher than interest rates, money will decrease in value over time and, instead of saving their money, people will spend it more freely. In other words, their time-preference increases due to low interest rates, which in turn decreases their likelihood for entrepreneurial action. On the other hand, loans are cheap and it does not make a lot of sense to sit on your savings, waiting for their purchasing power to drop. Therefore, there is a chance that more people will try to implement their ideas during a time of low interest rates.
The problem with this approach is that artificially low interest rates do not spell a sustainable economic growth. First of all, it doesn’t bode well for a society when their members have a high time-preference. At all costs, you want your society to be populated by financially responsible adults who set aside savings, in order to be resilient in times of crisis. Secondly, artificial booms like these always end up in a bust. In other words, Europe is preprogramming its next financial crisis.
Going into detail here, though, would break the scope of this article. If you’d like to know more about why artificially low interest rates lead to economic crisis, ask your local Austrian School economist, or watch this epic masterpiece.
a-Qube’s approach in tackling Factor x is to provide an easy and intuitive way to present your ideas to the public and to let the public cooperate in growing your idea. Gamification and the formation of prediction markets around your ideas will make the whole process enjoyable to both you and everyone who contributes to your idea.
Loss of Salary
Unfortunately, we can’t do much about entrepreneurs losing their salary when they pursue their ideas part-time, or even full-time. However, we can make the process quick and easy, so that entrepreneurs can grow their ideas in their spare time. a-Qube aims to be a platform where ideas can be exchanged and grown freely, without having to put a large time-effort into them. Moreover, we designed our system in order to give everyone the chance to contribute in the area they are most skilled in, without the need for them to be involved in the entire business development cycle.
Maybe the greatest leverage for fostering entrepreneurship is by reducing the time needed to implement ideas. Remember that v, e, and s in our model are time-sensitive functions. Time-preference comes into play here: when faced with the choice of receiving a certain amount as a valuation sooner, compared to the same amount later, they will always choose sooner. This is not least because they need to forgo less of their income this way.
Finally, knowing your chances for success is an important part of entrepreneurial calculation. As startups are the most vulnerable in their early years, their success rate will rise over time, given that they survive. However, during those first years, the success rate of a startup often hangs in the balance, where it is a risky endeavor to keep going, but the business is just successful enough to not give it up. It would be preferable for the entrepreneur to know early on, whether a business will succeed.
a-Qube tries to achieve both of these goals through prediction markets, which allow users to assess both valuation and chances of success for an idea in real-time.
Tobias W. Kaiser is a Research Associate at a-Qube. He is specialized on Tokenomics, decentralized business models, and Game Theory.