#akwwong

[iampjr]

“Tokenization of Energy: Crypto Mining, Proof of Work & the Reinvention of Energy Financial Markets” by @akwwong https://t.co/IL3Cfdmdxg

“Tokenization of Energy: Crypto Mining, Proof of Work & the Reinvention of Energy Financial Markets” by @akwwong https://t.co/IL3Cfdmdxg

— Patrick Rooney (@patrickrooney) March 17, 2019

https://platform.twitter.com/widgets.js from Twitter https://twitter.com/patrickrooney

[streamsmith]

Crazy to pause for a moment and realize: 4 months ago, the 4 of us, were not in 4 different cities. It still blows my mind to see how quickly things change. Only truly understanding the magnitude of what's happened, when looking back with the wisdom of hindsight.

[streamsmith]

The future of scientific research

Scientific research has long followed a four-step process: funding, doing the research, publishing the results in a paper, and commercialization. I believe that we’re at a unique point in our history where a number of changes in technology and in the broader public mindset, will allow for each step of the process to be disrupted and changed for the better. 

Based on discussions, readings, and some of my own reflection. Here is my collated view on how each part of the process is changing, and some of the implications.

1. Funding

The types of capital used for funding research will increasingly grow to be a more balanced mix between government, private, and philanthropic (pseudo-government) capital. Each source of capital will have a natural affinity and incentive towards different types of science research (be it basic, applied, data, or educational).

More collaboration will occur between the different types of capital owners to ensure that research in aggregate, is funded in an optimal way. A ‘systems’ approach to funding will be born that is fluid and always adapting. All players will need to know what the others are doing (almost in real time), and as such, new partnerships and data infrastructure will need to be built. 

2. Doing the research

Research will continue to become more modular. The ability for a research problem to be broken down into distinct tasks, and outsourced to those that have a comparative advantage in doing the tasks will change the economics of the research lab. As technology improves to make equipment cheaper and easier to use, it will be possible to outsource many of the lower value activities.

The hope here is that we’ll see a shift in science similar to what we’ve observed in tech. That is, when the cost of “doing stuff” drops rapidly, we’ll see a spike in productivity growth due to the lower barriers to entry.

3. Publishing the results in a paper

In a world where the fundamental mechanisms for communication are rapidly changing, we’d expect a similar thing to happen for scientific communication. In the context of science, communication has historically been about publishing in a journal for a scientific audience. The new order of communication will have an equal focus on communicating with and to the general public.

We’ll likely start to see labs employ “science translators”, or communications / community teams, that will focus on connecting with a broader group of stakeholders outside of the scientific community. Much of this will begin with an overlap with the field of science journalism.

4. Commercialization

Universities are sitting on goldmines of scientific IP – yet at the moment, many institutions have a fairly lean group of commercialization staff. With technology making it easier to share and disseminate information, commercialization will grow to be a more globalized, borderless business. 

That is to say, no longer will there be as heavy of a geographical constraint between research and industry. IP sourcing will change and both academic institutions / organizations will find themselves with new markets to share / acquire IP.

[streamsmith]

New York New York

Everything about New York City fascinates me. Wander to any part of the city and you’ll find unique collections of structures and landscapes – each with their own story to tell. From the city’s central jungle to the surrounding concrete jungle, there’s always something new. Moving to New York City two years ago, I already knew that I’d like it, I just didn’t realize that I’d fall in love with it.

While it was a bit overwhelming at the beginning, I quickly learned to appreciate that living here meant taking everything that the city had to offer and boiling it down to a set of things that worked for me. While New York is big enough to have almost everything, the one thing it doesn’t give you is time. The fluid nature of the city and its people means that nothing ever stays static. For this reason, everyone’s New York story will be different.

                                                      * * *

For me, my story started with a simple walk along the Hudson River on Thanksgiving in 2011 (when I was an intern in the city). Escaping from the crowd of the Macy’s parade, I managed to make it to the water, and for no particular reason, just started walking along it. Maybe it was the fact that it was a beautiful sunny day, or because it was one of those rare moments when you’ve got an entire piece of the city to yourself; whatever the case, that walk convinced me that I needed to be here.

Returning a year later to work full-time, I started to see different aspects of New York, and felt a sense of “being home”. Starting my new job, I met a ton new people who came to become my new family. Days were spent food hunting (for the best ramen, best burger, best pizza, the best “you-name-it”), seeing galleries/museums, and strolling through the city. Nights were spent bar hopping, hanging out on rooftops, or just simply hanging out.

The silliness of being young while also forming lifelong friendships was a big part of my story’s narrative. It was nice to know that you never had to really plan to find something interesting – rather, something interesting usually finds you. About a year in, I was surprised to find a sense of stability in such an inherently transient environment.

                                                      * * *

Though, as with many things in life, change comes when you least expect it. Faced with the prospect of leaving, I can’t say that I’ve tried everything that New York has to offer, or that I am “ready to leave”. That said, I understand the reality that every story has to have an ending. For mine, I’ve thought quite a bit about what it would be – coming to realize that there is really only one appropriate answer: “To be continued…”

[streamsmith]

In this moment.

Most of us who end up here,   

probably overachieved in school, 

probably have ambitions,

probably values the prestige of things, even if we don't admit that we do, 

probably cares about legacy,

probably trades upside for optionality,

probably overvalues ideas and undervalues execution,

probably a little too guided by what other people perceive as success, 

probably over thinks everything,

probably knows what they should do, but aren't doing it

most of us who end up here, are frozen in this moment, but I don't know if its for better or worse...

[streamsmith]

The energy diversification benefit

One of my favourite courses from university was in my last semester of school and on the topic of Energy Engineering.  Different from typical engineering courses, the content was not all technical. It was a good balance between the science of different energy sources (i.e. Coal, Oil, NatGas, Wind, Solar, Nuclear, Geothermal etc.), along with insights into the political, societal and environmental implications that comes along with their implementation.

We were encouraged to think critically about how to address the issue of balancing energy supply and demand in light of the ever-growing body of evidence around climate change. The final question of the final exam asked us to outline what we thought the energy mix of the future was. There was no right or wrong answer to this question – as long as it was justified with supporting evidence.

Thinking about the answer of this question from an engineering point of view, I structured my answer around a common framework that many people typically think of energy in – baseload vs peakload demand.  Baseload demand energy was the ‘always on’, reliable, and non-volatile source of energy crucial for keeping the lights on. I argued the types of energy sources fitting this category should be either nuclear or enhanced geothermal.  Peakload energy was the opposite – energy that could be ramped up or down based on demand. The typical sources of energy in this case I argued should be the renewable energies of the world (and maybe natural gas for a bit).

I generally concluded, as most other engineers would, that there is no one energy source that will dominate in the future – an all the above strategy seemed sensible to providing what we would need.

                                               * * *

Fast forward a few years after leaving that classroom, one thing that I quickly learned in the ‘real world’, was that almost everything was dominated by finance, and with that, the concept of risks and returns. This version of the world placed a heavy emphasis on evaluating decisions by trying to maximize returns whilst minimizing risk.

I also learned very quickly that minimizing risk meant being well diversified and ensuring that you were not overly concentrated in any one asset class. Relatively uncorrelated or negatively correlated assets were the keys to limiting volatility. This formed the basis for the concept of a diversification benefit – the idea that on average you’ll realize more value from the sum of the parts, than any one individual component.

Thinking about this in the context of energy, it wasn’t that much of a stretch to think of financial assets as energy sources, and financial returns as the actual energy produced. Different energy sources (like assets) can be more or less volatile than others with their production (like cashflows or returns) driven by different external factors. Going back to that course in school, I started to see that the ‘all the above’ energy concept was really just the idea of ‘diversification’ explained in a slightly different way.

                                               * * *

This got me thinking. If a diversification benefit can be calculated for a portfolio of assets, why can’t the same thing be calculated for a portfolio of different types of energy? I believe that we should think of different energy portfolios (that supply a particular population of people) in the same way that we think of financial portfolios.

Only in this way can we avoid making decisions based purely on overly simplistic economics. The case and point here in the US is the recent discovery of shale which, on the surface, makes any cost/benefit analysis based on current day gas prices conclude that other energy sources are not viable. This type of short-term thinking has the potential introduce substantial concentration risk into our energy system and substantially weaken its resilience to shocks.

Quantifying the diversification benefit is paramount to allowing for a meaningful conversation about the future of energy, and the role of different players. Those involved in different aspects of the energy industry should realize that they’re all tracking the same goal, and that everyone has a role to play. To succeed, we need to stop thinking of energy sources in silos, and to approach it more holistically as a true system.

[streamsmith]

Publically traded impact investments

One of the defining features of an Impact Investment is the differentiated mission statement(s) found within the organization or groups of organizations you invest in. Where traditional investments maximize financial outcomes, impact investments maximize social and environmental impact alongside financial returns. This is baked into the governance structure and values of the organizations – legally binding them to minimize mission drift as the organizations mature and take on additional investors.

A key certification program that has become the standard ensuring this new form of governance is the ‘B-Corporation’ certification program (or B-Corp for short). The program evaluates any given business on a standardized set of impact metrics, all the way from environmental sustainability to evaluating the strength of the organization’s governance structure. For-profits and non-profits have been accredited under the designation and include famous names like: Patagonia, Etsy, and Warby Parker (to name a few!).

Given that a number of these B-corps are growing to a point where the next logical stage of growth is to take on public equity, interesting questions are arising around:

1) the ability for these organizations to minimize mission drift and 2) the ability for investors to adapt financial theory to take environmental and social impacts into consideration in valuation and credit analysis.

My view on question 1) is that it will be impossible to have zero mission drift when you open the company up to public investors. Even if your investor-base is 100% mission-aligned, they still expect risk-adjusted returns comparable to the market. All investors have some expectation for their investments to appreciate in value, or return dividends in the long run. The balancing act here is for organizations to transparently articulate to its investors the options available for re-balancing social, environmental, and financial levers – such that net-net, the organization continues to meet profitability expectations (both from the revenue and expense side!).

On question 2), I believe that a new set of impact investment focused data and analytics will need to be created in order to characterize these new risk/return profiles.  These tools will differ widely across the different types of impact investments (the four categories were introduced in my previous articles). Systems that track and standardize social and environmental metrics (and the ability to translate these metrics into costs) will be imperative for capital decision making for investors, governments, and donors.

Of course, we won't really know how the dynamics between impact investments and investors will play out until these organizations actually IPO. At the very least, the dialogue has to start today to begin setting expectations.

[streamsmith]

Continuing to look at the impact investment framework…

Below-market rate investments

Unintuitive at first, one might wonder why anyone would ever consider making a below-market rate investment. When I started looking into examples of below-market rate investments in the context of social impact investing, I found it easier to think of it as two further sub-categorizations – “emerging” or “catalytic”. Both of these categorizations have very different ‘investors’ with very different outcome expectations.

Emerging: Investments in developing countries and/or investments that are targeted towards bottom of the pyramid (BoP) populations around the world. The component of these investments that makes them ‘below-market’ is on the denominator side – i.e., the ‘risk’ piece of the equation.

Examples here would be investments in areas like water sanitation, low-income housing, and microfinance (to name a few). Investments in these developing / BoP markets have inherent frictions that can significantly increase the risk of doing business. For the typical mainstream investor, information asymmetry is rampant, political risks could be high, and liquidity is basically non-existent.

That being said, this piece of the market boasts the most popularly quoted statistic in the impact investment space today – the potential market size of $400bn to $1 trillion of invested capital over the next 10 years. However, getting to that point won’t happen overnight. As suggested by the initial classification as a below-market rate investment, you can expect significant risks. There’s a reason why the players for "emerging” investments are mostly occupied by private funds that have significant capital (to diversify) and deep expertise in managing and mitigating the risks mentioned above. For mainstream investors, investments into the ‘emerging’ segment will always carry significant risk until the market infrastructure matures.

Catalytic: Investments in markets/communities that spurs additional investment. This is typically done through investment in market infrastructure (which otherwise would not exist / be built) or by providing early risk-capital.

Examples here can be drawn from a number of innovative philanthropic funds – the most famous of which is Acumen Fund. Acumen Fund is a philanthropic fund that deploys its donation capital in investment-like circumstances in order to create the right conditions for further investment.

These investments are more a function of the evolving world of philanthropy, where foundations are increasingly looking to invest their capital towards causes that result in multiplicative social impact. This is effectively a form of financial leverage applied to scale the “social returns” that these organizations target.

[streamsmith]

Breaking down impact investments

Impact investing has been getting a lot of press and has been touted by some as the next big thing. On the surface, the idea of making investments that have the “intention to generate social and environmental impact alongside financial return [...] targeting a range of returns from below market to market rate” sounds fairly reasonable, and for most people, generally makes sense when first explained.

However, when you dig deeper and ask the same people the question: “So, would you invest in an impact investment then?”, the conversation becomes trickier and more difficult for people to answer. For any investor , this requires a detailed understanding of traditional finance concepts like risks vs. returns for the investment. Further complicating this is the fact that impact investments and investors can take a number of shapes and forms. Without having a clear sense of what’s out there and how it compares (or doesn’t compare) to existing investments, it will be difficult for most people to understand the nuances and differences that impact investments have.

Through speaking with different stakeholders in the impact investment ecosystem (both practitioners and investors), I found it helpful to breakdown impact investments into broader categories to help orient myself to the right types of questions regarding the financial risk-return profile that investors are interested in. Only when we’re asking the right questions do I think that we can have an informed discussion about additional requirements needed for the impact investment market as a whole to grow and meet the global potential market size of $0.5 to $1.0 trillion by  2020.

General categorization framework:

For me, I typically use the definition of impact investments (as defined above) as a starting point, and think a little more deeply about what market vs. below-market rate really means. At the end of it, I came to the following general categorization framework helpful for stimulating discussions with people around the critical questions required to explain impact investments to investors:

Note: For this post, I will focus only on the market-rate investment piece of the categorization framework. Below market-rate will be covered in a future post.

Market-rate investments:

Market-rate investments are, all else equal, just as attractive to an investor as other available investments. In order for this to be possible in an impact investment, there has to be an ultimate payer for the targeted social or environmental impact generated. Depending on the payer, the investment itself can be categorized and thought of either as a “luxury” business or a “partner” business. Each will have different characteristics.

Luxury: Investments in organizations that can pass on the financial cost of added social and environmental impact to their consumer who can afford, and are willing to pay the premium.

As an example, think of an organization like Patagonia. Through their 1%  for the planet initiative, they donate 1% of annual sales to different social and environmental groups and causes. They are able to do that because their customers are willing to pay a premium to 1) cover the added costs and 2) for the brand value directly connected to the company’s mission. For Patagonia, being good for the environment is good for business.

The financial risk-return profile of this investment resembles that of a luxury goods investment -- with the “brand value” in this case being a function of the importance that customers place on social and environmental impact created.

Partner: Investments in a group of organizations where the payer for these social or environmental impacts is the government or other mission-aligned organization (i.e. corporate CSR, deep-pocket foundations). Because of this, complex partnerships are formed between the public, private, and non-profit stakeholders.

An example here would be the recent innovation of pay-for-success products like the social impact bond (SIB). A SIB is effectively a loan to a NPO that executes a program to target specific social or environmental outcomes. The loan payoff to the investor comes from an external party and is a function of the level of social or environmental outcome achieved. The first operational SIB in the US was in NYC at Rikers Island.

The financial risk-return profile for the investor in this structure does not really resemble any historical investment given the involvement of so many different stakeholders. The risk-return profile here is being codified by the early pioneers and requires a significant push for new data and infrastructure.

In closing:

Thinking about impact investments in a more targeted fashion and framing it in terms of the language that investors can understand will be paramount to growing the industry. Hopefully, this simple framework will help promote interesting discussion around how different impact investment risk-return profiles for market-rate investments can be characterized and the gaps that need to be filled. Next week, I’ll cover the area of below-market investments and the implications I see there for investors.

[streamsmith]

Defining Social Value

Over the past year I’ve been getting pretty interested in the concept of Social Finance and Impact Investing.  This in a nutshell, basically refers to the idea that we should make investments that dually targets financial, environmental, and social value. On the surface that sounds pretty reasonable, but when you drill into each of the components, interpretations can start to become murky. In particular, when it comes to social value, what does it mean? Don’t all organizations generate this type of value either directly or indirectly?

I would argue that social value is somewhat of a dynamic concept. It is whatever we as a society determines it to be at a particular point in time. For the better part of our parent’s and grandparent’s generation, social value creation stemmed from technological innovations and was executed through the ideas of capitalism. Profit maximization happened to be the most effective way to incentivize innovation that improved society. That being said, I believe that our generation is at a point where we’re seeing limitations to the traditional capitalist point of view. If capitalism followed a typical growth curve, we’d quite literally be sitting at the edge.

Knowing that we’ll hit some pretty unpleasant territory if we continue down this path, I believe that our generation is looking for something different. That “something different”, is manifesting itself today through concepts like Social Finance and Impact Investing. These concepts are the platform for redefining our definition of social value so that it can be contextually appropriate for the state of the world that we live in.

A definition of social value that considers things like financial inclusion, fairer employment and other factors (alongside profitability and the environment) forms the basis for how our generation will best add “social value” to the society we’re inheriting. This does not mean however, that we should completely scrap the old system. Rather, it means taking stock of what those before us have achieved, keeping what works, and adding what we need so that we can step onto the next growth curve.