There is an interesting trend in the high-tech industry. Not long ago, public goods were considered as an area for charity. Now, entrepreneurs, investors and top managers of corporations saw in them an opportunity for profit. In this essay we will go through the main issues of the public goods market. In particular, we will deal with the definition, business models and growth directions.
What is public good?
In economics, there are two interesting criteria for the classification of all goods: access parallelism
(rivalry) and accessibility
(excludability). Fortunately, it is non-parallelizable (rival) if using it by one participant reduces its accessibility for the rest. Benefit belongs to the category of open access (non-excludable), if it is not possible to restrict individual access or if such a possibility is not voluntarily used. Using these two criteria, you can divide all benefits into four types:
- Private goods (private goods) - non-parallelizable and restricted access: iPhone, Ford Focus.
- Common -pool goods - non-parallelizable and unlimited access: meeting rooms in an office building, fish in a river, support service.
- Club goods (club goods) - parallel, but limited access: cable TV, Windows 7.
- Public goods ( public goods ) - parallelizable and unlimited access: national defense, roads (except toll), GPS satellites, Wikipedia, fireworks.
Examples of public goods are easy to find in various areas: urban infrastructure, education, public order, peace, energy, environmental protection, health, transport, tourism, financial systems. In this article we will discuss the opening up opportunities for entrepreneurship in the field of public goods
Public goods and related concepts
Let's recall a few definitions. A non-profit organization
is a legal entity that does not pay dividends to its owners; instead, all proceeds are spent on production and development. A charitable organization
is a special case of a non-profit organization in which the goal of the work is a kind of "good goal". In many cases, it is about helping those who cannot help themselves. Charitable organizations may receive certain tax benefits. Social entrepreneurship
is a commercial activity aimed at good goals and beneficial social change.
The creation of public goods can be both commercial enterprises and non-profit. Public goods may be charitable in nature (a documentary about healthy habits), and this applies to luxury items (satellite group for GPS navigation). The public goods market
is a combination of all manufacturers and users of products with unlimited and parallel access. Players in this market can be both non-profit, charitable organizations, social entrepreneurs, and purely commercial structures. A common challenge for all players is finding a sustainable business model.
To participate in the public goods market, both start-up investment capital and a permanent source of income covering operating expenses are required. In search of investment capital, you can turn to standard venture capital investors, in particular, to funds with a specialization in public goods ( Omidyar Network
, Good Capital
, Unreasonable Institute
). Secondly, you can start the development of the company, using grants from charities and government organizations. Further, in some cases, there are programs of soft loans for enterprises in the public goods sector. Tesla Motors has received a credit line
in the amount of over $ 400 million to create a factory for the production of electric cars. Finally, an enterprise in the creation of public goods can receive significant non-financial support. This may be the help of volunteers, free premises, technology and data.
The parallelism and unlimited access to public goods gives rise to the “free rider problem”. Everyone hopes that someone else will finance the creation of the product. As a result, we have a shortage of public goods. There are three main approaches to solving this problem:
- Promised payment and direct donations. The manufacturer may ask users to pay a certain share in case the benefit is created. If the amount of the promised payments reaches a payback, the benefit is created. Otherwise, the money is returned. American sites Kickstarter and Spot.Us allow you to collect the promised payments under this scheme.
- Common boiler system. Community members donate money and delegate decisions to some intermediate organization. This organization orders the production of public goods in the interests of its members. The state and regional authorities, charitable foundations, professional associations and housing and public utilities operate in the common boiler system.
- Additional products. The producer of public goods may also receive income from side and ancillary products of its activities. The World Wide Fund for Nature (WWF) sells the right to use its logo in the form of a panda (for example, for credit cards). In many cases, sold the right to the name (ROSGOSSTRAKH Russian Football Championship). Mozilla gets the funds to develop a Firefox browser from auctioning the main search engine choice. In addition, public goods manufacturers can sell an improved version of their product (pro account in LiveJournal, PBWorks ) or use an advertising model (Yandex Search).
Most likely, in the coming years, the need for public goods will only grow
. The capital of charitable organizations is growing, developing countries are becoming richer, corporations are thinking about social responsibility, and in socialist and authoritarian countries (Sweden, North Korea), the state assumes expanded functions of caring for the population. An entrepreneurial approach to public goods brings many benefits. Commercial companies can attract venture capital and the best employees, invest in production facilities and research laboratories, conduct long-term programs to develop their resources. The public goods sector includes perhaps the most important problems of mankind: health care, transport infrastructure, environmental protection and education.
Now we see two large groups of public goods based on web technologies. The Internet is an ideal tool for creating marketplaces
. CharityNavigator connects philanthropists with charity programs, Kiva associates third world entrepreneurs with individual lenders, Kickstarter allows artists and photographers to find sponsors for their art projects, Spot.Us performs the same function for investigative journalism, CatchAFire helps to find volunteers, Alter Eco promotes fair trade products . The second group of technologies will consist of open knowledge
. KhanAcademy and SupercoolSchool publish lessons, Ushahidi collects reports from disaster sites, Wikipedia organizes encyclopedic knowledge, TED - scientists and politicians, OpenCongress publishes drafts of draft laws, and Ashoka collects stories of social entrepreneurs. Public web technologies also include mobile applications, specialized search engines, e-government, payment and financial systems, social and communication services.
There are a number of biases
associated with public goods. It is believed that government contracts and support from charitable foundations are built on corruption
and personal connections. There is a deal of truth in it. However, government agencies have a genuine demand for the creation of public goods. A number of funds operate under open market schemes. And corrupt suppliers still need subcontractors to fulfill their orders. Further, public goods are associated with non-profit organizations and charity
. In reality, the sphere of public goods is much wider than essential goods for earthquake victims in Haiti. City fireworks or the Internet system for paying fines are created by commercial companies. Thus, public goods is simply a sector with indirect business models. According to the following prejudice, sponsorship cannot be a basic business model for high technology. Here it should be remembered that museums, classical music, and many branches of education and environmental protection are supported by sponsors. Thus, recognition of the sponsorship model
is only a matter of time.
What awaits us ahead?
- Improving the market for the sale of public goods. The main obstacle in the production of public goods is the complexity of sales to the state and charitable foundations. In this issue, I want to aspire to the level of the Amazon with its one-click purchase mechanism. We need specialized sites for the sale of technological solutions to local authorities, large organizations (universities, hospitals), professional associations and foundations. We need a single platform to search for corporate sponsors. Open lists of public goods needs are needed. Need a history of existing programs and sponsorships. DonorsChoose , Kickstarter, zakupki.gov.ru are all steps in the right direction, but the space for improvements is simply enormous.
- Sponsorship network. At one time, the media industry was divided into two horizontal layers: ad networks (collect money and ads from advertisers) and publishers (create and publish content). Similar stratification awaits us in the public goods sector. At the first level, sponsorship networks and charitable funds will accumulate resources from interested parties. This level is in the field of corruption and squeezed into the non-profit sphere. The second level is directly companies that produce public goods. Thus, the level of sponsorship networks assumes the main problems and opens up net business opportunities for technology companies of the second level.
- Increase budgets. We need transparency and competitiveness in the formation and spending of budgets to create public goods. In particular, we need a unified approach of companies to social responsibility programs. It is necessary to place government orders in new technological clusters (Skolkovo, Berlin, Chile ). Increasing the demand for innovation is the main way to launch an ecosystem, attract talent and investment.
- Price reduction. It is no secret that the prices for the creation of public goods are too high at times. This is the reverse of the fact that there is no open market and sales are hampered by the bureaucracy. Now there is a unique opportunity to repeat the success of classic discounters (Walmart, SkyExpress, Pyaterochka) in the production of public goods.
- Development of metrics and measurement systems. The easier it is to measure the public benefit of a product, the easier it is to find money for its production. Metrics are particularly needed in the areas of education, environment and health.
- Increase investment. The first investment funds operating in the public goods market appeared in the west. I want to see more investments and loans for this sector.
- Creating a connected community. Remoteness from Washington is one of the reasons for the relatively small contribution of Silicon Valley to the creation of public goods. Success in this sector requires a constant relationship between innovators, the state / funds and consumers of public goods. To create a community, conferences, educational programs, role models, exchange of experience, and a base of market participants are needed. Need an exhibition and sale of "technology of the public good" with the direct participation of government agencies.
- The entry of large corporations into the public goods market. International corporations (Apple, HP, Sony) view public goods as a field for charity, and not as a business line. As a result, for projects in the public sphere (for example, iTunes U), resources are allocated on the leftover principle. This comes from the reluctance to communicate with government procurement and engage in work with charitable foundations. As soon as corporations realize the profit potential in the public goods sphere, the situation will begin to change.
- Creating public goods is a promising area for business. The private goods market is gradually passing under the control of large corporations. Increases competition in the most profitable areas. And at the same time, the business potential of high technologies in the field of public goods is practically not realized. Thus, for the next wave of startups, great opportunities are open in such areas as health care, environmental protection, e-government, transport, education and employment.
- The nature of public goods dictates the choice of a business model. If your product belongs to the category of public goods, then your sources of funding will be charitable foundations, the state budget, sponsorship packages and related products. In the past decade, the advertising business model has driven the bulk of innovation in the field of Internet technology. Now comes the time of the sponsorship business model. Further, it should be understood that public goods are both private. The product, being public for end users, is a private blessing for its sponsors. This is especially clear on the example of local public goods (knowledge transfers, marketing companies for tourist zones). Thus, the classical methods of marketing of private goods can be applied to attract sponsors of public goods.
- Technological progress in creating public goods is inextricably linked with the development of market mechanisms for financing these goods. First, we need efficient and transparent platforms for buying / selling / sponsoring public goods. Secondly, we need generally accepted metrics of the benefits of these benefits. Fulfillment of these conditions will drive progress in creating public goods and is necessary for rapid growth.