Social Capital Value Add

by Michael Cayley & Jonathan Salem Baskin

Lincoln and Roosevelt are heralded as great American leaders in times of crisis, and their vision and fortitude are recognized as drivers of their historic accomplishments. However, we think their greatness had far more to do with their abilities to be catalysts for network effects.

UPDATE@Nov.20: More on Lincoln as master network weaver.

If we’re right, it reveals a very different interpretation of the calls we’re hearing for “leadership” to restore confidence in our economic system. In fact, there’s a good chance that no government policy gesture or announcement will mollify the worries of businesses and consumers, let alone stabilize the markets.

Confidence must emerge from the networks in which we all participate. We need to lead ourselves.

This raises intriguing issues and opportunities for corporate marketers looking to craft a way forward.

“In times of uncertainty consumers rely more on trusted relationships when making purchasing decisions,” says Dr. Brent Simpson, an expert at the University of South Carolina who specializes in understanding how social order is formed.

Stanford University’s Matt Jackson, a leading social network theorist, adds: “People’s friends and trusted social relationships are important in influencing their behavior, and people learn from and emulate their friends. Attitude certainly can play into that, especially in turbulent times.”

So what does this mean for businesses directly impacted by the financial crisis, like banks, brokerages, and insurance companies, as well as any consumer business facing the prospect of declining (or less profitable) sales?

First and foremost, you can’t brand your way out of it. You can’t rely spin doctors to declare your path through the crisis; your customers must see and verify it. While your hired guns are hatching ads and press releases to statically “position” the situation, your networks are trading information and defining it in real-time.

And that information, whether accurate or not, has absolutely nothing to do with how the brand has been envisioned, promised, or promoted. Every network is founded upon the tangible realities of action and reaction, just as the mechanism of their function is cause and effect.

How do you empower these networks to step up and lead?

* Know your networks. Invest in software to map connections between people and content.

* Move your enterprise closer to customers, employees, partners and investors. In the past we talked about flattening hierarchies; now it is time to integrate internal & external sources of value.

* Trust opportunities that emerge from the exchange (don’t just talk, and certainly don’t lecture).

* Make information a utility as ubiquitous as electrical light. If what you share isn’t affirmed and forwarded, don’t repeat it…instead, recast or reimagine it, and find new ways to prove it to your networks.

* Demand feedback and ideas.

* Stop looking for ‘home runs’ and play ‘singles and doubles’ by finding small wins, frequent trials. Make constant adjustments. Allocate resources towinners and abandon losers without blame.

The larger revelation of today’s various crises is that the era of symbolic branding is waning, if not over. The woes of the financial institutions have graphically illustrated to us why.

It was always untenable for lenders to ignore the details of weak/bad relationships and to expect instead that homes or property (i.e. commodities) would appreciate in value with no accord to the strength of home owners (i.e. the source of value that differentiated the commodity). Instead of accessing and fostering the relationship to make the loan a better product, the banker chooses to focus on the derivatives.

All businesses face similar risks. From toothpaste to software services, consumer brands invite significant downside threats when they focus on manufactured identify and perception, and not on the drivers of true business strength: connection, interaction, involvement, collaboration, consumption and the other aspects of human behavior.

There are no brands, or businesses, without the networks of people who make them real. It is in, and through, the behaviors of these networks that the Lincolns and Roosevelts for our business and social communities will ultimately arise.

Jonathan Salem Baskin and Michael Cayley met through the concurrent release of their manifestos in the 50th issue of ChangeThis.

Jonathan Salem Baskin recently released the book Branding Only Works on Cattle. This post also appears on Jonathan’s blog at http://dimbulb.typepad.com.

Hat tip to Andy Lark for this Meltdown overview from Sequoia Capital.  Restoring trust and confidence seem key to me.  Trust and confidence are at the core of credit. Trust and confidence are social.

Fabio Sabatini recommended Social Capital Blog and now I have added it to my blogroll. It is the handy work of Thomas Sander, Executive Director of the Saguaro Seminar at Harvard University’s John F. Kennedy School of Government.

He has a great post up entitled Economy dangling by the thin thread of trust that has some great links to some seminal and more recent contextual pieces on trust, the economy and the banking system.

I hung out because this vid that Thomas includes from “Its a Wonderful Life” kinda says it all …

These are painful times. I don’t know about you, but I find it difficult to focus on emergent value when practical, pressing concerns are breathing down my neck.

I am wondering about the differences and similarities between brands and financial products.

Are there similar factors at work in the debasing of traditional brand value and complex financial products? Aren’t both concepts some sort of derivative?

Will we emerge from this transition recognizing that it is the underlying relationships that contain value yielding assets not commodities like houses or oil or flavored water?

Welcome if you are an attendee or organiser of Supernova2008. 

This is a simple call to action. 

“One the key points in the history of brand management was the whole “Barbarians at the Gate” period, when the link between brand value and corporate valuations was established, touching off a wave of corporate deal making. Deals like Nabisco and Kraft commanded the headlines but the main outcome was the broad realization in global boardrooms that brands are a top priority. They require commitment, investment and special management methods.” - from the Canadian Marketing Association blog, Friday, June 13, 2008.

It is time to link social capital to corporate valuation. Social Capital Value Add is a management method designed to connect the pioneering intellectual enterprises of social capital and social network analysis to value based management and priorities of marketers.

It is designed to greet the challenges of the Network Age that you will be exploring at Supernova 2008 this week.

You can help usher in SCVA by supporting in until June 19 at www.changethis.com/proposals

UPDATE: See post: Spreading a globally oriented innovation meme in Ontario for my proposal to explore another model for seeding and managing innovation.

ORIGINAL POST:

I am not a doctor, but I play one on T.V.

That sort of covers my depth of analysis here. I am not an expert on how to make the VC ecosystem better, but about three months ago I had lunch with someone who is and we talked about the Ontario government’s approach.

A comment on a post over at www.startupnorth.com has turned into a post here because it is a good follow up to MESH, unMESH. Jonas’ points and Mark McQueen’s post both do a good job at covering the shortcomings of the Ontatrio government’s plan to resuscitate the local venture capital industry.

What’s that they say about doing the same thing over and over and expecting different results? Basically, this plan reinvests in the same players and doesn’t dedicate cash to domestic seed/venture startups.

I do not think that there is a shortage of entrepreneurial talent and energy. As some have pointed out, government regulation/programs/tax breaks are actually pretty good in Ontario. And while it is nice to see the Ontario government stepping in to address the VC crisis in this province, few authentic capitalists would argue that it is government’s job to be a venture capital market maker. Just get out of the way.

And if you are going to prime the pump with some cash, try to stimulate some competition and establish high value links to global VC markets instead of reinforcing the tightly bound social network that can sometimes stifle innovation (as I wrote about in the MESH, unMESH).

Here’s what I remember from that lunch. The nachos were good. Israel seemed to have come up with the model that has been emulated with some success.

In those cases, the government provided enough funds to convince top tier US venture firms to open a local office (with Americans contributing some matching funds). Typically a VC partner with a winning record opened the office. The startups received the value add of that experience, the experience of successful partners in the US and most importantly, a bridge into the US market for follow on rounds and marketing.

These foreign VC offices also eventually spun off talented VC partners into stand alone local firms and encouraged globally successful nationals to repatriate.

The effect was the development of a layer of global class venture capital partners and returns on investment that obliged institutional investors to open the flow of cash to the asset class. Ah-ha!

It is tough to message this kind strategy politically though. Who is going to lobby for and sing the praises for this kind of approach? Cash starved entrepeneurs who are too busy trying to get their idea off the ground? The TD Bank who just got a juicy management contract as a reward for sitting on the venture capital sidelines for years? The local VC firms who are the only game in town? Hmm … maybe this is a job for David Crow??

ONTARIO GOVERNMENT FUNDS U.S. VC FIRM TO COMPETE LOCALLY … not a very catch Globe & Mail headline if you are the Premier but it is probably the best job creation strategy possible.

What happens if the market comes to accept that social capital is directly linked to corporate valuation, as advocated by SCVA, and then FACEBOOK or a publicly traded company is found to be irresponsible with consumer data?

I believe that as the market factors social capital into stock price, the pressure will mount on companies to conform to transparent best practices regarding management of consumer data. The corporation will become more responsive and responsible in their relationship with their customers. The corporation will become more socially motivated. Where do we go from there???

Interesting story about how Facebook is accused of violating user trust in Canada.

Is There Value in Getting Involved?

This blog is an invitation to great minds from a rough and tumble practitioner of business. Criticize, collaborate, pontificate; choose your course, but please provoke the next step for this nagging collection of thoughts.  Shall we put them away and get back to the real (read: cynical) world or dedicate our life to them?

The basic idea is that a new form of social capital that is attributable to social media has emerged as a distinctive contributing factor to corporate valuation and this has changed the way business is practiced. It will change decisions that management makes and how investors choose to place their money. Over the last twenty five years markets have come to accept that the sexiest part of corporate valuation – the premium that acquirers are willing to pay over market trading value - is largely attributable to brand.

However, since Interbrand Corporation, a leading proponent of brand valuation technique since the late 1980s, began publishing its list of the world’s most valuable brands in 2001, two distinct groups of valuable brands can be observed in the top 100 – “broadcast made” brands and brand valuations that are “social network made” (this later category employing powerful network technology).

Great minds will ask: Is this distinction important? And if so, what valuation techniques should be employed to “social network made” companies vs. “broadcast made” brands?

Symbols (like a brand) are valuable indicators. Some symbols tell us that the environment that businesses operate in has profoundly changed. Netscape is a good example. It is a symbol of great corporate value creation (and new risk) enabled by the introduction of the browser. The term Web 2.0 and the Facebook/Microsoft deal are symbols of the new environment that has emerged since mid-2004 when broadband over took dial up.

Examination and discussion of these symbols is the preoccupation of a lot of great bloggers. Who did what deal? What one ego said about another? The death pool mentality … that benefits from the energies of risk takers, but also may stifle some. It is too bad that Randal Graves was right, “There’s nothing more exhilarating than pointing out the shortcomings of others, is there?”.

Dwelling on the symbols can only take us so far in changing corporate management and dealing with the complexities of an “inflection point” for business that is the result of so many factors that challenge us in so many different ways.

Social Capital Value Add is designed to focus the attention and efforts of investors, managers and their agents beyond the symbols towards building out corporate social networks that are maximized for social capital.

Over the first 20 posts or so of this blog, we’ll introduce the SCVA argument with short pithy little gems like this.

UPDATE, Sept.6, 2008 - this was before Seth suggested posting “Introducing Social Capital Value Add” and things shifted from me taking this idea as far as I can, to following the idea as far as I can.