Wednesday, 10 April 2013

Markets 2.0: Social Finance. Affinity Capital


October 22, 2006

More updated material is available in the Presentation

Melanie Swan


The long tail, smart mobs and social networking are driving the evolution of economics to Markets 2.0. Social networks have been important venues for self-expression and interaction and now, with an increasingly linked online populace, are starting to add a new and important functionality, virtual aggregation for group power, both economic and political.

Two key concepts in Markets 2.0 are Social Finance and Affinity Markets. Social Finance is the virtual aggregation of dozens, hundreds or millions of people for the purpose of conducting an economic transaction. Social Finance is also known as crowd funding and crowd sourcing.

Affinity Markets are marketplaces where transactions can occur based on affinity attributes. Not just is the sweater red, woolen and made in China (legacy attributes) but under what conditions was it made, were renewable materials used, did female entrepreneurs make it (affinity attributes). Affinity Markets are also known as directed capital, cause-based capital and (in online aggregations) virtual affinity groups.

Platforms are also an important emergent phenomenon in Markets 2.0; free technology platforms to develop one’s own applications, such as Prediction Market platform Zocalo and virtual world/MMORPG platform Multiverse.

Markets 2.0 have the ability to completely disintermediate traditional financial institutions by providing instantaneous, cheaper, directed capital with more effective results.

Transition to the Post Monetary Economy

Why is World of Warcraft so addictive and successful (currently having about 6.5 million worldwide subscribers)? Why do 90% of Americans report dissatisfaction with their jobs? People are using virtual worlds to obtain what they cannot in the physical world: venues for ongoing competition and winning, interacting with a wide variety of others and having agency - the continuous ability to act and experience the impact of one’s actions, all of which are above all fun.

People are shifting time, energy, financial resources and attention to virtual worlds and other 2.0 Markets as these venues for fun, status, actualization and competition have exploded. It is fun to bid, compete and win in prediction markets, loan marketplaces, peer-to-peer donation and other new online spaces. Investing $2000 on Prosper in $50 increments provides 40 times to get the feeling of winning, even if automated capital deployment is selected. Markets 2.0 seamlessly merge work and fun, for example, Seriosity’s World of Warcraft version of enterprise software.

The shift to virtual worlds and other 2.0 Markets is also a transition to a post monetary economy. Monetary currency is supplemented and potentially replaced by ideas, reputation, merit, capability and whuffie. In the Western world and increasingly every where, a declining percentage of total income and total time need be devoted to basic survival needs.

Social Finance and Affinity Markets are now inexorably underway and will have an indelible impact on how all economic transactions are conducted. There is already a proliferation of models and types of transactions and payment mechanisms and infrastructure to support this. The full potential of the transformative impact is largely unperceived. Traditional economic institutions will likely be displaced if they do not evolve in response.

What will it be like when people can get their mortgage and home equity loans online from peer finance, when anyone can have a local portfolio manager for commodities in India, when million-member virtual BuyGroups bid for insurance and healthcare services, when synthetic economies nominate and finance virtual candidates for physical world office, when Socially Responsible Debt means that states without measurable social progress cannot get their bond offerings financed? How soon will eBay and Amazon begin merchandizing reputations and allowing portability?

Markets 2.0 is about earning and deploying capital and reputations and there are examples emerging in all of the usual areas of economic transactions:

  • Affinity Investing
  • Affinity Philanthropy
  • Affinity Purchase
  • Affinity Earning
  • Virtual World Affinity Economies

Affinity Investing

Affinity Investing is the ability to direct and pool investment capital using much more specific parameters than in the past and not just basic definitional attributes but cause-directing the capital with a much closer link (possibly interactive) to the end use and results of the investment.


Socially Responsible Investing (SRI) Mutual Funds

Although green is the new black, social responsibility is just one of many possible affinity attributes that can be applied to stock investing. SRI’s implementation has been growing over time. Initially, SRI meant mutual funds that did not hold tobacco, firearms and alcohol stocks. SRI leaders like Citizens and Calvert have begun to include a second level of in-depth screening for corporate governance, diversity, labor, environment, human rights and other factors.

Other Affinity Equity Investment Parameters

There are many more dimensions along which firms can be evaluated. The next obvious affinity attributes are measuring social impact metrics (such as those developed and implemented by the Social Venture Technology Group), number of patents or open source licenses (degree of innovation), levels of carbon emissions and adherence to other green policies, degree of workforce diversity at all levels and on-site daycare, etc.

Private Equity Affinity Funds

Like SRI public equity funds, private equity affinity funds also have a “double bottom line” with both financial and social objectives to meet, and are an important means of directing social capital to non-public entities through portfolio managers who screen, facilitate and monitor the investments. GoodCap is the innovator and pioneer in private equity affinity funds, with a $30 million fund currently being raised. This new asset class provides a purpose-driven investment vehicle for investors and unifies formerly disjoint debt/equity investing and philanthropic activities.


Socially Responsible/Responsive Debt (SRD)

Socially Responsible Debt (SRD) is the loan/bond analog to SRI stock funds. Articulated as one part of Urban Logic’s Sustainable Resiliency strategy, SRD is debt that quantifies and measures good behavior through loan covenants, for example cities issuing bonds based on their public transportation utilization rates, infrastructure replacement costs and pollution levels. Bond investors could select state bonds based on their affinity parameters, for example, states with high levels of alternative fuel usage, technology job creation and acceptability of progressive policies (stem cell research, gay marriage, euthanasia, etc.). Bond funds would develop just as SRI equity mutual funds for example the “Boomers Balanced Fund,” or “Green Bond Fund,” affinity products which would appeal to the values and financial return goals of retiring boomers.

Peer-to-peer (P2P) loan marketplaces

Online lending marketplaces like Prosper and Zopa are taking advantage of social networking to virtually aggregate lenders to fund loans, a model which could replace traditional financial institutions. This new “eBay of loans” concept is the biggest breakthrough in credit products since junk bonds. The ease and immediacy of obtaining sizeable web loans, essentially “Get Money Now!” cannot be overstated.

Prosper loans are unsecured, and have a $25,000 maximum amount ($4,000 average) and a three-year term. The interest rate is set by lenders bidding down from the borrower’s maximum acceptable rate. Borrowers list their loans for free, agreeing to have their credit ratings posted publicly (an interesting proof of utility triumphing over privacy in transparency matters). If the loan is funded, Prosper takes 1% of the proceeds from the borrower and 0.5% per year of the average balance from the lender, substantially shrinking the 10% spread in traditional bank lending and borrowing. Borrower defaults are reported to credit bureaus and a collection agency is hired but lenders main default risk strategy is diversification and small investment amounts ($50 minimum). As of October 2006, approximately $15 million has been borrowed on the Prosper platform.

Lender capital can be directed to specific loans based on recipient profile attributes (geographical, gender-specific, political, economic, race, ideological, commercial affiliation, alumni, etc.), for example, lending to African American single mother Katrina-displaced entrepreneurs or libertarian vegan senior citizens in Vermont or NRA member males in Oklahoma; any and every affinity profile is supported.

Groups are a feature of the Prosper marketplace, in hopes of stimulating low default rates through social pressure like the Grameen Bank and other micro-finance models, but Prosper’s groups are bit more like multi-level marketing than full affinity financial communities in their current implementation.


Grameen-style peer-to-peer (P2P) micro-finance is also available through Kiva, where investors can make cross-border loans in $25 increments to developing world entrepreneurs who have been screened by onsite Kiva Field Partners. Despite Kiva’s cause-directed venue for world-is-flat capital, it falls short by failing to build social community; lenders cannot click and see who else has committed what amounts, even if by anonymous handle.

Peer-to-peer (P2P) real estate investing

Real estate is another area where peer-to-peer aggregation could be very effective as affinity groups pool money for real estate investments which are prohibitively expensive to access otherwise. Peer-to-peer real estate investing also has a better risk profile than going it alone since as with the peer-to-peer lending model, individuals can invest small amounts in multiple projects, effectively syndicating the risk of the asset class.

Prediction Markets

Prediction Markets are an important emerging phenomenon in behavior and social finance where millions of individuals log their predictions of the outcomes of a variety of events ranging from political elections to microprocessor wars to celebrity status. Either fictitious or real money or points are used to keep score.

Economists like Wharton Professor Justin Wolfers have shown that the crowd wisdom of Prediction Markets often beats traditional forecasting methods. Prediction Markets are becoming an increasingly important venue for price, opinion and information discovery. There are several existing prediction markets and free platform software like Zocalo for users to develop their own.

A few Prediction Markets examples:

Hedge Street (A real financial exchange using real money)

Long Bets (affiliated with the Long Now Foundation)

Reputation Building through Affinity Investing

As successful World of Warcraft players started listing their attained levels on their resumes as a proxy for achievement, team-work, leadership and tech-savviness, individuals are also building reputations online with Affinity Investing. In fact, as eBay and Amazon showed, it may be impossible without a reputation and the trust it engenders to transact at all or at least in scale in online communities.

With today’s online linked world and Affinity Investing, reputations will only be more important and should be portable across sites, maybe federated reputations can work before universal identity and login. In fact, as Dick Hardt of Sxip suggests, eBay should merchandize out user reputations, which could be achieved with web widgets or badges. eBay may not realize that they should actually be in the reputation business in their next phase, just like PayPal may not realize they could be the escrow business of the future.

Prediction markets, including RMM (real money markets) like HedgeStreet, allow users to see the track record of other investors/speculators and people are building potentially commercializable reputations for themselves via their virtual performance (another way to self-actualize on the Internet).

Online brokerages could enable investors to share their portfolio (stocks, not amounts) externally and publish historical returns. Lending marketplaces like Prosper could also give lenders the option to make their lending portfolios publicly viewable with site-validated returns.

Affinity Philanthropy

Philanthropy 1.5 has several examples where donors have been able to be more active and cause-directed with their capital, e.g.; donor-advised funds and the Social Venture Partners model where donors can donate money and time/skills, however the current emergent power and potential in affinity philanthropy is in the spontaneous assembly of crowds to support affinity causes.

Crowd sourcing, peer-to-peer donation finance

Peer-to-peer funding, essentially lots of people (dozens, hundreds) each contributing $10-50 is taking off both in loans (Prosper, Zopa) as discussed above and also in donation support for a wide variety of arts, humanitarian and software development projects. What is different in Philanthropy 2.0 is the explicit and tangible agreement of the expected action from the recipient in exchange for the donation.

Fans are financing bands at Sellaband, movies at A Swarm of Angels, and citizen vlogging at HaveMoneyWillVlog (via an easy-to-use crowd finance Wordpress plug-in which also lists the deliverables and a feedback loops for on-project progress). Austin-based Fundable is a clearing house crowd funding site suggesting project financing for individuals, non-profit organizations, relief efforts and software development projects on its platform.

A minimum contribution of $10 is generally required and the total amount to be raised is still low, ranging from a few hundred to a few thousand dollars. PayPal, in a burst of extensibility which could redefine its future business, provides escrow functionality and other mechanics of crowd pledging and funds disbursement.

Open Basic Research
Any entity, individual, non-profit, business, group, startup, NGO, etc. could finance its longer-term less-monetizable R&D efforts via OpenBasicResearch Affinity Philanthropy.

A response to declining NSF, other government and corporate research budgets, OpenBasicResearch would be a larger-scale application of the Fundable and HaveMoneyWillVlog models where individuals, research teams and companies could post projects to solicit funding and interested parties could pledge and fund (tax-deductible) anonymously or publicly. Project results would be open-sourced and collected into a meta-level cohesive whole for public benefit, highlighting that negative results are also quite useful in the extension of human knowledge. Deliverables could be monitored online with subsequent project phase funding not released until approved by project sponsors.

Personal Foundations and Bequests

As with crowd sourcing donation support, individuals or groups could compete and bid for personal foundation and bequest resources. Economics and software tools will now be allowing individuals without substantial wealth to set up personal foundations. With software plug-ins, anyone could set up a donations section on their website to organize and conduct their charitable giving and publish their supported organizations/projects.

Affinity Purchasing

Affinity Purchasing includes both selecting purchases of goods, services, information, etc. by their attributes and executing the purchase transaction in aggregation with others making the same purchase (GroupPurchasing).

Legacy Affinity Purchasing

Affinity Purchasing is not new. Organics, hybrids and buy-local are familiar examples. Again social responsibility (SR) is one possible affinity attribute out of many.

Stewardship Council Certified Products

In Collapse, Jared Diamond cites the Forest Stewardship Council who certifies worldwide forestry practices and lumber products and the Marine Stewardship Council which does the same for seafood. Some test examples suggest that customers are willing to pay a premium, perhaps as much as 20-30% more for a socially-responsible product but some degree of price parity is probably necessary for large-scale acceptance. Although, the organics and hybrids examples have shown that people are willing to pay an SR premium.


GroupPurchase is the aggregation of multiple buyers for the purpose of commanding a volume discount in a purchase transaction, an idea that is also not new and has been deployed for years in community and vertical purchasing co-operatives. What is new is the scale over which GroupPurchase can now be deployed on the Internet.

There was an early wave of GroupPurchase with Web 1.0 companies: Ariba (focus: spend management) and Commerce One (now Perfect Commerce, focus: Supplier Relationship Management (SRM)), GroupPurchase (focus: small business) and Ctribe and DMob (focus: consumer electronics). Only the enterprise group purchase companies remain currently and have shifted their focus to supplier management but the time is ripe to re-deploy GroupPurchase in the consumer space.

GroupPurchase is an obvious and monetizable feature for social networking communities such as MySpace, Facebook, etc. It should just be a matter of time until community members can click to add themselves to a virtual BuyGroup for any of a variety of desired purchase items. Price, timing and other specifications could be set.

With the massive numbers of online community members, insurance is a natural product. Large groups of individuals can disclose and pool their personal attributes and bid for coverage from insurers. Insurance providers could have even more liquidity and flexibility to diversify their costs and risks in ways that they are only able to do now with employee groups.

Affinity Purchasing 2.0

Marc Smith’s Project Aura at Microsoft Research is an indication of the next level of what Affinity Purchasing could be like in the future. Project Aura is a mobile software application for scanning product barcodes and building a database of reviewed products. The basic product information could be mashed-up with trusted affinity attributes including conformity to a diet program, SR ranking, celebrity endorsement and many other user-selected personal affinities.

Urban Logic envisions a similar version of this, the Means Meter, mobile device software that would scan a product and immediately identify its rating on a scale of user-specified values (e.g.; labor-friendly, ISO 14001-compliant factory, degradable materials, etc.). Urban Logic sees the Means Meter fitting into a broader system of SR banks and credit cards with user rebates for SR purchases.

Affinity Tagging

Especially with RFID tags, the future could include a proliferation of Affinity Tags on products in physical world, Internet and metaverse world shopping. Affinity Tags could be physically visible stickers or certification symbols, or information that pops up when the item is scrolled or scanned or if permissioned, beeps to signal the user of its compatible affinity status (a more subtle and user-controlled version of the targeted advertising example in Minority Report).

Purchasing Personalization

Just as people may want website widgets that post and update the donation activity of their personal foundations, they may also want to post their affinity purchases via website widgets called shopcast badges by ThisNext who offers the functionality. Of course merchandisers are beyond excitement with this word of blog recommendation mainline to customers and there are ample business model innovations to share margin/referral fees with recommenders or their personal foundation donation recipients. Celebrity gossip and shopping site PopSugar is an under-implementation of Affinity Purchasing by not identifying (or even connecting product items to celebrities at all) the apparel and accessories worn by celebrities and offering an immediate click to buy. Click on the fab sunglasses Eva Longoria is wearing to buy them now! would be a much better option.

Affinity Earning

Individuals and organizations are starting to be able to use affinity attributes to identify each other for remunerative projects. Employees are demanding more progressive work environments and corporate values which mesh with their own affinities. Employers are using more granularity to select their teams.

Top Coder is a website for programmers build reputations by competing to deliver the best coded solution to a given problem. The earned reputations confer status which presumably could be monetized depending on the objective of the coder. World-is-flat geographically disbursed virtual teams can be assembled ad-hoc based on reputation and skill affinities for the purpose of executing a project and then disbanded.

Rent A Coder is a reputation-based marketplace for software programming projects for development teams or individuals to bid for paid projects. Like the eBay model, a site reputation is crucial to securing projects. Presumably reputation-based online clearinghouses for project work will continue to expand.

Attribute signaling to clientele

Businesses have long been signaling to their clientele with affinity attributes such as minority or women-owned, GLBT friendly, se habla español, etc., or via their values such as Hewlett Packard’s tag phrase “HP Invent” and IBM’s “Think.” The increasing granularity of attributes would allow for a new level of signaling between goods and services providers and consumers, and as with Purchasing Affinity website shopping widgets, facilitate referrals.

Virtual World Affinity Economies

MMORPG (massively multiplayer online role-playing game) video game (Ultima Online, EverQuest, World of Warcraft, Lineage, etc.) and metaverse world (Second Life, Sims Online, There) economies are rapidly eclipsing the GDP of many countries in the size and volume of their economic activity. For example, metaverse world Second Life has been recording $7M USD of transactions occurring in-world per month since July 2006, and surpassed one million registered residents on October 18, 2006. Economist Ed Castronova was one of the first to formally measure MMORPG economies and estimated that in 2004, the economic activity in and around EverQuest was comparable to the economy of Namibia. (Reference)

There are two aspects of virtual world economies:

  • Intra-world trade – barter or in-world currency based goods and services transactions. Example currencies: Linden Dollars (Second Life), Simoleans (Sims Online), Gold (Ultima Online, World of Warcraft)
  • RMT (real money trade) - the exchange of virtual world goods or currency for physical world currency. RMT is conducted informally and through currency exchanges, on eBay (thousands of concurrent auctions) and through other dedicated sites, which often have superior exchange rates.

Virtual world economies represent the great proliferation in which economic agents can conduct affinity transactions. The lines between physical and virtual world presence will continue to blur, as will the relevancy of the location of economic transactions. Physical world transactions, for example some degree of Wells Fargo banking and financial services can be conducted in-world. Internet shopping research can occur more effectively in a 3D world where product information and prototypes can be reviewed in an interactive multidimensional environment aided by an immediately available dedicated sales avatar, or not. Instead of reading forums for product reviews, in-world meet-ups could provide live interactive user reviews.

Political Affinity Markets

Concurrent with the evolution to Markets 2.0, political participation can become truly popular and democratic (assuming universal Internet access and usability) with daily issue opinion polls and voting by email. Political views could be instantaneously polled at the local, state and national levels. Social sites could post running polls or indices, real-time political thought barometers that became sources looked to by other voters for opinion-sharing instead of marketing efforts by the politicians themselves. Fundraising, campaigning and lobbying could all be carried out via Political Affinity Markets. Accessible politician online voting records and more of a markets approach to political issues would trigger a significant shift in the role of politicians, becoming more of the architects and executors of SR Debt programs for their constituencies for example.


The shift towards the Affinity Economy has been portrayed here at the level of the individual, as the individual becoming an increasingly powerful economic agent in all manners of earning deploying capital and reputation in an expanding number of affinity-driven marketplaces.

The same Affinity Economy can operate even more powerfully at the community level, initially for physical communities such as families, neighborhoods, cities, counties, municipalities, states and nations and eventually for virtual economies.

Exhibit A: Key Players and Possible Future Markets 2.0 Events

Markets 2.0 Area
Key Players
Breaking News to watch for over time
Affinity Investing
Equity: Socially Responsible Investing (SRI) Mutual Funds
· Citizens and Calvert to launch different flavors of SRI funds
· Mainstream mutual fund companies (Fidelity, etc.) to offer SRI and other affinity funds
Debt: Socially Responsible / Responsive Debt (SRD)
· Institutional investors (CalPERS, etc.) requesting community metric data in bond offering presentations (e.g.; pollution levels, public transportation utilization, degree of green infrastructure)
Debt: Peer-to-peer (P2P) Lending Marketplaces
· Prosper to hit milestone numbers ($ loans, # borrowers) $100M in loans (currently $15M)
· Zopa to launch in the US
Real Estate: Peer-to-peer (P2P) real estate investing
· Website(s) offering P2P aggregated real estate investing
Prediction Markets
· Increasing press citation and accuracy of Prediction Markets; e.g.; regarding election outcomes, operating system wars, opening weekend movie receipts
· eBay/Amazon announce portable Reputations
Affinity Philanthropy
Crowd-sourcing, Peer-to-peer (P2P) donation finance
Sellaband (band)
Fundable (multiple areas)
· Increase in site activity
· Launch of more sites including
· Availability of web 2.0 widget to personalize website with social donation activity
Affinity Purchasing
Legacy Affinity Purchasing
Organics, hybrids, local
Affinity Purchasing 2.0
Microsoft Research’s Project Aura
Urban Logic-Means Meter
· Proliferation of certification stickers and other product affinity tags such as those from the Forest Stewardship Council and Marine Stewardship Council
GroupPurchase: aggregating users into virtual affinity groups for transactions
· Social community websites (MySpace, Facebook) to enable GroupPurchase
Purchase Personalization and Broadcast
PopSugar (a mis- implementation of affinity purchasing)
· Proliferation of affinity shopping websites and personalized widget functionality like shopcast badges
Affinity Earning
· Employment based on online reputations
· Employers heavily signaling to potential employees with a more granular level of affinity values
Virtual World Affinity Economies
· Virtual world economies hitting milestones (e.g.; Second Life just hit 1 million residents, There, 500,000 residents; Second Life has been a $7M/month economy since July 2006)
Political Affinity Markets
· Live ongoing web-based opinion polls, issues barometers on social community websites
· Popular voting on legislative agenda/issues
· Add voting records to FEC and OpenSecrets campaign finance mash-ups

Melanie Swan is a futurist, professional trader, markets expert, technology entrepreneur and blogger based in Silicon Valley.
She founded and sold a technology startup company, GroupPurchase, which aggregated small business buying groups. She was Director of Research at Telecoms Consultancy RHK/Ovum and previously held positions at iPass, JP Morgan, Fidelity and Arthur Andersen and has been an advisor and consultant to numerous technology companies.
Ms. Swan has an MBA in Finance and Accounting from the Wharton School of the University of Pennsylvania and a BA in French and International Economics from Georgetown University. She is the Treasurer of San Francisco-based non-profit Equal Rights Advocates, an Advisory Board member of the Accelerating Studies Foundation and co-moderates the Washington DC, Philadelphia and Boulder Future Salons.

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