Last year in TiB 129
I wrote about designing an “Optimal Kickstarter” for public goods, based on this post
by Matt Clancy. I pointed to Alex Tabarrok’s idea of Dominant Assurance Contracts
(DACs) as one of intellectual antecedents of this concept. The core idea of a DAC is that pledgers to projects that don’t meet their funding target not only don’t pay, but actually get paid a “refund bonus”. The goal is to avoid the failure mode in which good* projects fail to get funded by shifting the Nash equilibrium
from “do not fund” to “fund”. More in this talk
Maybe that sounds bizarre, but Tabarrok has an update: DACs work in practice. A new experiment (paper here
; write up on Marginal Revolution here
) suggests that they increase the funding rate of good projects by over 50%. That makes DACs an interesting mechanism for funding public goods, but - credit to my friend Marc
- it’s interesting to ponder whether it might be a good way to fund startups too.
One problem in less mature startup ecosystems is that you have a lot of investors who don’t want to commit unless there’s a lead investor (this is less of a problem in Silicon Valley, where “high resolution fundraising
” is more common). This means that it takes much
longer to raise capital and, again, a lot of good companies don’t get funded. In many non-US ecosystems, government is the largest investor in VC funds. I wonder what would happen if some of this capital was redirected to refund bonuses. Not only might it be cheaper, but I suspect it might end up with a more diverse set of founders getting funded. It would, at minimum, be an interesting experiment.
*where “good” means that the total social value (i.e. the sum of the benefit each individual receives) is greater than the cost