Robert D. Austin - Specialized Research AI at MIT

Robert D. Austin

Kiva as a Test of Our
“Societal Creativity”

Innovations Case Discussion: Kiva.org

The accomplishments of the team of founders at Kiva are impressive on many lev-
els. Their use of technology to connect Westerners who have money with people in
the developing world who need small loans to start businesses achieves both eco-
nomic and social benefits. It creates a form of valuable exchange that could not
easily have occurred before widespread use of the Internet. Unlike many other
platforms of exchange, Kiva adds to the world’s overall wellbeing in a way that con-
veys major benefits to a group that often misses out on the biggest advantages of
economic interaction: those who (as economists might put it) lack significant ini-
tial wealth endowments. Getting this special kind of value creation going required
that Matt Flannery, his wife Jessica, and other early members of the team at Kiva
surmount major challenges. As impressive and interesting as their story is, though,
Kiva’s significance as a test of our own societal capabilities might be even more
important.

Kiva’s founders were tested in the sense that entrepreneurs usually are. They
had to get things to work that never had before, to build technology, systems, and
relationships that would enable beneficial interactions. But what emerges most
clearly from this story is that it also presents a test of our societal institutions,
organizations, individual and group inclinations, and much more. If Kiva repre-
sents a new form of exchange that creates value, if all parties involved in it wish to
participate in that exchange, if this activity harms no one in any obvious way, and
yet the inertia of existing ways of doing things fails to permit that, then who has
really failed a test? Framed this way, the social welfare stakes seem very high.

As we move more deeply into the 21st century, the measure of our institutions
may be how effectively they can adapt to new forms of value creation, especially
technology-enabled forms that produce social returns in addition to strictly finan-
cial ones. This test may prove important commercially and competitively, as devel-
oped economies come to rely more on innovation to create economic value. One

Robert Austin is Associate Professor of Business Administration at the Harvard
Business School. His research focuses on management of innovative and knowledge
intensive activities, especially as applied in creative industries and information tech-
nology management. He has written on these subjects in five books as well as in aca-
demic and trade journals.

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Robert D. Austin

of the central difficulties of innovation is that the commercial value of something
new is often not obvious. To be good at innovation, whether as an individual, firm,
or society, you need to be able to recognize and appreciate that even commercial
value that does not always manifest in an obviously or entirely commercial way—
not at first anyway. If, as I suspect, our ability to innovate in a commercially bene-
ficial way depends on our ability to recognize value that extends beyond purely
commercial terms, then the competitive stakes surrounding the Kiva story are very
high too.

Kiva challenges the ability of the society in which it operates to seize upon
valuable novelty. It is, thus, a test of our societal adaptability. To explore this idea,
we need to develop from research a more exact notion of what might be called
“societal creativity.”

DEVELOPING A NOTION OF “SOCIETAL CREATIVITY”

In 1960, Donald Campbell proposed a simple evolutionary model of creativity
with two sequential stages: 1) Blind variation and 2) selective retention.1 This
might seem technical, but it’s actually elegant in its simplicity.

In Stage One, a person, organization, or society generates varied outcomes. For
the purposes of example, let’s focus on a group designing a new teapot. At this
stage of teapot design, the group might sketch out ideas or build prototypes, each
one different from the others. In Campbell’s model, the process for generating
variants is “blind”—completely random. If you used a random process for gener-
ating teapot prototypes, you might produce some with spouts on the bottom (the
tea would leak out) or with handles too close to the flame. But randomness is not
required for the model to work. Good thing, because people are not very effective
randomizers anyway. Most of the time when people create variation, it’s not pure-
ly random. People tend to avoid putting spouts on the bottom, for example. But
non-random outcomes can still be interestingly varied.

In Stage Two, the person, organization, or society looks at the variants it has
produced and decides which to throw away and which to keep. Most variants that
result from most kinds of variation generation are not valuable, and thus ought to
be thrown away. At this stage, you’d probably throw out the teapots with spouts on
bottom and handles too close to the heat source. A small subset is valuable and
ought to be retained. Features from this subset might be combined to build a bet-
ter teapot. Now and then, on rare occasion, a variant is extremely valuable, often in
some unexpected way. If this happened in teapot design, you’d have a break-
through, an entirely new kind of teapot. Our difficulty in imagining a break-
through teapot attests to the rarity of such variants.

This process is simple, but in practice there are lots of ways it can go wrong,
and lots of places where differential skills and inclinations can come into play. For
example, the people creating variants may be more or less good at creating inter-
esting or potentially valuable variants. Some groups might be unimaginative when
it comes to teapots. Organizations involved in operational execution—say, making

innovations / winter & spring 2007

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Kiva as a Test of Our “Societal Creativity”

teapots on an assembly line rather than designing new teapots—may, in fact, have
reflexes that cause them to minimize variation; in normal operations in such con-
texts, the surprises that result from variation are considered “quality problems.”
Habits and behaviors that serve well in avoiding quality problems may prove a hin-
drance when the task shifts to inventing new teapots. Even if people can switch
gears from operation to innovation, as they try to innovate, as they try to generate
variation, their reflexes might lead them to generate variants similar to outcomes
they have already experienced and thus not very innovative. In a well-developed
continuous improvement system, like the Toyota Production System, quality prob-
lems can result in benefits. You might discover a way of improving a teapot when
you goof while making one. But the variation that causes this improvement is
unintentionally generated and probably is not particularly dramatic. And though
incremental improvements might add up impressively over time, in the short term
you are probably more likely to make moderately improved teapots this way than
breakthrough teapots.

So far we’ve been dealing only with Stage One difficulties. When we get to
Stage Two—recognizing value, retaining valuable variants and throwing away the
ones that aren’t valuable—we encounter a new set of challenges. The most curso-
ry look at the history of innovation reveals that seeing value in something truly
new is a far from trivial task. This reality extends beyond the economic sphere.
When audiences first heard Beethoven’s 3rd Symphony, the Eroica, they did not
know what to make of it. On February 13, 1805, readers of Leipzig’s Allgemeine
musikalische Zeitung read this report: “The reviewer belongs to Herr van
Beethoven’s sincerest admirers, but in this composition he must confess that he
finds too much that is glaring and bizarre, which hinders greatly one’s grasp of the
whole, and a sense of unity is almost completely lost.”2 When Pierre Monteux con-
ducted the world premier of Stravinsky’s Rite of Spring, the Paris audience erupt-
ed in outrage and threw vegetables at him and the orchestra.3 In scientific fields,
many overflowed bathtubs before Archimedes, many saw apples fall before
Newton, and many suffered pots boiled over on hot stoves before James Watt, but
those others did not make discoveries or inventions from what they observed.4
More recently, in business, Xerox had famous difficulties in recognizing the value
of what its Palo Alto Research Center staff had created in a remarkable period of
just a few years in the early 1970s; firms other than Xerox captured most of the
value that resulted from this research activity.5 Being able to recognize value is a
capability. Louis Pasteur called it the “prepared mind” and argued that “fortune
favors the prepared mind.” If you have taken care to build this capability, if you
have prepared well, then you can recognize value and build upon it where others
see nothing of value. If Stage Two is about sorting the valuable from the worthless,
it is clear that those who attempt to innovate differ greatly in their ability to get this
sorting right. In 1974, when Xerox could have beaten IBM into the PC market by
seven years, they opted instead to introduce the Xerox 850, a mechanized type-
writer of the sort that would quickly become obsolete when someone else intro-
duced computer-based word processing.

innovations / winter & spring 2007

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Robert D. Austin

The idea of the prepared mind, of a capability for recognizing and building
upon non-obvious value, can be generalized to societies. To what extent are the
capabilities of our institutions, public and private, configured to recognize and
encourage new value when it appears? To nurture new forms of value creation?

[O]ur societal capability
for recognizing, embracing,
and building upon value—
our societal creativity—is
being put to the test.

The Kiva team has done its job with Stage One. Through a series of acts of
individual and group creativity, they have created an interesting variant that has
demonstrated great potential to pro-
duce value for all involved. Even in the
long run—which is as yet unknown
and which Kiva representatives admit
might well include possibilities of
fraud, default, and other difficulties—
it would seem that this idea offers
more benefit than cost. Given this
assessment, can we, as a society, figure
out a way to embrace the potential
here? To allow Kiva to get on with it,
building even greater value? Or, to be
very specific: Can we accommodate
the charging of interest rates within their system without triggering dysfunctional
responses from the SEC or Homeland Security? Or will regulation, bureaucracy, or
some other form of inertia place unreasonable limits on value creation? The jury
is still out. It is our societal capability for recognizing, embracing, and building
upon value—our societal creativity—that is being put to the test here.

KIVA AS A HARBINGER OF ALTERNATIVE FUNDING STRUCTURES

The example of Kiva raises fascinating issues around the subject of alternative
funding models for business enterprises, and not just in the developing world.
Imagine a Kiva like platform called “MakeTheWorldBeautiful.com” with a goal to
help art-based businesses get started, wherever they are located. Just as develop-
ment enthusiasts and well-intentioned souls seem willing to participate in Kiva,
with or without being paid interest, so art enthusiasts might be willing to support
art making.

I wonder too if we might be seeing, in organizations like Kiva, the predecessors
of alternative, technology-enabled models for funding business ventures. With the
emergence of so-called “Web 2.0” businesses, many of which are very small in their
initial scale and very focused on small segments of readers or customers, it seems
only natural that micro-scale financing approaches might find their way into the
stories of some of those ventures.

Several realities feed this possibility. First, as it becomes possible to outsource
many standard business services to low labor cost countries, starting certain kinds
of businesses becomes more a matter of raising $5,000 than raising $5 million.
Second, it’s pretty clear that standard modes of financing can’t successfully supply

innovations / winter & spring 2007

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Kiva as a Test of Our “Societal Creativity”

small amounts of seed money to Web 2.0 or other non-traditional businesses;
increasingly, venture capital money is available to firms that fit a rather narrow and
traditional profile. Third, investors in traditional early stage companies have to be
“qualified” in terms of their net worth, to foreclose the possibility of later legal
complaints that might obstruct IPO or sale of the company; if you don’t have a net
worth in excess of $1 million, you can’t be a startup company Angel investor either.
This state of affairs suggests that there might well be activity on a platform that
enabled micro-financing of micro-businesses, in many different spaces where
enthusiasts congregate virtually. Of course the SEC, which gets pretty riled over
Kiva’s desire to pay interest, would surely want to be involved in micro-business
finance. But it seems a very good fit with the “social networking” aspects of Web
2.0 applications.

Indeed, alternative, technology-enabled financing platforms might prove gen-
erally important to innovation in this new century. Although I have only anecdot-
al, case-based evidence for this, it seems that some of the most interesting and
innovative activities happen in companies that are privately held or have some
other similar capital structure. Some companies I’ve worked with point to their
capital structure again and again as they explain why they believe they are more
innovative than competitors. This may seem heretical to some economists and
hard-core capitalists, but it’s a fact that managers of public companies must justi-
fy departures from conventional wisdom to shareholders. It’s not too hard to imag-
ine the necessity to justify your actions leading you to take fewer risks. Privately
held or alternatively financed firms may feel less burdened in this sense. The own-
ers of privately held Vipp, a high-end, designer kitchen and bath accessories com-
pany, explained in our research interviews how freedom from such pressures made
them more original in product design:

We look at [a new product] in this house and say, “This has the right feel-
ing, it has the right quality, it has the right expression, it has the right
materials.” We like it. Therefore, there must be people outside this house
who like it as well. But of course it could be very expensive to just use this
feeling, this intuition, and of course if you didn’t own the company you
might have to have some more sure answers to why you do things. But we
are the owners. We can believe so much in the product, saying “Okay, let’s
go this way.” That means we can do things faster than probably other
companies can.6

Perhaps alternative funding mechanisms—micro-loans or some arrangements
not yet imagined or perfected, some variation on the Kiva model—might prove
more suited to some innovation-based business models. This is speculation, of
course, but the most common capital structures have been around for a long time
and were conceived to serve the interests of industrial value creation. The dawn of
an innovation economy doesn’t mean the end of industrial value creation, of
course, but more variety in financing options for small firms attempting to serve
niche markets would seem to be a potentially helpful development.

innovations / winter & spring 2007

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Robert D. Austin

Researchers like Eric Von Hippel have heralded the rise of “customer centered”
innovation, in which communities of enthusiasts in specialized fields (e.g., kite
surfing) convene via the web and share their expertise with each other.7 As Von
Hippel points out, often these communities contain specialized expertise that
manufacturers cannot match; in such a situation, the viable innovation strategy for
manufacturers calls for observing these communities and adopting what “lead
users” consider to be the most important innovations. A kite surfing manufactur-
er sees what modifications best kite surfers make to their gear, then designs those
modifications into the original equipment. It’s only a short hop from this idea to
the related idea of members of the community becoming the manufacturer. And
it’s another short hop beyond that to imagine co-op or other financing arrange-
ments via which members of the enthusiast community help fund each other’s
highly specialized niche businesses. All this is enabled, of course, by the communi-
ty-connecting magic of the Internet. Although I don’t know of any examples of
this exactly, I’d be very surprised if it isn’t going on already, somewhere out in
cyberspace. In a real sense, Kiva would be an ancestor, or a relative at least, of any
such models that might eventually appear.

CONCLUDING THOUGHTS

In my enthusiasm for the originality of the Kiva idea and its potential to extend
into many other areas, I fear that I have said too little about the remarkable bene-
fits it enables that quite simply make the world a far better place. This is not at all
due to lack of appreciation. To the founders and current community in and
around Kiva I convey my earnest thanks and congratulations. It is a truly remark-
able thing that they have accomplished. May the future hold still greater successes
for the Kiva team and the members of its surrounding community.

1. Campbell D. T. (1960). “Blind variation and selective retention in creative thought as in other

knowledge processes.” Psychological Review, 67, 380-400.

2. See .
3. Lee Devin and Rob Austin (2007). “Artistic Methods and Business Disorganization.” Working

paper.

4. This clever way of putting it was first adopted by Cannon; see Cannon, Walter B. “The Role of
Chance in Discovery,” Scientific Monthly, 19 March 1940, p. 204. The general point was made
much earlier by Mach; see Mach, Ernst. “On the part played by accident in invention and discov-
ery,” The Monist, 6, 1896, pp. 161-175.

5. See Hiltzik, Michael A. (1999). Dealers of Lightning: Xerox PARC and the Dawn of the Computer

Age. New York: HarperBusiness.

6. Robert D. Austin and Daniela Beyersdorfer (2006). “Vipp A/S,” by Harvard Business School case

number 607-052.

7. See Von Hippel, Eric (2005). Democratizing Innovation, Cambridge, MA: MIT Press.

innovations / winter & spring 2007

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