The value of networks of trust

The most valuable and necessary networks of the next economy will be built around trust.

I just had lunch with my VC friend Ed Sim and I was boring him with my view of the future of advertising. The days of one-stop shopping for a mass of “consumers” will soon be over and advertisers will be faced with the opportunity and challenge of putting together smaller, more targeted, more efficient networks: the mass market replaced by the mass of niches. The opportunity is greater value. But the challenge is far greater effort and cost: It’s not going to be easy to put together and manage these small and ad hoc networks.

So I have been arguing that a good way to do this — once the infrastructure is in place — is to rely on human networks of trust: The advertiser or its agency can’t go and find and manage every damned little site (aka audience aggregator, aka community), so they choose a starting point: They trust me and my site (let’s say it’s a big-media site with a sales staff), and I trust you and your site (let’s say you’re a popular blogger), and we trust perhaps one more degree of separation out (let’s say those are your friends who write about the same things in more specialized but related ways). But if your friend messes up and you don’t fix it, then I don’t trust you anymore and I’ll find a new friend to trust — or else the advertiser won’t trust me anymore.

This way, we get to scale while distributing the work and the benefit with the trust. So in the end, the advertisers benefit by putting together the best networks at the lowest cost and effort and risk. And the participants of the networks benefit by attaching themselves, like atoms to molecules, to the highest value buys. (Oh, how I wish this blog had a whiteboard.)

We need some such way to operate in the age when small is the new big.

Then Ed and I were talking about similar challenges for investors and entrepreneurs in the small-is-the-new-big age: Today, it’s much, much easier to start a new company on far, far less capital than it used to be. But this also means that it’s easier for someone else to start a competitor. So speed is more important than ever: You have to develop your business as quickly and nimbly as possible to build your product and then perfect it after it’s out so you quickly establish your value. This means that the VCs need to be able to act just as nimbly to invest as quickly as possible. The good news is that the investments are smaller and the risk is thus less. But the bad news, of course, is that it costs more effort and attention to manage many more smaller investments and it’s hard to act quickly at scale. Early bird, worm, and all that.

So I wonder whether a network of trust is a solution here, too: The VC with the money trusts you to bring in deals and you trust someone else to bring in more deals and whoever brings in the most value gains the most value and grows biggest fastest. The work, risk, and benefit are all distributed.

In a way, I wonder whether that’s what VCs are doing by blogging: They’re going open-source, sort of, to state their interests and bring in more of the right deals more efficiently. But it’s still not efficient enough for a world of companies that need six figures instead of eight to succeed. And there needs to be a means to share benefit with the trust.

I think it can work in news, too: If I trust Sally’s reports on my school board more than Joe, I’ll send traffic her way and she’ll make more money on advertising from the newspaper (see Pincus’ world, below) and maybe she’ll send traffic my way for my reports on the town council if she trusts mine, too.

Where else?

: All of this is my clumsy, imprecise, philosphy-not-math-major’s re-expression of the discussion about Reed’s Law vs. Metcalfe’s Law vs. Oren’s Doubts vs. Evslin’s Postulate, none of which I understand above a kindergarten level. I was just trying to get my head around Reed’s Law, which Evslin explained to me on a napkin, when suddenly he and Wilson and Oren are abandoning it. (Cue Tom Lehrer’s New Math.)

I’ll try to summarize this badly: Metcalfe’s Law says the value of a network increases as more nodes are added to it (i.e., one fax machine is worthless, two fax machines are each work a lot more, a large network of fax machines is truly valuable). Reed says (I think) that if a network includes social sub-groups, it grows exponentially faster. All the wise gentlemen listed above are now debating whether the math works and I leave that to them.

But to me, the humanities guy with the damned liberal arts degree, it’s obvious: A network built on trust is clearly more valuable than a network built on technology.

Repeat after me, after Butterfield, after Mayfield, after Soylent Green: Web 2.0 — It’s made of people. It’s not about controlling scarce assets in a post-scarcity world. It’s about trust.

And it’s hard to chart trust. It’s hard to give it a metric. It’s hard to give it a market value. But it’s damned easy to lose.

: UPDATE: Here’s what Ed took from lunch (besides the check…).

And here’s Tim O’Reilly on both.