Venture Capital for the Long TailJuly 21st, 2008 View Comments |
Carrying on the discussion on funding the future of micro-businesses and entrepreneurship… (for background read here and here)
Venture capital needs a fundamentally different, more economically viable model for creating and funding micro-businesses.
Why?
- Declining costs to create and operate businesses: easier, quicker and cheaper to start, implement and scale. How? S3, EC2, Google AppEngine, a wide variety of free software development tools, free and cheap project management tools, easier access to tiered legal and accounting support, the increasing use of “consumer-grade” products to power business infrastructure, an abundance of free business advice. Startup Weekends are proving that people can use these tools to create value in short amounts of time.
- Increasing quantity of profitable niches: as many markets become larger, some become smaller. The same forces of decreasing transaction costs, declining costs to scale and increasing speed, quantity and transparency of information are driving different industries in different ways, creating opportunities for national, international, local and hyper-local businesses in different ways. The rise of the Long Tail is a driver behind localism.
- Ideas have become a free currency to bid for notoriety and personal brands: more than ever, execution is the true differentiator.
- Increasing collaboration, transparency and sharing of ideas: want to learn about what a company is doing, or what people are thinking, or about what customers are saying or suggesting? Read blogs, forums, reviews, collaboration networks, or simply search Google. Content and context are being created every day. Want to get access to use another company’s program or data? Use their published API, check out their open source code, scrape their publicly-available data. The cultural ethos of open-source is propagating throughout the economy.
- Declining ability to use patents, intellectual property or proprietary lock-in as fundamental value drivers: everything can be copied, faster, easier, better. Success is not guaranteed by being first to market, first to a sizable customer base or first to profit: continuous upgrades, improvements and innovation (big I and little i) are requirements rather than goals. With an increasingly networked value chain, innovation will be spread farther and farther out the realm of partners, contributors, consultants, customers.
- The impact of Generation Y in the workplace: the traditional idea of work and career path is changing, prodded by the impact of Generation Y on the workforce. Culture and technological changes are creating the risk of generational conflict as generations begin to disagree on expectations of career path, fulfillment, and degrees of responsibility.
- A shift in seed-stage venture capital: traditional venture capital is moving away from early, seed-stage investing and becoming less willing to take certain risks. Firms like Y Combinator and TechStars, Launchbox Digital and others are filling the gap with a different ethos for proving business ideas and investing in startups, evolving the incubator model past the attempts of the first Internet boom. But once a business is created and achieves the goals of TechStars and Y Combinator, what support exists to sustain and grow businesses beyond these initial stages?
The result is a shift towards more a personal, collaborative and distributed system of value creation, an economy increasingly powered by a long tail of micro-businesses.
Not everyone can be the best, create a hit product, succeed on the grand mass market. Instead, aim differently: find the niches scattered throughout the long tail, each niche with its own winners and losers.
We have already started to see a rise in freelancing and contract labour and a wave of marketplaces for project-oriented contract labour like Elance, Guru.com and Rentacoder are only the start (think it is too long before people find and organize talent or business partners through Facebook?).
But this is a more profound shift, a more organized, valuable and economically viable model of economic organization. It is the long tail of the economy, a networked, linked but unorganized amalgamation of one, two and three-person businesses, each trying to deliver their discrete, individual value, but in the aggregate redistributing the sources of production throughout the economy.
The formation and success of micro-businesses will depend on how our culture and business support systems adapt to the new set of organizational challenges created by these trends.
Usually we are talking about the aggregators of the long tail (e.g. Amazon, Netflix) and their economic models when we are discussing the Long Tail, rather than looking at the perspective of the content and value creators. The real question is whether the producers who live in the long tail will be able to make enough money to create sustainable businesses. It depends: is the goal of the long tail producers to create lives or create businesses? To live or grow rich?
The trends outlined at the beginning are starting to create the cultural and business support systems critical for micro-businesses to thrive in the long tail.
Yet one gap exists.
Venture capital, for one, has yet to deliver a scalable, viable funding and economic model to fit this new model of economic organization. The traditional high-risk, high-reward, high-touch operational and cultural model simply does not fit the micro-business economy, an economy of “lifestyle” businesses based on smaller interactions and smaller bits of value exchange, created out of the need to build lives, not necessarily a business to sell.
Just as everyone is a photographer, everyone can be an entrepreneur.
How can venture capital adjust?
July 21st, 2008 at 15:52
Personally, I agree that these are the conditions today, specifically in the area of digitally distributed tech sector. Bio-tech, Clean-tech, etc will still need the VC bucks to get off the ground.
The Internet is such a large place though, that many so called lifestyle companies are only lifestyle by choice. And who am I to judge. If that's what you want to do, then great. There a lot to be said for not answering to anyone, and sitting at home in your underwear selling ceramic unicorns. But most of these companies are capable of using their traction as a starting off point to build a very valuable enterprise. That's when taking a bit of investment can help. Doesn't have to VC, but growing your company at any rate faster than organic usually requires capital from somewhere.
July 21st, 2008 at 15:52
Personally, I agree that these are the conditions today, specifically in the area of digitally distributed tech sector. Bio-tech, Clean-tech, etc will still need the VC bucks to get off the ground.
The Internet is such a large place though, that many so called lifestyle companies are only lifestyle by choice. And who am I to judge. If that's what you want to do, then great. There a lot to be said for not answering to anyone, and sitting at home in your underwear selling ceramic unicorns. But most of these companies are capable of using their traction as a starting off point to build a very valuable enterprise. That's when taking a bit of investment can help. Doesn't have to VC, but growing your company at any rate faster than organic usually requires capital from somewhere.
July 21st, 2008 at 20:00
Thanks for the thoughts, loving the debate on your own site…
There might be a lot more froth (technologies or features masquerading as businesses or products), but there is a value in letting some of that froth (both in terms of ideas and intellect and business talent) hitting the market to see what works and what doesn't. Especially if it's cheap to test the marketplace (low startup costs, etc.)
And that, by and large, seems to be what Y Combinator et. al. is about: take an idea, fund it with low overhead and test it out, whereby Bootstrap seems to take the more traditional incubator approach (correct me if I'm wrong!) and placing a different burden on creating companies with more visibility to business models.
Capital has always and will always play a role in creating growth. I think the key thing most people are missing is that what we call a “startup” is changing… and thus what we call “venture capital” is changing as well…
The entrepreneurial path is not broken (it might be stronger than ever): it's just different.
July 21st, 2008 at 20:00
Thanks for the thoughts, loving the debate on your own site…
There might be a lot more froth (technologies or features masquerading as businesses or products), but there is a value in letting some of that froth (both in terms of ideas and intellect and business talent) hitting the market to see what works and what doesn't. Especially if it's cheap to test the marketplace (low startup costs, etc.)
And that, by and large, seems to be what Y Combinator et. al. is about: take an idea, fund it with low overhead and test it out, whereby Bootstrap seems to take the more traditional incubator approach (correct me if I'm wrong!) and placing a different burden on creating companies with more visibility to business models.
Capital has always and will always play a role in creating growth. I think the key thing most people are missing is that what we call a “startup” is changing… and thus what we call “venture capital” is changing as well…
The entrepreneurial path is not broken (it might be stronger than ever): it's just different.
August 4th, 2008 at 09:34
I'm not sure that “traditional” VC — that is, an agent acting on behalf of a large pool of investments — is tenable in the market of lifestyle business. The problem with the lifestyle microfinancing stuff is that in reasonable investment lifespans, it's effectively a high-risk, low-reward prospect. Putting $50k into a project now whose income might only hit $100k/year isn't a very good investment for a VC — on the other hand, it's a great investment for a person to make, doubly so if it enables them to quit their day job.
On the other hand, a VC-backed prosper.com equivalent might be an interesting approach, particularly if it integrated with SourceForge or WorkingWithRails to programmatically grok “geek cred”… Hrm…now I've got a start-up idea!
August 4th, 2008 at 09:34
I'm not sure that “traditional” VC — that is, an agent acting on behalf of a large pool of investments — is tenable in the market of lifestyle business. The problem with the lifestyle microfinancing stuff is that in reasonable investment lifespans, it's effectively a high-risk, low-reward prospect. Putting $50k into a project now whose income might only hit $100k/year isn't a very good investment for a VC — on the other hand, it's a great investment for a person to make, doubly so if it enables them to quit their day job.
On the other hand, a VC-backed prosper.com equivalent might be an interesting approach, particularly if it integrated with SourceForge or WorkingWithRails to programmatically grok “geek cred”… Hrm…now I've got a start-up idea!
August 4th, 2008 at 12:04
Traditional VC is not tenable in lifestyle businesses: the model does not fit. The opportunity is to change the model, and it's not what we are calling VC today.
I simply believe we (society, business) need to create ways to support entrepreneurship, and for many people lifestyle (even “service”) businesses is their route. If you carry out entrepreneurship to the masses, there simply won't be enough ground-breaking product businesses to sustainably support that amount of people.
But now you're thinking of the model… one of the key problems with prosper.com has been securities law and investing in “individuals” by individuals. A marketplace in the middle, funding “companies” (lightweight companies) solves that problem.
August 4th, 2008 at 12:04
Traditional VC is not tenable in lifestyle businesses: the model does not fit. The opportunity is to change the model, and it's not what we are calling VC today.
I simply believe we (society, business) need to create ways to support entrepreneurship, and for many people lifestyle (even “service”) businesses is their route. If you carry out entrepreneurship to the masses, there simply won't be enough ground-breaking product businesses to sustainably support that amount of people.
But now you're thinking of the model… one of the key problems with prosper.com has been securities law and investing in “individuals” by individuals. A marketplace in the middle, funding “companies” (lightweight companies) solves that problem.
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