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?