Finding a consistent thread through my thoughts is difficult; one of the few is “Venture Capital for Long Tail Entrepreneurs”, an idea that describes the need for a fundamentally different model for for creating and funding micro-businesses in the Long Tail of the economy as our society shifts towards a more personal, collaborative and distributed system of value creation.

I submitted a proposal for a SXSW panel on the idea back in August; as expected, it has yet to be accepted.

But I find the theme continuing to crop up in my thoughts and discussions with entrepreneurs and their ideas. Perhaps entrepreneurs just like to envision an environment where they can raise capital and start their businesses, or maybe there is a cultural change: I’m not sure.

Perhaps a broader economic downturn will create a more favorable environment for “too small to fail” startups and small companies: perhaps the push will be to get smaller, not larger, to “act small and think big”. I’m intrigued by the idea that an economic downturn could incent millions of people to start their own businesses as large company layoffs eliminate the cushy, lucrative jobs created by a bubble of fake, misplaced economic value creation. We’ll see.

In any case, I’ll be at SXSW Interactive in March 2009 of the long-shot change that the proposal gets accepted,

Series of posts building up to and thrashing around the idea:

• Is this what we need? Is this what we want? (April 10th) on taylordavidson.com)
• Do we need a new funding model for starting businesses? (June 4th on taylordavidson.com)
• How can we create a funding model for lifestyle businesses? (June 12th on taylordavidson.com)
• Venture Capital for the Long Tail (July 21st)
• Venture capital creates real options (August 8th)
• Want to hear more about Venture Capital for Long Tail Entrepreneurs at SXSW? (August 8th)
• Markets in Everything: Innovation in Angel Capital (Sept 2nd)

As always, I reserve the right to go off-topic, although I’m not sure what “on-topic” for me would be…

Is the Millenial generation shaping the future workforce?

The Millenial generation is creating a bit of generational tension as they bring their cultural imprint to the workforce. Employers realize Millennials are a large part of the future work force, but employers (namely Boomers, and to a lesser degree Generation X) are concerned about the generation’s desire to shape their jobs to fit their lives rather than adapt their lives to the workplace.

It may seem obvious that employees should show up on time, limit lunchtime to an hour and turn off cellphones during meetings. But those basics aren’t necessarily apparent to many millennials.

Seriously? Why is that obvious? [1] Why are we - all generations, not just the Millenial generation - bound by the old standards? How are the standards of “professionalism” being rewritten?

Why shouldn’t / can’t Millenials shape workplace rules and expectations rather than merely adapting to existing conventions?

John Hagel:

[Shaping] strategies use positive incentives to mobilize and focus thousands of participants in shaping specific markets or industries

Three key elements come together in these strategies – a compelling shaping view to provide focus for investment by participants, a powerful shaping platform that provides economic leverage for participants and a set of acts and assets by the shaper to communicate conviction and capability to potential participants.

Does the Millenial generation have enough of a shared view and platform to shape workplace conventions?

Will the Millenial generation just drop out of Boomer corporate culture and employ themselves by creating their own companies and workplace cultures?

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More: How might workspaces adapt to aging generations?

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[1] Granted, the third one is obvious, simple human respect.
[2] For more on shaping strategies download the full article (PDF) from Harvard Business Review: Shaping Strategy in a World of Constant Disruption.

I’ll start with a valuable perspective for entrepreneurs, startups, creatives or anyone trying to take something from an idea to a reality. Hugh MacLeod at GapingVoid:

“Good ideas have lonely childhoods”. When I say, “Ignore Everybody”, I don’t mean, “Ignore all people, at all times, forever”. No, other people’s feedback has an important role. Of course it does. It’s more like, the better the idea, the more “out there” it initially will seem to other people, even people you like and respect. So there’ll be a time when you have to press on, alone. This is normal. This is to be expected.

I highly, highly encourage reading the rest of the post and basically everything MacLeod writes.

MacLeod points out an unappetizing truth for entrepreneurs: the best ideas are likely the ones that everybody hates. Therefore, expect to hear “no” from prospective clients, customers, investors, employees; expect to hear resounding silence from the marketplace; expect even trusted advisers and friends to fail to understand your idea or grasp the opportunity.

The hardest part is knowing when the resounding “no” is just noise or a signal. And that can only come from you.

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I’m starting a series of posts on advice for entrepreneurs, aimed at people looking to make the transition from being an employee to creating their own business. There is a cacophony of advice out there, but so much of the advice is short-sighted, biased by personal experiences, or just simply wrong. I don’t have all the answers, but I can help you think through the right questions.

If you have any questions you would like answered on how to brave the entrepreneurial path and how to make the transition from an employee to an employer (of yourself), please drop a line in the comments, by email, by Twitter or by the contact form. I’d love to get your thoughts…

We’ve probably talked about this all before, but I thought it would be good to summarize the concepts, ideas and changes we’ve been discussing. And if you want to hear more, vote for the proposed “Venture Capital for Long Tail Entrepreneurs” panel using the SXSW 2009 Panel Picker. For more background on the idea check out the earlier “Venture Capital for the Long Tail” post, and for more information about SXSW read about SXSW 2009.

“Venture Capital for Long Tail Entrepreneurs” describes the need for a fundamentally different, economically viable model for creating and funding micro-businesses in the Long Tail of economy. A new model of business is emerging as the costs to start and scale businesses decline, the culture of Generation Y begins to impact the workplace and increased personal transparency forces companies to re-think how to compete in the marketplace for employees and customers.

The result is a shift towards a more personal, collaborative and distributed system of value creation, yet venture capital has yet to deliver a funding and economic model to fit the specific needs of the long tail of micro-businesses. 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.

Granted, this is an opportunity: an addition to the traditional venture capital model, not a replacement.

Creating an economic model that fits this niche will take a lot of work to change our notions of venture capital and entrepreneurship.

If everybody loved their jobs and enjoyed working for large companies, and if large companies were the most efficient and effective organizations for creating value, this wouldn’t be necessary.

Since that’s not the case, let’s start thinking.

Originally posted on June 4, 2008 to taylordavidson.com/writing, reposted here to provide easier access to fundamental thoughts behind Unstructured Ventures. Click here to see comments on the original post.

Three separate issues / trends that I’m looking at, and hoping to address:

• Entrepreneurship: An increasing interest by younger people entering the workforce to create their opportunities (forming or joining startups or smaller companies) rather than have their opportunities handed to them (joining a larger company).
• Collaboration: Rapidly decreasing startup costs [1] and continued development and usage of inter-company interaction and communication platforms leading to reduced interaction costs and an increasing need to develop collaboration core competencies. [2]
• Venture Capital: A “funding gap” in the venture capital community, where there is a dearth of investors funding early-stage companies in their growth from seed stage to established companies.

All of these trends are addressed far better elsewhere: search for “millennial entrepreneur”, or “venture capital funding gap”, or read John Hagel, Paul Graham, Fred Wilson, Umair Haque or Marc Andreesson, to start.

I’ve touched on some aspects of these trends before, but instead I’ll address a different (although inter-related) set of questions:

• If more people want to be entrepreneurs, will they want to form the same kind of businesses that exist today?
• Does a company have to get big for it to be successful, or can “lifestyle businesses” be a successful end goal?
• And if so, do we need an entirely new structure and economic model for funding new businesses that does not depend on exit M&A-events to create economic value for investors?

Following on, some unstructured thoughts about these trends, issues, questions…

1) Aren’t we seeing venture capital address the funding gap?

The “Y-Combinator Approach”… the buzz is there, not just in Silicon Valley, and not just about copying Y-Combinator. The key in this space is to learn the lessons from the incubator approach in the early 00s. Y-Combinator is an early success story because a) they eschew coddling entrepreneurs to the degree typical of most early-00’s incubators, b) they do a great job of using social media to create deal flow and c) we are in a vastly different cost structure and market environment for startups than we were then, especially in web software.

And angels are in fact starting to become more institutionalized and move up the funding ladder, pursuing later, bigger deals. But from what I’ve seen the interest is more in partnering with institutional money, “validating” their investments, rather than continuing to fund startup risk.

And at the same time, venture capital continues to get farther and farther away from the market it used to serve. Read Haque, Wilson, and a lot of influential and forward-thinking venture capitalists and you’ll see the trend exists; there are a lot of people interested in “fixing” venture capital (and not just from entrepreneurs looking for funding).

2) What happens if people want to create lifestyle, cash-flow built businesses but venture capitalists wants to invest in scalable, big hit and big exit businesses?

It’ll be tough for the two to work together. Entrepreneurs always have the option of bank debt to fund a new company by getting business loans from a bank. While that model still works in a physical asset business, it just doesn’t fit the needs of the bank or the entrepreneur in the digital asset / knowledge / communication industry. And banks have a serious skillset mismatch in funding non-physical asset based businesses. [3]

3) If the model of creating new businesses change, how will the rest of the ecosystem adapt?

I’m more curious how things change when startups get even cheaper to start and maintain, or if/when people truly prefer starting companies to getting jobs (is it fundamental to the Millennial Generation entering the workforce or something more?), or the “value of collaborating” gets higher and the transaction costs between companies get even lower.

What role does venture capital take? What risks does venture capital take on to take a company to scale (market, technology, etc.)? When is money really necessary (what stage)? Will venture capital investors focus on enabling business to scale rather than to start?

Venture and angel investors make money when deals get made - M&A - for the big hit multiple. But what if the goal of entrepreneurs is sustainable, life-style businesses, that for the large part will never have a big-hit M&A event, just annual cash flow, which just doesn’t fit the venture capital economic model. If the risks of starting a company decrease, does the deviation of returns decrease?

Can we make it easier for people and companies to collaborate? When will people start mini-companies, one-person, two-person shops? How do we improve on the freelance / consultant marketplaces like Guru.com and Elance.com? How can social networks help to fill this gap to connect mini-companies?

Is there an alternative route towards funding startups based on a different economic model?

Or am I misguided, overly idealistic (”everyone wants to get rich”), biased by web economics, out of touch with most small entrepreneurs, thinking about a very small niche, or just flat-out wrong? I’m looking forward to finding out.

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[1] At least for web software
[2] Ethan has been pushing my thoughts on “collaboration core competencies”
[3] Maybe venture debt is an alternative viable funding model, but I’m not as familiar (yet) with venture debt economic model or history of returns. Would love to learn…