Does Peer Production Turn Capitalists Against Entrepreneurs?

from the not-really dept

There's an absolutely fascinating post by Tim Lee examining whether or not the rise of peer production has misaligned capitalists and entrepreneurs. It's based on a blog post by Jed Harris trying to explain the same concept. The two posts suggest that traditionally the view of capitalists (those with money to invest, basically) and entrepreneurs is aligned. An entrepreneur needs capital to get a business started. The capitalist supplies the capital in exchange for a piece of the resulting business. The question, though, is who is more key to the equation here. The capitalist? Or the entrepreneur? In the past, it might not have mattered, since the two functioned together so well. However, lately, there's been a lot of concern that the venture capital model is broken. There was story after story of brand spanking new web 2.0 companies springing up with little to no need to raise venture money (other than, perhaps, the connections it brings).

Harris and Lee suggest that the reason for this is the rise of peer production (which certainly is a big part of the whole 2.0 thing), in which money is not necessarily the main ingredient. People aren't paid to post their videos to YouTube. They do so for other reasons -- whether it's expression, fame or that it's just an easier way to upload and host video. Harris and Lee suggest that those who believe that the capital part of the equation is more important than the entrepreneur will naturally be averse to such a situation. They tend to judge everything solely on the dollar amounts involved. Throwing in incentives that have nothing to do with dollars seems wrong. It's either a glitch, or more likely (they'll often claim) based on some Utopian standard that can't last (or they'll just call it "communism"). And, when it keeps going, they'll claim that it's just exploitation when nothing is further from the truth.

However, if you believe that the entrepreneur and the related innovation is the real spark, then all of this makes perfect sense. They're providing services that people want -- and those people are participating because they get non-monetary value and benefits back out of it. That could be things as simple as community or attention or it could be deeper things such as knowledge, experience and opportunity. Those may not have a direct monetary value, but they do have tremendous value -- and entrepreneurship is based on solving a market need by providing value.

Still, I don't think the real result is that capitalists and entrepreneurs have turned against each other (and I think a few of the smarter VCs have figured this out already). What it really represents is "capitalists" who are too locked into obsolete business models to realize that there are different ways to profit. The trick is just recognizing that the money part of the equation shows up somewhere else. Whenever value is created, there are always opportunities to profit. For the biggest shining example of this, just look at Google. It gave away its product for free and eventually created a business model that works (and, boy, does it ever work). Now, there is certainly a problem in that some entrepreneurs never have been able to figure out the business models that leverage peer production to later benefit the entrepreneur -- but that hardly means they're against profiting in the traditional sense (just as it doesn't mean they're exploiting anyone either).

The general framework for aligning capitalists and entrepreneurs over peer production is simple: Peer production only works when it creates value for the "peers" involved. When you increase value in one place, there will always be somewhere else where that value can be captured monetarily. Therefore, the smart capitalist is not looking at funding entrepreneurs due to their ability to "exploit," but is looking for entrepreneurs who have business models that both increase value for users on one end, and then have ways to capture that value monetarily at the other end. The mistake is thinking that just because peer production doesn't involve direct payments that the overall value isn't increased and that there isn't a way to later capture that value monetarily. If you believe that there's a near limitless ability to increase value, then peer production is fantastic for both capitalists and entrepreneurs. It's only if you believe in a zero-sum world where someone's increasing value means someone else is losing value that you end up seeing conflict. Unfortunately, there are many who still believe this fallacy -- and it's really that group that sees peer production as some sort of threat to capitalism.


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  1.  
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    Sagacious Coward, Feb 28th, 2007 @ 4:46pm

    Short answer

    This, too, shall pass.

     

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    misanthropic humanist, Feb 28th, 2007 @ 5:20pm

    interesting stuff

    This is fascinating. It's why I read Techdirt to have Mike dig up pieces like this.

    Profitability is an epiphenomenon of activity. It's the froth on the great wave beneath it. But the classic capitalist is like the froth believing that it leads the wave along. It's a delusion that smart capitalists need to shake off. Only then can they engage in real *partnerships* with enterprise and take a fair share of profits for their help.

    TFA mentions the ways in which startups die as a result of too much pressure to return capital investments too early, possibly a reason that enlightened modern businessmen stay away from VC until the last possible moment, and also when they are in a stronger bargaining position.

    As I've mentioned before in realation to my own business adventures and failures, the currency of the 21st century is not pounds and dollars, but exposure, access and marketing. Growth can rarely be explosive, except for a few lucky enterprises that catch a wind of fashion or subculture, it needs some kind of push and that's where a little extra money helps.

    Old school capitalists haven't woken up to the new currency yet. They still want to "own". Everything they do is based around a model of ownership and control which is a sure route to failure in the 21st century. To be really smart you need to divorce the concept of collective ownership and non-ownership from old fashioined ideological rubbish like "communism" and all those dumb, devisive old cold war era ideas.

    "Before peer production came along, being “pro-entrepreneur” was usually equivalent to being “pro-capitalist.”

    Yes, and the implication that this has changed is correct. But it's not because of the reduced need for VC money. Or because any fundamental change in the way capital should be reinvested. Imho, it's because of a new culture. Let's face some facts (as I see them). Corporations are seen as the new evil. In all of our lives we are touched by the greed, immorality and anti-social behaviour of the major corporations. People do not see them as participants in our society, let alone progressive leaders, but as parasites which feed on us. Capitalism (big C) is indelibly stained with the behaviour of corporations. You could say that they have "let the side down" and now even the most ardent entrepreneurs would rather not take money from them even if they offer it for free. This is an ethical and moral choice. The corporations want only wealth that can be converted into dollars for investors and ownership of assets, but the new entrepreneur sees the peer community ("his flock") as that wealth. Drive them away by trying to aggressively monitize and you have destroyed that wealth. And the peers that participate in this new economy also see it the same way and are very fickle. If they think that an operation is over-commercialising they start to leave the ship and it begins to sink. This can be something as stupid as allowing Sony and Microsoft to place advertisments on the site, which is as good as writing a suicide note in many "web2.0 cultures". People know the smell of the bad guys, perhaps only at a subconscious level, but they clearly are influenced by who they think is associated with a site.

    Another excellent point in TFA is the corporate obsession with intellectual property. They believe this a way for them to "own" something of value. But neither the entrepreneurial leaders nor their peer contributers have any intention of allowing them to take so much as a jot of IP. They know and see only too well what happens when you allow this, as demonstrated by the RIAA/MPAA. People want to keep their own ideas or share them in the public domain, it is that spirit of community sharing of ideas that drives the new economy. I don't think the old capitalists realise quite how dead the traditional copyright and patents are, and until they do realise they aren't going to be able to reinvent themselves with a new way to profit from wealth generating human activity without trying to take too much. As it stands they kill the golden goose with their greed instead of just taking a modest egg or two.

    Would I ever take VC money again? Yes, probably, but on my own very strict terms and after substantial research. Any investor who does not get the moral and social aspects of my vision would be excluded from the opportunity to invest. A primary indicator of this would be their willingness to abandon any notion of "owning" intellectual property and them being able to realise that profit will come from the activity itself, not from any ownership or control :)

     

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  3.  
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    Markus, Feb 28th, 2007 @ 6:29pm

    That all depends

    To say that VCs and Entreprenuers are at odds is a very broad statement and may be true for certain markets and certain technologies.

    A few key reasons that some "Web 2.0" start ups need very little initial investment:

    - Google and others have put in place a way for a small voice to be heard from a very long distance for a small amount of money.
    - When it comes to software, development costs can be slashed by using oversees programmers.
    - Hardware technology has come far enough along so that the average household computer room can be turned into an office with only a small amount of money.

    However, if you are starting a business that sells directly to other businesses, in most cases it is not enough to just use AdWords and a website. Today's business owners do not take this kind of solicitation very seriously, so more marketing and sales dollars must be spent to get the word out through direct marketing, trade shows, industry publications, direct sales, etc.

    VC money will always be necessary for the average entreprenuer because they either do not have enough money to fund the startup themselves, or they are smart and would rather not risk all of thier own money. Besides, VCs bring a lot more to the table than just money, such as expertise and connections.

     

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    The Dukeman (profile), Feb 28th, 2007 @ 6:53pm

    The day hasn't arrived yet that I can take the free video I downloaded from YouTube and exchange it for food to feed my family. When the value of the video I downloaded and the video I uploaded are equal to all parties, then maybe. At this time all the "peers" in this example are not equal and so the value is also not.

    Food for though but not for my family. 21st century food still costs 21st century capital.

     

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  5.  
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    Austin in ATL, Feb 28th, 2007 @ 8:15pm

    You raised some great points Mike, keep it up.

     

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