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.