The end of venture capital and the beginning of peer-funded, “slow money” based production using shared designs and low-capital machinery

We’ve made and cited the argument before: In peer production, the interests of capitalists and entrepreneurs are no longer aligned

Essentially, in an era of open knowledge, free code and shared designs, the design phase needs less and less capital, and as shared design communities progress, they design not just sustainable products, but a new kind of machinery, along with new ways to peer-fund entrepreneurship.

This argument finds more and more credence, including in Silicon Valley, witness this article from Chris O’Brien.

Now the author is not exacly making the same argument, but we would argue that the situation he described is very related to the lower capital requirements that we have been describing. It’s precisely because the Facebook’s and Google’s of this world could start with low funding and zero advertising, that they obtained independence from the venture capital and IPO world.

We cite:

Chris O’Brien:

“Silicon Valley has passed an important milestone that may mark the end of one era and the beginning of another.

This dividing line in history was revealed this summer in the latest report from the National Venture Capital Association, which showed that 10-year returns on venture capital investments had turned negative at the end of 2009, and nose-dived during the first quarter of 2010. Let me translate what might sound like some insider mumbo jumbo: Venture capital investing, the lifeblood of the valley’s innovation economy, has become a sucker’s bet.

The venture industry is in free fall.:

Why is this happening:

” the larger problems plaguing the venture industry are really about how the world has changed since the dot-com bust. The venture industry’s financial model was built on having a significant number of their portfolio companies hold initial public offerings of stock. Venture firms depend on windfalls from these IPOs to overcome failed investments and to deliver healthy returns to investors. But except for a couple of years, the IPO market has been comatose this past decade.

Venture capitalists were hoping against hope that this year might finally be the year that the IPO made a comeback. But once again, that hasn’t happened. According to Renaissance Capital, the Bay Area has had nine venture-backed companies go public this year, up from two last year. The most notable of those was Tesla Motors, the electric carmaker that represents the highest of high-risk bets.

What little momentum these IPOs generated has been offset by companies like Solyndra, a cleantech success story that filed and then withdrew its IPO plans. And worse for venture capital firms, companies that might provide a true home-run IPO, such as Facebook, LinkedIn and Zynga, have been doing everything in their power to avoid an IPO. These companies say they don’t need the money enough to give up the control that comes with being a public company.

How gloomy is this picture for venture capital firms? According to an NVCA survey, 90 percent of venture capitalists who responded expect their industry to contract through 2015.

Some will argue that at least in the area of Web startups, companies can be launched on the cheap, and growing numbers of angel investors — those wealthy individuals who invest at the earliest stages — are stepping in to give these companies a boost. True, but that kind of funding doesn’t work as well for biotechnology, medical devices or cleantech. And these angel-backed companies are small and lean, and don’t create large numbers of jobs.

Instead of going public, the companies that do show potential now get gobbled up by the Googles and Facebooks of the world. At the same time, valley giants like Hewlett-Packard, Oracle, Intel and Cisco Systems continue their acquisitions of larger tech companies, a consolidation trend that more often than not is accompanied by big job cuts.”

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