Diffuse Innovation and Venture Capital

In my presentations and seminars on the business impact of the peer to peer model of production, I often stress how diffuse innovation has become, how it now transcends any fixed borders such as an entreprise. This is so first of all because we have a permanently connected workforce that is constantly exchanging knowledge and learning, both before and while they are working for a particular company, but of course also because of the trend towards crowdsourcing and user-generated innovation.

This significantly overturns not only the Shumpeterian model of the lone entrepreneur, but also the very role of capitalist investment. If innovation is indeed social, more and more taking an open source format, if the treshold of innovation is becoming lower, this also means that such innovation is more and more possible outside of the constraints of prior capital. This would mean that capital intervenes more and more a posteriori.

These conclusions are based on intensive personal observation of Web 2.0 models, and I was looking for any data confirming this trend. One such confirmation is coming from a column by Robert Cringely.

After first reviewing the pre-internet and the first internet bubble models, the first which involved hard work before obtaining VC funds, the latter, which of course failed, based on a heavy a priori investement, he says a new hybrid model is arising:

And now we’ve entered the crazy era of AJAX and AJAX-related start-ups where a new hybrid rule set applies. Companies no longer need to raise lots of cash, no longer need lots of people, no longer need to even directly sell anything at all to be considered successful. They need revenue, of course, but that’s mainly through advertising. And they need to create something people want to use. But Super Bowl ads? Forget those.”

What this means is that innovation is now directly the result of connected brains, not from heavy capital investment, and we would add, there is no particular reason why such a process should take a corporate format.

Cringely then goes on to note that there is no an enormous surplus of VC funds available (one trillion dollars), and relative few takers. As a result, VCs are now taking on the roll-on method, which involves consolidating many different players in a sector.


Today’s high-tech version of VC-managed roll-up means buying a bunch of similar high-tech companies, consolidating their products and services, then selling the whole or taking it public, simple as that.

What’s driving this trend beyond the simple needs of VCs trying to find good places for all that money is Google. Will there ever be another Internet success to rival Google? Not in this decade there won’t. So rather than even trying to repeat Google, VCs participate in the Google ecosystem, the best example of which is YouTube, which just made a few VCs a LOT of money when it was purchased by Google for $1.65 billion.

But the very success of YouTube strongly suggests that there won’t be another YouTube, simply because one site downloading 58 percent of all Internet videos and that site, in turn, being acquired by the second-biggest video downloading site that also has more money than God, well the YouTube guys would have to commit mass suicide to blow their lead at this point and I don’t see that.

But this doesn’t mean there aren’t a lot of suckers, er, motivated investors out there for the other 99 video-sharing sites. They just need some visibility, hence the roll-up. Buy 20 such sites for $200 million, throw away the bad technology and (hopefully) the poor-performing people, get everything running under one brand name, then either take it public (doubtful) or sell it to Barry Diller, Rupert Murdoch, or some other tycoon who needs to be a part of the latest Internet miracle but may not fully understand the nature of that miracle.”

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