Money? No thanks!

Matt Marshall reports on start-ups that don't need VC money:

"Many Internet entrepreneurs don't need the cash, because they're building
products cheaply — using open Web technologies, often with two or three developers. "

"SugarCRM's software was done dirt cheap. Roberts and his small team worked out of their homes, chatted through the night via computer on Yahoo!'s Instant Messenger and met only once a week at a small borrowed office. Within four months, they had launched a test version and had 1,000 people downloading the software."

SugarCRM took the money anyway, because one of their VCs had invested in Salesforce.com, and they needed his connections. It worked, it seems; the CEO claims that ten companies have switched away from Salesforce.com. In this case, VC stood for "Venture Connections".

The traditionally cited "factors of production" are land, labor, and capital (and coordination/entrepreneurship, some say). It's clear that in the case of software, know-how matters more than any of those. One might say that the ability to innovate derives from "human capital", that is, education and training. I'm not yet convinced, since neither the inventive urge nor the common knowledge context in the Internet community has the properties of physical capital. Regardless: the assets needed for knowledge production are scant, and this puts in question the role of providers of such assets.

There is often too much money chasing too few deals in the VC world; as more businesses are primarily knowledge-based, this problem will get worse. The key resource entrepreneurs require will increasingly be just social, not financial, capital; they always needed it in the past, but VCs were able to package it in money and make a $$ return for their investors. This is a case where knowledge is losing its husk of money; I argued in Why you should care about CPCM that digital media are a case where information has lost its husk of matter.

The obverse point is that the barriers to entry are very low. If a newbie and three friends can take customers away from a market leader after four months' work, someone else can do the same to them. If the products are intangible, churn will be great. The barrier to entry will be as intangible as the threat. Brand will matter: the loyalty and trust that users have in a provider who buffers them from too much change.