kidmercury

The future of investing is something we've discussed many times before (see our report on Culture 2.0). Basically I'm a believer in the "lots of small bets" concept, as well as the "investing knowledge and connections more than capital" concept. YCombinator and TechStars are examples of investment funds utilizing these principles.

For me, my business strategy is basically to create niche social networks for bloggers/musicians/new media publishers (primarily bloggers at this point, though I want to focus on musicians -- specifically bedroom rock stars -- over the next year). We find talented publishers, and we invest our business contacts and Internet marketing expertise to help them build a profitable and sustainable business. We work on a revenue-sharing basis and view the publishers we work with as teammates/partners rather than customers. Eventually, we'll look to connect all the social networks we create to allow for greater innovcation (basically create a cloud), but will do so in a more democratic way -- essentially creating an organization that allows the nodes to determine what the cloud can and cannot do.

For a broader look at our strategy see our report, The Mythology of Web 2.0.

We are in the process of testing out this concept with two bloggers. Implicit in the "lots of small bets" model is a more casual relationship; we've never met either of the folks we'll be investing in in real life. The key to a more casual relationship is to have a more standardized relationship; a template of sorts of how things will work, what all parties can expect, etc. Truth be told we've tried investing in bloggers in the past before, but it didn't work out -- both because we bet on the wrong people and because we did not have the model as standardized as it needs to be. Do we have it right this time? Only one way to find out.

Either way, I am confident that this model of investing is the future, and that it will prove to be immensely disruptive. Disciples of Clayton Christensen, something I proudly claim to be, will be able to spot that this fits the paradigm of disruption quite nicely. Consider:

1. Commoditizing the core competence of incumbents. The traditional model of investing is to invest capital. To disrupt incumbents, we need to develop a new competence. This new competence is the investment of knowledge/relationships, while abandoning older models of investing money, which will yield lower returns -- doubly so so long as inflation remains the objective of the Federal Reserve.

2. Competes for undesirable customers. Who the f wants to invest in bloggers or bedroom rock stars? Certainly not many professional investors. They have bigger opportunities to chase. Of course, a key principle of disruptive strategy is to target customers that incumbents cannot profitably reach. The current investment models make it harder to justifably invest in bloggers -- but investment models that can successfully invest in bloggers (or more generally, the "lots of small bets" concept) can use this as a foundation to more efficiently make larger investments down the road.

Of course, disruption is a powerful thing, because once you disrupt one element of the value chain, you'll end up realigning the whole thing. For instance, if we invest in bloggers, how do we value them? Valuation models are already broken, a result of broken accounting standards as well as the horrifyingly awful monetary policy set forth by the Federal Reserve (we talked a bit about this previously, in our recent post on how virtual currencies change the world. Eventually this will lead to whole new exchanges, as well as new regulatory bodies (we can add the SEC to the list of things that are broken on Wall St).

The Big Picture

Of course, changes of this magnitude are likely to be resisted passionately -- but the good news is that the tide is slowly shifting. Venture capitalists have been receiving an increasing amount of criticism lately, as we discussed in our post, "Venture Capital Continues to Take Ass Whupping From Blogosphere." Ultimately, though, a greater understanding of what is really going on in the world -- economically, politically, culturally -- is needed before real progress in this disruption can be made.

David

I've been thinking about something similar. I've mocked this up:

me-vc.com

I'd be interested to hear what you think about it.

The idea is that it's micro-financing for start-ups. Anyone can invest small amounts in any start-up anywhere. There's more here:
Internet start-ups (for example) need less and less money to start. VC and Angel are not only less-and-less necessary, there's no reason we can't leverage the public (ala Wikipedia). I think the success micro-loans have made in less-priviledged countries can be duplicated with micro-equity here, and really, everywhere.

Again, I'd be very interested in what you think.

kidmercury

Hi David,

Thanks for your comment. I watched your slideshow and your concept page. Here are some basic thoughts I had:

1. All things considered I love the idea, especially the concept page -- it hooked me
2. Are you prepared for a regulatory nightmare? That is my biggest concern with these types of ventures, and I think it will scare away many others too. But we need stuff like this so I am definitely rooting for you and I hope that others will not allow themselves to be intimidated solely by regulatory risks
3. I'd be more interested in learning the details of how you plan to ensure your marketplace is safe and void of scamming entrepreneurs, how legal conflicts will be resolved, is there an opportunity for short sellers, can anyone participate or is there a screening mechanism....I think the standards you put in place will be what you are competing on if/when others try to compete against you with this idea
4. Personally, I'm very interested in seeing what kind of opportunities there are to help entrepreneurs. While they may need less capital, and while this capital can be easier to obtain through crowdsourced funding initiatives like what you have planned, I think there will still be an opportunity for advisory services, M&A, and lots of other things that professional investors can help out with besides cash infusion. In fact I think being the intermediary that helps entrepreneurs get these services could be where the great money making opportunity is for businesses like yours.

Just my two cents, for what it's worth. I'm certainly very excited about your idea and I hope you're able to pull it off -- the world needs it!