(2017-03-31) Rao A Most Useful Misunderstanding S V

Venkatesh Rao on A Most Useful Misunderstanding

One of the most interesting things about Silicon Valley is that a great deal of the value created by the culture is due to a very healthy and useful misunderstanding: that Venture Capital is a broadly applicable funding model.

But our topic is not venture-fundability, but the huge universe of things that is "not venture fundable." This means everything from writing a book in a "software eaten" way to nonprofits.

Only a tiny fraction of the software revolution is VC-fundable.

The vast majority of innovation funding in the world is not VC.

There are models that bring financing and liquidity to these other activities, ranging from Kickstarter and gofundme, to more specialized ones, such as crowdtilt and Patreon (CrowdFunding)

Understanding the "shape" of your idea, and figuring out the financing model that fits that shape, can take a few rounds of trial and error. It is not a formulaic process.

A good 2x2 on which to plot funding models is one with non-profit to for-profit on the x-axis, and growth speed (from human-speed to money-speed) on the y-axis.

The middle is an awkward place

This is the space occupied by an uneasy cocktail of models — lifestyle businesses (Life-Style Company), bootstrapped businesses, debt-financing, franchising, CrowdFunding, and so on.

As you get to "money speed" it becomes increasingly unclear whether you're creating or destroying wealth

But why is misunderstanding this picture a good thing? The reason is that the prospect of "VC funding" attracts a huge number of talented and imaginative people to Silicon Valley.

Learning that their idea doesn't fit the "VC fundable" shape can be highly disillusioning.

The better way is to recognize that "VC fundable" is the stone in the stone soup of Silicon Valley that attracts a lot of other ingredients into the pot, and triggers a lot of Plan B activity.

Misunderstanding of the core model by smart people creates a community of people figuring out alternatives.

A misunderstanding, even a beneficial one, is a mistake with a cost. And in the Bay Area the cost is a very specific sort: rent. The cost of pursuing Plan B innovations in SV is high rent.

Silicon Valley creates non-VC-funded spillover value only to the extent that rents are affordable. A threat to this Plan B spillover zone is actually a threat to the Plan A core zone as well.

The "non-VC" surplus and spillover that makes SV so special, and different from competing regions, can only exist so long as the region is hospitable to the Plan B tribe.

Without this Plan B ecosystem around the Plan A core of VC-funded wealth-creation, SV would be like New York: lots of good culture, but a clear caste division between fat cats and proles.

In the process of trying to compete with Silicon Valley in a misguided way, some of these regions will figure out actual alternative playbooks.