Thursday, January 26, 2006

Venture Capital, Open Source, and Quantum Mechanics

Rick gives a cautionary tale about the fickle nature of some VCs, and the dread they inspire in those who need their money. He starts off:

Short story. “Joe” has been working for 5 years to bring a software product to market while keeping the day job waiting & bussing tables. He has a wife, two kids, a dog and they live in a small nothing apartment.

I think “Joe” already has a problem... and we're still in the introduction... do you see it yet? Let's keep going...

For years, Joe toils away while pounding the VC pavement looking for angel, seed, anything. He is in the apartment because he’s already sold the house, already maxed the credit cards, hiding from bill collectors, etc, but he believes! He also driving a Pinto with a billion miles on it; trillions if you do it in kilometers.

At this point Horatio Alger would be pleased... he's working hard and pulling himself up by his boostraps...
Finally, one day, he gets funded. 3 million brand new Yankee dollars into the company. He is flying. The VC says, Joe, you gotta do this full time, quit waiting on tables and Joe says, amen. The VC says, Joe, take a salary with the founder title and Joe says Amen.
At this point the story could be complete, except it goes bad, and thus the cautionary aspect of the story.

Now... I was ready to call foul right at the introduction... but I doubt that most people are. The problem is I have an idea in my head of how things should be... which doesn't match reality.

I've misread an article by Arthur R. Miller in the Harvard Law Review calling for a reboot of the law surrounding protection of ideas. He used the term Quantum Meruit which describes what happens when a price isn't agreed before work is done (IANAL)

I thought he wrote Quantum Merit , and read an entirely new concept into it that wasn't there.

So without further ado, here's my definition of Quantum Merit...

An idea takes some effort and initiative to be useful, or innovative. There is a definite amount of energy and creativity that has to be added to an idea before it becomes a useful thing in any system that will utilize it. This amount of work is the value of measure of Quantum Merit.

The thing is that Venture Capitalists see the smallest possible amount of innovation as one that they know how to fund and exploit. In the physics of the VC, the Quant of Merit is a Company. They can't work with anything smaller, their physics can't comprehend it, for good reason.

One very good reason for this is the Patent and Copyright laws in existance. The courts and lawmakers see it in their best interests to insist that the smallest possible unit of innovation that can be rewarded is one that is both Concrete and Novel, which make small innovations immeasureable, and thus decidedly un-Quanta-fyable (bad spelling, but I hope it makes the point)

This is the reason that "Joe" up above was forced to work without any compensation for 5 years... the fact that it takes a fairly large chunk of change to reach the quanta at which the market knows they can get the law to recognize a chunk of innovation, and thus have some reasonable assurance of getting to keep their investment.

We need to change the rules, and allow smaller units of innovation to be rewarded. Open source does this in a decidedly non-capitalistic, but effective way. Unfortunately for "Joe", he didn't think this was a reliable option, and for many people it's not.

I believe that innovation is just a matter of ideas that are commonly available, being put together with enough energy to get to the quantum level of being useful enough... and then simply keeping it alive, and not letting it get lost due to bad marketing.

I believe it would be a very good thing if we can get the courts and lawmakers to reconsider their stance, and normalize things to protect smaller (but valuable) innovations. Now this is what Arthur Miller does argue, quite well, in his article on the subject.

"Joe" should be able to recover value from his work in the very first paragraph of the story above. If he could be fairly compensated for something less than a VC bundle of cash, the rest of the story wouldn't have happened. Doc asks how to disrupt VC? This is how you disrupt VC.

Thank you for your time and attention.


PS: More discussion about Quanta:
Open source people see the Quanta as a project on SourceForge. Once a group of people (or a single very dedicated person) get a project going, and it stays active, that its the smallest amount of merit they can rationally discuss.

In Blogging, it gets hazy, but it tends to boil down to an actual person, or perhaps even a blog (which could be one of many written by even a single person). This physics allows us to go into areas with a much lower quanta, or a low barrier to entry in Economics parlance.

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