November 03, 2018

If the supply of risk capital declines, what then?

I think we'll see a lot more Craigslists: sustainable "businesses", "operations" really, that earn enough money to fund themselves on an ongoing basis, even without much growth.

It strikes me that we lack a category for Craigslist. They clearly aren't trying to maximize profit. And yet, nonprofit doesn't feel quite right, either: the connotation is too "humanitarian" (arts, healthcare), with funding from donors. Somehow a website for apartment and job listings doesn't seem to sit right, in that category.

But maybe my thinking is too narrow. Nonprofits do everything from disaster relief (Red Cross) to looking after real estate (my condo association), to museums and even international aid (Rotary).

I get a lot of sideways stares when I call a tech company a "nonprofit". But there's no reason we couldn't have more Craigslists and given how efficient modern software stacks are, and how things are stabilizing, I think we'll see a lot more stuff like this: not hockey-stick venture growth, but too many active users to shut down.

As I thought about it more, I came up with the following taxonomy of funding models:

  • Traditional venture capital: always understood to be temporary. Growth extremely important.
  • Revenue, for profit: How the Fortune 500 runs. Long-term stable. Growth important.
  • Revenue, nonprofit: same as above but less emphasis on maximization and growth.
  • Patronage: solicit donations from wealthy benefactors (many arts organizations use this)

The distinction is fuzzier than it first seems. A lot of venture companies won't hit their numbers (most don't) and might end up with more of a nonprofit/patronage model if they aren't shut down outright. In any case, sites like Indiegogo and Kickstarter show that revenue and venture capital aren't the only game in town.

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