A few weeks ago, Steve Poland officially started the ambitious project Ringside Startup to develop, fund and market a startup with the participation of the crowd. A few days ago, the attempt was given up because Poland had failed his expected goals in funding. From our point of view, however, the idea is still interesting and the question remains whether it is possible to launch a startup by collaboration of networked individuals.

We always thought of Open Entrepreneurship in this manner - if such a project succeeded, it would support our idea of the creation of wealth in networks. At the moment we often have to focus on focal networks in our research, giving the creative crowd the possibility to act as micro-entrepreneurs without any risk because the focal center is providing all critical business processes. A crowdsourced startup however would change the game essentially: the decentralized contributors would define, develop and control the whole process. In order to reflect on the failure of Ringside, we would like to highlight the most essential steps of the project.

22 March - Launch of the project

“I’m raising $20,000 in reader/sponsor contributions to launch a web start-up. Contributor participation entitles you to vote on actual business decisions — the first of which will be which idea that I’ve exposed via Techquila Shots will be the web start-up I build from the ground up. I will blog about this entire journey as openly as I can — taking you through the entire start-up process (beginning with incorporation — whether to be LLC or S-Corp Inc; in Delaware or NY) and providing feedback from VCs to Entrepreneurs along the way. My hope is that we’ll all learn quite a lot about the start-up process from this experience.”

26 March - Introducing different business ideas

Poland introduced 5 community concepts and asked the crowd: „Which one of these ideas do you feel has the most potential for ‘success’?”

4 April - The end of the journey

“I don’t believe at this moment that I can raise the contribution size I have been hoping to raise ($10k minimum; $20k goal). My belief was that I could get tons of entrepreneurs that are very interested in the entire start-up experience. […] Well, we’re still going to get to hear that valuable insight – only, I’m starting a venture now. I’ve aligned with a programmer that believes in one of my ideas just as much as I do. Thus, we’re moving forward on it.”

In our opinion, the Ringside project failed because of its setting and predefined conditions. Poland wanted to engage people to donate money instead of providing shares with the possibility to make at least a small profit. The incentive to donate money to a startup only to see what happens with it, seems to be not enough. If Ringside had been a success, the only winner would have been Poland himself, holding all property rights. Collaboration, however, is about true contribution and an advantage for all people involved in such a project - and who should therefore benefit from it as well. As the crowd obviously made clear to Poland by not contributing in the intended way, collaboration is not about standing applauding on the ringside watching the protagonists inside the ring. And it is definitely not about one single person only using the crowd.

Patty Seybold, inspired by the Web 2.0 expo, has made a nice package, combining Web/Biz 2.0, Open Innovation and Customer Integration in her optimistic way.

The Web 2.0 Culture: Loosely-Coupled Innovation

There are no evil empires that can stop innovation. Anything is possible. It’s a culture of DIY, roll your own, solve your own problems, invent a new toolset, secure in the knowledge. […] So, one reason why Web 2.0 is not a fad that will go away or that you can ignore like just another technology buzzword is that it is a cultural phenomenon.

Some people still think of Web 2.0 as a technical innovation - but that‘s only one part of the truth. The main spirit of this phenomenon is people interacting with each other. Above all, also from our point of view, Web 2.0 is a social innovation.

Web 2.0/Enterprise 2.0 Mission: Empower Customers and Employees

In Web 2.0, giving end users the tools to create and publish information, to create and deploy applications, and to mix and match information and applications to create new inventions has provided a platform for innovation.[…] People are inventing new businesses, new business models, new games, new tools, and forming new communities. These new communities don’t just discuss topics of interest; they build things. They solve problems. They invent together.

Empower Customers–Then Align around Their Outcomes

We can harness the Internet to make it easier for us to design, sell, ship, and service our products, but we still have people to lead and inspire, jobs to do, results to achieve, work that we all need to get done in order to contribute value.

Consumer, use the global network to create new things, inspired and driven by the interaction with other consumer and organization harnessing enourmes potential of lead user. The former lead user, have realized their power and using it to produce profit for the firms and for themselves. Openeur are on the rise.

One may consider our concept of Open Entrepreneurship even as an approach towards the future of work building a democratized economy where everyone will become an entrepreneur and can be recruited (or rather recruits himself) for temporal projects in permanently changing constellations and forms of organization. Despite all promises of the so called digital revolution, one may not forget that a democracy like this will probably ever be a representative democracy not making it possible for everyone to participate to the same degree. The model therefore is helpful to improve the understanding of currently happening developments, but does not meet the requirements of solving any problems of society as the concept is not intended to achieve.

So the question remains open whether this approach is part of another organizational fashion or whether it really holds revolutionary potential. Probably the answer to that lies, like most answers to difficult questions, somewhere in between. Like in every oscillation there will stay something behind, possibly even deflecting the movement of the pendulum of organization slightly to another direction. The importance of this approach as of any other, even if they may contain characteristics of fashions, lies in providing permanent challenge to the dynamics of organization. In so far the democratizing creation of wealth in networks can be a contribution to the core of entrepreneurship: the destruction of existing, the creation of new – and thereby the permanent reinvention of organization.

David Beisel, an early-stage VC usally gives valuable internal views on the startup scene, but this time he got it strait to the point. On Genuine VC he posted his experiences about the copycat phenomenon and how entrepreneurs surprisingly working on the same business idea without knowing each other.
He also announces one cause for this effect:

„Information about new startups and trends affecting them is near ubiquitous given the rise of influential and well-read blogs, as well as the mainstream press and conferences. And based on these visible and salient market trends, smart people tend to be led to the same conclusions about wherein lies the opportunity.“
So he believes „the risk of another someone literally copying an entrepreneur’s startup idea is largely overperceived and overweighted.“

In the manner of Open Innovation the idea itself, has literally no worth at all, not untill the idea has succed to switch onto the market and therefore transforms into an innovation. The challenge is to maximize probability that this switch happens.

„Defensibility with other aspects of the business model and above all, execution, mean so much more than a few months time-to-market.“

„The question when pursuing a new idea for a business isn’t “has someone else thought of this and how can we prevent that from happening?” but rather “how can we beat someone else who is thinking of this right now?”

The current developments of entrepreneurship in networks can be described by the metaphor of a jam session in regard to the organizational models currently observable. The interpreters of this jam session, the networked individuals and organizations, seem to have thrown the conductor’s score away improvising on the challenges and opportunities they are confronted with. The result of that may be growing disorder and instability of increasingly diversifying society, but just like in jam sessions this seems to be nevertheless working astoundingly well. The order emerging out of disorder and the stability of highly dynamic systems are two paradox figures that seem to be observable in many situations where sociality meets individualism.

On the basis of the mentioned approaches towards Open Innovation and Open Entrepreneurship, we would like to venture on the attempt of a synthesis. From our point of view both approaches are interacting and built on each other. Only in combination a deeper understanding for the existing potentials of both concepts is possible. While the perspective embodied in Open Innovation by the integration of the user into the organization mostly has a top-down view, Open Entrepreneurship exactly works the other way round from bottom-up. Regarding inter-organizational cooperation, Open Innovation provides an inside-to-outside view on external resources and competencies whereas Open Entrepreneurship comes from the outside, from the widespread knowledge probably emerging in something that could possibly build a future inside in networks or on the switch to markets and hierarchies.

A new type of entrepreneur therefore has to combine elements of both approaches and make innovation on the whole more likely to happen by acting in networking structures together with other users or companies: the Open Entrepreneur or in short terms “Openeur”. According to that, Openeurs are companies or single individuals who take advantage of the opportunities of Open Innovation through collaborative work in networking structures and who generate added values in networks out of their knowledge and faculties.

Morten Hansen and Henry Chesbrough describe networked incubators as companies offering space, coaching, funding, and various basic services for start-ups, and being a new organizational model to create value and wealth.

“The promise of networked incubators lies in their potential to surpass existing organizational structures in creating and growing new businesses. They combine the benefits of large corporations with those of VC-backed start-ups […]. Networked incubators are designed to launch a greater number of ventures more quickly than an established company can, and their ability to connect those start-ups surpasses that of an independent VC.”

In that sense, networked incubators do not play a role much different from intermediary platforms networking Open Entrepreneurs unless they are unvirtually real. The main difference lies in the local aggregation of start-ups produced by networked incubators, having contributed in the density of high-tech companies for example in Silicon Valley as well as for the corporate birth surplus of the New Economy. The interesting part of it lies in the competition between the different networks, virtual regarding intermediary platforms as well as in real terms of networked incubators.

While real start-ups are bound to networked incubators by funding or long-lasting rent-contracts, virtual collaborations do not stick necessarily to a specific network and might change sides to another one if conditions alter. Therefore the competition between virtual networks must usually be higher although networking externalities could maybe suggest staying on the largest platform where the most customers or contacts can be expected. However, for an Open Entrepreneur in virtual networks nothing speaks against partnering with different networks at the same time. Therefore pressure on virtual intermediary platforms could be very high if competitors are around that could benefit from this latent polygamy.

The concept of Open Entrepreneurship contains several paradoxes which can become relevant through this special form of organization. First, people collaborating in networks are consumers and producers at the same time. Alvin Toffler’s approach of prosumerism leads in a functional view in the same direction for the non-monetary economy. Especially for the interactive creation of wealth understood as the informational exchange between manufacturer and user the problem emerges that you may have to start talking to yourself.

Second, Open Entrepreneurs in networks can be seen as competitors and cooperators at the same time. Cooperation and competition are reciprocal, being two sides of the same medal reflecting each other. For instance, if you consider entrepreneurs trading with the same goods over an intermediary platform, they have the same interest in regard to a well working cooperation towards the platform, but stay in competition to each another.

Third, there exists something like an informational dilemma. Large-scale collaboration in the mentioned form seems to have become only possible by the technological development of the internet and the reduction of transaction costs for this collaboration. At the same time the internet reduces asymmetry of information and therefore the customer knows better about the market price of a certain good or service that is tradable worldwide over the internet. Therefore when switching a potential innovation generated in networks onto the worldwide market of the internet, the margins for profits could stay very low. Through this, innovation could be destroyed by the same medium that supported its creation.

A challenging question that remains still open towards the approach of Open Entrepreneurship is the definition of who actually are the individuals that have the necessary attributes to venture entrepreneurship in networks. Eric von Hippel’s concept of Democratizing Innovation (2005) makes thereby the importance of lead users clear as already mentioned. The mostly intrinsic motivation of lead users to cooperation results in networks of lead users not being a mass phenomenon. It is likely that particularly the most creative users take part in such a form of collaboration.

The question that arises is, in how far the mentioned lead user approach might be equivalent to Richard Florida’s concept of the Creative Class (2002) based on the role of creativity by the according to Florida key factors of economic development, technology, talent and tolerance. May it be possible to network the creative class even if they live in different cities all around the world? It seems likely that people belonging to that socio creative group would willingly join to forms of networked collaboration, but as the different concepts focus on different attributes and mental models congruence cannot be proven.

A further look still has to be provided on the creativeness of individuals inside a networked cooperation. If anybody will be in the position to become an entrepreneur in networking structures, what is still the core that qualifies for entrepreneurship? According to Joseph A. Schumpeter the creative destructive element characterizes an entrepreneur.

“They will create something new and destroy the old thing, conceive and carry out bold plans, which, whatever their nature, seem to ridicule any attempt of being grasped.” 

Permanent reinvention and continuous renewal is the consequence of that. The creation of a new organization therefore always embodies already the core of its own destruction. For the creation of wealth in networks this estimation might be true after all considering that the network as well underlies continuous change. The stability of the network therefore is shown by the ability to cope with change inside the network or its parts.

Eric von Hippel (2005) delivered an example for inter-personal collaboration developing goods mainly on the own resources of the group involved in the absence of a platform or manufacturer.  These “User Innovation Networks” as von Hippel calls them can cope with complex, knowledge-based goods like software as well as with physical goods if they can integrate the necessary infrastructure for production into their networks.

For instance, the kite-surfing industry has been mainly developed by customers changing the rules of industrial creation of value and forming a 100-million-dollar industry today. Because of the high specificity and specialists’ knowledge needed to produce kite-sails, not many people possessed the capabilities to develop good sails. These customer developers built only because of their personal needs a community sharing their latest blueprints with each other and continued on developing the kite-sails designed by others. By acting that way, value in networks could have been generated when the blueprints are subsequently manufactured by external sail makers who usually all are able to work with open interfaces and standards like CAD.