Column: Why you no longer need a venture capitalist to start a successful business

People gather and talk at Sightglass Coffee in the South of Market (SoMA) neighborhood in San Francisco, California January 14, 2015. Visitors can get a taste of the booming startup scene in San Francisco, home to thousands of technology businesses, particularly in neighborhoods that are popular with tech workers like the fast-gentrifying SoMA. Jack Dorsey, the co-founder of Twitter and Square, recently made an investment in Sightglass Coffee - some believe for the opportunity to observe digitally savvy San Franciscans in their most natural habitat. Picture taken January 14, 2015. Photo by Robert Galbraith/Reuters

If I can use a credit card to start a business that will quickly grow to be dominant, why do I need a venture capitalist? asks Jerry Davis, author of the new book, “The Vanishing American Corporation.” Photo by Robert Galbraith/Reuters

Editor’s Note: This is the fourth in a series of excerpts we are publishing from sociologist Jerry Davis’s new book, “The Vanishing American Corporation: Navigating the Hazards of a New Economy.” For more on the topic, watch last week’s Making Sen$e report below.

— Kristen Doerer, Making Sen$e Editor

Nike demonstrated that the value of sneakers is in the design and the brand, not in the actual physical production or distribution of the shoes. Design and execution can be entirely separated, and consumers do not seem to be bothered by it. The value is in the intellectual property; goods themselves are fungible. This model spread far beyond the garment industry to include computers and electronics, pharmaceuticals, pet food and almost anything else you can buy in the U.S. Nearly everyone is aware that the iPhone, the leading product of our age, is assembled by employees of Foxconn, not by Apple. Aside from occasional concerns about human rights abuses, however, consumers and investors are untroubled by this.

If I can use a credit card to start a business that will quickly grow to be dominant, why do I need a venture capitalist?

Dell demonstrated that even the design is not always especially important if the price is low enough. Why pay extra for an IBM label when a Dell is just as good, customizable and a lot less expensive? Vizio took the Dell idea a step further. The designs are thoroughly generic, and there is no customization. But they are much, much less expensive than the name brands like Sony. Unlike Sony, Vizio has none of the baggage (and costs) of being a social institution. And when flat-screen TVs are replaced by implantable 3D virtual reality brainpods, Vizio will disappear with a minimum of fuss and tears, to be replaced by a new generic implantable brainpod vendor.

There is something of an irony in the fact that the shareholder-driven outsourcings of the 1990s and 2000s created the infrastructure of generic manufacturing, distribution, business services and computing power to render the shareholder-owned corporation obsolete. The restructurings of the 1990s were almost inevitably accompanied by a nod to shareholder value, as at the food company Sara Lee. The spread of the virtual corporation model was a boon for generic plug-and-play vendors who could assemble products and manage supply chains, ship goods to consumers and provide various business services. But once all of these components were available off-the-shelf — not just the physical components, but all the processes needed to do business — it became much easier for anyone to be the next Michael Dell. The economies of scale that made corporations indispensable in the 20th century had now shifted against them.

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Surprisingly enough, this often came at the expense of the investor class who had helped make it happen in the first place. If I can use a credit card to start a business that will quickly grow to be dominant, why do I need a venture capitalist? A 2013 article in The New Yorker described how the cost of starting up a new venture had collapsed due to the ready availability of plug-in resources.

Once, an entrepreneur would go to a venture capitalist for an initial five-million-dollar funding round-money that was necessary for hardware costs, software costs, marketing, distribution, customer service, sales, and so on. Now there are online alternatives. ‘In 2005, the whole thing exploded,’ [an informant] told me. ‘Hardware? No, now you just put it on Amazon or Rackspace. Software? It’s all open-source. Distribution? It’s the App Store, it’s Facebook. Customer service? It’s Twitter–just respond to your best customers on Twitter and Get Satisfaction. Sales and marketing? It’s Google AdWords, AdSense. So the cost to build and launch a product went from five million…to one million…to five hundred thousand…and it’s now to fifty thousand.’

It is not hard to predict that this cost structure will continue to decline, and it is not just for app startups. Capital equipment has also dropped dramatically in cost, due in large part to CNC (computer numerical control) technology, which acts as the brains of machine tools. A Shopbot router, which could cut plans for much of the furniture in the Ikea catalogue, costs far less than a year of tuition at a private college, and a portable version costs not much more than a laptop. Indeed, outfitting a machine shop can cost far less than sending a kid to college these days. But there is no need to actually purchase or rent the equipment because membership in Techshop or other similar makerspaces allows makers to use high-end precision equipment for the cost of a gym membership. With easy access to open-source designs, anyone who can assemble Ikea furniture can make it themselves, using their own materials.

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