Knowledge is the new start-up capital

By Jon Bradford on December 30th, 2011

Times are changing. Over the last ten years, the cost of starting a consumer internet business has fallen dramatically. Equally, the cost of distribution is approaching zero. There has never been a better time to start a business. Sensing this is so, many people are now turning their backs on corporate jobs, helping to fuel an unprecedented rise of start-ups in hubs, including London and Berlin.

This new class of business relies a lot less on early-stage investment capital. The competitive advantage for these firms now comes from their experience, know-how, creativity and contacts. In other words, they are living on their wits and intellect.

At the earliest stages of a business, investment and intellectual capital are necessary to create critical momentum. They start the ball rolling. As a prominent venture capitalist once put it, investment capital is like rocket fuel: it gets you there faster.

But you have to make sure your rocket is pointing in the right direction, and it is the intellectual capital that serves as the navigation system, ensuring that you know where you are going before you start the count-down.

There are, however, some profound differences between the two asset classes of investment and intellectual capital.

Investment capital is controlled and distributed by a very small number of people, and it comes with a series of terms and conditions. Intellectual capital, on the other hand, is widely distributed, and individuals can choose the terms on which it is shared. It can be given away freely, or charged for.

In our fast-moving society, the free exchange of information creates more value to both the provider of the information and the recipient than a proprietary approach. We are moving from a time when knowledge distribution was restricted and proprietary to an open source, collaborative future.

This is the fuel on which Silicon Valley has operated for decades. Now, others are cottoning on.

Unlike conventional investment, intellectual capital can be redistributed again and again. The advice continually evolves: it becomes more refined, crafted and useful, based on feedback.

Similarly, the recipient of knowledge can now choose to pass it on to others, creating a network effect of expertise, strengthening the ecosystem and accelerating idea generation.

Finally, and possibly most importantly, the cornerstone of an innovative and entrepreneurial culture is failure. It can’t be repeated enough that failure must be embraced and accepted as natural consequence of innovation. A culture which shuns failure is a culture that shuns entrepreneurship, and, ultimately, wealth creation.

This is where the most significant difference between venture capital and intellectual capital exists. Failure leads to the loss of investment capital. That is accepted by venture capitalists and angel investors alike, who encourage businesses to take risks with the potential of a big pay-out on a few of their bets.

But intellectual capital is different, because entrepreneurs arguably learn more from their failures than from their successes. Heads you win, tails you win – at least, in respect of your intellectual capital.

The knowledge and know-how generated from success and failure builds a stronger ecosystem. Imagine it as a pruning of ideas; the creation of a fertile “entrepreneurial compost heap” and the recycling of expertise being dug back into new ideas, helping them to germinate, take root and grow back stronger.

The latent potential of any ecosystem to generate and strengthen its intellectual capital is a valuable and rich resource, but on that remains largely forgotten and overlooked. This is a tragedy, because it is largely controlled by the entrepreneurs themselves.

A considered approach to the sharing of knowledge and expertise by entrepreneurs will create a vibrant and stimulating envirnoment. This does not require permission. Give it freely, pass it on and finish every meeting with: “Is there anything I can do to help you?”

Mass adoption of this strategy by the wider start-up communities outside Silicon Valley will create a stronger and more transparent ecosystem that supports heroes and highlights bad practices. It is a crowdsourced, peer-to-peer support network that comes from the community.

Perhaps best of all, unlocking the latent potential of intellectual capital will reduce the reliance of the start-up community on investment capital and its owners – nudging the balance even further in the direction of what – and, yes, who – you know.