3rd Wave Capitalism: Radical business innovation begins anew

Last week, on Thursday night September 16, 2010, I had the good fortune of speaking to the Society for Information Management's (SIM's) Boston chapter about the implications of social media.  You can get the slides here. The core of the talk was the idea that we are entering a third wave of capitalism, and further that two of the most central tenets of capitalism are the collective absorption of risk and the ability to self organize.  The first wave was born with the creation of the "shared stock" company in which the owners could spread the risk to create new ventures too risky for any individual or the crown.  John Jacob Astor, the famous fur and real estate magnate came to the United States shortly after the revolutionary war and began a number of firms, including the American Fur Company, which helped to make Astor America's wealthiest man when he passed away.  His fortune today if compared to the nation's GDP, is calculated by Forbes to be worth $110 billion -- more than Bill Gates and Warren Buffet combined.  Astor, to me, is a great example of first wave capitalism.  Collective risk absorption allowed Astor to grow.

Second wave capitalism rose on the back of the twin innovations of the railroad and the telegraph. Historian Alfred Chandler carefully documented the evolution of the large, complex and modern corporation -- arising from the Scale and Scope (which Chandler's book of that name documents so well) of commerce enabled by the ability to move all manner of goods across the entire nation (or across Europe) in a very short time (3 days for the US), and with great control over the process of shipment through the use of the telegraph.  The capital needed to build the railroads and the telegraphy system created the demand that helped to launch the modern capital markets we still use today.  William Crapo Durant, a man with a most unfortunate middle name, was the father of General Motors.  He built the company and lost due to financial pressures.  Then, working with the upstart Louis Chevrolet, Durant managed to take over GM again, only to lose it again due to his over aggressive financing and expansion efforts.  To me, GM, founded by this courageous entrepreneur, and then well managed through the middle of the 1900's was a shining example, of Second Wave capitalism -- growing to a size and complexity never seen by the world before. There were many other examples too: DuPont, Swift, Sears, AT&T, among others.  GM, and these other firms, could never have reached the scale and efficiency they achieved without collective absorption of risk, and massive self organization of supply, demand, and management.

In this Third Wave of Capitalism, which I think we are beginning to experience now, we have the commercial miracle of the internet.  The internet give us standard parts for knowledge work, communication, and data transport.  Like the telegraph and railroads before it, it provides an unprecedented base upon which to build business models.  An excellent example is the founding of YouTube by Chad Hurley, Steve Chen & Jawed Karim, all alums of PayPal.  The company was founded as a venture backed start up in November 2005, and was sold to Google in November 2006 for $1.65 billion.

I argued that the reason that it was possible to create $1.65 billion in value in only a year was that YouTube is riding atop a standard, global infrastructure that enables massive self organization -- and end user participation at a new level.  Like the waves before it, this infrastructure creates a space for new business models like Google, Twitter, Foursquare and others.

The great news for all of us is that every time there is a new platform for collective absorption of risk, and self organization of resources and drive, there is a huge explosion in the creation of wealth and new products and services for consumers.  I think we are just at the start of such a revolution.

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