The Nature Of The Firm and Work Markets

Those who watched the video I posted on Sunday saw me talking about this. But I didn't do it justice so I'm going to do a full post on this.

The brilliant Nobel prize winning economist Ronald Coase (who is still alive!) wrote a seminal essay called The Nature Of The Firm in 1937. This is an important work and something everyone should read. It is short, only 20 pages.

The entire essay

The wikipedia page on the essay

In The Nature Of The Firm, Coase investigates why "individuals choose to form partnerships, companies and other business entities rather than trading bilaterally through contracts on a market."

Coase argues that transaction costs that make "trading bilaterally through contracts" expensive spur the organization of firms. And if those transaction costs could be eliminated, more individuals would choose to trade with each other rather than forming partnerships, companies, and other business entities.

Enter the internet and having a computer in your pocket into this model and things change. Technology has been causing these transaction costs to drop precipitously for years now and the result is we have seen the emergence of work markets in which "individuals trade bilaterally through contracts."

Our firm is seeing these work markets sprout up all around us and if there is a single investment theme that is dominating our deal flow right now, this would be it. Christina touched on this in her recent blog post on the USV blog (the section she titled "work is shifting to a peer to peer model").

We have one investment in this category, appropriately called WorkMarket, and we will certainly make others as long as we can be sure they are not competitive with each other. And we can thank Ronald Coase who laid out this investment thesis for us only 75 years ago!

#VC & Technology

Comments (Archived):

  1. Dave W Baldwin

    Wise move.As the marketplace evolves into a more open flea market over the next 5 years, the same will happen with development/build.

  2. John Best

    I was writing something about this yesterday – the question was if the business took off, what my next hire would be. I thought about it for a while, and realised I wasn’t thinking about hiring immediately. That’s not to say I don’t have ideas about what inputs I’d need from outsiders (the founders can only wear so many hats, after all) but I was thinking about the work flow in terms of contracted projects. “Leasing” talent if you like. The Virtual firm has long been talked about, I wonder if the changing nature and ease of execution of transactional work will see it finally take off as a widely adopted model.

  3. baba12

    What is expressed in the work by Professor Coase and the use of technology to eliminate or minimize the transaction costs are part of the work to remove friction in the system.Unfortunately most of the transactions are conducted in a manner that works to keep the friction high.Middlemen(women) tend to play significant roles in connecting those who seek services and those who seek to provide those services. Technology has only made it more efficient and possibly reduced some of the fees.In certain sectors it is not possible as of yet to have a eco system to reduce the friction.Wonder how Mr.Wilson would react if he were to find out that there maybe folks out there who would say to entrepreneurs ” I know the folks at USV, I can get you in front of them, for a fee”I am doubtful a  peer to peer model in sectors like the VC industry work well or would be welcomed.The VC industry by and large works on introductions made and the connections that already exist.

  4. Carl J. Mistlebauer

    I have been thinking about this since William initially posted the Wiki link.Of course I think about it as someone with a background in “old economy” manufacturing and having experience with Guru.com.I have not read Christina’s post and won’t be able to till tonight late.  But, the reality is I can only go “peer to peer” in about 15% of the tasks that are required to keep a company running.  Thus, until our whole economy is information based the potential of WorkMarket is limited.

    1. fredwilson

      most of the work that is put on Workmarket.com is site based work, not virtual

      1. John Best

        That’s something I wouldn’t have anticipated. Are we seeing individuals becoming their own temping agencies?

        1. Work Market

          We are seeing the non value added costs in the labor supply chain being eliminated.

      2. leapy

        I welcome it.I have just spent 15 months contracting on-site for a UK quoted PLC where roughly 50% of my billing was taken by the “consultancy” providing me.Let me deal direct!

    2. michaelmayes

      Carl, our primary focus at Work Market is on enterprise, working with businesses who do thousands of assignments every week using on-demand labor and typically require someone to be physically present to perform a task. We think sites like guru.com or oDesk.com have created opportunities for the virtual web worker. It’s corollary to what we do. But there’s a huge market in IT service, Healthcare, Field Marketing, Legal, etc. for what Work Market is building at the enterprise level.Work Market has created a platform that enables a peer-to-peer conversation between an enterprise business and it’s network of contractor and employee relationships.(PS: I head up product design for Work Market)

      1. Richard

        I been using odesk and other freelance markets for 3 years now. There are lots of tricks of the trade to gettiing thenmist out of these sites.

      2. Erlend Wilhelmsen

        I think I understand what your roadmap is and it’s smart. Perhaps the challenge is, at the enterprise level, why do they want it? That is, the “fluid worker” — does she not become the virus against worker security within the enterprise?

  5. JimHirshfield

    Is the natural progression towards work market futures contracts? Will we speculate and trade in lieu of actually working?Is there an arbitrage opportunity in buying a developers time today for services needed in six months? I think so.

    1. fredwilson

      great question. i think you are right that we will see these things emerge

    2. markslater

      very good.

    3. BillSeitz

      That’s called a “retainer”.I’m dubious about it becoming a liquid derivative.

      1. JimHirshfield

        Point taken, Bill. I agree, liquidity matters.But to say it’s a retainer is, by analogy, is to say that there’s no difference between buying 10 shares of IBM each month (retainer) versus buying a 6-month call option on IBM.Again, I’m with you that none of this works without liquidity.

    4. Michael Elling

      Aren’t they doing it with athletes (particularly in soccer) and with horses?  Enter biological sciences.  The future is coming fast!

      1. JimHirshfield

        With athletes, I suppose kind of, when you think about signing bonus plus multi-year contracts.Over a dozen years ago David Bowie securitized the future revenue of his future music sales (or from performance rights….I don’t remember the details).

        1. Richard

          Looks like folks are conflating some terms here (which is expected considering that finance like other professions like to make it seem like they are rocket scientists).David Bowie issued an ABS ( asset backed security). He thus securitized his future earnings into a present day payout. (this though is NOT a futures contract).

          1. JimHirshfield

            Mea culpa. 

        2. Michael Elling

          +1 Bowie! Philly’s hometown hero.

    5. Jork

      Thanks for making the comparison with the futures markets … since futures contracts transfer the risk of the buyer to the seller  over time for a certain price. They aim to decrease by themselves “transaction costs” of the economy. By this mean they make it more efficient. Just as important they serve as a price discovery tool.Within futures markets the most vital characterstic that makes-or-breaks the success of a futures contract is  standardization (of the underlying). The underlying should be fungible or interchangeable. Does the same holds for organization or the labour market?Yes, because you can interchange one labour force for the other (as long as they are equally skilled and specialized – ofcourse not as good as you can do with corn but or live cattle but the idea remains the same… delivery of something (labour) for a certain price (wagers).

      1. ShanaC

        you can obfusicate in a contract the standardization process.

        1. Jork

          Well… contracts can be (made) fungible… but it is much harder to find underlying goods that are interchangeable. Interchanging a bushel of white maize with another bushel of white maize is a lot easier than interchanging one labour hour of Joe Black for one labour hour of Jill Green.

    6. leapy

      I think that you have hit the nail on the head. Derivatives contracts for standardised work deliverables is definitely the near future.This is already on the way. I have just spent one year contracting for a large UK energy company and their IT Services operation is increasingly moving onto a service-based model where the end-deliverables are contracted (data center hosting, IT Service Management, Asset Management) not the work component to deliver them.This thinking has to cascade down to the Workmarket level of things – and rapidly too.

    7. ShanaC

      Yes, there is an opportunity – it also will cause the price of startups to explode/go down radically (at the same time).  Don’t believe me – believe adam davidson!http://www.nytimes.com/2012…Its becoming unprofitable to be a dairy farmer because of commodity price swings UNLESS you have scale- because the time issues for tracking a futures or options market is intense.Futures/options plus computing can Increase!!! transaction costs because most people don’t worry about the transaction of time.  If you don’t make enough time/money to have help covering your ability to hedge (very time consuming) you are going to disappear from the business of making milk/programming.

      1. JimHirshfield

        Lots of factors that make dairy farming a tough business – don’t get this vegan started!!   ;-)But I get your point.  

        1. ShanaC

          Having options in fields that didn’t have them before does strange things to those markets.I’ve been overthinking that recently.  Granted I get away with it for a good reason :)Seriously though – if you can catch Adam Davidson articles, do – Planet Money the podcast is amazing, and he has a huge knack for explaining things like derivatives, housing markets, why gifts are bad from an economists perspective with the best possible examples 🙂

    8. Richard

      What do you need (other than what is missing related to the underlying contract, stadardization, delivery (cash vs actual)) for a futures market? Answer: hedgers and speculators.This is really where the analogy breaks down, i.e., no speculators.

  6. Humberto

    1. Fred, amazing post. I like how you remixed General Investment (at USV), a nobel prize and a specific investment. i’ll read the essay. thanks2. About WorkMarket, I think a one size fits all approach will eventually fail, because of the noize and prestige associated with job search.. I do love MBAandCo, who have this amazing approach for great positions in the corporate world. Some wild ex-mckinsey colleagues do freelance consulting through this platform, and many times end up in very cool projects – like launching a retail operation in Dubai, doing digital marketing in an Indian province, etc..3. Disqus still took me 13 secs to load..

    1. Work Market

      Our clients are organizing multiple teams of contractors – They form groups and people join them.  Some groups are for programmers, some are for onsite help, others for writers.  Our clients find people directly from our site, invite in contractors they already know and use the Work Market tools to place links in job ads and find new people as well.  Our clients find value in managing all contractors in one place regardless of skill set.

      1. Humberto

        i understand. it is a great solution for a one stop shop of “middleware Employment”, but I miss you’ll miss big market verticals that don’t want in that approach.

  7. jason wright

    So the firm model was constructed to contend with transaction costs, a form of economy of scale.Didn’t Dirk Bass form the first corporation to create the sufficiently large syndicated pool of capital required to invest in his global trading plan?

  8. David Semeria

    I’m sure longtime readers of this blog, like myself, find it fascinating to watch USV’s investment thesis evolve over time. You’re basically showing us where the puck is going. Well done Fred.

    1. fredwilson

      where i think it is goingwhere i hope it is goingbecause that’s where i am going

      1. jason wright

        Timing is everything. I wouldn’t even want to be on the road to Damascus at the moment.

        1. JamesHRH

          Timing isn’t everything……being right makes a difference 😉

          1. John Best

            The intersection of right, and right now. 🙂

          2. awaldstein

            So true.Right is when the market decides. No sooner or later. 

          3. Kasi Viswanathan Agilandam

            Right people at the right time … right now can be a mere coincidence 🙂 

          4. JamesHRH

            Mark Suster posted the buyer’s framework recently:- why should I buy?- why should I buy now?- why should I buy from you?You can see how easily that transposes to investment themes:- is this going to happen?- is the market ready for it to happen right now?- who has the pieces in place to make it happen?@awaldstein:disqus its not an intersection, its a classic European triangular traffic circle!

          5. leigh

            I’ve seen pple be wrong with great timing — some idiots often willing to pay them and make them rich.In such cases, two wrongs kinda make a right.Timing is often everything.  @JamesHRH — won’t let me reply again below — agree with you and that’s why it’s wrong and why i said, kinda to the right 😉

          6. JamesHRH

            rich alone is the wrong outcome for me.

          7. jason wright

            Yes, but if the timing is wrong you may never know if you could have been right. Cooking – the cake requires the rights ingredients, in the right quantities, mixed in the right order, cooked at the right temperature, for the right number of minutes. It’s a narrow pathway to success, and one wrong step off it can result in a Ray Bradbury 🙂

          8. JamesHRH

            We may be going down a bunny hole here (Easter is coming, after all).see my post re:traffic circle.An accomplished pastry chef can tell if your new idea for cake will turn into something tasty, from the recipe (is it right).An accomplished baking goods investor / marketer / operator will be able to tell if the market is ready for your new idea for cake.You are describing the pieces required to make the cake.Picky, but I have had two cappuccinos already today!

          9. awaldstein

            Right and wrong for market size are mutable terms of course.For Fred, success is scale. For many, success is a lifestyle biz.This is why I like today’s model of building to discover the market before building to scale for some ideas.

          10. ShanaC

            What’s a ray bradbury?

        2. testtest

          i don’t think you can time opportunity.you can take a position that gives you the highest probabilistic chance of success.

          1. FAKE GRIMLOCK

            INCREASE LUCK FUNNEL = WIN.

      2. Matt A. Myers

        And where you need to let people know you’re going, so then companies exist that fit your thesis (and makes your job easier so they contact you and you’re not doing all the hunting). :)We all learn something / get a bit of direction, the internet can evolve a little faster, and you have more companies to choose from to invest in. Win-win-win!

      3. davidmit

        I agree that’s where the world is going. Although there are other reasons why people form business entities: limited liability, scale effects, to name a few.

    2. ShanaC

      Not completely – I don’t see a big data thing at USV.  And there is space for USV to go in that direction…

      1. David Semeria

        The “big data thing” is not a direction in itself, Shana, it’s one of many aspects a “direction” can have.For example, big data mining concepts could lie at the heart of the new type of transactions Fred mentioned in this post. By identifying recurring patterns in these transactions, innovators could find ways of improving them.

        1. ShanaC

          I think in certain cases it is going to become a bigger aspect of many directions one can go to for exactly the reason you stated – and that it may become its own direction in and of itself.

          1. jason wright

            “What’s a ray bradbury?”‘Butterfly Effect’ – he wrote a fictional story based on the idea that the slightest and seemingly most insignificant of changes can have enormous consequences later on.

          2. ShanaC

            So why not call it a “butterfly effect” (and I need to read more ray bradbury…)

      2. fredwilson

        that’s not where we are headed

        1. ShanaC

          I know, but you could….

    3. karen_e

       For sure, that’s what keeps me coming back.

    4. William Mougayar

      But Coase’s theories are not the investment thesis. Their interpretation is. 

  9. Robert Thuston

    Break down “transaction costs”

    1. fredwilson

      here’s what wikipedia says on that frontsearch and information costs, bargaining costs, keeping trade secrets<http: en.wikipedia.org=”” wiki=”” trade_secret=””>,and policing and enforcement costs

  10. Tom Labus

    Consumer banking and healthcare please.I love what these guys from Dollar Shave Club http://www.dollarshaveclub…. are doing with razor blades.  They’re going right at Gillette.  The most entrenched market with huge baggage.

    1. JamesHRH

      Man, that is very well done.The tone of the video and the “Chairman’s no BS seal’ is spot on for what they are likely doing – targeting young men early in the habit creation cycle.I am a tennis guy – going to the BNP Paribas tourney this month – and I think the Federer bit is beautiful. It totally undermines sponsorship as an idea. They could add right in that spot “and why the f87k does having a good backhand mean you know s41t about shaving?’ line.If you know these guys, tell them to edit in a ‘we ship you the handle for free, who are we kidding, we make money selling you blades’ line. I thought, through most of it, that they wanted me to buy Gillette razors and then buy their blades. Even after I checked out the first product page.I don’t know why they would call them handles either: razor, blades, gel/foam/soap.Focus group of one here! You have a great eye – this is really strong stuff.BTW, I just reset – yesterday – my home / travel kit with $84 of Gillette fusion products – (razor+5 blades)x2. Ouch.

      1. Matt A. Myers

        I was waiting for the said Federer bit, and resulted in a power laugh.

        1. JamesHRH

          For every non-Canadian who has never heard of Rick Mercer, he has made the walking rant a signature bit. It is a terrific format.Here’s a sample: http://www.youtube.com/watc…

          1. Matt A. Myers

            Ahh that’s why it felt so homely!

      2. Tom Labus

        The VC’s are top line too.  Kleiner Perkins and Andreessen.

    2. ShanaC

      By any miracle, do you know who that guy in the video is?  He’s hilarious in a serious way, and he has nice eyes….

      1. Tom Labus

        No, sorry.Part of the team my guess.

        1. ShanaC

          He’s very cute..

          1. Tom Labus

            Order some blades and ask for home delivery!!

          2. ShanaC

            Ha, but they don’t have women’s blades 🙁 (still tempted to try the mens blades though)

          3. LE

            Tell him you want to interview him for AVC.com.(Or you can just turn the page).

  11. JamesHRH

    Cristina’s post was good the first time I read it. Smart.However, every example is from an area that has is freelance based and has been for some time.I don’t doubt that transaction costs for being a project based worker are dropping and that Work Market will make that more efficient. It is cleaning out intermediaries (I got a buddy who has a cousin who plays bocce with the foreman at…….).A long term trend that turns the world of work into free agency? Not buying it. There are many other transaction costs, mostly around acquiring job specific knowledge, that will make most jobs to complex too turn into a commodity.

    1. Anne Libby

      Workplaces are communities — and being outside of this construct is not for everyone.   That’s a hidden “cost” of free agency.I think that social shifts can take place to mediate this cost.   But these shifts will take place at something approaching the speed of change for human nature.   Or they’ll take into account our desire to gather in tribes.

      1. JamesHRH

        Anne, i have worked from home, when I was single.When anyone (that I like!) ever tells me they are ‘going free agent and creating a home office’, I run them through an ‘isolation acceptance or preparation checklist’.Working at home all alone is a lot different than being a project based tradesperson. The virtual firm is not likely much of a widespread reality as there is a big gap between the ability to enable people to work at home and the number of people who are capable and comfortable working virtually (if that makes sense).

        1. Matt A. Myers

          I do most of my work in cafes – my co-workers are my friends who I regularly see there, who I can bounce ideas off of, chat with, etc.. or just feel connected back to reality temporarily before diving back in.(Mind you, I’m thinking and planning throughout the day)

        2. kidmercury

          shared workspaces, conferences, and occassional office meetups are all a part of the formula to address the loneliness problem. i agree though the infrastructure is far from ready. i work from home, and i’m generally okay with it because i’m comfortable being alone for extended periods of time, but most people would go nuts in that environment. actually now that i think about it maybe that’s what happened to me too! 🙂

          1. JLM

            Interesting insight.My office is just 3 minutes from my house so I have almost no transaction cost to “go to work” nor do I have a huge benefit of working from home.I love to work from home and am abundantly more productive because of the absence of interruptions.  Well except for my wife who is always a welcome interruption.  We have separate home offices.I think it is very, very dependent upon the individual.I also subscribe to the notion of never missing a chance to meet and have lunch.  A missed lunch is a missed opportunity.So my alone time is tempered by more than a bit of people contact.I am often alone but rarely lonely.

          2. panterosa,

            I agree working from home is highly individual. I will add that what phase you are in in your life also makes a difference, and whether you are the primary caretaker of a family.The two ends of the stick are loneliness and interruptions, and that is also personal preference.I have always worked for myself, mainly at home but I have had art studios as well. Since I became a single mother I’m not paying a babysitter to go to my studio at night, so I’ve been working at home. Since I design for children its a happy thing for my daughter.

          3. William Mougayar

            Pinning you down for lunch or brunch at SXSW. You better be in town 🙂

          4. Anne Libby

            A strong family goes a long way in providing the sense of belonging so many seek…as do the kind of long-term term relationships that are the privilege of those of us who are “of a certain age.”

          5. JamesHRH

            LOL

          6. Anne Libby

            And to your point, it’s more than just infrastructure, as we might usually speak of it here.   And it’s more than the loneliness of spending time alone.It’s about a cultural infrastructure that a workplace provides. Most people want to “belong” to something.  One of many reasons — though it’s complicated — that we see people stay in sub-optimal situations at work.  For many, there’s a fear of being separated from the tribe.  

          7. kidmercury

            Absolutely — that feeling of disconnect, or even the fear of it, can be brutal.

        3. Michael Elling

          Skype video, etc…, but more importantly high-def video and the ability to be both fixed and mobile (4+ inch smartphones on wifi or 4G) will remove much of the isolation.  I rediscovered someone from Malta a few weeks ago that I had only known telephonically 10 years ago and met him for the first time on skype.  He was wearing a ManU jacket and yet I had never known that about him.  All of a sudden we were many degrees closer.  2-way video is just beginning to change our world.  It will definitely help the WorkMarket model.

          1. JamesHRH

            video is a good point……will chew on that.I had to book appointments away from the home office. Or walk around when I call people. Sitting still undermines my productivity.I have a friend who works from small town in the mountains and has his own small office. He won’t let me Skype him, b/c then he can;t use his cordless phone and talk to me while he rides his bike around the park next door.There are some benefits!

          2. Michael Elling

            I bang the bandwidth drum incessantly.  Pervasive rich bandwidth (especially in the hinterlands http://bit.ly/zW1OFF).  The 1990s was the decade where digital text scaled (AOL), the 2000s where digital pictures scaled (Facebook), will the 2010s be when 2-way digital (HD) video scales?  MSFT buys skype.  Fred mentioned using Google hangout the other day.  Then there is face-time.  Of course these platforms will need to interoperate.

        4. Donna Brewington White

          I do some freelance work with a search firm that is all virtual — at times I lead or team up on projects with other recruiters. It works really well!  Technology makes it happen.I think one of the problems for me working at home is that work gets integrated into my life in such a way that the work day never truly ends. When I am not working, it just feels like taking a break.  If I worked in an office every day, I wouldn’t have as much flexibility, but I would probably have more free time.

          1. JamesHRH

            My Dad was a criminal trial lawyer.He had the beginning and nd of his work pretty well delineated. Most people need that help – they lack the discipline to just ‘turn work off’.Although, it is not much of an issue, with startup entrepreneurs, as a group 😉

          2. Donna Brewington White

            Which is probably one of the reasons I relate to startup entrepreneurs.  The first time I worked with one as a client, I thought “I have found my people.”Never thought of it as a discipline issue, but it might be.  Ironic though considering that working from home requires immense discipline.

          3. Donna Brewington White

            Wow, James, then it is even more impressive that he worked as long as he did and explains why hearing loss would cause him to retire. Was that hard for him? What type of transition did he make?

      2. fredwilson

        Just like home schooling and old schooling

        1. JLM

          I just cannot imagine the burden of home schooling.  It would take me 5 years to prepare to home school anyone.

        2. JamesHRH

          Great point.What is the adoption rate on this example?

      3. michaelmayes

        Anne, you got it right. Work Market is all about communities. We talk about an enterprise’s “vendor graph” or “work graph” as a way to think about who a company works with or works for.We are not about isolated individuals hovering over keyboards in cafes or dark home offices. Most of what we see on the platform today is on-site work requiring one or more people to show up at an office, work site, or home.Work Market is about enabling small businesses and independent professionals to build strong relationships with their clients (the “buyers” on Work Market). We are a thin layer – a platform of tools and workflow that enable a more efficient transaction and provide both parties with a dataset to better understand the work being performed.Its the social nature of work that we are focused on. Ratings and reputation. Ease of invoicing and discussing payment. Customizing the interaction between a buyer and seller of labor. Helping you find work. Helping businesses find contractors, freelancers, experts, consultants – the right resource, at the right place, the right time, with the right attitude.

        1. Donna Brewington White

          First of all, I think Work Market is an outstanding idea.  Are you making an attempt to expand beyond technical work (unless you have already)?  Do you see Work Market strictly as a facilitator of bringing together the parties to a work agreement transaction?    

          1. michaelmayes

            Work Market will launch in several other areas this year, rapidly expanding outside of IT services, initially focusing on North America, and then stepping into international markets as well.I think we are more a facilitator of tools and data for buyers and sellers of labor. We’re a thin layer between the transaction that helps make it more effective and efficient. We don’t get involved, so I wouldn’t say that we are the facilitator of the transaction.We’re looking forward to sharing a lot more about what we do throughout the Spring as we update our public website, onboard more users into new industries, and work with more organization to organize and manage their contractors and employees.

        2. zotium

          How are you going to be different than odesk?

          1. michaelmayes

            Zotium,ODesk is more focused on 1-1 needs, like a one-off building of a website. They also focus on virtual out-sourced work that can be done from anywhere in the world. I’ve read that most oDesk customers spend $5-10k and that’s the lifetime value. One project one time.Work Market is an enterprise SaaS platform, like Salesforce is to CRM. Our clients manage 1000s of assignments every day. They run their business on Work Market, spending millions of dollars a year on contract labor. The lifetime relationship is different. the target client is different. And our users are different too. Over 90% of assignments on Work Market today are in person, on site. People get backgrounds checks, take tests and get vetted before working. You get to know these people and you build relationships. It’s a key to running a model that leverages the power of the on-demand contract workforce.

      4. matthughes

        My wife and I work from home…We have an intercom (Facetime, no joke). Or we just yell down the hall… 

      5. Donna Brewington White

        I think this is part of what I was getting at in my comment earlier.  There is a community aspect to work — we are communal creatures, even those who are introverts. For me, that community does not have to come from being in the same place at the same time, but through a sense of connection, working on a common vision or goal.  Although as someone who is home-based and self-employed, I do at times miss being part of a team and going into an office (but only part of the time — I get distracted).  Some of that “community” is formed with clients.

    2. BillSeitz

      CharlesHandy’s “doughnut” model suggests that a firm (esp a single-purpose corporation, which I think is the related trend) will have a “core” of unique-value-creation functions, where having a more-stable team/culture will make sense, with everything else  being more liquid. (Perhaps this will kill the SAP model of customized logistics software, where it will make sense to keep your processes more vanilla for sake of being able to “plug and play” your people. On the other hand, maybe SAP will be more of an API for automated logistics, and you’ll eliminate those people – expert systems to approve your expense report…)http://webseitz.fluxent.com…

    3. Christina Cacioppo

      This paper’s one of the best I’ve seen that explains the links between job-specific training and freelancification: http://faculty.fuqua.duke.e…I’ve found the analogy of the chef, tycoon, and skipper helpful in thinking through your last point.

      1. JamesHRH

        Christina – I scrolled the report, saw the equations and passed!And I have an undergraduate degree in Math!Humour me – give me the <50 word summary of the chef, tycoon & skipper triangle.@fredwilson:disqus  are you hiding more Christinas somewhere? If you are stockpiling them, I am in the market!

        1. Christina Cacioppo

          Toward the end of the introduction, there’s an example given of a tycoon, a chef (who has undergone training), and a skipper. In some cases, the tycoon owns the boat; in others, it’s the skipper.The story concludes with some variation on “perfect contracts are impossible to write up front, and the more decision makers a negotiation has, the tougher it is too — so the distribution of resources (or assets if you’re thinking about a firm) matters tremendously.” Put differently: eduction (/skill accumulation) still happens in a freelancified world, but those workers will need to be pretty sure that, when they decide to invest in their human capital, they’ll earn an attractive return.

          1. JamesHRH

            One of my kids watches a cartoon where they say ‘super cool’. Super cool that is.I have a simple theorem about market adoption that is the antithesis to the surplus issue that drives this paper.It states that the market adoption likelihood (MAL) is directly related to the number of solution pieces (SP) required to provide full value (FV) to an adopting customer and the number of independently accountable providers (AP) that are own the delivery of one of the solution pieces (hard product or service, it does not matter, in my experience).The simple HRH theorem on market adoption likelihood (MAL ) states: MAL= FV/(SP+AP).It is important to note that the denominator is not a constant. The FV can wildly fluctuate – as a friend of mine who is in sales says: ‘does it save my life? save me money? make me look like George Clooney to all women?”If FV gets low enough & SP&AP get high enough, the number can get close to 0.If you alone can make me look like George Clooney to all women, we’ll start talking about scaling and skill transfer.If you and 10 other people can save $20/month on my phone bill, well………I have never taken the time to integrate scaling parameters, but that would be where assets and transferable skills come in.Suffice it to say, the adoption of seaboard cuisine by the tycoon has the highest likelihood, if they all work for him – ∞ = FV / 0   😉

    4. Matthew Lenhard

      I have to agree with you James that we won’t up as a “fee agency”. Although we are moving away from traditional firms the end result won’t be a pure free agency but more likely a blend of the two

  12. markslater

    its no longer the collab consumption its productivity collaboration that’s now emerging. buys and sellers of products, skills and services are gaining unprecedented access to one another through innovative utilities that seek to connect, not aggregate. as umair would say – we aer seeing the atomization of this old way of doing things. 

    1. jason wright

      I wonder if atomization is an intermediate stage, and that later there will be reclustering in new and interesting shapes and ways?A star explodes, but its material is found inside even our own bodies. 

      1. markslater

        very interesting point. Atomization implies an irreversable seperation of connected parts – their could very well be isalnds of re-constitution.

      2. kidmercury

        yes. atomization only reduces costs, but the profit center remains in the re-aggregation/bundling/reformation etc. 

        1. JamesHRH

          not sure here Kid.The profit centre is an effective platform that connects the atoms to their customers.The question here is: what can be atomized?

    2. awaldstein

      umair….sounds like a book recommendation that I need for upcoming vacation.Got one or more?

      1. Donna Brewington White

        I would make a questioning comment about reading Umair on vacation…but I might do the same.  Promise me, though, that you will read at least one novel.

        1. awaldstein

          I’m on a search to discover some inspiring thinking around transactions and reputation in community right now.Searching for something with a story that captures that will suit the hammock swinging between the palm trees though;)

          1. markslater

            i think that subject is early – it likely has not been cautified in a book that has meaning yet – you might be looking at subject papers – not a book – cehck and see if Doc searls new book called “the intention economy” is out yet – that will defo get the hammock swinging!

          2. awaldstein

            Thanks!

          3. BillSeitz

            A couple oldies* DavidBrin’s “Earth” http://webseitz.fluxent.com…* MarcStiegler’s “EarthWeb” http://webseitz.fluxent.com…* Early parts of Accelerando http://webseitz.fluxent.com…

          4. awaldstein

            ThnxI worked with Randy Farmer in @ Electric Communities back in one of the earliest experiments in online communities. Didn’t know this book.BTW…books are the only product I know of where the referral is the transaction link. Huge asset to sharing.

          5. testtest

            “Books are the only product I know of where the referral is the transaction link”interesting point.

          6. markslater

            @awaldstein:disqus why is that? totally weird – i never thought of that. 

          7. panterosa,

            Have you read Boorstin’s The Image?

          8. awaldstein

            New to me, checking it out.Thanks

      2. markslater

        honestly – i never read his book! this blog about 7 years ago was on-fire with umair discussions and he wrote many papers in that time that all got attention here. He called it early and big – and in large part was spot on (like fred!)i just this morning finished dan baldacci – hells corner……i’ll get my coat 😉

  13. awaldstein

    Community as a discovery mechanism is core to these p2p niche markets working.If you can drive down transaction costs along with discovery, you’ve put a big % of legacy cost back in the system.

  14. RichardF

    What is it with websites that you have to register with before you get a feel for what  they do.  Workmarket are another company that are doing this…..ugh

    1. Work Market

      Hi Richard – We are a new company and wanted to stay under the radar for a while as our business grows and we work out UI, work flows, etc.  The site is quite extensive in what it does.  Now that we do millions of dollars in transactions per month we are going to find some time to re-do the front page properly.  When you arrive – you will be in our software able to easily find people, manage work, take courses and explore opportunities, join teams, etc.

      1. RichardF

        Staying under the radar can be a good strategy and I do understand your reasoning for doing it thus far.I hope you do re-do the front page soon because it could be a key part of attracting new customers and at the moment it isn’t.Twitter does the same thing and rather than pulling somebody in from the moment they land on the site, they are putting up a barrier to use.Acquiring new users, particularly in Twitter’s case should be as frictionless as possible.

    2. LE

      I agree. Add foursquare homepage to that thought. Tiny “magnifying glass” if you want to see anything. I’m not interested in watching a 59 second video. I missed the magnifying glass a few times I went there. Why do I have to join and signup?  I don’t have to do that with tripadvisor or open table or oyster.comAnd if a merchant visits foursquare they would have to be motivated to go to the bottom to see “merchant” link to find out more.  

  15. markslater

    there seems to be a “reputation management” opportunity in this theme fred. Alot of these sites – workmarket included – have extensive reputation management / verification tools that are core to the product. This jibes very well with the VRM theme – where people will have PDS (personal data stores) that they can backpack with them around their work life on the internet. the attached graphic (our name redacted along with our peer companies so as not to be shamelessly self promoting) provides for an interesting look at where this stuff might be going – your “work theme” to me is an evolution of the “connectivity” module – you could re-label this something like “peer-to-peer productivity” and it would fit. 

    1. awaldstein

      Right on Mark.If these markets are all individuals then reputation is everything,I have an innate dislike of reputation scales. The more you get reduced to a number in anything from reputation to wine, it breaks.If each individual is a vendor, the infrastructure to vetting becomes a community dynamic.Any directions that you like in this area?

      1. BillSeitz

        The “badges” model, for all its weakness, might support a multivariate/semi-structured definition of reputation.

        1. awaldstein

          maybe….I’m struggling over this a bit.Is there a badge system out there that you see close to feeling right that works?

          1. BillSeitz

            (Note that I don’t necessarily buy the badges thing either, just chewing on it…)Haven’t found any executed systems that seem both flexible and “legible” enough.Some Mozilla user-story notes at http://webseitz.fluxent.com…See also Josh Schachter’s new skills.to. http://webseitz.fluxent.com…

          2. awaldstein

            Thanks!

          3. markslater

            Forrester is calling this Personal Identiy management (PIDM). Its a typical research thing to do. But seriously – the opportunity to create digital reputation lockers is a huge one – in that locker i can keep any number of digital reputation and verification markers from my CC numbers to my degree, work certs, reccomendations and on and on – and pull the appropriate marker for use at will based upon the action i am taking. negotiating a piece of work = list of references and reccomendations.applying for something = verification marker.this will need to be open source. the company that cracks this is a monster.And forget the stupid game mechanic layer – that separate – that’s social. 

      2. chernevik

        I think employers would suspect any fully-dimensionalized model as gameable.Candidate assessment is already moving hard to portfolio and github assessment.  And I wouldn’t be surprised if the market found its way to some network-directed inquiry model.  (If we could inspect social / professional graphs for paths to prospective candidates, we might be able to find trustworthy reference chains.)

        1. awaldstein

          Agree…I have a friend with a platform in stealth that is attacking the opportunity in that direction.I’m pinging him to see if I can get him to chime in.

        2. Erlend Wilhelmsen

          Ok the github reference is very interesting. Code samples tell you more about developer than anything else, yes? How do you transfer this to other verticals?

    2. leapy

      <nitpick src=”your graphic”>Vender != Vendor</nitpick>

      1. markslater

        good catch!

    3. michaelmayes

      Mark, we are thinking a lot about this right now. The “gamification” and badging of a user’s reputation management. There are so many things outside of one’s skillset that are critical to a successful work management platform. Cancellation rates, on-time percentage, attitude, personality.Working with someone is a human-centered interaction. Building a relationship takes time and effort. Work Market is focused on giving people tools and data to efficiently manage this interaction and to understand the reputation of both parties involved.

      1. markslater

        hey mike – totally agree – its a vast set of data points that you are potentially dealing with.

  16. Donna Brewington White

    Are there not reasons other than transaction costs for which individuals form partnerships, companies, and other business entities?  I wonder how the social and synergistic elements of work factor into work markets.  But I do note that you (he) said “more individuals” not “all individuals” would “choose to trade [directly] with each other” if these costs were eliminated.In addition to the creation and transformation of work markets, I believe that we will see the structure of organizations and work change over time due to technology.  Time and space will have less of an impact.  The Wikipedia article touches on this at the very end in mentioning the influence of technology in creating “virtual organizations.”  Some of the reasons that we have something called “retirement” will disappear.  I’ll read the article.  Thanks.

    1. JamesHRH

      Seriously, who would want to retire?If you have worked at something that provided income alone, then sure. If you have a deep passion for something that is uneconomic, sure.My Dad loved what he did so much that he finally retired when his hearing dropped to a level that he could not be effective at what he loved to do – age 77.

      1. Donna Brewington White

        People like your Dad are inspiring to me.My father-in-law is 73 and still going strong in a demanding role.  I hope I have his genes.  (Yes, yes, I know.)I can’t imagine retiring.  Another career perhaps at 80 if I’m blessed to live that long.  I’ll write novels. 🙂  

    2. chernevik

      For one thing, companies provide a sort of trust framework — you know a lot about how someone has / hasn’t been vetted, and the predictability of their behavior.  If you work for Google, you might well learn more and quicker about Googler George than Cafe Working Freelancer Fred.If BigCorp deploys social media / cloud tools _inside_ their structure, and allows teams to form fluidly, they might benefit as much or more as the people outside those structures.  Maybe the cultures of current corporations aren’t up to it, but perhaps those companies will be supplanted by companies with new cultures.

      1. Donna Brewington White

        Some good points.  Replicating the “association factor” that comes with being part of an organization is one of the challenges of not being associated with one.  I see this all the time as an independent recruiter.  I have been told by clients that the work I do is superior to the larger search firms, but still, not having that “name” behind me makes it difficult to pry open certain (many) doors.  But, even though I think this is a result of limited thinking I “get” it…especially in a highly competitive industry.To your point about BigCorp allowing teams to form fluidly — excellent point BTW — it is not just BigCorp that has this challenge.  I am often surprised at how rigid some startups are in creating work structures.   Innovative thinking can be selective even in innovative environments.  For instance, while I think there are justifiable (but debatable) reasons for having the team housed within the same space, I am surprised by how many emerging internet companies are closed to the idea of virtual or telecommuting employees.  I laugh at the irony.

  17. mike gilfillan

    I agree with the basic premise and I’ve hired dozens of freelancers from various sources of the years, but the user interface to these sites needs great improvement (WorkMarket included — why should I register before at least seeing what type of people are available?)oDesk seems to be the current top site for IT professionals (I had long forgotten Guru), but it’s hard to separate the true independents from the body shops and it’s hard to get a call/email back from the qualified people — they should include ability to response as part of the rating system.   I think getting the UI right will be a big part of a company’s success vs. just throwing up a bunch of information in front of me.

  18. LIAD

    psychological transactions costs have not yet been reduced let alone eliminated. 

    1. fredwilson

      Very true. But that’s changing too.

      1. Ed Freyfogle

        Not sure Fred. Human nature doesn’t change. That’s why the classics like Homer still resonate today.Technology is the easy part of change, the hard part is getting people to try new things and comprehend the benefit. Fear and just plain inertia are very powerful.

        1. LE

          “Human nature doesn’t change.””the hard part is getting people to try new things and comprehend the benefit”Keep in mind that one of the things that can get people to change is “social proof”.  And with social media that is much easier than it has ever been. (It doesn’t take an article in the NYT to start a trend and change behavior anymore.)Simply put until people observe others doing something, they are reluctant to follow the same change their behavior. It comes from an insecurity in decision making.Most people are lemmings and fear being criticized and made fun of for something that the herd doesn’t do.As an example nothing prevented someone from installing a “chef’s kitchen” 30 years ago if they had enough money.  But they didn’t until it became the thing to do among groups of wealthy homeowners. (Sure they weren’t as nice back then either but large ovens did exist as did huge commercial stainless steel refrigerators..)I’ve always marveled at the things that people don’t spend money on that they should simply because they don’t see that others are doing it. When they do it then becomes ubiquitous.Being raised in a different era one of the things I’ve had a hard time wrapping my hands around is all the openness and lack of privacy on the Internet. But young people share everything (of course they are not old enough sometimes to see how that can be a really bad decision). All they see is the social proof that others are doing that and then they follow.

          1. Ed Freyfogle

            That’s a great point. Clever entrepreneurs should be thinking how they can ride the social wave to create social proof. Most obvious example if using FB’s graph to show me which of my contacts are already adopters.That being said, I still maintain change is very hard. Our lives have so many distractions (I write this as someone who just spent over an hour trying to get his 18 month old son to bed).  The path of least resistance is almost always to keep doing things the old way. As one example of many, as we sit here debating the payment methods of the future, how many people are still paying with things by check?

          2. LE

            (I write this as someone who just spent over an hour trying to get his 18 month old son to bed). I am firmly in the camp of letting a child cry their way to sleep. (I’m sure you’ve heard that of course.) N=2 My kids are teens and they turned out great!I was once criticized by an ER doc (and my ex wife) because my daughter was hysterical and I manipulated her into stopping her hissy fit. She didn’t want a needle for something in the ER. So I told her “the more it hurts the bigger gift you get!  Do you want it to hurt?” – “YES!” she said. She pulled herself together and her whole attitude changed. She stopped crying. And I bought her a big present. One thing you will notice about kids as they get older (keep this in mind) is that they will act with different levels of control around their friends and in the classroom then at home. So they have to (like a pet, sorry it’s true) know who is boss.Sorry for the fork, just my thoughts.

        2. kidmercury

          true, but when people have a problem and the only solution within their reach requires adoption of a new technology — they’ll bite. so when we look at double digit unemployment, and we see a partial solution to that problem that requires adoption of a new technology……

          1. Ed Freyfogle

            Agree, rate of adoption of the new increases when people have no other choice, but few people are truly in that situation. In the grand scheme it all evens out and the pace of change is guided by the limit of our societal ability to comprehend and digest the change.Is this not Carlota Perez’s hypothesis? Major technological innovations across many fields – agriculture, manufacturing, finance, and now information – and the ability of society to come to grips with it all follow the same pattern and eerily similar schedule.

      2. Richard

        Yes. Google “opt in” vs “opt out” and 401k participation. A lot of good work going on in bahavioral economics.I dont think we wil recognise how we make purchases and decisons 10 years from know.

    2. leapy

      HIPlease explain…L

      1. LIAD

        Dealing with peoples idiosyncrasies is stressful.Overcoming trust barriers takes mental effort.

        1. leapy

          Thank you

  19. Steven Deal

    I looked over the terms of agreement for  WorkMarket.  From my perspective, the transaction costs remain — finance, insurance, certification — these are all the elements that drive people to organize so those specialized functions can be handled by the enterprise freeing them to do the work for which they are trained and at which they excel.

    1. fredwilson

      Yeah but workmarket handles them instead of the two parties

      1. JamesHRH

        Hmmmmmmm.Did the third stage of their Market Opportunity slide have Enterprise Employee Benefits Outsourcing on it?;-)

  20. Kasi Viswanathan Agilandam

    “individuals would choose to trade with each other” is a far fetched statement. May be partially will become applicable to IT industry in terms of getting the work done.Grouping is a animal instinct and i don’t think technology will break that so easily. A good example of in-animate to animate thingy is shown in the movie “I robot” … the first symptom observed within the robots is grouping.

  21. Pascal-Emmanuel Gobry

    This post intersects with so many of my obsessions it’s ridiculous. Coase has never been more relevant than today, and his model, along with Hayek’s model of limited information, are going to be the main drivers of value creation in the 21st century. (Software eating the world, a trend which is underhyped by almost everyone, is the catalyst, but it’s smaller.)Venkat Rao touches on many of these themes in his piece here: http://www.ribbonfarm.com/2… which opened my eyes. Although I agree with Rao’s diagnosis I strongly disagree about the consequences.

    1. fredwilson

      I’m reading steven Johnson’s new book (in draft form)Hayek gets a lot of run in it

      1. Pascal-Emmanuel Gobry

        Interesting. What’s it about?

      2. ShanaC

        How is?

    2. Christina Cacioppo

      That Ribbonfarm blog post is one of my favorites!

    3. SubstrateUndertow

      Yes! Yes! IndeedIt is the network-effect disintermediating and accelerating information-synchronization that is exponentially enabling the creation of distributed-process based virtual entities.And thanks for that gem of a link. Love Venkat’s writing style!

  22. leigh

    – Decentralized- Open- Local control with centralized coordination- Bartering systems (time banking by the way is quite fascinating)- Building of specialized yet diverse ad hoc teams to solve in particular problems Feels almost ironic — VC investment strategy following community development more closely then traditional Western economicsLet the ecosystem approach to investing go forth and prosper.

    1. fredwilson

      Word

    2. Matt A. Myers

      In a way, for many sectors (that aren’t opting for controlling population and therefore price) are reducing the costs of living / transactions for everyone – eventually reaching zero profit!

    3. Ronnie Rendel

      BH. Crazy Moshiach guy here… The shift we are seeing, and the roles vc play in the evolution from industry to information to knowledge is all part of “the plan”.It’s gonna be good. For everyone.

      1. ShanaC

        *headthunk*

    4. Shawn Cohen

      What Fred wrote about peer to peer in the business world is where we’re trying to move education. And you hit the nail on the head–it’s about allowing teams to problem solve together. As students learn how to problem solve collaboratively, then they are truly set up for success in the real world.

    5. ShanaC

      I still think the transaction costs when it comes to time are going up, especially for the very rich and the very poor.Computers don’t really solve transaction of time issues.  You can end up spend more time if you are not careful.

    6. panterosa,

      Leigh, I work with a team which is building this in Europe, for women by women. Bartering is central, but all 4 points you make apply. And the trick will be to get funding beyond advertising and community money. It’s starting to take off and is so cool to watch. I think you’d love it.

  23. jason wright

    Can we work on this idea by naming specific industries and try to look at the process of change from the point of view of those presently earning a living in those markets? I want to think about the actual nuts and bolts of this change from the view of those who will work it.

  24. Ronnie Rendel

    BH. The transition to p2p work is the other side of the collapse of the behemoth firms of the last generation. Those firms are inefficient full of lies waste and no value added bureaucracy. BoA laying of 30k employees is a perfect example. Sad to say but most were not adding value.The flip side is the formation of highly specialized niche professionals contracting services through a “work market”. The key to this will be these markets having the proper tools for both managing projects and collaboration.There is still a lot that goes into a successful contract job. Much more then “matching buyers and sellers”. To thrive, the markets needs to become the new “virtual workplace” to bring many different contractors together under a unifying purpose “business objective” linked to $ value.Good luck to work market.

    1. Work Market

      We agree – to make WORK work there are many things that have to go right….The framework which our business is architect-ed around is:FIND, VERIFY, ENGAGE, MANAGE, PAY and RATEMatching a buyer and seller is just FIND.  

      1. SubstrateUndertow

        Can you give more detail on the MANAGE process ?

        1. michaelmayes

          To us, manage can start out as the simple work request and search for a resource to do the work. Basic project management concepts.But we approach MANAGE as a most critical and customizable part of the flow. Templates, pricing models, custom fields. Projects, scheduling, document requirements, check in and check out, communication preferences, roles and permissions. We give our users deep control that works for sole proprietors through multi-faceted enterprise organizations.MANAGE is the meat of the relationship for a specific interaction between a buyer and a seller of labor.

          1. Richard

            The low hanging fruit for this type of market is labor that depends very little on the interactions of among different knowledge sets. The better the platform is designed to help the knowledge buyer and the knowledge seller of this, the more likely the transaction. When the knowledge requirements of the buyer require two or more knowledge sellers and there is autocorrelation requires between the sellers, this is where the model break down. But this is where the breakthrough is coming.

  25. mike gilfillan

    I agree with the basic premise — I’ve hired a dozen freelancers from various sources over the years, but most of these services need help with their user interface (WorkMarket included — why require me to register before showing me any goods?).oDesk has a large base of IT professionals world-wide, but it’s hard to tell the true independents from the body shops and it seems that it’s not common practice for the higher quality talent to respond back to initial requests (which should be incorporated into their ratings).  I think focusing on UI and on these types of details will separate the long-term successful companies from the rest of the pack.

  26. Sebastian Wain

    “…and the result is we have seen the emergence of work markets in which “individuals trade bilaterally through contracts.””It is true but even if you are the best professional (as individual or small team) you will need to allocate resources for marketing, sales, finances, and research and this is the key for the future of work, how you can make “ad-hoc firms”, in science fiction it sounds good but in the reality how you know that the team of sales that you contracted is not working for the competition? or, simply, the sales team put the best guys on the best customers and not on you.Also a natural effect that go against freelancer markets (as seen on “Rent a Coder”) is the emergence of a company who just manage a lot of freelancers, has a better reputation than individuals themselves and is in a better position to win bids.So, it will be very difficult to avoid firms, since they grow everywhere and naturally. 

  27. kidmercury

    great subject for discussion that i wish were more discussed! this topic is up there with disruptive theory in my opinion as stuff most worth studying for internet business folks.i’ve dwelled a lot on this subject and wanted to share my main thoughts:1. a lot of this stuff can apply to nation-states too. i.e. why do we form nation-states or political groups at all, why is there any government…..in a way the purpose is the same as corporations — to reduce transaction/contract costs so that we can establish commerce with a wide group of people. just as the internet is making conventional corporations obsolete it will do the same to nation-states. 2. related to the size of corporations is the ease with which they are disrupted. for instance, as anonymous routinely illustrates, it is possible for a self-organizing group with little money to take down big corporations. the end result of this is that it costs too much to try to build big things; only a modular structure is viable. for the entrepreneurs and investors in the midst of bubble 2.0, this is a huge point. in terms of coase’s writings, corporations do reduce contract costs — up to a point. moreover, as they are a way of centralizing wealth, they also introduce insurance costs in a way. the internet is making these costs greater, and so the optimal size of the corporation is falling. or at least that’s the story!

    1. BillSeitz

      re NationState-s, yes! See NationsLite and MinimalCompact ideas.re BigCo-s: I think they are often based on having 1 huge profit-maker which then subsidizes lots of other operations (think Microsoft and Google) and nice-to-have-functions (think 80% of HR). Whether that’s a rational investment-model or CEO-EgoBoo is up for debate…

    2. kidmercury

      also one thing i wanted to add is dunbar’s number: http://en.wikipedia.org/wik…once an internet company goes over 150 employees, i feel they are on the wrong track, ignoring peer-production, leveraging the edge, etc. craigslist and wikipedia have under 40 employees. the real promise of the internet is in creating companies that will yield outstanding per employee metrics. the two US-listed companies with the highest market cap/employee are apple (#2) and silver wheaton (#1) — the right internet company should be able to beat apple handily in terms of market cap/employee, and should give silver wheaton a run for its money especially over the long term. 

    3. Michael Elling

      Mauldin discussed Nial Fergusson’s book recently about the state of western civilization.  http://bit.ly/wkiNzP   In it, the latter cites Charles Murray’s call for a “civic great awakening”.  Current institutions (financial, political, social) are being disrupted and the individual is getting back rights and freedoms that have been lost (stolen?).  They’ve been lost because these large institutions have justified their existence saying that they could better abrogate risk.  Fred is saying that competitive ecosystems do a better job of innovation and risk management (please, ALL, hear me when I say we’ve lost that innovation and risk taking in the lower layers).  The other day, Alan Patricof said on CNBC that he has not witnessed a more fertile entrepreneurial environment in his lifetime than today.  Love to see the Austrian School references in the background here.

    4. fredwilson

      great point on nation states as “firms”

  28. Jork

    But, even more important is that Technology (such as WorkMarket) introduces the “price discovery” tool for buyers (managers) and sellers (workers). If this market becomes liquid enough, it can be used to determine the fairest price of labour for all parties involved.WorkMarket is therefore extremely viable. Great Tool!

    1. Work Market

      Work Market is very liquid in technology services and we have growing liquidity in many other areas. If you place work opportunities priced correctly they are picked up in minutes.  We can tell you the going rate for almost any technology service in any US location (Other countries launching soon).

      1. leapy

        I am in the UK. Just signed up at WM (despite the US-centric process) and I am ready….

      2. Jork

        Great! I’m curious to explore any arbitrage opportunities based on the location of ‘delivery’ of the same labour service 😉 not only within the US but also thinking of the UK vs US ….

  29. Michael Elling

    I am relatively new to this blog, but after today it struck me that Fred embodies true Socratic thinking.  Who needs real school with so many gifted students in his virtual course?  This is fun!

    1. Matt A. Myers

      There are no bullies here either! Welcome to AVC!Just watch out for that big robotic dinosaur.. he gets especially hungry on Fridays.

      1. Michael Elling

         Did he/it coin TGIF?

        1. Matt A. Myers

          Tether GRIM, It’s Friday?

    2. fredwilson

      and i am the student

  30. Elia Freedman

    I have been thinking about this lately. I’m working on something new and have been thinking about the “company building process.” At one point I had like 13 employees and we did everything ourselves. Now I am thinking of a model where the key components are built in house and the remainder are done with contractors. Since there are so many platforms to support now, we believe the core (the key components) can be built in a cross platform way and the rest built for specific platforms. And thus we hire out to get the specific platform stuff done. This keeps our team small and lean and allows us to hire for need at growth rather than what we perceive we will need now. It is a hypothesis at the moment so will see how successful and/or possible this really is.

  31. Marios Koufaris

    Funnily enough, I was just teaching my class of MBA students (at Baruch College) on Monday about Transaction Cost theory and the impact of IT on the firm through the theory’s lens. The reduction of transaction costs, i.e. costs of participating in markets (like search, communication, coordination, etc.) has resulted in firms using the market for more than just labor. They’ve been using the open market for all kinds of other resources. In fact, this theory in combination with IT can be used to explain the growth of outsourcing/offshoring and the growth of the freelance segment in the labor force. It can also help to explain the increased specialization in core competencies that so many firms have engaged in.

    1. fredwilson

      you were a few days ahead of me Marios

  32. ShanaC

    I keep wondering about how computing seems to make the transaction costs involved with time go up.  It gets much more expensive for certain human tasks to get done.  Especially tasks that require a bit of thinking.It used to be you called a travel agent to buy a plane ticket:  Now you surf multiple sites until you find your plane ticket – and I keep thinking for the average person, it may not be cheaper in time to have done all that surfing.  And it definitely would not be cheaper in time if you are either very poor or very rich….So have transaction costs shifted or just changed, is my question…and I am not sure…

    1. laurie kalmanson

      the transparency has increasedthe costs have been shiftedit’s disintermediated — unless you are fancy and have a fancy travel agent for fancy tripssee also: bagging your own groceries

      1. ShanaC

        Bagging your own groceries can take more time from you (self checkout) that went elsewhere

        1. laurie kalmanson

          exactly

          1. ShanaC

            so that could be disrupted by old school methodologies – time has transaction costs that we are only starting to see

  33. William Mougayar

    Someone needs to write an update to Coase’s essay that takes into account where we are with the Internet today. That’s key in figuring out the opportunities. Or maybe he did another interview from the past 15 years. Worth looking into it.

  34. William Mougayar

    This trend is a bit more obvious than the “network of engaged users” theme was several years ago when you saw it before others did. But Coase’s theories are not the investment thesis itself. Its interpretation is.

  35. kirklove

    Perhaps overly simplistic but it reads as though tech is allowing what people did long ago (barter) en masse.Everything old is new again and with a faster processor. 😉

    1. fredwilson

      if we are really moving back to barter, that’s not good for the IRS

  36. Luke Chamberlin

    I feel like USV already has many investments in this category – Etsy, Kickstarter, Meetup, Shapeways, Skillshare. All of these products lower transaction costs to enable individuals to contract directly with each other to get things done.

    1. fredwilson

      yes. very true.

  37. georgiatanasov

    Fred, you and your readers might enjoy this episode of EconTalk with Clay Shirky where they discuss precisely this, but in a different, more general context (This was four years ago, after all) http://www.econtalk.org/arc…

    1. testtest

      EconTalk FTW

      1. georgiatanasov

        The difference being that four years ago they viewed only the altruistic types of peer to peer labor interactions, having only examples such as wikipedia and flickr back in 2008. But their predictions of p2p labor arrangements are more and more tangible with the current wave of startups in this direction.

        1. testtest

          i liked the idea of ‘hyperspecialization’ when i read about it. seems like a plausible trend.http://hbr.org/2011/07/the-

    2. testtest

      came across this video that was posted yesterday, with clay christenson, whilst looking for that article. something else worth a looking at.http://blogs.hbr.org/video/

    3. fredwilson

      thanks, i will check it out

  38. Jerome Camblain

    The more it changes, the more it stays the same as they say in France (Plus ça change…)Transaction costs go down – more people go it alone (Peer to Peer as they call it now) (why, because they can) … and new type of brokers re-emerge (marketplace, crowdsourcing sites, group buying, all sort of cheap and better saas products…) and once again the money will be made by the shovel salespeople, not by the majority of the gold diggers.The biggest issue ahead in this Peer to Peer economy will be the creation of trust in order to enter into a transaction (no branding power, no advertising dollars, just new new tools)Trust and instant branding will be a new frontier.Fred, I would like to advertise one of my investment (Prestashop, free open source e-commerce software) Free Barcamp that will take place in NY on March 20TH as it fits the subject of this post:http://barcamp.prestashop.com/

    1. fredwilson

      hi jerome. nice hearing from you. i trust you are doing well.

  39. Ethan Bauley

    Fred, don’t forget Yochai Benkler’s “Coase’s Penguin, or Linux and the Nature of the Firm,” too!http://www.benkler.org/Coas…Kind of the next step from firms and markets to pure collaboration without monetary exchange, which “has systematic advantages over markets and managerial hierarchies when the object of production is information or culture” (from the abstract).I completely agree! Could be useful in framing thinking about specific verticals that will make a good fit for these kinds of investments.Yale Law Journal in 2002.  Yikes.Ethan

    1. Christina Cacioppo

      That’s a great paper.

    2. fredwilson

      yochai is one of our gurus

  40. RocketSpace

    Deep down I am hoping that this will drive the self correction the ecosystem needs to pull power away from the large corporates and unions. Insightful post Fred. 

  41. Jay Janney

    I really enjoyed the post about transaction costs,and how the internet/mobile computing changes those costs.  I’d caution only that they do not always lower those costs, they can actually increase them. But, those increased costs will represent real opportunities to for new ventures as well.   

  42. jason wright

    The thought of mass peer to peer work markets has major implications for government and tax gathering. Some may say that the firm was created to counter transaction costs, but others might say that the firm has been an agent of government economics. The transaction cost to government of taxing firms is far lower than the transaction cost of taxing individuals. Strip away the firm layer and government is in a spot of bother.

    1. fredwilson

      great point

  43. matthughes

    I wrote a paper on The Nature Of The Firm in college.It’s saved on a floppy disk somewhere. 😉

    1. fredwilson

      bring it!

  44. Modernist

    Do you think voice recognition implementations (Siri et al.) are at a tipping point wherein they will substantially contribute to the reduction of fixed costs posed by clerical staff?

    1. fredwilson

      not yet

    2. laurie kalmanson

       a friend sent me the google transcript of a voicemail i left; they have a looooong way to go

  45. Ricardo

    Wonder how this issue is perceived in countries with higher labour security than the states, for example in European countries. Will this nature call be stronger than the wish to have a secure pay check? Then again, in this financial mess we are in, nothing is secure anywhere.

    1. fredwilson

      they will be harder to build in countries with more labor security

      1. Erlend Wilhelmsen

        Met with Swiss investors on similar concept to Work Market. Hard sell in Europe. Highly vertical corp structures with less efficient free agent markets. They will see it, eventually, but not as innovators in this arena. Respect to you, Fred, for taking the lead supporting this movement.

  46. LukeG

    Been thinking about Coase a bit over the last few years, especially in the context of Hagel and JSB’s Big Shift (http://blogs.hbr.org/bigshi…It’s hard to argue that transaction costs aren’t falling, but we also live in the time of the largest technology company in history.There are remaining implicit transaction costs that seem to be less-discussed, e.g. onboarding and time-to-trust/time-to-max collaborative performance. It still takes time to learn your products & markets, and it still takes time to learn your people.It seems reasonable to me that networks of people that have e.g. worked together and/or solved certain types of these problems before can be applied pretty effectively. Sure, build new networks, but map & leverage existing network subcomponents, too.The scale of the challenges that we’re attacking also rises as transaction and other costs fall. Epic goals (the moon, mars, clean energy, billions of engaged users) that require large engaged networks of producers will continue to generate institutional gravity. Information may want to be free, but Apple still builds hardware at scale in a way that’s impossible for competitors to match within 6-18 months.Solvate seemed to be a decently executed product. What lessons do we learn from their closing?

  47. pointsnfigures

    Glad you are coming around to this!!  Coase is HUGE.  Thinking in Coasian terms is what I have done my whole life.  It’s a very very difficult concept but essentially it’s the basis of the Chicago School of Economics.  The problem comes when people attribute emotion, and normative judgement to Coase, and not focus on positive economic theory.  Agree, the gig economy is all Coase.

    1. laurie kalmanson

       chicago, represent

      1. ShanaC

        As an alumna, I feel so meh about Chicago school – they’ve gotten orthodox, and I think they need a dose of heterodoxy to survive.  A large dose.(this doesn’t mean coase isn’t right though.  or parts of rational expectations theory/robert lucas, I just think they all need a kick in the pants about how people actually react to the situations they posit)

        1. laurie kalmanson

          i am secular with regard to the church of the free market, but the religion has some good points

          1. ShanaC

            In person, its a bit more churchish. And I tend to be heterodox – though I think they have a point….

  48. pointsnfigures

    Additionally, funny story.  At the school where my kids went to, they had to do a report on an immigrant.  One of their friends heard Coase speaking on the street and asked, “are you an immigrant?”.  He said he was.  So, she interviewed him.  Most kids were interviewing their housekeepers and she interviewed a Nobel Prize winning economist that provided the seminal theory for modern economic thought! I guess those immigrants to the US aren’t so bad after all!

  49. Jonathan

    first industrial revolution was horizontal (coal, rail and telegraph spanning the globe)second industrial revolutio WAS vertical/hierarchical (oil, car and phone to harvest the earth and build global commerce)third industrial revolution IS lateral/individual (sun, drone and internet to replenish the earth and build solar system commerce)

  50. Property Investment Australia

    Great job! Thank you for educating us regarding investing. An article worth reading for indeed.

  51. Bruno Haid

    Adding to the single mentioning of Williamson:http://en.wikipedia.org/wik… is the preeminent school of thought based on this early roots, earning him and Elinor Ostrom (first woman to do so in economics, but more concerned with externality side of things) a noble prize in 2009. Also highly recommending the work of Mark Granovetter or, on the other side of the Atlantic, Dirk Baecker and Manuel Castells, as (social) systems theory is another trans-disciplinary home for many aspects.Sean’s blog http://www.parkparadigm.com… also yields, as always, a ton of gems in this area.

  52. David Caldwell

    I’ve given two startups a go in this space, starting in Sydney in 2005 when I first tried to use SMS + reputation to auction jobs geographically. Most recently failure was the zaarly-style (though a year before zaarly) YourJobDone in London, though we did get up over 10,000 users on next to no cash.I think the great challenge of this sector is the partner of its potential strength. The loss of the centralised economy-of-scale for marketing, and the competitive relationship of individuals participating on the supply-side puts a brake on spread. Growing the demand-side and maintaining supply side engagement is tough, particularly if you’re aspiring to be a broad physical-service marketplace, as we were.I think there is quite a long road before platforms (comprised of a reputation system, individuals and small “firms”) can compete in the mass-market with the brand credibility of established firms. So far the only businesses I can see really succeeding as marketplaces/platforms for physical-world servies are vertical-focussed, e.g. spare beds, town cars or cleaners. There must be now over 100 companies claiming to be the “ebay of services”.

    1. fredwilson

      i totally agree

  53. Brian Hayashi @connectme

    Like Daniel Boorstin’s book “The Americans”, Coase’s “The Nature of the Firm” provides useful historical context for the rise of institutions for people now seeking to reinvent them. The growth of US corporations accelerated because it provided a more efficient way to aggregate physical capabilities such as manufacturing and distributing stuff. For these companies, there was much value in sophisticated legal agreements that ensured a consistent supply of raw materials from suppliers while preventing key employees from leaving with proprietary insights. Today most companies are hindered by the organizational silos that were understood to be harmful yet tolerated because there were no economic alternatives available. So-called peer-to-peer markets address the inability of those enormous corporations to properly wield the assets that have become more valuable in a real-time world: access to consumers, rapid deployment, and individual initiative. While lots of people are starting to grok the importance of bilateral access to consumers, some companies, such as Demand Media and the Spanish retailer Zara, are head and shoulders above their peers in using that access to harness sentiment exhaust to rapidly identify and develop the stuff people want. As for individual initiative, it’s been fun watching companies like Taskrabbit and Zaarly as they  start to explore how real-time signals can be used to incentivize people to do new things. None of them yet approach the monumental conceit of ESPN, which is using online to create second careers for retired pro athletes. I think this area will really take off once a peer-to-peer company is able to provide people with a meaningful vector for their career.