PG's argument as I read it is that there's a shift in comparative market power towards entrepreneurs qua producers because the barriers to innovation have fallen so their funding needs are less.
I agree that companies pursuing small opportunities (web 2.0 features, iPhone/Facebook apps, etc.) will face little competition from funded competitors. That's because there's little money to be made out of those innovations. In the short term, that may even apply to situations where the prize is large (Skype, Google, Facebook, etc.).
But in the longer term, economic systems operate in equilibrium, so you have to think about marginal not absolute factors. In equilibrium, competition will increase, and in turn cost of supply (of developers, airtime, etc.) will scale, in proportion to the size of the prize. Only proprietary cost advantages offer sustainable competitive advantage, whereas free software tools, cloud hosting, and cheap airtime benefit all contestants equally. When credible signalling costs are high and transparency is low, relative early advantage tends to be self-reinforcing. So when the pie is big enough, unfunded start-ups will find their marginal rate of growth just as constrained by a lack of capital as it's ever been, and will lose the initiative to better-funded rivals accordingly. Which means VCs will be just as essential in supporting high-value product development as ever.
Of course, you might say that the rate at which the marginal utility of wealth declines is high enough that few rational entrepreneurs will be motivated to pursue big new product innovations given the higher likelihood of failure compared to developing iPhone apps. In practice I tend to think that success for most entrepeneurially-minded individuals is as much about recognition (a positional good), as it is about absolute wealth. And again, in equilibrium, position goods are definitively scarce, meaning the arms race for status will continue ad infinitum.
There's an old adage about how to make money: sell bullets in the war without end. That's what VCs do. And the invention of the taser doesn't put gun makers out of business. On the contrary, it increases their utility.
I think the only fallacy I'd point to in that argument is the idea that "more money helps" when building software.
In practice, I've found that adding more developers to a team actually makes it less likely to succeed. Imho, the ideal team size for a software start-up is three - three excellent, top-notch hackers, but just three. More than that and the communication overheads start to hurt your early progress and flexibility.
That's not to say that the three hackers won't want additional help later, which is where you could come in. But that's only the case until the tools get good enough that the three can continue as three pretty much forever.
The increased productivity of tools like Rails means that larger teams are actually at a disadvantage. This to me is the greater threat on your industry. In my start-up, I don't want us to grow to a mega-team of hundreds of people. In fact, we've already had numerous discussions about having it as part of our business model to keep the company as small as possible and outsource any work that's not core to the business - so that we can ensure that the only people we employ are top notch.
Otherwise, your analysis is good - but imho this factor could be the chink in your armour.
Even were that uncontroversial, the cost of developers' time generally accounts for only a small proportion of the costs of bringing product to market.
I agree that companies pursuing small opportunities (web 2.0 features, iPhone/Facebook apps, etc.) will face little competition from funded competitors. That's because there's little money to be made out of those innovations. In the short term, that may even apply to situations where the prize is large (Skype, Google, Facebook, etc.).
But in the longer term, economic systems operate in equilibrium, so you have to think about marginal not absolute factors. In equilibrium, competition will increase, and in turn cost of supply (of developers, airtime, etc.) will scale, in proportion to the size of the prize. Only proprietary cost advantages offer sustainable competitive advantage, whereas free software tools, cloud hosting, and cheap airtime benefit all contestants equally. When credible signalling costs are high and transparency is low, relative early advantage tends to be self-reinforcing. So when the pie is big enough, unfunded start-ups will find their marginal rate of growth just as constrained by a lack of capital as it's ever been, and will lose the initiative to better-funded rivals accordingly. Which means VCs will be just as essential in supporting high-value product development as ever.
Of course, you might say that the rate at which the marginal utility of wealth declines is high enough that few rational entrepreneurs will be motivated to pursue big new product innovations given the higher likelihood of failure compared to developing iPhone apps. In practice I tend to think that success for most entrepeneurially-minded individuals is as much about recognition (a positional good), as it is about absolute wealth. And again, in equilibrium, position goods are definitively scarce, meaning the arms race for status will continue ad infinitum.
There's an old adage about how to make money: sell bullets in the war without end. That's what VCs do. And the invention of the taser doesn't put gun makers out of business. On the contrary, it increases their utility.