Peer to peer pay to play paradigm

One of the greatest challenges for entrepreneurs and early stage investors is betting on an early paradigm shift; you never really know if it's a deep market, or a drip of water till you dive in. The venture business thrives on the turbulence and opportunities that paradigms offer entrepreneurs and their risk equity backers. But it's not a smooth line. Over the past 5 years we have seen a number of false paradigm waves that have consumed billions of dollars of capital and countless entrepreneurial cycles. Two of the largest faux paradigms that come to mind were RFID and WAP (mobile).

Moreover, despite great fanfare, it's still unclear whether stand-alone 'social' and 'video over the net transport/hosting' will prove to be faux or real self-sustaining markets too.

Another area that's received great attention is the great market disruption that can follow embracing peer to peer technology. BitTorrent was an incredible innovator that followed hard on the heals of Napster. Unfortunately, they also initially embraced the pirate aspect of Napster and, though attracting stalwart investors (Accel and DCM), they seem to have been unable to translate great download acceptance into a self-sustaining business.

Techcrunch posted a sad letter to shareholders from Bittorrent's CEO that details the terms of their most recent financing, which appears to be a rescission of their most recent $17mm financing round, replaced by a $7mm 'pay to play'...highlighting the desperation of the situation. The end of the post has the full term sheet.

The peer to peer paradigm has many niches (full disclosure that I am on the board of Pando ) that are performing well, though it's clear that eyeball aggregation, based on purloined content, though it worked at YouTube, is not working here.