Small is the new big

Small is the new big

: I’ve been trying to figure this out for sometime: On the one hand, things in our world are getting bigger: Walmart… media conglomerates… Dell… merged airlines… megachurches… Home Depot… merged banks… Microsoft…

But on the other hand, things are getting smaller: The empowered individual can create a media company, using blog software; create a manufacturing company, using somebody else’s factory and somebody else’s distribution; create a multinational enterprise, using nothing more than a Skype line.

I wondered whether small was just a trend or a new organizing principle for the business world. I now think it could be the latter. Small won’t replace big, of course, but small will add up to considerable new competition. And that is because small can now succeed. The economies of scale must compete with the economies of small.

On the supply side, the point of critical mass has imploded. It used to be, you couldn’t make money writing unless you got paid by a big publisher; now you can begin to make enough money blogging. It used to be, you couldn’t make money running a store unless you had location and marketing and capital and employees and enough revenue to support all that; now you can make enough money on eBay. It used to be, to get a job you had to be willing to dress up and commute; now you can work at home online. The cost of running business has declined; the revenue you need to be successful thus declines.

But there’s the critical calculation: The price of independence declines. In a world where most people are sick of their jobs — be honest now — this is big. There is no loyalty from employer to employee and given the chance to earn FU money, there will be no loyalty from employee to employer. We’ll see more and more people trying to make it on their own and now more and more can.

On the demand side, I do believe that the market will embrace alternatives to the one-size-fits-all malling of the world. Before the Berlin Wall fell, I was amazed to find a Benetton in East Berlin. Now you can find the same stores from the same malls everywhere — all over Berlin and even filling once-hip Soho in New York. Everything’s the same, nothing’s unique, and that takes the fun out of shopping. So given a chance to buy something special, wouldn’t you? You’ll find it on eBay or even an Amazon zShop or on one of the craftsman’s group sites online and you won’t need to buy much to make that seller successful.

You’ll also save money. We’ll see the death of many middleman. That is what Craig’s List is all about. Who the hell wants to pay real estate brokers if you don’t have to? Direct, person-to-person commerce with the aid of services like eBay and FedEx reduce friction and cost and put middlemen out of business. And that is what internet media is about: direct, person-to-person communication.

And you will come to a new definition of value built on trust. Dealing with big companies today — airlines, banks, stores — you know you’re going to get screwed and consumer victory is avoiding that. In the person-to-person marketplace the internet enables, you do business with and converse with those you trust. They value that trust and earn it.

Walmart won’t die. But it will have a million new competitors. Newspapers won’t die (maybe) but they better figure out how to embrace the small guys who can cover the news they can’t afford to cover. GM won’t die (maybe) but look at one of the links below to see a guy who put together his own company making scooters with his own design and others’ manufacturing; can cars be far behind? Microsoft and Intel and Apple won’t die, but see another link below about a guy who’s using someone else’s manufacturing to make his Pez-like MP3 players. Airlines will die because they don’t know how to get small and any old Joe can’t get a berth at JFK and that’s why airline travel today sucks.

: I’d been contemplating this and the other day, I mentioned in a link to Seth Godin’s blog that I was working on a post about how “small is the new big.” Then, the next day, Godin headlined a post with just that notion.

Small is the new big because small gives you the flexibility to change the business model when your competition changes theirs.

Small means you can tell the truth on your blog.

Small means that you can answer email from your customers.

Small means that you will outsource the boring, low-impact stuff like manufacturing and shipping and billing and packing to others, while you keep the power because you invent the remarkable and tell stories to people who want to hear them.

A small law firm or accounting firm or ad agency is succeeding because theyíre good, not because theyíre big. So smart small companies are happy to hire them….

Is it better to be the head of Craigslist or the head of UPS?

Small is the new big only when the person running the small thinks big.

: See also Fortune on the “amazing rise of the do-it-yourself economy.”

: See also Business 2.0 on the “new instant company.”

: See also this Powerpoint on the death of blockbuster media — an industry built on the hope of getting massive mass — and the rise of micromedia.

: And the funny thing is, small keeps getting smaller. Here is The New York Times chastising eBay for being too big and telling them they should learn some lessons from li’l ol’ Criag.

: SEE MORE: Trendwatching.com’s latest newsletter touches on how marketing happens in a small-is-the-new-big world: Of course, it’s about recommendations — links — from friends and trusted cohorts, first. And TW says this leads to “twinsumers” (yes, they get paid more for making up obnoxious names for things… and “bloggers,” “vloggers,” and “podcasters” can hardly throw darts), which means that people are in search for their “taste twin.” That is the ideal and the infrastructure of the internet is now enabling it.

  • Right of Center

    Information has been commoditized. Places like Walmart (because of readily available information on its competition) can now only compete on price. Once you can only compete on price you have to sell A LOT of stuff on small margin.
    But also with the commoditization of information comes the possibility of a myriad of exploitable small niches – both in services and in information distribution (even physical things, if esoteric).
    Both growth of “small” and “big” are results of the commoditization of information brought on by the internet.
    The ones who are really screwed are the purveyors of information who are also “big” (ie newspapers) They are getting the short ends of both sticks!

  • http://home.ioa.com/~vampire/index.html Robert

    While I admire the spirit of do-it-yourselfers ( I’m one of them! ) I would ask that people that are interested in design and development of their own products to not use factories in china for their work, as is mentioned in the Fortune article.
    china continues to use political prisoners in “re-education” camps to make various products that are then sold overseas, and physically abusing the prisoners that cannot meet their quotas. Do they really want their products made by someone who is chained to a workbench?
    In addition:
    china has threatened to invade the independent democratic country of Taiwan.
    They have invaded and continue to occupy the country of Tibet. Raping it of it’s natural resources, and selling uranium to terrorist nations such as Iran. They also are displacing the ethnic Tibetans and moving chinese into the region to dilute the Tibetan population.
    They have held a child under house arrest since he was a baby, simply because he is a religious figure to millions of Tibetans. Monks were arrested and jailed simply for flying the Tibetan flag. Hundreds of temples have been destroyed.
    They deny religious freedoms to their citizens. A woman was beaten to death by chinese police for distributing bibles. Catholic priests have been and in some cases still are held in prison.
    They have armed nuclear ICBMs aimed at targets inside the US.
    300,000+ people have been evicted from their homes to make way for the construction of the new Olympic stadiums. When some of them had the audacity to complain, they were jailed.
    I am not against outsourcing. I realize that it is necessary in todayís times, but there are many other countries that can be used without funneling our money to a country such as china.

  • http://RuthCalvo Ruth

    It is also a risk to ‘lend’ your ideas to China. See today’s WaPo editorial, yes, laws are on the books to prevent encroachment on others’ patents, but enforcement doesn’t happen. While the editorial gives a lot of credit, I have heard of experiences of people who tried to invest in Chinese industries and were defrauded and had no legal recourse; lack of enforcement.
    Direct engagement through the internet is a great development, would love to see it end the paving of America.
    See: http://www.washingtonpost.com/wp-dyn/content/article/2005/06/05/AR2005060501241.html

  • Right of Center

    “Pish-tosh” the wise shopkeep doesn’t nuke his customers!
    In fact we have much more leeway to be critical of their human rights abuses if we do business with them – we have leverage.

  • CharlesWT

    With a rational tax code and the elimination of petty regulations that protects established business against competition, small could get really big.

  • http://http://robertdfeinman.com/society robertdfeinman

    The obstacles to small businesses are the same as they have always been: distribution and “presence”.
    Take blogs as an example, there are millions, but only a few get noticed. If information is going to be product of the 21st Century, then who controls the distribution system is going to be the big winner.
    Perhaps people are making a living on ebay with very little capital investment, but compare their success to that of ebay itself.

  • Right of Center

    “then who controls the distribution system is going to be the big winner.”
    But no one controls the internet. It is uncontrollable and all attempts fail (thank goodness) the ultimate power of information “machine” has arrived an can be used by anyone and controlled by no one.
    “then who controls the distribution system is going to be the big winner.”
    Sounds like AOL’s failed business plan!

  • http://www.ericscheske.com/blog/ Eric

    Excellent meditation. Some readers may be acquainted with the economic thought of distributism. Distributism can mean different things, but it all comes down to the idea of smallness. I’d recommend “Small is Beautiful” by E.F. Schumacher for readers interested in the beauty of this small movement.

  • http://stakeventures.com Pelle Braendgaard

    I wrote down some rules about this last year, that I am trying to follow in my new startup. Go to my blog and search for “6 simple rules” for the full article.
    The basic point of it is that almost all of the things that people do in the traditional “startup” really is an anti pattern. For example I say that business plans, burn rates, employees, capital costs and incorporation as an inc are really all things that are damaging to the micro startup.
    Instead of a business plan use a Backpack http://www.backpackit.com site as an internal dynamic plan.
    Burn rate, capital costs and employees should all be replaced by partners. Each individual partner handles all the expenses related with his task(s) in the business.
    Instead of incorporation use LLC’s. This is because your business should be all about business and pass everything through to it’s partners. Each partner can do whatever is best for them tax wise.

  • AlanKelley

    Comments from Fred Beste and Todd Pietri on capital efficient businesses….
    Until, that is, in March of last year, when I received the latest copy of Milestone Venture Partners’ newsletter, and read the following sage words of Milestone partner Todd Pietri:
    Think Small
    Milestone is in the small deal business. We focus on small transactions in part because our investment size is smallÖ In addition, we believe that the market for small transactions (less than $5 million) is the least competitive and thus the most attractively priced segment of the venture capital market. But all small deals are not created equal. In fact, we insist on one very important characteristic when we evaluate an investment opportunity: capital efficiency.
    Capital efficiency to us means we invest in companies that have the option to build growing, profitable enterprises with one or two modest rounds of investment (e.g., $7 million over two rounds). Of course, it does not always work out this way, as companies often stumble and therefore consume much more money than anticipated. In the opposite case, where a company is thriving, the smartest thing to do may be to raise a much larger second round of capital ($8 million+) and swing for a home run; for example, when a company is fortunate enough to be in a large, growth market with tremendous demand for it products and services but where only a short window of time exists to capitalize on the opportunity.
    The problem is that very few entrepreneurs, and venture capitalists for that matter, want to admit that their company is not one of those fortunate few firms that merit a large capital infusion. Like the children of Lake Wobegon, every child is “above average.” Therefore, too often, the preferred course of action is to pursue a “get big fast” strategy, even when valuation has hopelessly outpaced the underlying fundamentals of the company. The hope is that somewhere down the road, the gods will be kind and it will all work out as hoped.
    There are several reasons why this line of thinking generates poor shareholder returns. First, financial common sense tends to evaporate when a large pile of money is in the bank (emphasis mine). The virtue of having very little money as a young company is that it focuses the mind, inspires resourcefulness, and promotes wise decision-making. On the other hand, when lots of cash is available, management can easily lose focus by pursuing new markets, new products and acquisitions before there is a rational caseÖ.
    There is, as well, an equally vexing structural problem with over-funded companies, which presents a stark new reality venture capitalists must contemplate going forward: the venture capital market is in the process of reverting to its historical mean in terms of exit values. When median IPO valuations for venture-backed companies crested above $300 million in 1999, it didn’t matter if a company raised an extra $15-25 million of capital; 5-10X returns were still very achievable and the payoff came so soon that all interested parties were euphoric.
    However, if IPO valuations return to their historical norm (and they have every indication of doing so) of between $70-110 million (total value), as they were from 1994 thru 1997, then companies that raise more than $15 million of venture money are going to have a very hard time generating 5X to 10X returns for their investors. The problem is compounded by the fact that it is going to be harder and take much longer to get public in the first place.
    The historical merger and acquisition market paints an even worse picture. From 1994 to 1998, average venture-backed valuations for M&A transactions ranged between $45 million and $70 million. The outlier years were 1999 and 2000, at $156 million and $221 million, respectively. Given that most venture investors get liquid from M&A events, not IPOs, every extra $5 million of unnecessary capital that goes into a company can make or break an attractive return.
    After considering such thorny logic, we find it strange that over 70% of new money going into venture funds (recently) went to large funds (over $250 million). Large VC funds are in a tough position. They need to put $10 million or more into each deal. If they syndicate, which promotes good risk management, each of their portfolio companies will have a minimum of $15-20 million of venture money (of course usually much more goes in). We just don’t feel there will be sufficient liquidity to provide attractive exits for all of these over-funded deals.
    Thus we are sticking to an investment strategy where we invest in capital-efficient companies that have the option to generate 5-10X returns on exits between $50-150 million. We hope a few, maybe even several, can do much better, with or without a large capital infusion, but we don’t want to depend on it.