Business modelsStartup general interest

Smaller companies set to fare better than larger ones

By December 4, 2008 2 Comments

Paul Graham has a post up today arguing that in areas of rapid change small companies are better placed to succeed than larger ones.  Moreover the pace of change has recently reached a level where we are starting to see a tipping point in favour of the little guy.

in the late twentieth century something changed. It turned out that economies of scale were not the only force at work. Particularly in technology, the increase in speed one could get from smaller groups started to trump the advantages of size

The main point of Paul’s article is that this brings with it a change in the aspirations of smart young people – more and more they are looking to work in startups rather than large companies.  Gone are the days when it seemed that the coolest place to work would be a large progressive company – e.g. IBM or Intel in their day.  These are now the safe options.

Social changes like these take time to build up momentum and once established are not easily swayed off course.

To all of this I would add that the lesson of the last 12 months (and maybe longer if you include Enron and Worldcom) is that financing large companies is also becoming more difficult than financing small companies.  The sheer size of large corporations like Citigroup means they need large numbers of shareholders and are extremely complicated and hard to understand.  It is therefore impossible for executives to spend enough time with enough shareholders to get them over this complexity issue.  This drives a coach and horses between owners and management and can result in wild fluctuations in share prices and many of the other problems we are now working our way through.

Smaller companies suffer much less from these sorts of problems and I suspect that just as they are becoming more attractive to employees they will become more attractive to investors.  We are talking about a very significant shift in the way global capital markets operate though and I don’t expect anything to happen quickly.