Polishing my mirror

reflecting the collaborative reality of our networked world

Tag: New economy

Small Business is a FARCE!!!

When billionaires who run global corporations wax poetically about virtues of small business you better believe that big global business is the business of our times.

In a globalized world, size matters
In 2011 Marc Andreessen famously started talking about the disruptive nature of technological innovation as “Software Eating the World”. Today, everybody, from entrepreneurs like me to VCs, along with the news media, is chasing Unicorns. And by unicorn, obviously I mean a startup with valuation above one billion dollars. Not small.

If we work backwards from this billion dollar unicorn valuation, and take the most absurd valuation of 20x revenue for a growing tech company, you would need $50M a year in revenue to support that $1B valuation. However, most small businesses are not growing tech companies and $50M is not a small amount of revenue.

Unicorns are global
It is important to note that as technology is shrinking our world, the conventional big businesses are becoming bigger and more global as they expand for growth abroad. Listed companies on average get 50% of their revenue from international sources. For tech companies that is 60% of their revenue and it’s growing. Let that sink in for a minute, 60% of US tech companies’ revenue comes from abroad. Just to be clear, that is more than half and that is not small.

The USA news tends to look on itself, but there is more to our world as the big companies found out. Unfortunately, in today’s capital-intensive world the opportunities that existed in the labor-intensive emergent industrial society in EU and US which created our middle class in the mid 20th century do NOT exist for the globalized masses in the Emerging Markets.

When people are talking about US companies holding more than $2 trillion in profits overseas, and just seven of the biggest tech companies account for a fifth of this, it is not just a result of tax shenanigans. It is where the growth opportunities are and where the business is: overseas.

The unicorns that we are all chasing are tech companies. Inherently, most tech startup’s are global from the get go. Facebook, Google, Pinterest and Uber are all global companies. We even compare our startups to countries not businesses: If Facebook were a country, it would be the most populous nation on earth. Facebook valuation at IPO was over $100 billion. That’s not small and everybody is trying to build the next Facebook-sized company: a company that has a small staff, impacts billions of people and makes billions of dollars.

What exactly is small business
The US Small Business Administration defines what constitutes small business by industry. Generally, it is a business with less than 500 employees or some annual revenue maximum. For a law office or a doctor’s office, the annual revenue maximum is $11M, for a dentist it is $7.5M, and for a construction company it is $36.5M, just to name a few. Not sure I would call 500 employees a small business. However, in comparison to McDonalds or UPS, who employ around 400,000 people each, one could draw an arbitrary line at 500 employees.

The US Small Business Administration’s definition in terms of revenue and the number of employees really does not help us to frame an image of the elusive small business. The average person on the street imagines small business not much different than what an inhabitant of Paris or London would imagine it in the mid 1800’s. Back then, almost all of the businesses were small business. The corner store, the hairdresser, the butcher, the lawyer, the seamstress, the baker, and yes, the candlestick maker. All of it.

Historical perspective
As industrialization was spreading into the world from the late 1700’s UK, railroads that connected the emergent centers of manufacturing and the steel used for the railroads and manufacturing became our first big businesses. In 1901, US Steel became the first company with valuation over a billion dollars when JP Morgan refinanced it after he purchased it from Andrew Carnegie. We only went up in scale from there.

Slowly but surely, from the mid 1800’s, technology has been improving, railroad networks continued growing, manufacturing continued expanding and people’s lives were changing for the better. Over time all the small general stores started to be displaced by new and much bigger department stores. In the developed world, the idea of having many products and services under one roof took off and permanently reshaped peoples shopping habits.

One world
The pattern of increasing size, scale and scope continues today. Have you ever shopped at eBay or Amazon.com? Every industry continues the quest for economies of scale. We have many global brands now. Coca Cola became the first global brand after WWII, but pick an industry, any industry, from manufacturing, consulting, software, banking, automotive, you name it, and you will find that today they are all completely global. I just went to a baby store in Cali Colombia to get new level 3 nipples for our Dr. Brown bottles, and a few Fisher-Price teether toys for my twins. You can buy all the same brands in Colombia and anywhere else that you find at Babies”R”Us in the US. Our twins are used to air-conditioning so we went to buy a room AC unit at a local equivalent to Home Depot. Again you can get the same brands as in the US: Whirlpool, Black&Decker, Bosh, Panasonic, Electrolux, you name it. When I needed an antibiotic, I had a choice of Pfizer or Abbot. The same story is happening in the world over. In Lagos, I was drinking Johnny Walker, blowing my nose into a Kleenex, and driving in a Toyota to the airport. The Chinese are famous for buying western brands despite the high prices, particularly, when it comes to taking care of their little emperors, their kids. You can buy Nestle products all over Latin America, including on the trail to Machu Picchu. And so forth and so on, this list could go on forever and extends into services as in Clifford Chance for legal or McKinsey for consulting.

Global mega corporation
The point is that whether you see it or not, more and more industrial and consumer goods and services are provided by global companies the world over. As a side note, executive compensation tends to be proportional to company size which explains some of the exec comp increases from the last three decades. But where are all the small companies which we started out with in the 1800’s? The Department Store displaced most of the specialty shops. Big Box retail epitomized by Wal-Mart displaced most of small city small businesses. And now Amazon goes beyond Wal-Mart. Global food franchises displace small restaurants. For example, that was very visible in NYC after the recession. The growth of Chipotle and Shake Shack epitomize that small restaurant demise. Both Chipotle and Shake Shack were listed with valuations above $1B. Not small. Just when you thought your taxi driver was local, Uber came in, a company with over $50 billion valuation. On a side note, I love having Uber in Cali Colombia as much as I love it in Brooklyn: makes life easier.

What’s left to be eaten up by software? We still have insurance agents and small wealth advisors all over the US. The robo-advisors are effectively displacing wealth managers as discount ticket agents such as Priceline displaced travel agents in the late 90’s. Insurance is not far behind and with the advent of the self-driving car, auto insurance will for a big part disappear from consumers’ lives. Healthcare, as practiced by independent doctors is still small business, however, the level of VC money going into that field makes me think that’s not for long. The classic argument for local business was that your plumber and your cleaning lady would both always need to be local. Well, there are Uber-like companies getting into this space as well, like Angie’s list and nannys.com. In Atlanta, there is HUX , however, Amazon is exploring getting into services as well. It’s the beginning of the end of local.

On the continuum from everything being a small business to everything being efficiently provided by mega corporations operating on a global platform, we are a little more than half way there. The monumental scale of the global business reality we live in is greatly misunderstood and vastly different than the romantic perception the term small business evokes in most people, even when billionaires themselves talk about small business.

The Numbers
I do not have numbers going back to the 1800’s, so I will look at the data available from the US Small Business Administration. From 1977 to 2012 the split between the number of small and big businesses has shifted marginally towards big business. The number of businesses with less than 500 employees grew at 1.5% annually, whereas the number of businesses employing more than 500 employees grew at 1.8%. The real split is at 100 employees. The number of firms with fewer than 100 employees kept track with population growth of 1% per year and the number of all bigger companies actually grew at 2% a year. That is a sustained and steady change. As of 2012 we are talking about 5.7 million small firms and 18 thousand big firms.

When we look at the employment numbers, more than half -or 52%- of the working population now works for big businesses, whereas, in 1977 more than half -or 54%- of the population worked for small businesses employing less than 500 people. On average, the big business employees make 30% more than the small business employees as of 2012. That gap was 27% in 1992. That demonstrates a steady growth and an impressive advantage of big corporations. However, that is partial information capturing only the US.

The small business numbers in US hide inside them the rise of the precariat, the increasing shift to freelance labor. Many of the freelancers operate as a small business under the US Small Business Administration, though not all. Nearly 1 in 3 working Americans is an independent worker, and that’s not explicitly captured in the numbers.

Although the number of big and small firms and the number of employees working for big and small businesses and their average salaries have shifted only marginally in favor of the bigger firms according to data available from US Small Business Administration, the big firms became massive global organizations. If we use S&P 500 as a proxy for the big firms, the market cap of the average S&P 500 company has grown at 10% a year for the past 38 years. In 1977, the average market cap of an S&P 500 company was $1.25B and today it is $40B. All the S&P 500 firms combined had a total market cap of $623 billion in 1997. Today it is $20 Trillion. Just for perspective, the total size of the US economy as measured by GDP is estimated to be $18 trillion this year. That is not small.

Technology and globalization are shrinking our world and creating unicorns in the land of ever increasing global corporations. Thus, Marc Andreessen’s statement “Software is Eating the World” has to be restated as: “Software is enabling big companies, old and new, to grow by eating small business everywhere.” This statement is perhaps not as sexy, but it is more descriptive and more accurate. Hence, small Business is a farce.

_ _ _

So it’s a farce, now what? We need to address the reality of our emergent post-industrial world and not play up the importance of small business without acknowledging the structural challenges posed by the emergent reality of our connected globalized world. Preaching the gospel of small business without understanding those forces that are driving our post-industrial society is at best a harmful red herring and detracts from addressing the rise of global corporate entities that surpass in economic scale and power many countries. We can debate whether it is a good thing or a bad thing, and that’s a separate debate, but we need to have that informed debate.

Why I believe global tech companies are a net positive
Ironically, all this globalization with the Unicorns’ and mega corporations’ growth will have a counterintuitive and positive result on the nature of business. We are actually going back to relationship based businesses and will witness the slow death of the transactional culture. The transaction culture emerged as a result of the 1970’s deregulation and ensuing market competition. The return to the relationship culture is brought by the same technology revolution that is shrinking our world and creating unicorns. I am talking about the vendor and product review process on Amazon, Airbnb, the vendor review process on eBay, and about the behavioral change among all the global hotels and restaurants as a result of our reviews on TripAdvisor. I’m talking about all the Uber drivers and clients that review each other. Yelp and so on and so forth. Welcome to the new networked reality.

The humanizing Facebook/LinkedIn effect, that is, your identity being verified and permanently out there, will have a profound impact on how big business evolves as it eats small business. This is shaping positive changes in retail and in finance and all of business. I view it as an opportunity for the consuming public to get closer to the brands and service providers, and via this new feedback loop, help businesses serve us better with more relevant products as we continuously iterate in a more dynamic connected system. Many of the feedback loops connecting consumers to brands and corporations are business opportunities yet to be realized and yet to make our lives better. My professional and personal goal is to help connect the big businesses to big numbers of people and make the world a better place for all. That’s the idea behind Stocks You Love.

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Growth of precariat is the wind beneath my wings, thoughts on replicating the Starbucks success in social finance.

Did anybody explain Starbucks success as perfect timing of product release with the tidal rise of outsourcing and emergence of Freelance labour? As I am searching for my next startup I watched Bill Gross, founder of Idealab, TED talk where he identifies timing as the biggest factor of success for a startups.

As reatail investors we are pushed towards dollar cost averaging and advised against timing the market, howaver here as entrepreneurs we are told that timing the market is the biggest success factor? What gives?

I know that Howard Schultz is from Brooklyn and Sara Horowitz runs the Freelancers Union out of Brooklyn. Do they even know each other? Regardless, I seriously doubt that in 1987 as he was taking ownership of Starbucks, Howard Schultz made a calculated analysis looking at the level of outsourcing among US business and the rising number of skilled class of career jugglers and independents who get income from contract gigs, projects, part-time jobs, temp work, moonlighting and consulting and said to himself: all those wonderful people without a stable income source will permanently need a temporary place to work from, why don’t I create Starbucks. I do not think he knew that.

The story we are told is more intuitive. “When I walked in this store for the first time—I know this sounds really hokey—I knew I was home,” Schultz remembered. “I can’t explain it. But I knew I was in a special place, and the product kind of spoke to me.” So that sounds a lot more like the follow your passion and intuition advice than a calculated planned well thought out success driving strategy is the only way to go advice.

Perhaps we can find a happy median in value investing: find what you love and wait for affordable pricing before buying to hold and cherish. Find your passion and wait for your opportunity to enter the market?

Can we really benefit from the Bill Grosse’s insight about importance of timing in the success of a startup? Or do I have to rely on my gut feeling telling me that social finance is where it’s at. This is the opportunity of our life time because it viscerally feels like home to me?

If I am looking to join a FinTech startup targeting the rise of social finance, what would be mine freelance union equivalent factor? What would be that yet unseen wind which will drive Starbucks type of success for social finance space?

If you want the answer or to discuss this further you can meet me at my office, the local Starbucks.

We are the new economy, we are building the new economical structures, and the we includes you!

Screaming fire in a crowded theater:

It appears that our economists, after their splendid failure in predicting our great recession, are trying to compensate for their failure by engaging in a scary competition among themselves to see who can predict the most gloomy future for us. I would characterize this as screaming “fire” in a crowded theater. Not cool! Particularly as there is no fire, other than the one they erroneously imagine in their heads.

What’s the fiery crisis du jour, you ask? Well, The robots are coming for our jobs!!! Or in the words of Jeffrey Sachs and Laurence Kotlikoff, the smart machines are coming for your children’s jobs and will bring long-term misery, I have not read such an upbeat white paper in ages.

Jeremy Rifkin is talking of a third industrial revolution where automation and robots take our jobs.

Paul Krugman is building on those fears and beyond by saying that this generation who started graduating into the great recession in ’08 and thereafter will never ever catch up with their earnings. Game over, lost generation.

The Economist is jumping on this gloom and doom band wagon as well with their Robocollegue article saying with a smile that because of automation there is going to be a lot more unskilled low pay dead end jobs filled with university graduates who implicitly defaulted on their student loans.

Most of the above economists draw very logical conclusions about need for change of our social systems which is right regardless. However, my simple point is that I am not quite ready to start worrying nor should you be worrying, just yet!! We must realize that it is the same old economists now screaming fire who failed to predict the great recession. Thus, we, the creative educated masses, should continue working on our startups and re-imagining the world and writing software that eats this world, and building our new economy.

 

The world it is changing:

We would be excused for thinking that all the economists got hold of the same make and model of disaster colored gloom and doom glasses. That’s not far from the truth. Their economic models which illuminate their view of reality are grounded in established yesterdays structures. Unfortunately, for the brilliantly structured economic minds, we are changing the structure of the world they are modeling, right now, in real time. We are reshaping our world.

First, their discussion was framed in terms of recovery timeframe with the predominant question being when do we get back to normal? The answer is never ever never.

Spain having financed the anglo-spanish wars with silver from Latin American colonies has forgone the emergent banking innovation happening in Antwerp and the Spanish crown ended up defaulting on its debt at least fourteen times between 1557 and 1696. Spain has never ever returned back to that normal.

London had a thriving bond market by the mid 18th century. France had no such thing as a bond market. If not for the British Empire’s ability to raise enormous debt Napoleon might not have been defeated. Thus, we speak English.

After the crisis of the US revolutionary war, cotton production moved to India. That move out of US was permanent, it never ever came back.

The economic crisis brought by the world wars in Europe eliminated the live in servant culture. That world is not coming back.

We just cannot expect things to get back to normal after our current crisis. And we don’t just have an economic crisis. We have a structural revolution.

The question is not if things will change but when will the changes go mainstream?

LinkedIn is having recruiting conferences for people who are the back bone of their revenue model!

E-bay has conferences for the people making money selling things on e-bay.

Amazon, as far as I know, has no conferences for the people they enable as sellers, but they have conferences for the masses of entrepreneurs who use the Amazon Web Services as a software platform.

Etsy is starting to have conferences discussing small business and sustainability ideas.

On a smaller scale, Estimize does not have any conferences yet for analysts estimating stock performances but they provide an incredible disruptive platform for stock analysis. I totally see a conference for all the analysts in their future!

Those are, present tense existing things, foundations of a massive new global economy.

To assume that the changes will take generations and old world economic models will persist is simply looking into slightly dated forecasting models.

 

RareBridge as a solution:

Collaborative cross community communication is the new paradigm! Just look at your own Facebook friends, where they come from, where they live.

All this is becoming an integral part of this new entrepreneurial culture. I am not sure when RareBridge will be hosting an entrepreneurial conference or what will be the specific themes, if you have an idea for a innovative entrepreneurial theme, let me know. But for now we have built the infrastructure to help accelerate the global emergence of startup culture. Come join us!  

We are working on this project from London, San Francisco and Bogotá, and one of our advisers lives and works in Lagos. We are united by our passion and believe that this stands in direct opposition to the latest wave of our economist gloom and doom forecasts. We have a vision and drive to support the self-starters and the self-employed of our era. Come join the movement!