Guidewire Group

Several days later and I’m still reacting to the amazing day that was TEDxAustin.  In a day jammed with wonderful ideas, insightful speakers, engaged audience, and some stunning performances, I had the privilege of sharing one of my ideas within the event’s banner “Play Big.”

Being the contrarian I am, of course, my talk centered on the idea of remaining small.  Here’s my case:

Consider the sumo wrestler.  He’s one big boy.  Professional sumo wrestlers – of which there are 700 in Japan’s traditional training centers, or heyas - weigh in from 250 to 500 pounds.  They are very competitive in a decidedly individual competition, and while they are strong and quick in short bursts, they can be cumbersome and slow outside the ring.  Maybe most importantly, they are bound by centuries of tradition.

Now, consider the peloton.  A compact team of athletes, the peloton leverages the strength of individual members to deliver benefit to the whole.  By working together, an well-architected peloton can reduce wind drag by as much as 40% to operate with greater efficiency and greater speed.  Throughout a race, the peloton can react to changing conditions and proactively seize new opportunity.  In a word, pelotons are entreprenurial.

In the world of business, the sumo is a big company, which is resource rich, with strong brand power and great global reach.  With a rich legacy in the market, big companies – like tradition-bound sumo wrestlers – are well rooted, and while that provides great stability, it can also make change difficult for the big company.

The peloton, as you might have now guessed, is a small business.   They may well be resource constrained, but they tend to be on a first-name basis with their customers.  Small businesses have a strong connection to their local community, and yet they often play in global markets. With fewer and thinner layers of decision making, small businesses are adaptive.  They can be risk takers.  And often because of their constrained resource and their close ties with customers, small businesses must be incredibly innovative to serve their markets.

As entrepreneurs, we aspire to be big businesses.  That, after all, is what investors look for and what the public markets reward.  The Fortune 500, we often assume, are the drivers of the global economy.  In 2006, the Fortune 500 had aggregated revenues of more than $9 trillion, with profits of $610B.  With nearly 25 million employees world wide, the Fortune 500 earns $368,000 per worker.  In big energy, that number can reach as high as $1m per worker and in the retail sector it drops to about $200,000 per employee. If the Fortune 500 were a country, it would be the second largest economy in the world.

Impressive.  But let’s consider the other 29,599,500 businesses in America, business employing fewer than 500 people.  Most of these are sole proprietorship; only some 5.7M businesses have employees, but among them they employ nearly 115M workers and generate $22 trillion (yep, that’s more than 2x the Fortune 500 in the U.S. alone.) .  If you’re doing the math, that’s about $192,000 per employee.

We tend to think of big business at the head of the long tail of business.  I’d argue we turn that graph on its side.  The size of the ecosystem swirling around small business and the economic value created by it outstrips the Fortune 500.   In the U.S. alone, small business accounts for nearly half of the GDP.  Worldwide, small businesses in aggregate must certainly stand and the largest global economic force.

The entrepreneurs who start small businesses are arguably the most innovative.  Think of the market-changing, market-making innovations of the last 10 years.  Software as a Service, smart phones, eCommerce platforms and businesses, fundamental Web technologies and security systems, digital media and the DVR.  These, among many others, were developed not in big companies (in fact, many big companies failed to deliver products in these categories), but by small entrepreneurial businesses.

The irony is that the very thing that makes a big business “successful” is that thing that often prevents them from furthering their success.  Big businesses lumber under the weight of  their size, unable to move fast enough on their own.  That’s the good news for startups who become targets of acquisition, as big business consumer young companies like so many calories in order to fuel their innovation engine.

But what if there were a different model?  What if we rewarded companies not for getting big, but for being efficient engines of innovation, employment, and value creation?  Imagine for a moment the rise of the Fortune 500,000, those top small businesses that outperform the markets by performing well together, much like a peloton.

Individually, each small corporation is strong, highly adaptable, capital efficient, and profitable.  These strong businesses remain agile, able to pounce on new opportunities and deliver results without wading through layers of decision making and corporate process.

Best of all, they can easily partner with other strong small enterprises to tackle a market or create one.  Each small enterprise brings its unique and highly-tuned capability to the partnership.  At the risk of mixing my metaphors,  each small enterprise is a free atom that can bond with other organizations in a precise formula to attack a business opportunity.  They can decouple and re-attach to other organizations when new opportunities arise.

Collectively, they can be stronger and more competitive against lumbering large organizations than they ever could be on their own.  And, collectively, they can react more quickly and be more responsive to a changing market environment than large companies can.

With specialization to deliver expertise and collaboration to deliver complete market value, the peloton model of business will drive innovation and create economic value.

Whether today’s capital markets can be as reactive to this coming business change is an entirely different matter.