Why the Future of Entrepreneurship Is Small
Originally published in Entrepreneur
Here’s why the future looks bright for small businesses.
In his book, Zero to One, iconic Silicon Valley investor Peter Thiel famously argued that “Competition is for losers.” Thiel argued, “If you want to create and capture lasting value, build a monopoly.”
Given the choice, every entrepreneur should drool at a chance to build an uber-profitable monopoly with no real competitors. But is this a realistic goal for most entrepreneurs? And should those who can’t measure up chalk it up to failure and give up their ambitions?
Competitive small businesses are less heralded than market incumbents and monopolies — but they’re often resilient and innovative. They also allow millions of founders to achieve financial autonomy and make meaningful contributions to their communities. In fact, “small” may be the future of entrepreneurship. Here’s why.
1. The quest for autonomy
Entrepreneurs aren’t created in Silicon Valley incubator labs. They’re partly born. Many factors help predict what psychologists call “entrepreneurial intent.” For example, some people are naturally more industrious and comfortable taking risks than others.
But the most important one is a strong need for autonomy. Natural entrepreneurs have a vision and need to pursue it their own way. Executing on someone else’s vision isn’t enough. In multiple surveys asking people why they decide to start their own business, “being my own boss” typically ranks as number one.
Very few will ever have a real shot at creating a monopoly. Building a very large business is extremely rare — but this doesn’t mean they’ve “lost.” For natural-born founders, the first big win isn’t even in the marketplace: It’s the autonomy itself.
Owning a successful and competitive small business is a more realistic and attainable path toward that aim than setting out to build a monopoly. The “successful” part, of course, can be tricky. But small businesses are remarkably resilient.
2. The amazing resiliency of small
Individually, small businesses are less impressive than larger, monopoly-type businesses. Taken together, they’re a force. According to the Small Business Administration, small companies account for over 60% of new jobs created in the U.S. and produce roughly half of U.S. economic output.
Even though many of them end up failing, the overall trend is positive. Economist Dr. Scott Shane has found that since 1977, the failure rate of small businesses has gone down by over 25%. Leveraging their agility edge over larger corporations requires constant innovation — something many small businesses embrace and excel at.
3. Small engines of innovation
Small business is a force of constant innovation. One large-scale study shows that small firms vastly outperform larger ones in patent originality on a “patent per employee” basis.
Monopolies often get set in their ways and seek to slow down innovation once they’ve established their dominance. As Michael Riordan argues in the Harvard Business Review, “the lack of competition induces corporate somnolence, and new technologies are patented mainly to consolidate and protect a company’s dominant market position rather than to encourage the creation of revolutionary products and services.”
This is why acquisitions — buying smaller businesses that are innovative — is such an appealing strategy to larger corporations. The spirit of innovation implies risk-taking, agility, messy experimentation and a desire to change or improve the status quo — all qualities that small businesses have in droves.
4. Small bridges the purpose gap
Increasingly, people want more than just a paycheck. They expect their work to be infused with purpose and align with their core values. For example, millennials are far more likely to walk if a job isn’t aligned with their purpose.
Large, monopolistic businesses have to juggle many pressures — obligations to shareholders, big regulations and the interests of multiple stakeholders. In their singular focus to dominate markets, providing a rich, values-driven environment for individuals is often not a top priority.
In a small business, the distance between ownership and labor is much smaller. There are fewer competing interests to balance. An alignment in the core values between founder and employee can go a long way in strengthening the sense of purpose of both.
Small businesses can also work with their equity more directly, giving key employees a real ownership stake. There is no wonder so many workers — whose options have multiplied following the pandemic-induced labor shortage — are picking jobs with small businesses rather than larger companies.
5. The cycle of community impact
Being small makes a business more responsive to the needs of the local community, almost by design. A small business itself acts as a small human community: It’s closer to the famed “Dunbar’s number” of 150 — the typical number of relationships human beings can comfortably maintain.
On the other hand, monopolies are larger, more impersonal and bureaucratic. Their concerns are more distant from those of communities. A small business has no choice but to earn a good reputation within the community it serves. Otherwise, the impact can be felt on its bottom line very quickly.
Smaller businesses are likely what Adam Smith had in mind when he argued, in the Theory of Moral Sentiments, that efficient economies emerge from the quest for selfish gain, as long as it’s held in check by the powerful need for peer recognition and neighborly acceptance.
Thiel’s point remains valid, of course — for a small number of fortunate founders. But striving for monopoly shouldn’t be the main goal for the bulk of entrepreneurs. It’s neither viable nor necessary to achieve their life goals.
Building monopolies is exciting and can generate an astronomical return for investors. Because of this, the quest for big has skewed the game of entrepreneurship toward this goal. But competition isn’t just for losers. A quality small business can allow founders to achieve autonomy, find new opportunities, innovate, pursue their purpose and meaningfully contribute to their communities. After all, competition also forges winners.