If small is the future then we will all be big winners
First published in the Financial Times on 16th December 2014.
I have always preferred small companies to Big Business. They are more dynamic, more youthful, less bureaucratic and less corporate. And it seems I may not be the only one who thinks this way.
A recent book by fund manager Gervais Williams, called The Future is Small , argues that investors should back smaller quoted companies on exchanges like Aim, because they offer growth and potential that large, mature businesses cannot match. He contends that most institutional investors overlook microcap stocks. Instead, they focus on larger capitalisation shares, usually with international exposure.
But the credit excesses of recent decades may well mean that overall economic growth is sluggish in the coming years. Large companies could find that an advancing top line is almost impossible during such stagnant conditions, whereas smaller companies tend to be better at retaining their vitality. The law of large numbers militates against large corporations; they tend to become too complex and inflexible as they expand, which inhibits their ability to adapt.
Moreover, research shows that new and small companies create almost all the new private sector jobs, and are disproportionately innovative. By contrast, large companies are mostly forced to generate value through financial engineering. Almost all of my big winners — from PizzaExpress to Giraffe to Topps Tiles to Patisserie Valerie — have been organic growth stories, each from a small base.
In many cases there can be diseconomies of scale, with margins falling as a company gets bigger. Mr Williams’ book discusses a fascinating study which suggests that productivity falls in businesses with more than 250 employees. Tesco is a classic case of vastness leading to over-reach; its fleet of corporate jetsproviding a shocking symptom of imperial hubris. Even their superstores are now seen as too big — shoppers increasingly want convenient, local stores with a distinct personality. Multinationals are hardly about to disappear: but I hope that their dominance has peaked.
Another book, due to be published late next year by Adam Lent, takes this philosophy further. Small Is Powerful contends that neither big business nor big government are the way to manage society in the 21st century. Appropriately enough the book is being published by Unbound, a new house which raises money for each title via crowdfunding. I have contributed because I believe the book’s thesis. I got to know the author while I was chair of the RSA, where he runs their excellent research output.
Mr Lent asserts that thanks to everything from the internet to 3D printing to micropayment systems, entrepreneurs are leading a start-up revolution, while small, independent initiatives and campaigns are displacing the traditional big political parties and unions. Established religious and civic organisations are being rejected in favour of a patchwork of self-help groups, loose networks and niche affiliations. The old consensus has fragmented: on the left, the socialist obsession with a big state is breaking down; on the right, crony capitalism between big business and government is being exposed as a fraud on the public.
These trends are about empowering individuals to take control of, and responsibility for, their lives. Jobs for life in giant institutions are mostly history; so is the all-embracing, cradle-to-grave welfare state and a central, command and control government. These models are neither affordable nor desirable. I believe citizens prefer to determine their own destinies, and want freedom and independence — rather than rigid adherence to conformist ideologies, buying replica products and working in lookalike buildings. I hope citizens reject the inefficient monopolies that still loom large, or inventors work out ways round them, thereby enabling opportunities for armies of entrepreneurs of one type or another.
Assuming these authors are correct, and there is a growing movement towards small and away from big for big’s sake, then the world will become a more diverse and interesting place. I hope their ideas are broadly correct. If so, everyone from graduates choosing a career, to investors thinking about asset allocation, will need to consider the implications — and go small.