What is going to happen to small businesses in the U.S. in the coming years? The general thesis is that technology allows mega-companies like Amazon to scale, putting small businesses into a systemic decline. But I am not at all convinced this is the way the future needs to play out.
If the last wave of the internet empowered big businesses over small ones, it is possible that the next wave of the internet could easily end up doing the opposite—flipping the relative balance of power back toward small proprietors.
The question is what technologies would you need to build to empower small businesses to be more competitive with large corporations? Here are some ideas.
Measurement Tools and Data
One of the biggest structural advantages that large companies have over small companies is that they are able to reduce incredibly complicated business practices to simple financial statements and models that the market can understand and digest.
This is the brilliance of modern finance. By using technology to reduce complexity to simple numbers that the markets can digest, big companies get access to massively cheaper inputs at high volume. The financial market gives them access to cheaper capital, and suppliers are willing to cut them volume discounts. The scale and access to data make it worth the while of business partners to transact with the large players.
Small businesses historically have lacked these advantages. To be sure, small businesses may have basic financial statements—which is why they can interface in a rudimentary way with banks, etc. But they don’t generally have the track record and depth of data that make it cheap and easy for other businesses to deal with them. Small businesses have no real way of easily sharing information with third parties about things like customer acquisition costs, unit profitability, retention, etc., so those third parties have a hard time building business relationships with small businesses on good terms. Historically, a big supplier or financier just wouldn’t bother with small businesses because the transaction cost of knowing the health of a small business is too high.
This is starting to change, however, with technology platforms like Stripe and Square. These firms effectively allow small businesses to digitize transaction-level data, giving them a few huge advantages.
It lets small businesses know their customers better by, for instance, getting a better handle on customer spending habits in a way that big companies already can do. It also standardizes their business data in a way that other companies can more easily analyze. For instance, it becomes easier and cheaper to finance cash flow needs when the cash register of a given small business is online. A financier can more quickly evaluate the moment-to-moment health of small businesses in a standardized way.
Cash register data should only be the start. In the coming years I would expect that camera data from store locations, and other business intelligence tracking services and APIs, will make it far easier for small businesses to collect data and measure their performance. This will make it easier for small businesses to get help optimizing their process and operations.
But just as importantly, measurement platforms should allow small businesses to cheaply and efficiently publish the data they need to other companies in the ecosystem. That will help small businesses build the trust and predictability necessary to reduce interaction costs between firms.
Liquidity
If the first problem faced by small businesses is measurement, I would argue that the second issue that many small businesses face is liquidity of their equity.
If you own shares of a public company, part of the value ascribed to your ownership stake is the fact that it is liquid and you can sell it whenever you want.
On the other hand, if you own a small business—a cafe, a tax preparer, a yoga studio or a laundromat—the value of your asset is effectively penalized because it is very hard to sell.
This doesn’t have to be the case however. You could easily imagine a digital platform that would make it easy to buy and sell small businesses in a given community, and you could also imagine that the increased liquidity of such a market would make all the small businesses worth more.
A more liquid digital market in small businesses would almost certainly help build talent in small businesses. I assume there are many people who would buy a small business if they had a route to do so—but the transaction costs of finding the right business to buy and start operating are just too high.
Training
The third big advantage large companies have long enjoyed is the ability to invest in the training of great people. Small businesses, historically, just can’t afford to invest in training in the same way.
I think there is an argument, however, that the internet could swing the pendulum in favor of small businesses, to a point.
Imagine a new type of online business school platform that wasn’t focused on training management consultants and bankers, but instead on helping small business leaders improve.
It might be impossible to get all laundromat owners or cafe owners together in a physical space. But it makes sense for small businesspeople to use the internet to tap into training and learning communities to get better at their jobs.
I am aware that there are many online classes out there and resources for all sorts of small businesses, but I have yet to see the type of high-end and cost-effective training, mentorship and advice I would expect to evolve for small business owners. I think it is a very solvable problem with technology.
Toward a Small Business Platform
In the last few years companies like Facebook and Google (and to a lesser extent Amazon) have dramatically leveled the marketing playing field for small businesses. P&G is very much under pressure from what is effectively the “small businesses” of consumer product companies coming out of nowhere and picking off niches.
Looking forward, it seems that with the right measurement, liquidity and training, small local businesses that have been under intense pressure for decades from big companies, such as Walmart and Amazon, should have more than a fighting chance to survive and thrive.
If technology first empowered the big companies, there is no reason that with the right platforms in place, technology shouldn’t enable small companies to band together and get many of the benefits of their bigger brethren.
If and how the actual platform ends up occurring is anyone’s guess. You could imagine a vertically integrated small business platform that brings in a ton of permanent capital, and does the whole spectrum of investing in small businesses, finding leaders, and measuring and coaching them to success.
You could imagine a series of different services and platforms that small business owners stitch together to create a network of services they need to compete.
You could even imagine that payment companies like Stripe and Square end up expanding their role to offer such services over time.
There is a lot of value that small businesses bring to different communities. With the right technology and platforms, they can broadly be competitive with big companies.