05 Jul Why the big brands envy start-ups
Conventional theory about economies of scale would suggest that big companies are unassailable. But the normal rules of business have changed and it is nimble entrepreneurs that are challenging the old order and are more often the drivers of innovation and creating new consumer behaviours.
Start-ups are usually unencumbered by the deeply entrenched thinking and bureaucratic shackles that stifle large businesses. And they have recently started to enjoy some of the advantages that used to only come with scale, for example:
- the cost of entry for a start-up is decreasing rapidly – a retailer can create an online shop window for almost nothing, an app can be built for less than £5,000.
- social media allows a new entrepreneur to interact with their consumer, grow a brand and make it personal and relevant to a precise audience, all at low cost.
- entrepreneurs now can think globally from day one – selling in multiple markets and sourcing from multiple markets.
However, more than any of these I believe, from working as an innovation consultant with some of the world’s largest businesses (such as IKEA, AB InBev & Waitrose), as well as years of investing in start-ups that an entrepreneur’s greatest advantage is born from scarcity. Entrepreneurs have…
These constraints perversely give them more freedom & agility than large businesses and create the necessity to rapidly and cheaply experiment, learn and iterate with the main effort focused on the customer. Whilst large business get stuck in a ‘pilot’ mentality with huge effort, risk and a focus often shifted internally to a business plan.
So entrepreneurs should cherish this advantage for as long as they can. Huge businesses can protect this start-up mentality as they grow, if they deliberately protect and nurture it.
This also means that an entrepreneur escaping a big company should be very mindful of the mentality they have. Many years ago, I left a big job at John Lewis to set up a new retail business. I was full of the hubris of spending multi-millions of pounds and set up my retail business with a proposition, processes, systems fit for the over 100 store chain I expected it to become. With hindsight, much of my capital expenditure was wasted. I’d have been better experimenting more quickly and at lower cost, getting a deep understanding of the customer and iterating the proposition more quickly.
So as an investor, I have a huge ‘watch-out’ on the mentality of an entrepreneur that has come from a large business. Industry knowledge is hugely helpful, as is the structured thinking, prioritising, planning skills that are nurtured in a large business. But alongside these, an entrepreneur must demonstrate their experimental mentality to get me past my scepticism of corporate types.