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Startups Disrupt Industries, Not Economic Systems
Douglas Rushkoff's "Startups Are Not As Disruptive As They Appear" starts with "We first got excited about web startups because they didn't have to follow the script" and ends with the somber
Perhaps we should have seen this coming. After all, when startup founders are invited to the ring the bell on the stock exchange, it's not because they've disrupted the way we do business. It's because they've maintained it.
Let's unpack that a bit.
As I discussed long ago in the Rebirth of Entrepreneurialism series, the fact that web-based businesses can be started and run with such low capital is why we're seeing the renaissance in entrepreneurship. It's a renaissance, and not something new in human development, because businesses ran out of small houses and shops before the rise of the factories that were the foundation of industrial capitalism. Small farms were manned by people -- unfortunately, a great deal of unpaid and underpaid labor -- but still didn't require large outlays for land or equipment. Lastly, the communications technology that allows us to coordinate a lot of people over vast distances hadn't been invented yet, so there was a very real limit to how much a single business could grow.
The upshot of that was that investors largely weren't needed. The proliferation of factories and transcontinental corporations required the creation of the concepts of limited liability and shareholder investing. A handful of individuals no longer had the requisite wealth to create the factories and logistics empires, but hundreds or thousands of people pooling their wealth did. Management science followed soon after to coordinate ever larger organizations ever more profitably.
Small businesses obviously continued to exist, but they couldn't compete with the sheer amount of profit that larger corporations could create due to economies of scale and found it difficult to secure enough customers to keep the lights on. Corporations filled the shelves and our attention with cheaper goods and thus got increased market share, which made it easier to fill the shelves with cheaper goods.
The disruptive nature of internet-based businesses is thus threefold:
Less capital is needed to start and manage a business.
The high profit margins lessen the advantage of economies of scale.
It's significantly easier and cheaper to create and maintain relationships with an ever-larger pool of potential customers.
It's thus very good to be an owner of a scalable Net business. That's precisely why so many investors are happy to
covertly take over and harvest come in and provide the capital for growth. It's also why we see so much emphasis placed on the scalability thesis. So Rushkoff is exactly right: if founders are being invited to ring the bell on Wall Street, it's because they're being "rewarded" for making a lot of other rich people that much richer. At that point, though, they're no longer being disruptive -- they're just being hyper-efficient factories that funnel more money to fewer people. To be clear, we need factories, corporations, large organizations, and so on, and there's nothing inherently wrong with them. As a small business owner, I'm also rather happy to have those three factors above working for me and my clients. It's also important that we call a spade a spade, especially if we set out to build a fork. Startups disrupt industries, not economic systems ... unless we as entrepreneurs decide to use our businesses to chip away at the current systems or create new ones. That's not about business models, though, and a singular focus on profitability isn't going to do it, either.