Prime Time for Entrepreneurs
I recently spoke to a group of high school students from across the country for Virtual Enterprises International, Inc., an education nonprofit organization for which I serve as a mentor. VEI provides students with business and entrepreneurial experience. I was struck by the fears expressed by some of these students, fears of the unknown in the post-COVID-19 world. I told them that, to the contrary, they will be graduating into an unusually fertile environment for entrepreneurism and small business, with arguably more opportunity than ever before. I genuinely believe this.
I think several trends are converging to make this a golden age for innovative small companies. Capital is abundant for talented and dedicated entrepreneurs with good business ideas (the dramatic rise of the private equity industry has shone a light on and lowered the cost of capital for small businesses). Technology and declining costs of computing power have lowered barriers to entry and enabled small businesses to compete more readily with large, established players. Digital disruption and the power of the internet are allowing successful small businesses to scale rapidly and to frequently achieve extremely high profit margins. The global challenge of climate change is attracting young, purpose-driven entrepreneurs who want to help change the world.
Digital Disruption
Ironically, much of the innovation and creativity was stimulated by the dreadful COVID environment. For example, working from remote, which is here to stay to a greater or lesser extent, breathed life into the “future of work” theme and businesses such as global electronic marketplaces for matching professional talent around the world with employers who have shortages of skilled professionals. Being cooped up at home helped to spur growth in small fintech companies ranging from banks and insurance companies to real-estate brokerages and robo advisors. A number of these young financial services businesses, harnessing mobile gadgets and technologies such as artificial intelligence, have seemingly emerged from nowhere to compete with large, old incumbents. We are literally seeing businesses that didn’t exist five years ago taking over entire industries.
You might ask why big companies, with deep pockets and large budgets, are not dominant. As organizations grow larger and more institutionalized, it frequently becomes very difficult for them to innovate. Large corporations often suffer from the “innovator’s dilemma,” in which they lack an incentive and culture to break and disrupt their own platforms (many big businesses that are unable to innovate end up acquiring small, entrepreneurial companies). I recently learned that, even in the rapidly emerging business of investing in space, the “last frontier,” the disruptive innovators are primarily small, entrepreneurial companies (to learn more about the fascinating field of space exploration and development, I highly recommend you listen to my recent podcast with Dylan Taylor, a pioneering investor in the space industry: Dylan Taylor: Investing in Outer Space) .
In short, today is prime time for entrepreneurial, innovative, and disruptive small businesses. I personally am participating in this trend by investing in publicly traded small, growing companies from around the globe. In addition, I feel that the time may be ripe for small cap stocks. Due to the small-cap premium, over the past 90-plus years small company stocks have outperformed large caps by about two percentage points per year, whereas in the past decade the reverse has been true. I do not believe that the small-cap premium has been repealed, and at some point—perhaps very soon—it will reassert itself.
Finally, I recently was interviewed on investing in global small growing companies and other investment topics for two podcasts, one for Bloomberg and the other for Stansberry Research. I invite you to listen to these podcasts: A Quant's Take on Innovation and The Quant Approach to Innovative Investing