Small Companies, Big Profits

Bigger is better.
— Thomas Andrews, the designer of the Titanic

One of the most disastrous myths of the dot-com era was “Get Big Fast” (GBF). Its apostles spread the gospel of growth from the suburbs of Seattle and the subdivisions of Santa Clara, CA, to the hallowed halls of Harvard Business School. The problem is that while being big may sometimes be an evolutionary advantage, it always restricts flexibility. The dinosaurs learned that lesson the hard way.

The GBF philosophy was predicated on two flawed assumptions. First, vast amounts of capital would be available. Second, the online first-movers that managed to attain behemoth status would dominate their industries, crushing smaller competitors and brick-and-mortar players alike.

The proponents of this philosophy, most notably Amazon.com, set about constructing businesses of T. rex-like proportions. No amount was too great to spend on marketing, hiring, or building. Revenue and growth were everything; profits were for wimps.

And then the sky fell.

Like a giant asteroid slamming into Silicon Valley, the Nasdaq cratered. The resulting shock wave ran through the capital markets and dried up the supply of funding, eliminating the GBFs’ only real source of sustenance.

At first, the giants seemed unaffected. Sure, they said, there’s going to be a shakeout, but that just means that the big will get even bigger as we consolidate our industry — and quality companies such as eToys will always be able to get more funding. Some firms even managed to hit their earnings estimates. But the damage had already been done; it just took a while for the famine to work its way up the food chain.

By the winter of 2001, the GBFs began dying out like the lumbering dinosaurs of old. Because of their gargantuan size, they couldn’t adapt to the suddenly frigid funding climate. A small, nimble five-person company can easily get to profitability with $1 million; in contrast, bronto-sized CMGI lost some $1.2 million an hour this past quarter. GBF now stood for “get bankrupt fast,” and pink-slip parties replaced the de rigueur bacchanalia that had previously announced each site launch or round of funding.

Yet this was not the end of life on the Internet. As the thundering footfalls of the GBFs died away, millions of survivors could finally make their voices heard.

The truth is, there are millions of profitable Web sites. In the U.S. alone, there are over 21 million small businesses (1997 U.S. Census data), and close to 15 percent of them are breaking even or making a profit on the Web (Verizon’s Small Business Internet Survey). That means there are over three million profitable Internet businesses in the U.S.

How did these thinly funded, underhyped, unfashionable pipsqueaks survive where Kleiner Perkins and Benchmark now fear to tread? Simple: They adapted.

Small businesses have lower overhead, greater flexibility, and faster time to market. Small businesses and sole proprietors can make decisions quickly and turn on a dime, unburdened by the need to carry out yearly business plans or fixed budgets.

Executives at a women’s site that I had contact with actually rejected a deal because they didn’t want to amend their six-month operating plan. In this rapidly changing market, six months is an eternity. You have to be able to shift in six days, or even better, in 60 minutes.

Small businesses are also more creative. Because they survive in smaller ecological niches (and because they don’t have money to waste in the name of “branding”), they avoid national television ads and huge banner buys. They find ways to generate leads and sales without spending a lot of money.

Small businesses pioneered email marketing (with personal newsletters), viral marketing (which used to be known as word of mouth before Draper Fisher Jurvetson hijacked the term), and loyalty marketing (get your 10th ice-cream cone free!) long before the GBFs found ways to lose their shirts on yesmail.com, Epidemic, and MyPoints.com.

Small businesses always knew that you shouldn’t spend five times your annual sales on marketing when you can get a complete solution for $25 a month or can do it yourself.

Small businesses also always knew that you shouldn’t spend $160 million on high-priced consultants when you can figure out your own answers or can hit the mailing lists and ask your fellow entrepreneurs for their two cents’ worth.

Ironically enough, Jack Welch, the head of the world’s most valuable conglomerate, summed it up best with his Destroy-your-business.com initiative. You have to be willing to undergo radical transformation, even creative destruction, in order to evolve and survive.

Dinosaurs died out. Mammals survived. Which do you want to be?