How Big Firms Kill Entrepreneurs

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Entrepreneurs are the backbone of the innovation economy and continue to radically change the way people work and live. Entrepreneurs challenge the status quo by creating new businesses, jobs, products and even new markets and economic sectors. While it is often true that big companies are sometimes a necessity to innovate given their larger capacities and economies of scale, startups are the most dynamic part of the economy and constantly forces labour and capital to be put to better uses. Despite the hype surrounding unicorns (startups valued at over $1 billion), in the US over the past 15 years, for example, not only have there been fewer startups overall, but a smaller number of startups have been able to transform into high growth companies.

Part of this problem is the large amount of mega-mergers that kill innovation. Consolidation and mergers can sometimes be good for consumers, as bigger companies have the resources to innovate and provide new products and services that might otherwise never materialize. However, the vertical integration of these sectors often restricts innovation due to decreased consumption and the limitation of research to specific technologies that support existing business lines. Take Facebook’s $19 billion acquisition of WhatsApp in 2014, for example. Facebook’s primary reason for acquiring the company was to utilize the chat technology on its social media platform to bolster its existing messaging application, which currently lags behind WhatsApp in the smartphone market. Beyond that, Facebook also gains from the acquisition by leveraging WhatsApp’s own massive user base to promote its social media offering. But either way, the integration of Facebook with WhatsApp is the main goal and driver of value instead of a trailblazing and innovative technological development in the chat space itself. That is not to say that all acquisitions and mergers are negative or that the largest companies never move society forward, technologically or otherwise. But if the pace of consolidation by major firms continues as is, it may very well shrink the playing field to such a degree that innovation will become the sole domain of just a handful of companies. And this is an issue. These big companies will only finance targeted research that boosts their own profits, and use powerful patents to prevent others from advancing that technology in other directions. Along with patents, large companies often have exclusive licenses to operate in a market or a government subsidy or contract that smaller firms lack. Regardless of other factors, the many patents that major corporations hold on their technology often make efforts from smaller businesses and startups unprofitable.

Beyond patents, funding is also a huge issue. Big companies have the ability to pay large amounts of money to acquire small startups with promising technology. However, big companies often destroy what they just bought, squandering whatever initially made the acquisition so attractive initially. When Google acquired up-and-coming home automation company Nest as a potential challenger to Amazon’s Internet of Things technology for $3.2 billion, this is exactly what happened. The original founder of Nest is now gone and the company has made little to no progress as a division under Google (now Alphabet). This incident is particularly tragic, as Google is generally renowned as an innovative firm. What big firms need to do is respect entrepreneurs and startups by letting them operate unhindered as they have, focusing on what made them successful in the first place and ultimately letting them build something that makes the world better. If large corporations do choose to acquire smaller firms and startups, they should keep these businesses separate from the larger firm’s bureaucracy and management. The irony is that this is what allowed Facebook to become so dominant in the first place. Despite the constant efforts of companies to buy or control Facebook early on in its development, founder Mark Zuckerberg stubbornly kept control of his company, taking on as little investment capital as he could to keep growing the business. However this rarely happens, and instead of smaller entrepreneurial firms operating as a separate entity, they are fully absorbed into larger firms with key figures in the startup being ousted, as seen with Nest. In this case, no one wins.

Across various fields and sectors, it is often the inherent structure of big firms that makes them lack innovation and entrepreneurship. First, there is a focus on short-term results, which drives out ideas that take longer to mature. This approach manifests itself in incentives being geared towards maximizing current business and reducing risk, as managers are trained to look for flaws in new ideas rather than testing their potential. Additionally, the fear of cannibalizing current business by developing new products or services that would negatively impact on the sales performance of a firm’s existing and related products and services further prevents investment and research in new areas. Even if big firms are innovating, they tend to focus on incremental developments that have more controllable risks and predictable returns, as opposed to the potential of the much more risky and revolutionary startup. This philosophy extends and infects itself in promising entrepreneurial minds. Recent university graduates entering the work force full of entrepreneurial potential are easily enticed by lucrative offers from large and influential firms. Often these top candidates will go to a big firm for two or three years to generate substantial capital, with the promise of startup life after that. However, when surrounded by a high-end, lavish lifestyle with a huge focus on what other people have, it is all too easy to become addicted to this way of life, extinguishing young minds’ entrepreneurial flame. This is what is referred to as golden handcuffs – benefits, often deferred payments, provided by an employer to discourage an employee from taking employment elsewhere. The best time to push the boundaries of what is possible is when you are young and energetic and have the most motivation to positively impact the world. As renowned entrepreneur Andrew Yang argues, smart people should build things. Too much potential is lost by entrepreneurs becoming absorbed into the status quo ecosystem of big firms, particularly in finance, management consulting, and law. Hopefully the booming tech industry follows a different path.