It’s the golden age for the little guys, says author and journalist Chris Anderson. What will it mean for large companies?

Topic: Small is the new big

Chris Anderson: I do think this is the golden age of small business. It may not feel that way to a lot of small businesses, but I think time will show that in this current crucible that whether people started small business either because they could or they had to because they were being employed by big businesses, that we will see the seeds of a stronger economy going forward. To answer the question with a little historic context, Ronald Coase, the famous economist, prize winning economist, in the 50s and 60s came up with a theory to figure out why companies exist. It is kind of paradoxical on some level. Countries work best among democratic principles.

Markets work best among free market principles and yet companies work best among very dictatorial lines. Very top down, organizational lines. Why is it that companies exist? What is the purpose of us going to work every day to work in an office next to others? He came up with the concept of lowering transaction costs. That it was – The reason companies exist is to make it easier to get things done. That rather than sort of saying, well I need this thing made. Where can I find a guy that makes things? Instead I turn to the guy seated next to me whose job it is to make things and say do this. And he understands. He’s got tools. We have the conventions. We have the trust relationship. We’ve got [that] things can happen more quickly. What’s interesting is that era defined the 20th century. Lower transaction cost was the advantage of the firm. Now we’re in an era where it’s completely reversed. Now big companies have bureaucracy. They have red tape. They have long procedures. They have certain profit requirements. The transaction costs are actually higher inside the walls of a big company than they are outside. The reason that when Ronald Coase was talking about this that transaction costs were closer was that it’s hard to find that person that’s just the right person to work with you. Now it’s easy to find. The fact that I can – It’s often – Bill Joy famously said that the smarter people in the world for any given project don’t work for you. That’s a problem if you can only work with people that work with you. I mean, why are you working with this guy? Is he the best person in world?

No, he’s the closest person in the world. Now it’s incredible easy to find the best person in the world and to get them to work with you. The internet has provided a sort of global lowering of transaction and so we can now, it’s often more efficient to look outside your company and, you know, I’m joking on some level. The idea of finding the right person via Elance versus your internal HR is actually often easier to go outside and get things done. What that’s done is that it’s said we have a diseconomy of scale with big companies. The bigger they are, the harder it is to get things done. Small companies are nimble. They’re focused. The cost base is lower. They don’t need big markets so they can target more narrow opportunities. Not to say that it’s easy to raise capital or that all small companies will succeed but this is a great time because it’s never been cheaper to start a company with all this free stuff. I’ve been talking about free products, but they’re also consumers of these products. Open source software, hosted solutions, all this cloud stuff, those will lower the cost of starting a company. The internet has lowered the barrier of reaching products. These global markets of talent have lowered the cost of finding people the right people to work on your project. All of it is really creating an army of competitors to the large company model. Large companies are still great at mass but there is a long tail. And large companies are bad at the long tail. Small companies are perfect for the long tail. And we’re not going to see a battle between the two.

Let’s take a classic software – I have a company like that called BookTour.com. We are four guys with laptops, basically, no infrastructure. We have no office. We have no servers. Ten years ago we’d have some servers and rooftop parties and an office and no doubt t-shirts. Now we have nothing. The software’s on Amazon’s web services. The code is open source. We work out of our homes. I’ve worked off my iPhone in between meetings. It’s all on the credit cards. This a company that didn’t need to raise venture capital. Increasingly you’re seeing companies like this where you can start a company on a credit card. You can offer products for free to thousands of people. Once you reach tens of thousands and hundreds of thousands and millions, you start to deal with real costs and at that time, you probably do have to raise some money. We did in the end, when we got there. But what’s nice is you can sort of test your product. You can reach that sort of, is there really something here? You know, are my premises correct? You can do the reality check before you raise the money. When you do raise the money, if you do raise the money, you’re raising it from a position of strength. You’ve proven your utility and the question now is scaling money rather than creation money.

Recorded on September 30, 2009