Why Most Startups Can't Keep Up With Today's Mega Businesses

If you look at what’s happened in big cities around the U.S. in recent years, it’s easy to think we’re living in Startup Nation.” writes James Surowiecki of the MIT Technology Review. Companies like Uber, AirBnB, and Square have completely changed the way that we behave in our daily lives. But even so, as Mr. Surowiecki writes, startups on the whole are struggling, and there’s a big reason for that.

Economists Ian Hathaway and Robert Litan found in a 2014 Brookings Institution paper that American entrepreneurship is actually on the decline, and has been for decades. Despite all the seed funding, investment dollars, and Silicon Valley excitement; the number of new businesses being founded by Americans has plummeted since the turn of the millennium and most fail before the can even get started.  

So why is this happening? Why are new businesses struggling so much to find a footing in an era where startups are quite literally changing the way we live?

The first thing to understand is that most small businesses in the past were not tech companies that wanted to transform the world. This notion of “transformational entrepreneurship” is relatively new and it has gripped the imagination of small business founders everywhere. While on the broad scope, there are less small businesses today than in the late 20th century, the number of new startups that want to change the societal game is climbing rapidly.

But here’s the bad news: most of them fail.

Transformational businesses are succeeding at a much lower rate than ever before. Uber, AirBnB, and Square are the outliers; the vast majority of this new brand of startup just can’t seem to make any headway.

In spite of the increased opportunity for new innovation and novel technological progress, these businesses just can’t figure out how “to scale in a meaningful and systematic way.” Surowiecki highlights one big reason why: the rise of what he calls “established incumbents”.

Established incumbents are the Googles, the Amazons, and the Facebooks of the world that have become so stable and entrenched that the market has almost completely closed its door to any kind of meaningful competition.

These incumbents, these mega-businesses, these market monopolies — whatever you want to call them — have taken control of a significant portion of the mind share of American society.

It’s easy to see why this is a problem. While it’s true that these major corporations are still innovating on their own, history shows that a lack of competition is a huge danger to not just the fledgling small business, but the consumer as well. It can lead to stagnation and anti-consumer practices that harm the market as a whole.

We’ve seen the harm this kind of stagnation can do in industries like consumer air travel and ticket sales. Major airlines and ticket retailers have so much control that they’re free to engage in awful consumer-facing practices.

There’s a very real danger that this same problem will come to dominate the tech sphere in the very near future. Maybe it already has. Netflix just raised its subscription price for long term subscribers, and there doesn’t seem to be much fuss about it. This is what happens when a business takes so much control that many people wouldn’t even consider another option despite changes like this.

Small businesses are supposed to challenge that paradigm and encourage growth, change, and newfound opportunity. Innovation is the lifeblood of American capitalism and startups are the force that needs to keep it alive.

— ZK 

Ed Lynes13p5Comment