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The Small Business IT Revolution Will not be televised April 22, 2014

Posted by Bernard Lunn in Uncategorized.
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We all love a David vs Goliath story. We want small businesses to prosper. Our economy depends on this. We want David to win, but today it looks like the score is 2 Nil to Goliath:

1 Nil: access to low cost finance (Fortune 500 can borrow at Libor Plus 2, SMB is more likely to get
Libor Plus 6 if they are lucky to get any financing at all).

2 Nil: low tax rate. The effective tax rate for Fortune 500 is around 12.6% vs the 19.8% that small businesses pay on average according to the SBA. That 7.2% difference is massive when you are scrabbling to be price competitive while maintaining reasonable margins.

The macro numbers reflect this. In 1954, Fortune 500 companies accounted for only 1/3 of GDP, but by 2000 that share of the pie had grown to 2/3. In those cold statistics lie a lot of Mom & Pop shops and family farms and shattered middle class dreams. Yet 50% of jobs are still in small business, so this matters to all of us.

2 Nil is tough, but it is not game over and small business will bounce back because of IT. Think about the iterations of IT and how they affected small vs big businesses:

– Mainframe/Minis: David did not get a shot at all. All the advantage went to Goliath.

– PC: Wordprocessing and spreadsheets empowered small business, but before the Internet, the PC was only marginally useful unless attached to servers and there the playing field was still tilted to Goliath.

– Web 1.0: only BigCo (or developer hobbyists or VC funded startups) could create an online presence.

– Web 2.0: we could all now write as well as read, but all we did with this new power was play and spend, we did not use this new capability to earn a living.

– Web 3.0: I define Web 3.0 not by any single technology innovation but rather by the ubiquity of digitization. Earlier IT was primarily about reducing G&A costs; if G&A is 10% of costs, even a big reduction in costs is not that big a deal. Today, when most of the 7 billion people on this planet have mobile phones, selling digitally is a big deal; the CIO has become the CMO because IT is about revenue acquisition.

Let me give three examples from my personal experience of hacking IT from components of the programmable web to create capability that was unthinkable for tiny new businesses even a few years ago:

1. An annual sporting event. In the first year we had zero budget for both IT and marketing. Never having written a line of code in my life, I was able to hack together a solution using a mix of WordPress, PayPal and EventBrite. It was not perfect, but I can already see the tools and features I will use next year (eg replacing PayPal with Stripe).

2. A sports training business. This has more admin complexity than the annual event, so I will be looking into really simple accounting systems such as Xero that play well with online marketing tools, so that we get as close as possible to straight through processing.

3. A niche electronics product used in sports training. Thanks to Arduino, building the first prototype can be as low cost as building a web site. That is a big deal, because consumers still expect to pay for a physical device even if they expect a digital online service to be free. Add Crowdfunding sites to get products into the hands of early adopters and we have a real revolution. This can enable hundreds of thousands of niche businesses.

A lot of the buzz about SAAS and Consumerization refers to the enterprise market but the real revolution is in small business.

SAAS reduces CAPEX, but enterprises don’t worry about CAPEX, they are loaded with cash, they worry about OPEX. However, small business worries about CAPEX; their cost of capital since the financial crisis is far too high. So SAAS is a big deal for small business.

Consumerization is a game-changer for vendors, but – viewed from the enterprise IT buyer’s point of view – it is simply out of control spending driven by employees using whatever they want and expecting the enterprise to pick up the tab at the end. However, for small business owners, who do IT in their spare time, consumerized digital services (no training costs or IT overhead) is a total game-changer.

Here is what I mean by “will not be televised”. The small business IT revolution will not generate stories about superstar entrepreneurs like Steve Jobs, Jeff Bezos or Mark Zuckerberg, it will be the untold stories of millions of small scale entrepreneurs. Nor will those stories, even in aggregate, be reflected properly in the sorts of numbers like GDP or Unemployment that are beloved of the economists and financial traders that we see discussing the stock market on TV: these data points reflect an Industrial Age which is passing.

Integration is key to this small business IT revolution. The first phase of this revolution is driven by tools that are designed like consumer services, they do one thing and only one thing very well. That is fine for free agents and entrepreneurs in the really early stage of a new business. Simplicity and low cost rule, we can use “digital sneaker-net” (aka copy & paste) for integration. However, as the business grows from one or two people working part time to a “real” business with employees, integration becomes key. Fortunately the Programmable Web with RESTful APIs makes this easy. So companies that work a lot with small business, like WordPress and Nimble, offer built-in integration with the other services that their customers want. If you used WordPress in your “ramen days”, will you desert it for an enterprise CMS when you grow? Or will WordPress continue to evolve to serve your needs and partner with others to fill in holes they don’t consider core? I would bet on the latter. If your favorite services don’t already work with each other, there are now services such as Zapier where you can integrate services yourself without writing a line of code.

Technology is also addressing one of the biggest issues for small business – working capital. If you asked most small business owners what keeps them up at night, the most frequent response would be “working capital”, the money you need to pay the bills as you expand. Here again, technology is helping in three ways:

1. “Spare change in your sofa”. New services such as AirBnB and Uber help people generate cash from spare resources (such as a spare bedroom or a few spare hours per day or week). This is a big enabler for ramen startups.

2. “Disruptive Fintech” services that byepass the banks such as Peer to Peer Lending and Crowdsourcing. If the banks won’t lend and you don’t have a buddy on Sand Hill Road, don’t give up, these new services have moved beyond the cool idea phase to viable alternative sources of capital.

3. “Just in time supply chains for the rest of us”. Michael Dell became one of the richest men in the world by building the product only after a) the customer had sent the money and b) the component vendors had sent the materials needed to build the product. Thanks to this innovation, Dell got rid of the “curse of inventory” and always had positive working capital cash flow. Thanks to the real time web, this kind of real time supply chain is now possible for any company. This disruption, what I think of as real time supply chain for Mom & Pop, is still nascent. (I would love to hear from startups innovating in this space.).

It’s 2 Nil and Goliath is looking cocky, playing to the crowd, he does not notice David with his IT slingshot.



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