Do Startups Stand a Chance Against Big Business?

Source: Thinkstock

Source: Thinkstock

The latest indications from Silicon Valley are a bit disheartening, particularly for entrepreneurs hoping to get disruptive. Many of the startups that have sprung up over the last few years — many of which are aiming at disrupting already-established industries — are startlingly ineffective at disrupting anything. In fact, with a few notable exceptions, corporate America is looking as strong as ever, at least according to insight from FiveThirtyEight.

As an example of disruptive startups, Uber and Lyft have built their businesses by taking aim at the taxi and transportation system, and it’s definitely worked to some degree. Airbnb is disrupting the hotel and hospitality world. Another example — and possibly the most successful instance — is that of Netflix, which turned the home entertainment industry on its head.

While those companies have tasted success or even flourished, most others are still struggling to swipe market share from incumbents. And for right now, those incumbents are standing strong. While FiveThirtyEight says that entrepreneurship and startups are an important piece to the overall economic health of the country, the rising rates of startup failures and failed ventures have economists worried. In 2011, 27% of new companies went out of business within their first year, whereas 20 years ago, that figure was at 20%. Also of note: during the 1970s, 15% of all businesses in the United States were startups. Now, that number has been cut nearly in half, to 8%.

It’s hard to pinpoint exactly what’s going on here, but it’s clear that there are a number of things at work. One possibility is that following the recession, which hit a lot of lower and middle-class residents incredibly hard, people have not been willing to take on the risk of either starting their own company or working for a small business. The security and safety of working for large corporations does have its benefits, as they are less susceptible to going under when economic conditions sour.

This is really only one advantage that big companies enjoy over smaller, less-established businesses. And it plays right into declining rates of business dynamism being seen across the country.

Although it’s loaded with subtleties, the average age, or tenure, of American businesses is steadily going up, and many of the younger companies are being pushed out, or swallowed up. That’s one of the other major trends, particularly in the tech sector. New businesses and ventures being created by a subset of bright, young entrepreneurs are quickly being acquired by much larger businesses before they can become an issue down the road. Look at what Google has been doing for the past several years, or Facebook. By swallowing up potential competitors and using their technology to augment their own services, these companies can effectively kill two birds with one stone.

Returning to the Netflix example, imagine that Blockbuster had acquired the DVD-by-mail company while it was still young. Blockbuster could have chosen to use Netflix’s strengths and adopt streaming technology while it was still in its infancy. Or — probably more likely —  the company would have dismantled it in order to preserve its investment in the hundreds, if not thousands, of brick-and-mortar stores the company had spread across the country.

The new penchant for acquiring businesses before they can reach maturity is one factor playing into the declining rates of business dynamism. And when business dynamism and entrepreneurship rates are in a lull, the big guy usually wins. It goes without saying that bigger companies have a distinct advantage, along with a lot more to lose and a lot less liquidity. Despite the best efforts of Silicon Valley’s best and brightest, incumbents are still ruling from on high without much worry.

Of course, that doesn’t mean the current state of the business world is permanent by any means. Many of today’s growing companies — Airbnb, Uber, and Netflix among them — have already provided plenty for the big business world to think about. It’s just a matter of keeping the pressure on, and waiting for the armor to crack.

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