Corporate America Hasn’t Been Disrupted

I think there is a bit of cognitive dissonance in the tech community about "disruption" versus "big companies." Technology, in general, makes it easier to scale companies to large sizes, and "disruption" often involves using technology to enter an existing industry that is dominated by small, inefficient companies.

A great example is Uber. Uber is making the taxi market a lot more efficient, but it's also well on the path to replacing a bunch of little local taxi companies with a big national one. That's the power of technology: it pushes out the point on the curve where diseconomies of scale cancel out economies of scale. Technology enables consolidation. Other good examples are the dry cleaning and food delivery startups.

It's also not surprising that once an industry has been "disrupted" it takes a lot to push out the incumbent. Small businesses are generally inefficient and prone to failure. Large corporations are efficient and diversified in comparison. A new mom & pop coffee shop might easily out-compete the old mom & pop coffee shop across the street, but they can't offer the scale and uniformity of a Starbucks. When big corporations die, it's either because of their own mistakes, or some seismic market or technological shift (e.g. Kodak).

I have another suggestion for the decline in startup rates: health care and college expenses.

The historically "prime" years for entrepreneurship are in one's late 30's to early 50's, years when one typically has a family in need of healthcare, college tuition, and hopefully retirement at some point down the line. In the 70's and 80's someone could leave the security of their big company, get relatively affordable private insurance for them and their family, and sleep moderately well knowing that even if their new venture fails their children will at least be able make it through a state school working part time. Now, they'll have to pay through the nose for healthcare and we all know how much schools cost these days.

Given the increased failure rates of new ventures these days it's not so hard to see why more mid-career individuals are remaining in corporate jobs instead of venturing out on their own: it's getting too expensive to roll those dice.

As a Professor of entrepreneurship at NYU's engineering school (that VC Fred Wilson called a jewel -- http://avc.com/2014/03/the-value-of-an-engineering-degree), I can summarize the problem in one phrase many of my students said when describing their goals after graduation:

"... but I have to get a job at a big company to sponsor my visa."

They're brilliant, motivated, and capable, but almost none are citizens. To start new companies they have to leave the U.S. To stay they have to work for a big company even though more than half are continuing their entrepreneurial class projects after the course ended. There are options to jump through difficult hoops, but those options are much harder for most.

So we motivate potential entrepreneurs to start elsewhere or give up their plans. What if instead we motivated the world to start companies here instead of elsewhere?

(Incidentally, we're organizing an event in October for non-U.S.-citizens who found ways to start companies and stay here to help inspire others to find ways to do it. If you're interested, especially if you know non-citizens who found ways to stay and live near NYC, please contact me -- http://joshuaspodek.com/contactconnect.)

I keep saying to people in valleybubble.io that the rest of America is in something like a depression.

It might not meet the strict economic criteria of a depression, but the general sense is that there is no opportunity and that the future is only for the 1%. Wages are going down (or nominally flat and losing ground to inflation) and everything else is going up (or at least keeping up with inflation).

This is particularly true if you're not in the top ten to twelve (mostly coastal) major cities: San Francisco, New York, Seattle, Boston, "San Angeles," etc. The gap between rich and poor cities has noticeably worsened in the past 10-20 years. In the rich ones, the poor are being priced out. In the poor ones, there are no jobs and no routes to advancement. The long term trend is toward something resembling The Hunger Games, with the alpha coastal cities as "the capital" and the rest as "the precincts."

It looks not terribly unlike Japan post-bubble, but perhaps with streaks of Gilded Age and the 1970s cultural malaise. It's not pretty.

Much of what we are seeing is the effect of our insane visa and immigration policies.

The traditional entrepreneurial spirit of the United States was driven by the culture of immigrants. Over 40% of the companies on the Fortune 500 were founded by immigrants or the children of immigrants. These were once disruptive startups.

Now we make it very difficult for talented and intelligent people to become permanent residents. So instead they stay home, or maybe go to Canada or Australia.

In many markets, there are great opportunities to nibble around the edges of the larger companies. The crumbs of many of these companies offer entrepreneurs the opportunity to build six and seven figure annual businesses.

The way to win in markets that aren't likely to be "disrupted" is to go for the crumbs, not the cake. It's a shame so many entrepreneurs have been deluded by the appeal of "disruption."

Here's a Y Combinator example: Casetext says it is "disrupting" the legal research market dominated by Westlaw and LexisNexis[1]. Anybody who has any experience in this market knows how absurd this is. Bloomberg has invested approximately $1 billion trying to make a dent in this market, with limited success[2]. You simply cannot disrupt the incumbents because they have too many advantages.

That doesn't mean there's no opportunity in the legal research market, however. There are quite a few focused/niche legal research services that are doing well. I know one that counts close to 90% of the Amlaw 100 as subscribers. This service will never be a billion dollar business, or even a $100 million business, but back-of-the-envelope math says it's a business most founders would feel blessed to have started.

[1] https://news.ycombinator.com/item?id=8011009

[2] http://www.adweek.com/news/press/fortune-reports-bloombergs-...

For the purposes of this discussion we should dispense with the word "startups" and replace it with "new businesses". Since 1970 the rate of new businesses has been falling. Gee, can anyone else think of reasons why that might be besides immigration and housing rates in the bay area? What a bunch of navel gazing. Perhaps there is a causal connection with population age? What about other factors? What if we zoom out a bit and look at general workplace productivity factors and the impact of technology? Yes, that old crusty stuff they are currently using which you don't consider technology. It's actually a lot better than how things were done before, and before that, and before that too.

And what about the rising number of old companies? Look at different industries such as air travel, raw materials, and manufacturing. What I see is Standard Oil all over again, consolidation, incremental optimizations, with a little anti-competitive behavior thrown in to boot.

That's sometimes the problem with us programmers, especially the more naive amongst us. We often believe that File > New is the answer to the world's problems when incremental optimization often is more pragmatic (and as the market shows us, more effective). It isn't sexy but it "works".

I don't know much about Home Depot but I'm going to guess that they got as big as they did (mostly) by introducing optimizations into the marketplace for home improvement products. They are not a monopoly (such as taxi services) that was created by and protected through legislation and can dissolve rather quickly (like it did in Houston this week) with a change in public support.

The tech "startup" community should stop looking at companies like Wal-Mart as evil and start to respect and marvel at the massive amounts of muda they have been able to eliminate from product supply chains. Just because they don't use Node.js doesn't make them disruptable (yes, I'm aware Wal-Mart actually does use Node).

</rant>

Could other possible reasons be:

1) The companies innovating become large themselves and are now indistinguishable from the incumbents?

2) Silicon Valley is in a venture capital frenzy. VCs make money by exits. Innovative companies keep getting bought by the incumbents.

Though I find his point intriguing about corporate America entrenching itself, the graphs he has chosen to represent it are a bit misrepresented - most notably, the graph about startup failure rate. I disagree that the rate of failure in startups has risen significantly in the last 20 years - he cherry picked his data point from 1991 to 2011. The first fifteen years of that interval remain almost entirely flat. The spike in the last three are easily explainable as part of the housing bubble bursting that sent a bunch of businesses in the US to the deadpool. Conversely, the declines in new businesses in the early 80s and late 00s can be easily attributed to spikes in the price of oil and the housing bubble bursting. The rate seems pretty solid at about 10 percent before that.

I find the evidence he presents inconclusive at best. If anything, I find it encouraging - no huge sea changes in the ability to start a business in the US over the last 30 years, except for macroeconomic factors.

The compensation packages that tech companies are offering are outrageous. Coupled with the fact that money itself generates better returns than most startups.

Earning 10% a year over 10 years in some mutual fund is way better than investing in some startup that'll be around for likely less than two years.

The housing market in the Bay Area is exploding. The salaries are going to have to keep up somewhat with that explosion. Why would I run a startup making 50k in Chicago, when I can make more than triple that(with RSUs, options, ESPP, healthcare, etc.) in the Bay Area?

Also, keep in mind the ground beneath us is shifting constantly. Some web app written in Backbone yesterday may be slow as farts today. Objective-C, what's that? CSS? Use SASS. Chef? Use Docker. I mean use AWS. I mean use Digital Ocean.

I know it seems meaningless what technologies you use, but these are the margins which people win by; the ability to be fast and scale quickly. Those are just two aspects of probably a million other really important aspects in running a successful startup.

Again, though, you have to work normal hours(so as not burnout) while paying yourself enough to survive(forget the Bay Area). It's just not worth it to run a startup given the economics. Unless you can secure a shit ton of upfront investment. Which is unlikely unless the investor feels your startup idea could at least outperform some other investment vehicle like a mutual fund.

Does anyone see all the data cited in the article as only kinda tangentially related to what seems to be the main idea of the post? Isn't it possible that "corporate america" is being disrupted AND their are less new companies being formed? It seems simple enough to prove, if only 5 new companies started this year and all 5 grew to be as large as Google, that would be some serious disruption.

I am not arguing that their thesis is wrong, it just seems their supporting data falls short of proving the case. I think a more telling dataset would be a similar type of time analysis but looking at the top 500 companies by market cap. How many are new? And that might not even really be getting at the author's real point. Because, he's talking about upsetting existing industries. For instance, sure Apple, Google and MS are pretty new. But did they disrupt an industry or just make it through as the winners of a newly minted "tech" industry? I'm actually asking because this question and thesis is genuinely interesting to me.

I think the author of the article went looking for stats to support a title. Corporate America has been disrupted however I think this article was looking for financial failure versus adapting to the market pressures.

The corporations below have faced massive disruption:

Kodak, HP, GM, Ford, JC Penney, Sears, McDonalds, Radio Shack, Circuit City, Best Buy, Borders, Barnes&Noble, IBM, Microsoft, Xerox, and Target have all been disrupted.

But most of them have adapted as the market changed because they had the resources to do so.

A small company has fewer resources so when adversity hits (housing crash in 2008) or the market shifts (Digital music versus record stores), those business are less likely to be able to shift.

Regarding the comments in the article on Entrepreneurs:

I think the article is using too much of the 2000's data to make a correlation to today. 2001 - 2010 was the dot com bubble, 9/11, unemployment at 9%, and the housing / financial crisis. Banks weren't lending money and people had little capital to borrow.

Compared to today: Banks are lending again, unemployment is 6.2%, people are spending and earning more, and everywhere you read about startups and entrepreneurs.

One last thing: I find it humorous when articles say that government regulations, licensure, or taxes prevent innovation and entrepreneurial activity. I have never heard somebody say "I'd totally build X but the tax incentives just aren't high enough".

Another simple explanation for the decline might be economies of scale or economies of scope (or both) . Thirty years ago they might have had a smaller effect on small businesses (like coffee shops and retailers), whereas nowadays complex logistics (economies of scale, ie. walmart) or versatile production facilities (economies of scope, ie. starbucks) have a bigger influence on profits.

I think the promulgation of the idea of "disruption" is itself an anti-disruptive force.

The Microsofts of this world have seen the Kodaks and Xeroxes go down, so we see them doing bold things. For instance, Microsoft saw tablets as a threat to the PC, and they didn't let the fact that their customers didn't see it this way from releasing Windows 8.

I agree with everything in OP, and this admittedly makes me sound like a dreamer, but I think there's a good chance that computer-aided radical decentralization is going to have a major effect on these numbers in the next few years.

The possibilities of blockchain technology (and other technology inspired by it) has barely even begun to percolate through society, and in theory it allows free agents to fill roles previously only viable inside of corporations.

http://www.reddit.com/r/Rad_Decentralization/

Another issue is that as IT has become more prevalent in corporations, there are just more jobs out there in existing companies for STEM grads - so they feel less pressure to start new companies. But, I would honestly not take this data too seriously. The latest startup tech boom is too young to judge. this data is probably skewed by the tech collapse of 2000-2001.

"Revitalization" might be better word than "disruption" to explain what is required of corporate sector.

But corporate sector is adopting "disruptive" technologies and methods such as cloud, analytics, ecommerce. The problem is it is incremental and interstitial rather than comprehensive.

"Disruption" really means using technology to find loopholes in the law e.g. AirBnB "disrupting" hotels by providing services for people operating unlicensed hotels. Do how do you disrupt a bank? Insider trading? Fraud? Stealing deposits?

So where is there a better environment for entrepreneurship? I don't mean theoretically, I mean in practice.

Is there a country that has better infrastructure, capital markets, regulation and market size? I am genuinely curious.

I wonder: were past disruptive efforts more sucsessfull in unseating incumbents ? And is Clayton Christensen theory responsible for bigger companies' better defense against disruption ?

Private sector wages are quite high in places like San Francisco. Large successful corporations are great at incentivizing would-be startup owners into staying. Large companies are making money, the employees are creating value, and they're realizing some of the value as personal wealth.

People launch businesses when they have no better opportunity in front of them. In a rising economy with a record stock market, even the most capable people are finding significant upside within the companies they're employed by.

democracy->oligarchy->dictatorship->collapse->democracy

First of all, it's pretty clear that the Valley isn't "disrupting" the establishment. It is the establishment.

The elephant in the room: the death of the middle class.

Thirty years ago, unions were strong and average people had savings. Venture capitalists were wealthier than average, but not of a superior class... and they still hung out with people who wrote code for a living. Class distances weren't nonexistent, but they weren't nearly as sheer as they are today. And venture capital wasn't a requirement because bootstrapping was really possible, because average people actually had money.

People complain about how the Valley is cranking out apps for spoiled 20-year-olds instead of regular people, and missing the much bigger point, which is that "regular people" are cash-strapped, time-poor, overworked and generally disenfranchised altogether. The people building apps for spoiled 20-year-olds are staking out the new, post-large-middle-class world.

Now, to bankroll a business you either need elite connections (usually to people spending others' money) or outlandish luck, you have to have people in your pocket who'll ensure coverage, and you'll probably end up taking a back seat in your company as soon as you hire a "business co-founder" who can deliver Sequoia and A16Z.

No one has a good idea what to build, and products and technology aren't really the point (the point is getting bought; "startups" are a long audition process for would-be corporate executives looking to jump the queue) but one sector that isn't being targeted is the (disintegrating) middle class.

Corporate America, meanwhile, is stronger than ever. The wealth and connections are even more concentrated, giving power to the few at the expense of the many. And these Valley startups are the driving force behind all of this.