Recession has tilted the field toward smaller, flexible firms.

How to start and grow companies.
July 30 2010 6:48 PM

Welcome to the Little-Guy Economy

Recession has tilted the field toward smaller, flexible firms.

In March of 2009, just days after TBM ran an article called "Little-Guy Economy," the Dow Jones Industrial Average reached a record low of 6,443. Unemployment reached the highest level since 1983, and there were about 15 million jobless Americans (there still are). China, the world's fastest growing economy, experienced slower growth. As the U.S. economy constricted at the fastest rate in 50 years, penny-pinching replaced conspicuous consumption. Nearly everything fell except  vitamin sales.

And yet, in certain segments of finance, law, publishing, advertising, entertainment, and other industries, small entities that embraced a lean, nimble approach stayed afloat and, in some cases, fared better than their larger counterparts. Focused less on cutting budgets, shedding staff, and maintaining the status quo, small operations that operated fast, flexibly, and on the cheap were positioned to fine-tune their models quickly—or sink.

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Big Finance lost institutions or stalled, thanks to frozen credit markets, while smaller firms that didn't rely as heavily on those markets endured and even closed deals. Big Law shed jobs and merged, as boutique shops emerged. Media upstarts, albeit well-funded ones like the Huffington Post and Gawker Media, grew while the  New York Times Co.  (NYT) and  Time Warner (TWX) contracted, thanks to broken business models. As publishers cut lists,  branded writers received manna in the form of Amazon Author Stores.

One year ago, videographers Lindsay Johnson and Leo Borovskiy of Lush Life Productions went from project to project and hired help on an as-need basis. Now, the company is focused entirely on digital outreach for wine and spirit companies. It still charges less—there was one small project it did for $5,000 that a competitor did for $25,000—but the company has grown to 14, including six people who work for Lush Life exclusively. JDub Records has moved further into the niche music space, acquiring a Web site and partnering with another to create a larger fan base to distribute its music. It also branched out into producing and marketing cultural events and stole a marketing expert from Showtime. "The lucky outcome of the recession was that we took a good look at ourselves and tried to be nimble. We didn't just spin our wheels and try to do a million different things," said Chief Operating Officer Jacob Harris.

Meanwhile, with so many Americans out of work, more small entities began springing up. Instead of posting resumes to job sites or calling recruiters, laid-off or bored workers went solo or partnered with a friend to offer a new product or service. Some even  worked for free. In 2009, the number of new businesses being created reached its  highest level in 14 years  and about 500,000 businesses were founded each month. To the dismay, perhaps, of list-makers who tout the  best of youth, baby boomers ranked highest in terms of entrepreneurial activity. Surprisingly, Oklahoma and Montana had the highest entrepreneurial activity rates. Of the 15 largest metropolitan areas, Houston boasted the highest rate of new-business development.

The business world at large, where mysterious fads prevail, virtually ignored the nascent ultra-lean startup movement and its bare-bones approach. In January, Malcolm Gladwell  described the work of economist Scott Shane, who explained that failed entrepreneurs are wildly undercapitalized, organize as sole proprietorships, and don't write business plans. Successful ones, by comparison, according to Shane, are well-capitalized, organize as corporations, write business plans, and don't start from scratch.

But who wants to spend weeks and months writing a business plan? While it can help founders focus, by the time a company finishes one, the landscape may have shifted entirely. Announcing the launch of a new product two years from now, as Eric Ries of Startup Lessons Learned said, equals a doomed product. "Most of the things that companies do are a waste of time." Ries, who pioneered the Lean Startup methodology, praises the ingenuity of global supply chains, but asks a salient question: "How can corporate America be so good at sustaining innovation and so bad at creating something new? One interesting question is not why it is so inefficient and bureaucratic, but, given that it is, how is it possible that it gets anything done at all?"

We now live in an era where heavyweights like  JPMorgan Chase (JPM),  Goldman Sachs (GS),  Wal-Mart (WMT), and the New York Times still dominate, but can be eclipsed in certain ways by small operations and wind up the follower rather than the leader. Significant parts of the economy are vulnerable to an ever-growing flock of so-called little guys with more influence than ever before, thanks to a transforming technological and economic landscape that is leveling the playing field in the United States and beyond. While giants still move markets and, to an extent, the wheels of Main Street, small—and sometimes, more precisely, young—entities make inroads faster. Boutique firms like Evercore, Rothschild, and Perella Weinberg ranked alongside JPMorgan and Goldman Sachs in mergers and acquisitions. In banking, the FDIC is courting small banks. These gains are not merely a function of the recession. They reflect a changing economic landscape that increasingly favors the little guy.

The little-guy economy is a world where value trumps revenue, where iteration after iteration is the norm, where, as Ries puts it, you do the least amount of work to figure out what the customer wants. In other words, throw stuff on the wall and see what sticks. Flexibility is unavoidable.

So is failure. The little-guy economy is full of painstakingly planned launches that go nowhere and hours spent writing 40,000 lines of software that never see the light of day. It's also a place to which larger companies turn for talent, new ideas, and strategy, and one where industry veterans go to reinvent themselves. Even ousted NBC Entertainment co-chairman Ben Silverman has entered the fray: Last month he started his own production company with Will Arnett and Jason Bateman, who at the launch party told me that acting is his "day job."

Growth is essential, too, whether pay, community, or stickiness drives it. "What's frustrating about entrepreneurship is that at each level there's a key thing you need to do and graduate, but there's no gold star, no party, nothing good happens. Immediately, you get faced with next existential question," Ries said.

In this series of articles on the little-guy economy, we will explore entrepreneurial innovation in an uncertain, shifting economy. We will write every week about how this world melds with Big Business. We plan to look at how entrepreneurial ventures relate to bigger forces in various industries—and what larger entities can learn from small ones. Why? Entrepreneurial innovation is poised to hit every sector of American business. "Not that long ago, business models lasted a long time," said Ries. "A company would invent a new category, dominate and die. That might not even have happened in a lifetime, let alone every five years."

Jill Priluck is a writer living in New York City.