The (Secret) Rise of the Micro Company

Technology has transformed the world we live in - and continues to do so.

Since the dawn of time, man has benefited from singular discoveries that increased productivity, made life easier and opened up new possibilities for health and wealth.

Today, technology continues to change our lives.

Thanks to software - combined with innovative hardware - processes which previously required large amounts of manpower, time and capital can be carried out with the click of a button.

We marvel at this fact.

In the past few months, AI has surged to the forefront of the technical world and shown again that a new wave of innovation is upon us. Now a single person may do the work of 2 or 3 others - or even more.

Many doomsday prophets have declared that artificial intelligence will spell the end of work as we know it.

I believe that it - along with continued advances in other areas - will indeed change the world. But it will unlock dramatic new paradigms.

The most transformational of these trends will be the rise of the micro company.

These teams, small, agile and highly focused, will require no more than 3-5 employees. They will leverage a range of technical tools to do their work. They will work in a decentralized way, without costly overhead and unnecessary costs.

Most importantly their clients will be other microcompanies, not single consumers. Of course, the individual customer will not cease to buy consumer goods. But these will be limited to the bare necessities.

Instead, individuals, families and small groups of closely associated persons will form companies and most economic transactions will be between companies. The reason for this is that prices will continue to rise. Inflation will remain in place for years to come. It will be much more advantageous to build a company and make purchases through a firm than it will be to buy directly.

Because of persistent inflation, the incentive to hire employees and grow in a traditional way will disappear.

The cost of scaling a company to a headcount in the hundreds will be staggering. The organizational and cultural challenges that are a distraction to businesses will become more of a burden because business will move at a much faster rate than ever before. Scaling will take too much time and be too wasteful.

Since employees will not be able to find work in another company, they will start their own. With the help of tools like AI, automation and others, they will not need to think about hiring a big team in order to market their products and services.

You may say that this model already exists today in the form of Uber drivers, Upwork freelancers and the "new rich" solopreneurs. This is true.

The difference is that there will still be a distinct advantage for teams of more than one person. The human interaction and creative element will not fade away completely. A battle of the minds has its certain upside. This will help keep these micro companies from becoming cookie-cutter copies of one another.

Of course, there may still be an overlap between companies in the same vertical. The market is global, after all. But small, agile, hungry companies will prosper.

At the same time, I see a second distinct group of economic players. These are giants. They are highly-regulated. They are quasi-state actors.

These may include banks, telcos, insurance companies, national infrastructure providers.

The government - whether on a local, national or international level - will essentially hand them monopoly power. In many ways, they already have.

The current banking crisis has shown that there is a flight to perceived quality and safety. This makes the JPMorgans, HSBCs and Morgan Stanleys of the world all the more powerful.

But their costs will continue to skyrocket in a high-inflation world. Therefore they will have to lay off employees and outsource many services. This creates new opportunities for micro companies.

What does this mean for capital allocators - i.e. venture capitalists? In short, funds will not need to be nearly as big. Angel investors will essentially become the new VCs. Checks can be written for 100-250k and this will suffice for much longer than before. The main costs of a micro company will be software tools.

Legal will be outsourced. HR will be outsourced. Marketing will be outsourced. Because micro company will be hyper focused in its target audience - i.e. delivery tracking software only within a 50km radius - their costs will be minimised.

Investors will no longer be valued most of all for their money. Instead they will help connect micro companies to other micro companies to meet needs and drive sales.

Sales will often be automated. Deal sizes will be big, given the inflation that is a permanent part of the equation. However, it will only take a few sales in any given period to produce positive cash-flows since costs are relatively low. With little to no overhead, few employees and minimal friction, companies will basically build and sell. That's it.

Why do I believe this? Because I see the trends that are leading in this direction.

The first trend has already been mentioned: technology. It has reduced costs and sped up business tremendously over time.

The second trend is one which we have all seen - but perhaps not fully observed: smaller is better.

This fact is borne out in the recent scandal of Credit Suisse. Its new owner UBS is also an example of this axiom. Both started out small in Switzerland and were very successful.

Over time, their ambitions grew. They wanted to scale. UBS famously declared before 2008 that its goal was to be the No. 1 investment bank in the world.

That scale was their downfall.

Credit Suisse avoided the 2008 trap, but it too succumbed to the same trap. Its big, unwieldy corporate structure and cultural disharmony caused it to implode. Management was too far away from the business. Too many people and too many egos got mixed up into the equation.

In the end, 'too big to fail' was a misnomer.

Could micro companies work in very traditional businesses, like gastronomy or postal services?

Absolutely.

A restaurant may be run by a micro real estate business that owns two locations. The waiters and waitresses all have their own companies as well. Perhaps they work 2 days at one restaurant and one day at another. The raw foodstuffs are delivered by another micro company. All backoffice tasks are outsourced or automated using technology.

This transformation in business will also have an impact for the world of finance as well. With companies of a much smaller size, there will be less need for debt financing. Owners and operators will hold most of their own equity. There will be no need to scale. Bankers will focus less on sourcing capital and selling financial products and more on value-added services. In the end many banks may become more like VCs.

Where does regulation come into play?

This is the 64 million dollar question...

Because about the only thing that can stop the movement towards micro companies is the state itself.

It would be foolish to do so. It would kill innovation and put millions on the street. But they could do it...