Reinventing the Company: from the Economist

Last week’s edition of the Economist headlined with an article with the theme that the wave of start-ups, particularly tech start-ups were bringing about a re-design of one of the most basic building blocks of capitalism.

The premise was not new, namely that the demands of disruptive technology are reinventing not how the business works but also what it means to be a company.

Of course, this headline was premised on a benchmark that is more synonymous with business at the big end of town in which the owners of the business were largely anonymous – and often represented by institutional investors. By contrast, the overwhelming theme of start-ups is that the “coupling” of ownership and responsibility is tight. That is, the founders, staff and investors exert direct control directly.

Of course, in the New Zealand economy, dominated (at least numerically) by SMEs this coupling is nothing new. Indeed, even in very large economies such as the US the role of the (typically family-owned) SME is still that the backbone that generates a significant chunk (and accounts for the majority of the employment). Nonetheless, there are a number of key messages that the Economist article (and others like it) that are very relevant for New Zealand businesses.

The demise of the listed company?

Another theme that the Economist article appeared to be peddling was that there is something wrong with stock exchange listed companies. The thread seemed to go along the lines of the model showing signs of wear – because of a range of ill-defined symptoms such as problems with the incentives for management (and allegations of short-term thinking), and a break in the link between a grass-roots shareholder base (and the rise and rise of a cluster of intermediaries – including institutional shareholders and even regulators).

Whilst there may be something in each one of these points, as well as some very specific localised reasons why there have some handbrakes on investment in NZ companies, a recent speech by NZX CEO Tim Bennett highlighted the reasons why stock exchange investment to fund business growth and realise New Zealand’s economic potential, matters to our economy – and the progress New Zealand’s capital markets have made in the last 5 years. Underpinning this speech was the key pint that we have only just begun to feel the benefit of the type of uplift experienced by the Australian economy as a result of a sustained period of compulsory superannuation.

Whilst it might be equally true in New Zealand that there is an increasing trend of talented founders and managers choosing to stay private – I think the Economist may have called time on the listed company model – just a little too early.

The new menagerie

The most interesting part of the Economist article, at least from where I sit, was the discussion of alternatives to listed companies – featuring a so-called new breed of start-ups whose founders said to be are pioneering a new organisational form.

Here it was suggested that the primary point of difference was that of ownership: and that these star-ups were going to great lengths to define who owns what. Here the discussion turned to the focus on incentives in the form of ownership stakes or performance-related rewards all “meticulously defined” in contracts. Coupled with this element were sweeping statements about the use of performance metrics that are designed to measure how they are doing using by reference to what they have produced – rather than “elaborate” accounting standards.

Objections

The Economist also talked about a range of issues that have been well-covered by many others, such as:

• The advantages of new technology – enabling start-ups to go global without being big themselves.
• New modes of fund-raising such as crowd-funding
• The advantages of new ways of working – remotely and by sharing space and resources.

Thankfully, the article concluded with a list of objections to these being the symptoms of a revolution in the making. The bottom line appeared to be that the listed company will have the last laugh, because most start-ups want eventually to list or sell themselves to a listed company. This is tempered by the data which pointed to technology companies finding it easier to raise funds without “going public” and taking longer to list (11 years compared with 4 before the dotcom bubble burst).

The Economist also cited hurdles that get in the way of the average investor being able to invest in start-ups (which I think are often pragmatic issues affecting the ability to understand and value the opportunity – and the risk) – but even here the flexibility of capital markets is providing new ways for retail investors to get some exposure to newer businesses.

I think I agree with the conclusion that today’s start-ups and talk or new models are just incremental gains or enhancements as founders and investors benefit from the experience of the generation that went before them and learn to focus on the basic of some contractual and governance fundamentals being part of the basic building blocks of any new business – regardless of the location or the nature of the technology underpinning it.

Again, technology is helping with these building blocks – as a result of lawyers and others providing templates and checklists in readily assessable format for very modest cost (and in some cases for free). As a result, today’s generation of founders are able to spend more of their creative and managerial efforts on making the boat go faster than worrying about whether they should be spending more time on the housework.

From where I sit, this is the sign of a healthy and productive prioritisation – and a reinvention or the beginning of the end of a tried and true model.

Further information

If you would like more information about any of the matters discussed in this note, please contact me.