Why small businesses are more successful risk-takers

PUBLISHED : Friday, 09 December, 2016, 6:27pm
UPDATED : Friday, 09 December, 2016, 11:00pm

British advertising guru Sir Martin Sorrell recently argued, eloquently as usual, that due to the turbulent global economic environment, big companies are increasingly refusing to make long-term bets and are instead focusing on short-term quarterly results over longer-term value creation.

However, there is another segment of the economy that thrives in a rapidly changing market environment and is already adept at taking risks and thinking long-term.

Entrepreneurs and small business owners make up the bulk of the GDP of most major economies and have the capacity to flourish even in turbulent times, precisely because they do not make decisions based on their quarterly numbers.

By being owners of their businesses, they are empowered to take risks and make long-term decisions, and their reward comes from the total value they create over years, not months.

Technology is transforming the world’s major economies and this creates new opportunities for business, as well as challenges to overcome. Large corporates often do not have the risk appetite to adapt to meet rapidly changing customer demands. In contrast, smaller companies can, and do, thrive in a fast-changing environment because of their ability to innovate and quickly develop new products and services.

To overcome this challenge, large public corporates often acquire small innovative businesses as they start to gain traction. Yet, the traditional mergers and acquisitions model employed by most corporates often ends up destroying the very value that they had hoped to acquire as a new brand and culture is imposed.

Most deals are structured on an earn-out basis and, if the founder would like to realise the full value of the deal, they must toe the line, hit their quarterly numbers and avoid taking risks at all costs. Invariably this approach is an anathema to the successful entrepreneur and, in most of these scenarios, key personnel end up leaving at the earliest possible opportunity.

So how can businesses harness the talent of entrepreneurs, who are by their very nature risk-takers and hardwired to defer reward rather than chase the quick buck?

One answer may be through a collaborative approach called agglomeration, whereby a number of entrepreneur-led smaller companies group together under a publicly listed vehicle that they themselves control.

Calculated risk taking and long-term thinking are the keys to success in business, yet employees are not incentivised to do either within the confines of most large corporates.

Perhaps it is time to stop trying to fix large corporates, and instead put our weight and support behind the small businesses which are driving innovation and live and breathe with a more positive, long-term approach to value creation.

Callum Laing, co-founder and director, The Marketing Group