The Obama Surprise

Who were the rubes? They were the rubes:

The first surprise to many Valleyites is how innately anti-entrepreneurial the new Administration has turned out to be. Candidate Obama looked like a high tech executive – smart, hip, a gadget freak – and he certainly talked pro-entrepreneur. But the reality of the last six months has been very different. One might have predicted that he would use the best tool in his economic arsenal – new company creation and the millions of new jobs those firms in turn create – to fight this recession. But President Obama has instead appeared to be almost exclusively interested in Big Business as the key to economy recovery.

By comparison, almost every move the new Administration has made regarding entrepreneurship seems to be targeting at destroying it in this country. It has left Sarbanes-Oxley intact, added ever-greater burdens on small business owners, called for increasing capital gains taxes, and is now preparing to pile on cap-and-trade, double taxation on offshore earnings, and a host of other new costs. Even Obamacare seems likely to land unfairly on small companies.

Entrepreneurship has been the single most important contributor to the economic health of this country for at least a century now – and if you were going to systematically destroy that vitality, you couldn’t come up with a better strategy than the one Washington has put in place over the last six months. Indeed, you can make the case that the sole contribution the Obama administration has made to entrepreneurship in America to date is to force all of those millions of unemployed people to desperately set up their own businesses in order to survive.

But as he points out (and it’s a long-standing truism), big business has no interest in free markets:

…you may think that the competitive challenge that big tech companies fear most is from other big tech companies. You know: Apple v. Microsoft, HP v. Dell, Cisco v. Juniper, MySpace v. Facebook. But in fact, that isn’t the case. Sure, those are dangerous competitors; but far more threatening is that clever new start-up that seems to appear out of nowhere. That’s the threat that wakes up Fortune 500 tech CEOs at 3 a.m. That little start-up not only competes with you, it can render your entire business – even your entire industry – obsolete and you don’t even see it coming. Think desktop publishing and the printing industry, the iPod and the music industry – and just look at the terror that Twitter seems to be creating at Google and Facebook these days.

Once you understand this dynamic, a lot of the paradoxical recent business behavior in high tech suddenly becomes explicable. For example, why did the big tech companies embrace such regulations as Sarbanes and stock options expensing – even though they would cost them billions of dollars with no obvious gain? And why would they support a Presidential candidate who seemed to have little understanding of, or sympathy for, market capitalism and business?

Because it was the best strategy to crush the start-ups.

And for the most part, that strategy has worked. High tech has only seen a handful of new companies go public in the last five years – compared to hundreds per year before that. Less noticed is that this means most hot new start-up companies, instead of enjoying an IPO and becoming rich enough to compete full-on against the big boys, now can only grow to a certain size then offer themselves up to be bought by the giants. What had once been hugely valuable competition has now been reduced to a farm system for acquisitive mature companies. [And a side benefit has been the near-destruction of the venture capital industry, which big business always described as ‘vulture’ capital because it drew away their most talented employees.]

Now you see why the tech world joined the Obama team early on in the campaign. Not only did Senator Obama seem like their kind of guy, but each camp saw in him the President they wanted. The entrepreneurs thought they were getting a fellow entrepreneur, and big business thought they get a confederate in taking out the competition.

The entrepreneurs were suckers, but this is going to hurt the big guys, too.

ITAR is another example of this phenomenon. It really hurts the small companies disproportionately, because the big companies, like Boeing and Lockmart have a small army of compliance people in place who know how to work the system, and the costs of whom can simply get charged against their government contracts. This is in fact a big advantage of established aerospace contractors in general — that they have ongoing cost-plus contracts against which they can charge for the bureaucracy made necessary by government regulations, whether ITAR, or simply enforcing the FAR, plus they get an IR&D budget funded by the taxpayers. This makes being a startup all the harder, and this administration looks unlikely to do anything to make it any easier.

16 thoughts on “The Obama Surprise”

  1. “…you may think that the competitive challenge that big tech companies fear most is from other big tech companies. You know: Apple v. Microsoft, HP v. Dell, Cisco v. Juniper, MySpace v. Facebook. But in fact, that isn’t the case. Sure, those are dangerous competitors; but far more threatening is that clever new start-up that seems to appear out of nowhere. That’s the threat that wakes up Fortune 500 tech CEOs at 3 a.m. That little start-up not only competes with you, it can render your entire business – even your entire industry – obsolete and you don’t even see it coming. Think desktop publishing and the printing industry, the iPod and the music industry – and just look at the terror that Twitter seems to be creating at Google and Facebook these days.”

    I think this analysis is off-the-mark, at least with regard to the high-tech companies provided as examples. From what I’ve seen, a big company like Cisco doesn’t generally compete with startups that threaten to take away some of their business — they consume them. I’m not sure the big companies see innovative startups as threats all, but rather as opportunities. Large organizations can find it difficult (or near impossible ) to run projects in ways that allow innovation to occur efficiently. So when a startup does their innovatation “for them”, in a sense, it can actually be a huge bargain to acquire the startup rather than having to spend the time and money internally to achieve a similar result. Likewise, many high-tech startups are started with the explicit goal of being acquired. It’s a much more symbiotic relationship than this author seems to think. And, equally, I think it casts some doubt on the idea that big companies — at least high-tech ones — don’t have a self-interest in the existence of a vibrant, free market.

  2. Oh no, Cisco is definitely scared of the tiny start ups. They can wipe out entire wings of the company if they come up with a better product. Or create headaches of work — the entire thing needs to be an “end-to-end solution” which is a lot harder if you have to integrate with some other company’s thing…

    Cisco just deals with it by either destroying them or absorbing them into the Borg. (And then sometimes destroys them.) Not to say they’re evil or anything, it’s all part of the game.

    Think about it — Juniper is mentioned. They’re not even that big now, but when they started out with their “cisco-killer” they were *tiny*. And they got a lot of wins. But of all the places in the valley, Juniper would never, ever, ever sell out to Cisco.

  3. notanexpert:

    That’s true, and it’s not true. All of those big companies remember when they were big companies, and IBM or HP were the “big boys” in those industries. Cisco didn’t invent ethernet, and IBM was much bigger and could have dominated the router market. In the 1940’s, GE tried to get into computer manufacturing and IBM was just a little company; GE got routed.

    It’s also harder than most people think to successfully “innovate through acquisition”; small companies innovate because they encourage cultural practices of innovation. Big companies struggle with doing that often because it’s so difficult getting so many thousands of people heading in the same direction while not stealing from the company. There’s often a cultural clash on acquisition, resulting in the parent company keeping the IP but not being able to do anything with it, and the employees of the smaller company going their own way, often together, and outcompeting the big company. PalmPilot did that when they were purchased; the founders went and founded Handspring (Handspring was better, but PalmPilot was re-branded as phones or something and survived). The creators of Guitar Hero left after acquisition (I think) and started the line Rock Band (which I like a lot better); we’ll see how that goes.

    The other point mentioned is that “innovation through acquisition” is exactly what the big companies want; they want the end-game of small companies to be acquired by the existing big guys so that the big guys have the opportunity to bury serious threats.

    I’m getting my MBA right now and there’s whole days in Business Strategy devoted to the importance of getting regulations passed and creating similar barriers to entry. When a whole industry is regulated, that doesn’t affect competition because all of your competitors are faced with the same cost, and so prices go up together. But it means that small companies need more money to start up. Potential competitors are definitely as worrisome as existing competitors.

  4. @silvermine

    That integration issue works both ways, however. A startup may have a great product but in a high-tech world it has to integrate with everything else a customer may have in their entreprise, which can be a huge problem for small companies. This is actually where Cisco excels. Your “absorbing them into the Borg” remark is exactly my point. It can be win-win for megacorp and startup alike.

    Cisco and Juniper are indeed blood enemies, but then Juniper is hardly a single-product startup. They compete head-to-head with Cisco in some parts of the enterprise market. As far as selling out to Cisco, who knows? My view is that all it would take would be a big enough check.

  5. @Jonathon Card

    “The other point mentioned is that “innovation through acquisition” is exactly what the big companies want; they want the end-game of small companies to be acquired by the existing big guys so that the big guys have the opportunity to bury serious threats.”

    I guess the point I am trying to make is that this is often exactly what the little guys want, too. If an entreprenuer can put in a few years of work and then cash out with millions in their pocket and millions more they can use to go and do it all over again, what’s the problem? It may well be a more efficient business model than either 1) a big company trying to do all it’s own innovating, or 2) a little company trying to grow from being a lean, mean innovation machine into a sprawling yet profitable megacorp.

  6. The type of people that create startups and the type of people that run big business are two different animals. Founders of startups tend to sell out or be forced out when the business gets big enough.

    Big business mentality doesn’t want innovation, just market share… which means they certainly don’t want free enterprise.

    Free enterprise ceases to be the goal as soon as they notice someone else has one.

    Obama wants control. It’s a lot easier to control a few big businesses than a lot of free enterprises. Obama and the left hate competition… especially the competition of ideas.

    Competition benefits everyone but the control freaks.

  7. Too bad the Republicans didn’t have a better offer on the table.

    Worse, I don’t see any sign they’re going to come up with one by November next year.

  8. notanexpert,

    Early hominids on the savannah were just “food” to be “consumed” by lions. As such it was in the interests of lions to not eat all of them as babies. This system worked for millions of years.

    Then humans developed several “killer apps” like language, fire, and stone weapons on the “free market” of survival of the fittest. They could now compete effectively with lions for food, and even fight off and kill lions who threatened them.

    I think you would agree that there is clearly a qualitative difference there.

    Nowadays, we actually subsidize the existence of lions primarily because we find them aesthetically pleasing, and certain among us fear the consequences to the entire ecosystem should they die off. I guess you could say lions are just too majestic to fail.

  9. Big business mentality doesn’t want innovation, just market share… which means they certainly don’t want free enterprise.

    I don’t think this is flat wrong, but it may be a little too cynical. Certainly, innovation is not the prime mover of any business, big or small. Profit is. Logically, it follows that businesses will take the path of least resistance to get to profits, be it through innovation or by obtaining favorable government regulation, or by any other means. Businesses don’t make the rules. Granted, they have influence on the folks that do, but the degree of influence they have is overstated.

    It’s worth noting that Sarbanes-Oxley has been criticized as being an anti-startup measure because, although it burdens both large and small companies, it hits startups the hardest by greatly increasing the capital needed to start a business. In that sense it could be called anti-Free Market, yet Cisco was strongly against it, and in fact wielded their mighty influence with Congress to stop it. To no avail.

  10. The problem isn’t that it’s bad for big business or bad for small business, but that it’s bad for everyone else. Often, the innovations, which would benefit the rest of us, get buried when acquired or simply badly executed and lost. The point of economic policy isn’t to benefit any group in particular, but to craft an environment so that what benefits larger society also benefits the individual actors. When it’s in the best interest of small and big business to act against the best interest of society, that’s a policy problem. It’s often in the better interest of all business to act against society, and in the best interest of themselves, under one policy rather than to act in the best interest of society, and in the best interest of themselves, under another policy. Government should choose the policy where the best interest of society is the action that businesses will choose, and it’s not clear that’s happening here.

  11. The point of economic policy is to get the politicians re-elected to their phony-baloney jobs, and for the bureaucrats to extend their power over their phony-balony “responsibilities”.

    No cynicism here, just long-established observations.

    Therefore, if one wants to link the benefits of larger society with individual actors, one needs to get the government out of economic policy — except for establishing a stable currency, small GNP share of economy, and stable legal structure for contract enforcement.

  12. “Too bad the Republicans didn’t have a better offer on the table.”

    Even if McCain had just been more Bush but with random anti-Wall Street grandstanding, (which is about what I expected he would have been) it would have been light-years ahead of what we’re getting now. You have to go with the real-world choices.

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