The technological divide - Why small businesses are struggling to compete, and what we can do about it

I run a small business, but my training is in tech. Like, Silicon Valley-style, venture capital-backed tech.

In the tech industry, there's a saying: Software is eating the world. I interpret that to mean that we're no longer in a world where there are tech companies and non-tech companies. We're in a world where there are tech companies, and companies that went out of business because of tech companies.

Uber isn't a tech company, it's a cab company. Netflix is just Blockbuster 2.0, and Amazon is Sears 2.0. Every industry will eventually be dominated by high-tech companies.

There's just one problem: What does this mean for small businesses? I don't think too many people are going to shed a tear for Sears. Amazon and Sears are both giant, faceless corporations. Amazon provides a radically better customer experience, Sears failed to keep up with the times, and so Amazon won. But Sears wasn't the only retailer impacted by this disruption. For every Sears location that has been shut down, there are presumably dozens of small businesses that also shut down because of Amazon, and they weren't replaced by newer tech-enabled small businesses. Amazon replaced the big and small businesses alike.

Why are small businesses struggling to compete in a tech-driven world? I think it's because of a thing I'll call the technological divide (note: This concept is inspired by the digital divide, but slightly different). Let's explore why big companies have benefited so much from technology while small businesses have been left behind.

The economics of building software

Software has a pretty unique cost structure. It takes a tremendous amount of work (aka money) to build software. You need to hire a bunch of (expensive) programmers, spend years planning, building, testing, and launching. But once the software is built, it's effectively free to distribute. It's marginal cost is basically zero.

When a product has extremely high up-front costs and non-existent marginal costs, that means it's a terrible low-volume business, and an amazing high-volume business. You need to sell a lot just to make back your R&D costs, but after you've hit break-even, everything after that is pure profit. If you sell a little, you lose money. If you sell a lot, you're a billionaire.

Software isn't the only industry like this. Pharmaceutical companies are pretty similar. It takes hundreds of millions of dollars to bring a new drug to market, but the costs of actually manufacturing the drugs are very low. So it's a great business to be in if you can afford the up-front costs. Think it's a coincidence that there are no mom-and-pop pharmaceutical companies?

But the pharmaceutical industry is different. It's self-contained. Like, ok, you don't get to start your own small business that will make a pill to cure male-pattern baldness. Not a big deal, do something else.

Remember how software is eating the world? Software isn't an industry anymore, it's every industry. This "high-upfront cost, low marginal cost" business model is taking over every single industry. So if that type of business model only works for giant corporations, how can there possibly be a future for small businesses?

That's the technological divide. If you have the tech skills and can afford the upfront-costs of building software, this is an unprecedented golden-era of opportunity. Otherwise, you're stuck on the sidelines watching as Apple makes more money every 5 seconds than the average American makes in a year.

How can we bridge the divide?

Honestly, I don't know for a fact that we can. This is a scary problem, and while I'm hopeful we can overcome it, things have definitely been getting worse, not better. But we're entrepreneurs, right? When we see a new challenge, we just figure it out.

So in that spirit, here are some thoughts I have on what can be done to bridge the technological divide:

Focus on things the big players can't do

As I like to say, if you have to compete with Lebron James, don't do it in basketball. You're setting yourself up for failure if you mimic the big players in your industry. Instead, identify the things they can't do, and make those the cornerstones of your business.

For example, big companies have always been all about automation. At massive scale, everything has to systematized because big companies can't trust thousands of different employees to each do things their own way. Starbucks wants a cup of coffee to taste the same everywhere. This is even more true with tech, because software is literally removing humans from the equation, so they can't help but automate everything.

Use this to your advantage. What things are actually better when they aren't automated? Customer service, personalized advice, and personalized small batch products all come to mind.

Pool resources to build software

While it's true that no single small business can compete with a fortune 500 company when it comes to technology, it's possible that if we all pool our resources, we could fund the development of tech that's every bit as good as what the big players are building.

No, I'm not talking about some sort of software co-op. That would be neat, but I don't think it's practical. The more realistic solution is for companies to emerge that act as the tech layer for thousands or millions of small business. None of those businesses on their own have the resources to develop cutting-edge tech, but the platform they're all sharing does.

You might be thinking, "isn't this already happening?" Yes! Companies like Stripe, Shopify, and Square are doing this as we speak. We need more of that. Now.

Note: Not all "platforms" can be trusted. For example, Amazon lets small businesses sell on their platform, but they're obviously not net good for small businesses. One way to judge platforms is to see if the platform owner is competing with the small businesses using the platform. Shopify and Stripe are just platforms. Amazon, Apple, and Google sell the platform and also sell their own products/services on the platform. That's a big difference.

Build more tools for small businesses rather than "enterprise" companies

Not all software vendors are platforms like I described above. There are also a variety of tools that every business needs to operate e.g. CRM, ERP, project management, accounting, etc. The problem is, most software companies making these tools focus on the "enterprise" market (i.e. really huge companies) because that's where most of the money is. Enterprise software is incredibly expensive and complex, so it's normally not accessible to small businesses. This widens the technological divide.

We need that to change. We need more software companies building tools specifically for small businesses. This is what we're doing at my company (Less Annoying CRM) and it's working out well. Sure, we're not on pace to ever be a billion dollar company (RIP my dreams of swimming in money Scrooge McDuck-style), but we're profitable, happy, and fulfilled.

We're certainly not the only company doing this, but there aren't nearly enough. If you're in tech and thinking about starting a business, I urge you to join us in serving the SMB market instead of enterprise.

Push for smart legislation

Software isn't the first new technology that has had the potential to consolidate too much power in the hands of a few giant companies. Imagine if all energy were controlled entirely by one unregulated monopoly. Or if a single company controlled all internet (lol, who am I kidding, that is how it works in America).

I'm sure readers of this site will span the political spectrum and have different views on what the role of government should be in regulating business, but the vast majority of people agree that monopolies are bad for capitalism, and the government plays an important role in preventing monopolies.

I'm not an expert on this topic, but I know that at least two options are: Break up companies so they are no longer monopolies (e.g. AT&T in the 80's), or regulate them so they can't abuse their monopoly power (e.g. utilities).

Rise to the challenge

I'm putting this last, but it's the most important. I get how challenging it is to be a small business owner right now. The economy is shifting more and more towards consolidation at the top, and the technological divide is making long-standing businesses struggle.

That doesn't give you an excuse to bury your head in the sand. Ok, you're not a programmer. Tech doesn't come naturally to you. You'd rather just focus on your business and ignore tech altogether. Well guess what? You can't. Unless you have a time machine and can go back to 1970, tech is either going to be an important part of your business, or you won't have a business. Those are the two options.

Over the years at Less Annoying CRM, I've talked to countless small business owners who aren't tech savvy, but who are making it work. They've committed to putting the work in, figuring out how to use software to their advantage, and modernizing their businesses. I don't have hard data on this, but anecdotally, the people I talk to who accept that reality seem to be doing much better than the ones who are in denial about it.

If you buy my argument, but you're not sure what you can actually do to rise to the challenge, here's my advice:

  • Embrace change - Gone are the days where a business could pass down from generation to generation without anything fundamentally changing. If your business isn't regularly adapting to new technology, you'll become irrelevant. This isn't a one-time push to get your business online. This needs to be a habit that you practice constantly.
  • Be curious - What are your competitors doing? How is your industry changing? If you're not reading books, listening to podcasts, talking with peers, etc. you're likely to miss out on opportunities. I don't expect you to be a tech expert, but I do expect you to want to learn how tech can help your business.
  • Value the same characteristics in your employees - One of the most frustrating things I hear when talking to LACRM customers is, "I love your tool, but I've got this one sales guy who just refuses to use it." Remember, software is eating the world. Refusing to use technology is the same thing as refusing to do your job. It's unacceptable. It's the business owner's responsibility to help everyone understand how important it is to keep up-to-date. Innovation should be rewarded. Refusal to evolve shouldn't be accepted.

This is why I started I have a foot in both worlds. I'm a small business owner worried about the future, and I'm a millennial tech CEO with a computer science degree. I'm going to share my experiences running a modern small business in the hopes that the lessons I've learned along the way can help all small businesses bridge the technological divide, and thrive on the other side.

Have thoughts on this post? I'd love to hear from you! I'm @TylerMKing on Twitter.