Why 20 Million of You Can't Be Wrong

A long-time Inc. contributor surveys the current entrepreneurial scene and reports his findings. How do things look? Well, one answer might be "Never better, thanks!"

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If you want to scope out the prospects for growing companies over the next five to 10 years, the last people you'd want to talk with would be your fellow entrepreneurs. Reason: They will give you a universally positive outlook. I am reminded of my late father-in-law, himself an entrepreneur, whose stock answer to the question "How are you?" was a cheery "Never better!" One day when his wife was in the hospital, he had to be gently reminded that this might not be the most appropriate occasion to declare himself never better.

This spring the nation's company builders might not describe their own situations as never better. They haven't yet forgotten the late 1990s. But those I have asked about the future, to a man and to a woman, exhibit that congenital optimism. They reply that the economy has turned. They believe that, yes indeed, the next several years will be off-the-charts great. Even the scholars who study these companies share this sunny outlook. "I'm hugely optimistic!" exclaims William B. Gartner, professor of entrepreneurship at the University of Southern California's Marshall School of Business. "There will be more and more opportunities to make things happen."

But is all this optimism justified? For a contrarian view--and a sobering one at that--you need look no further than what the business press is telling us about the U.S. economy right now, recovery or no recovery. Among the recurrent themes:

Consolidation. Bank of America buys FleetBoston. Hewlett-Packard ingests Compaq Computer. Consolidation--the big getting humongous--is the name of today's game in financial services, computers, entertainment, and a dozen other more or less mature industries, as well as in some that are far from mature. In the rapidly growing (and fast-consolidating) business of pharmacy benefits management, for instance, the three largest players own more than 70% of the market.

Globalization, Round II. Remember when America's large corporations first found themselves threatened by overseas competition? They began downsizing and outsourcing, thereby creating huge market opportunities for entrepreneurial companies. Large corporations today continue to farm out their work, but not necessarily to U.S. suppliers. Outsourcing "remains an opportunity," says one expert, "but primarily for entrepreneurs in India and China."

No New New Thing. The major inventions of the recent past have passed their explosive-growth phase. Right now would not be the best time to launch a PC manufacturing company, say, or an Internet bookstore. Trouble is, no other technology on the near horizon is likely to create vast new markets. Biotech proceeds in fits and starts, as it has for the past two decades. Nanotechnology, says BusinessWeek, "might blossom in 20 years, not two."

These factors alone might provoke questions about the prospects for growth companies. But there's one more sizable negative, which might be dubbed The Empire Strikes Back. Remember when big corporations--we liked to call them dinosaurs--were bumbling and inept, saddled with high costs and slow to capitalize on new technologies? Some of them still merit the reptilian description. But more and more have turned into nimble, aggressive competitors. It's no accident that Wal-Mart and Starbucks, to pick two, have shoved so many smaller competitors out of business. Both are world-class operators, with a level of technological and managerial savvy to rival anybody's. Even older-line companies have caught up; Dow Chemical, for instance, reports that 15% of its transactions are now conducted online. "It used to be that there were new economy and old economy firms," says Roger Alcaly, author of a recent book, The New Economy. "Today everyone is going to be a user of the technologies and best practices of the new economy."

As the Empire gathers its forces, moreover, the rebels find themselves fighting for survival. Entrepreneurial software companies frequently face a sorry choice: to sell out to Microsoft or watch the Colossus of Redmond drive them out of business. Small manufacturers get beaten down on price by big customers until they can barely stand--at which point the customers move their sourcing to Mexico. Sometimes the battle is head-to-head. Ten-year-old Under Armour, a marketer of performance clothing, was No. 2 in last year's Inc. 500 and racked up more than $110 million in annual sales in 2003. By the end of last year, big competitors were targeting the young Baltimore-based company. "Under Armour is smack in the middle of Nike's sights," an industry journalist told The New York Times. "The first time, they might miss, but they never miss the second time."

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