In Search of Small Giants
The term "small giants" was not in my vocabulary two and half years ago, when I began looking into the phenomenon of companies that turn down growth opportunities because they have higher ambitions. Frankly, I wasn't even sure that it was a phenomenon, let alone that my research would lead me to label such companies Small Giants, as my new book is called. All I had to go on was one example, Zingerman's Community of Businesses, about which I had just written an article. (See "The Coolest Small Company in America," January 2003.)
That company had started out in 1982 as Zingerman's Delicatessen, located in Ann Arbor, Mich., and had been extremely successful. Within 10 years, it had a global reputation and a devoted following around the country. Its two owners had had the opportunity to roll the concept out nationally, either by selling franchises or by spinning off clones in other college towns around the country, but one of the owners, Ari Weinzweig, decided he wanted nothing to do with such a plan, which he felt would lead to mediocrity. Instead, he and his business partner, Paul Saginaw, came up with the idea of creating a local network of food-related businesses, all of them committed to Zingerman's goals of "great food, great service, and great finance," and all deeply rooted in the Ann Arbor community. In the course of implementing the plan, the company developed an extraordinary culture that proved irresistible to people who normally wouldn't consider working in a business of Zingerman's size, including successful entrepreneurs, M.B.A.'s from top-tier accounting firms, and erstwhile big-company executives.
My experience with Zingerman's made me wonder how many other companies had made similar choices. I'd run into a few during my 21 years at Inc., and I suspected that, if I looked hard enough, I could find more. But I had no idea how many there were, how difficult they would be to identify, where they would be located, which industries they would be in, or even what exactly they would have in common with one another that would distinguish them from other companies.
I began by spreading my net as widely as possible. I asked everybody I knew to recommend companies. I searched the Internet. I looked in magazine and newspaper databases for profiles of businesses that might qualify. Inevitably, there was a subjective element in my decisions about which companies to include. In an attempt to minimize the subjectivity, I added some criteria as I went along. First, I decided to restrict myself to companies started or owned by people who had actually been faced with a decision and made a choice. Second, I focused on companies that were admired and emulated in their own industries. Third, I looked for companies that had been singled out for their extraordinary achievements by other independent observers. Finally, I looked only at private, closely held companies--that is, companies whose owners were in a position to choose the path they wanted to take. Unlike the leaders of public companies, they had the ability to decide that they would forgo earning the biggest possible return on their investments in order to pursue other goals.
It didn't take long for me to discover that there were many more companies fitting my criteria than I had imagined. They were in every corner of the country and in almost every industry. (The exceptions were industries in which companies have to achieve certain economies of scale rapidly to compete effectively.) There were retailers, wholesalers, manufacturers, service companies, professional service firms, and artisanal businesses.
Because there were so many companies to choose from, I had the luxury of focusing on those I thought would give me the broadest and deepest sense of the phenomenon. I looked for diversity in terms of size, age, location, and type of business, but I also looked for companies led by people who had taken the greatest advantage of the freedom they'd been given as a result of their decision to limit growth and to remain private and closely held. That's the real payoff here. When you're hell-bent on maximizing growth, or when you bring in a lot of outside capital, or when you take your company public, you give away much of your freedom. As the head of a public or venture-backed company, you're responsible to outside shareholders whose interests you must always consider. As the head of a very fast-growing company, you're a slave to the business, which has tremendous needs. People who choose to keep their companies private and closely held and to place other goals ahead of growth get two things back in return: control and time. The combination equals freedom--or, more precisely, the opportunity for freedom. I wanted to include those who had made the most creative use of it.
I eventually settled on 14 businesses. A prime example is Union Square Hospitality Group, founded and led by restaurateur Danny Meyer. A native of St. Louis, he moved to New York City after college and in 1985, at 27, opened Union Square Café, which won critical acclaim from the start, including a coveted three-star rating in The New York Times. His early success notwithstanding, Meyer didn't launch his second restaurant, Gramercy Tavern, until 1994. Within a few years, the two places were rated the No. 1 and No. 2 most popular restaurants in New York City by the annual Zagat Survey. Their secret, Meyer said, was "enlightened hospitality," a quality that grew out of "caring for each other, caring for our guests, caring for our community, caring for our suppliers, and caring for profitability, in that order."
"I've made much more money by choosing the right things to say no to than by choosing things to say yes to," says Danny Meyer.
Given Meyer's success, it was inevitable that real estate developers from all over the country would begin courting him, hoping to entice him to build a Union Square Café or a Gramercy Tavern in Las Vegas or Los Angeles or wherever. He resisted their entreaties, coming up with what he called his "five-minute rule," according to which he would start restaurants only in locations within a five-minute walk from his home. Eventually, he built five restaurants and a burger stand in that five-minute zone--before he abandoned the rule to open a restaurant and two cafés at the newly renovated Museum of Modern Art in midtown Manhattan. But he continued to insist on growing at his own pace. "I've made much more money by choosing the right things to say no to than by choosing things to say yes to," he said. "I measure it by the money I haven't lost and the quality I haven't sacrificed."
Another example is Righteous Babe, the music company founded by singer-songwriter Ani DiFranco. (See "Don't Call Her an Entrepreneur," September 2004.) She had been wooed by numerous record producers, who saw her star potential early on, but she turned them down and stuck with Righteous Babe because she didn't want to be part of a giant corporation. Starting with a few audiotapes of herself playing her songs, DiFranco and her partner, Scot Fisher, built a diversified music business, including a music publisher, a touring company, a retail operation, a real estate developer, a foundation, and a concert hall, not to mention one of the few successful artist-created labels around, with offerings from more than a dozen musicians.
What is most striking about Righteous Babe are the extraordinarily close relationships it has with the people it touches--its employees, distributors, concert promoters, publicist, booking agent, CD manufacturer, cover designers, printer, and, above all, customers. Staff members, for example, respond with handwritten notes to thousands of letters the company gets from DiFranco's fans. The result is a powerful sense of community and a level of devotion seldom seen in any business, particularly one that can be as cutthroat as the music business. "Sometimes I think what we're doing here is creating our own little utopia," says Fisher. "Ani and I joke that we live in a fantasyland of honest people who treat each other with respect. Our promoters would no more cheat us than they would cheat their own mothers."
Or consider Anchor Brewing, the San Francisco company that transformed the beer industry with its pioneer microbrew, Anchor Steam Beer. The beer itself had been around for almost 70 years when Fritz Maytag (yes, one of the washing-machine Maytags) arrived on the scene in 1965, just in time to save the brewery, whose bank balance was down to $128. Maytag bought the company for a few thousand dollars and began to educate himself in the art of beer-making, over time producing a new, improved Anchor Steam that became so popular the brewery ran out of capacity and had to begin rationing what it made. Eventually, the operation moved to a larger building, where it produced a variety of handcrafted, high-quality beers.
That was the beginning of a revolution in the industry. As other microbrews began to appear around the country, the demand for Anchor's products continued to soar. With another capacity crisis looming in the early 1990s, Maytag made plans to raise capital for expansion by taking the company public, but he pulled back at the last moment. "I realized we were doing the IPO out of desperation--because we thought we had to grow," Maytag recalls. "It occurred to me that you could have a small prestigious, profitable business, and it would be all right. Like a restaurant. Just because it's the best around doesn't mean you have to franchise or even expand. You can stay as you are and have a business that's profitable and rewarding and a source of great pride. So we made a decision not to grow. This was not going to be a giant company--not on my watch."
After spending time around these extraordinary companies and talking with the people who built them, I couldn't help thinking about what they have in common. Or, to put it another way, what are the characteristics and practices that allow someone to create a Small Giant? In the end, I came up with five imperatives:
Know yourself and what you want out of business. The Small Giants' owners and leaders are remarkable, first and foremost, for the clarity they have about their goals in business. They can decide not to go for maximum growth because they know what else they are looking for and why.
Love your business. The Small Giants' leaders are unusual for the passion they bring to their companies. They absolutely love whatever it is that the company does, and they care deeply about doing it as well as it can be done.
Be rooted in a community. Each of the Small Giants has a close connection with the local city, town, or county in which it does business--a relationship that goes beyond the usual concept of "giving back." While all of these companies are model corporate citizens, the relationship is very much a two-way street. The community also helps to mold the character of the business.
Cultivate relationships with employees, customers, and suppliers. With customers and suppliers, the Small Giants emphasize personal contact, one-on-one interaction, and mutual commitment to delivering on promises. The effect is to create a sense of community and common purpose. The companies treat their employees in the way that the owners think people ought to be treated--with respect, dignity, integrity, fairness, kindness, and generosity.
Stay private and closely held. Finally, the owners are keenly aware of the need to keep ownership inside the company. If you have outside investors, you are both legally and morally obligated to try to give them what they want in exchange for their investments, and what they generally want is the best possible return. Of course, the Small Giants' owners also want a return, but it's not their paramount purpose. By keeping the stock inside the company, they're free to pursue other goals.
Businesses are the building blocks not just of an economy but of a way of life. What they do and how they do it has an impact beyond the economic sphere. They shape the communities we live in, the values we live by, and the quality of the lives we lead. If businesses don't hold themselves to a high standard, society suffers. There are no businesses that hold themselves to higher standards than do the Small Giants.