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Why big business failure is a good thing

Should we be worried when large companies fail?

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That may seem an odd question to be asking in a column devoted to small cap businesses, although the troubles that have befallen once-mighty brands like BlackberryTesco and HMV have made it a regular news theme since 2008.

However, I would argue big business failure is an issue for small companies – for two chief reasons.

Firstly, smaller companies often rely on their larger brethren for contracts, shelf space and even for growth finance. So Therefore what happens to one affects the other.

Secondly, there has been a marked difference in the performance of most small companies relative to some of the large ones recently. It may help us to understand why.

It is not only that when big companies go down they tend to grab the headlines, although they do – concern about the future of the high street has been intensified by the demise of the former retail titans WoolworthsComet and Blockbuster while the performance of smaller shops often goes unnoticed.

One reason we should all be worried about big businesses is they really do appear to be doing worse than smaller companies. That was emphasised last week when Experian published its latest insolvency figures for the UK.

The credit rating agency noted that while the overall numbers of failed companies is falling, the rate of insolvencies among the largest companies is rising. It almost doubled from 0.08 per cent to 0.15 per cent in the year to July 2013.

“A whole quarter of dropping insolvency rates is really positive news,” said Max Firth, managing director of Experian Business Information Services.

“But the fact that larger companies have seen quite a rise shows that we are not out of the woods yet, especially as this can trickle down the supply chain to smaller companies.”

So far, so depressing. But there is another way to look at this relative weakness of large companies: that such failure is a good thing.

It is a point that Daniel Isenberg, adjunct professor at Columbia Business School and author of the thought-provoking book about the contrary nature of successful entrepreneurs, Worthless, Impossible and Stupid , outlined in an article for the Harvard Business Review.

He notes that Finland is today witnessing an upsurge in start-up activity in part because Nokia, so long the country’s dominant corporation, is in the midst of shedding tens of thousands of high-quality jobs.

A similar drama is being played out in Waterloo, a city at the heart of Canada’s so-called technology triangle, whose name, linked to the downfall of France’s once powerful emperor Napoleon, has taken on fresh significance given the troubles wrought upon its local hero, handset manufacturer Blackberry.

Job cuts at Blackberry – whose product went from ubiquity to obsolescence in less than a decade – mean that thousands of skilled workers are now desperately seeking work to pay their bills.

Many have found the answer in the small business community, either starting up their own ventures, or finding work in young and fast-growing companies which themselves hope one day to outdo Blackberry by learning from its mistakes.

The flourishing of smaller companies in the shadow of big business failure is one of the “deep dark secrets” of entrepreneurship in start-up hotspots from Denmark to Colorado, Mr Isenberg claims.

It is not only big business failure that helps small companies, he adds. Government cutbacks can form a similar positive side-effect.

In August 1987, for example, under severe pressure from the US government, Israel abruptly cancelled its Lavi fighter development project. That important defence programme, which was to be Israel’s answer to the F-16 and that country’s equivalent of putting a man on the moon, led to between 1,500 and 3,000 job losses.

Shortly after Lavi was grounded, however, Israel’s start-up numbers jumped up. Of course, the axing of an important government programme may not have been the only cause. For a fuller explanation of this story, I would recommend another fine book, Start-up Nation, the work of Dan Senor and Saul Singer. However, Lavi’s failure helped, at least in part, to nurture Israel’s later entrepreneurial success.

Stories like that one should give heart to those in London and New York, where the banking crisis left thousands of bankers, lawyers and IT professionals looking for work. Out of the ashes of the collapse of Lehman Brothers and the near-death experience of RBS and Lloyds Banking Group, we are now seeing a flourishing of start-up communities form Shoreditch to Manhattan.

You do not need to be an economist to see why large company failure can be so good for small businesses. Just ask Darwin.

Next time you hear of a large company facing collapse, bear in mind that this corporate calamity could be the making of the next £1bn start-up.