How Can We Explain Tiny Startups Crushing Huge Tech Companies?

Suppose that mega-corp, a large corporation, has hundreds of employees, hundreds of thousands of customers, tens of millions of dollars of cash, a recognized brand, and an experienced CEO. Tiny-upstart, on the other hand, is just two twenty-five year olds with an idea, no funding, no users and no business experience. If mega-corp and tiny-upstart are in the same line of business, then by any reasonable stretch of the imagination tiny-upstart will lose the fight.

So how is it that tiny startups seem to keep crushing huge companies? Consider the top 5 most trafficked websites in the U.S. today. Google began its life as “backrub”, a research project created by two PhD students. Facebook was launched in a dorm room. YouTube supposedly started when some paypal employees had trouble finding a famous video clip of the incident where Janet Jackson’s breast was exposed during the Super Bowl. Then there was Yahoo!, which began as a site where two guys categorized their favorite links, “Jerry and Dave’s Guide to the World Wide Web”. Finally, there’s Amazon, which was created by a 30-year-old hedge fund employee. He drew up a list of 20 possible things to sell on the internet, and decided that books was the best option.

Not only did these companies go from nothing to enormous, but they did so under intense competition. Whatever needs a company fulfills (even if they fulfill them in a new way), there is almost always some way that people were already trying to fulfill those needs. Google blew its way past hugely popular search engines, Facebook beat the life out of Friendster and MySpace, the first video sharing website pre-dated YouTube by EIGHT YEARS, hundreds if not thousands of link directories preceded Yahoo!, and Amazon dominated the long successful Barnes & Noble, which had been trying to sell books online since the late 80’s.

If this blog post were a popular non-fiction book the next paragraph might be about how, with few resources, you can compete with the largest companies in the world (it just requires vision, hard work, and believing in yourself, the book might say). After all, that’s what the founders of all these now famous companies did. But the humble origins of the largest internet companies prove nothing about the ease with which one can go from something small to something great, or that startups are nimbler than large companies, or better at innovating, or have less screwed up incentives. And here’s why.

Companies pretty much come from two places:

But large companies usually just keep their new products in-house (like Apple with the iPod and iPhone). So they rarely bring new companies into existence. And while you occasionally get an Elon Musk type counter example (3rd time entrepreneur billionaire starts a new startup, seeding it from day one with enormous resources), or a company that exists solely for the purpose of churning out startups, people and groups like that represent only a tiny fraction of all would be entrepreneurs. So that means that nearly all startups come from a few people with dismal looking prospects.

Therefore, of course when we look around at the largest companies, they were once founded by just a few people in a garage. And of course they beat out the competition, because otherwise we never would have heard of them.

Tiny startups are to huge internet companies what tadpoles are to frogs. Most tadpoles die before they grow, but every frog started as a tadpole.