Of Coase and Creators
In his seminal 1937 article on the Nature of the Firm, Nobel prize-winning economist Ronald Coase posited that the size and boundaries of companies are defined by transaction costs - that is how expensive it is to outsource various functions.
For example, if I want to create a business that makes widgets, theoretically I could contract out everything to different firms: one to manufacture the widgets, one to sell and distribute them etc., and I don’t really need to have any employees at all.
However, at least as far as the 20th century was concerned, Coase reasoned that the transaction costs for negotiating all these contracts might be prohibitively expensive, and that is the reason I would have to build integrated operations, with my own manufacturing facilities, my own employees, accounting teams and sales channels, and thus be able to control everything within the boundaries of my company. So, based on Coase's theorem, transaction costs are the raison-d'être of larger companies.
Ronald Coase University of Chicago 2003
Solopreneurs
Conversely, Coase's theorem would indicate that if transaction costs were reduced to nil, companies would no longer need to exist, as each of us would be a solopreneur with our own one-person firm, contracting with other solopreneurs around the world to add value to the economy and to reap the benefits.
Today, we are obviously far from a world made up exclusively of one-person, solopreneur companies. However, there is no doubt that the internet has reduced transaction costs by orders of magnitude.
Thas allowed a greater number of people to act as solopreneurs, and enabled very small firms to accomplish that which previously required a conglomerate to achieve, thus validating the premise of Coase's theorem.
Gig economy
At a first basic level, this validation manifests itself in what has come to be known as the gig-economy - a world where one-person contractors work and get paid on the specific tasks they perform. Typical examples are Deliveroo (LN:ROO) riders and Uber (UBER) drivers, but also include gig workers that are programmers, designers, or analysts who find gigs through platforms like Upwork (UPWK).
Creator economy
A second more exciting manifestation of this phenomenon is often referred to as the creator economy, and is enabled by distribution platforms that allow creators to monetize their audience directly. Typical examples are all the influencers who set up channels on the likes of YouTube (GOOG), Instagram (FB), and Snapchat (SNAP). Google has paid over $30B in the past three years to such creators who post videos on YouTube. Many such creators can generate $1M+ through platforms like Patreon, a company that helps creators monetise their work through membership subscriptions. Patreon’s founder believes that we are at the beginning of a second renaissance of creativity: “If you are a creative person and you are alive today, this is literally the best time in the history of humanity to be on this planet.. what will happen over the next 10 years will be awesome.”
This trend has also been pronounced in online gaming. Companies like Roblox (RBLX) and Rec Room allow gamers to create their own games and to sell them to others. Increasingly, gamers are creating their own virtual environments on these platforms - the beginnings of a possible metaverse (which Facebook (FB) has recently latched onto.) Yet, this creativity is not limited to digital media or virtual environments.
PLATFORMS for creators
Platforms have emerged that allow small (i.e., close-to-one-person) companies to be able to sell their non-digital goods and services more easily to a much wider audience. Etsy (ETSY) has flourished as a marketplace for artisanal products. Faire is enabling smaller local brick-and-mortar shops to reach larger audiences. Curated is a marketplace that matches experts in sports equipment with amateur enthusiasts to help them buy the best sports products for their needs. The eGrocer Rohlik is partnering with local butchers, bakers, and small farmers around Europe to help sell their specialized and often local produce to consumers. These too are all creators!
Since the days of the barter system (the pre-eminent business model innovation of circa 6,000BC which allowed people to trade goods directly with each other) new technologies have allowed commerce to grow by aggregating demand and supply. New innovations such as money(!) and new means of transportation such as cars and trucks, and new communication systems such as faxes and phones, each allowed points-of-sales to become larger and larger, starting with the introduction of bazaars, then shops, malls, and department stores, all the way through to Amazon's online bookstore.
Now, with online marketplaces and direct-to-consumer (DTC) companies, technology is allowing companies to grow by aggregating demand and supply, allowing one-on-one relationships to be re-established between buyers and sellers - each a creator and consumer concurrently, and increasingly each a solopreneur.
lower costs and larger markets
Indeed, technology has allowed solopreneurs to tap into tools that let them reach much larger audiences as well as to access the infrastructure for designing, manufacturing, marketing, and distributing such products - all for orders of magnitude less cost than was ever possible before.
The lower cost base allows creators to produce products that were previously considered niche within their local markets... but such niches can become enormous if their addressable market includes the entire globe.
As a palpable example, Rohlik's CEO posits that “an independent pasta-making shop in Italy might now be able to, for the first time, also sell its ravioli and pappardelle to a buyer in Austria or Hungary through Rohlik.” This combination of lower costs and the greater value-add achieved by the ability to reach niche customers with niche products globally has meant that businesses which were inherently subscale can (by leveraging the new world of reduced transaction costs) become large, profitable, global players thereby creating new waves of innovation and disruption.
Of course, besides the solopreneurs themselves, the obvious beneficiaries of the above trends have been the platforms that enable sellers to reach these new audiences. From first generation players like Amazon and YouTube, to the new entrants like Rohlik, Rec Room, and Patreon, such platforms can grow into giants by serving millions of niches.
next GENERATION Services
Yet, in those cases, the solopreneurs are plugging into platforms that are in the driver’s seat. An alternate model is for the smaller companies and solopreneurs to take the driver’s seat by using various online tools and services to build their own businesses in the way that they see fit, rather than fitting into the model imposed on them by the platform. And there are now a plethora of services being created to help solopreneurs and entrepreneurs do exactly that.
From companies that help you brand your business, to services that help you live-stream your sales, or build your commerce website and apps, to yet other services that help you connect with your customers and fans on your own terms, entrepreneurs are experimenting with the next generation of services that will disrupt the archaic structures of the past. Many of these services will further reduce those Coasian transaction costs, unleashing the power of creators and thus re-redefining the appropriate boundaries and the Nature of future firms.
We remain optimistic and excited to see these cycles play out over time.
Disclaimer
The content of this article has been approved and issued by TOP Fund Advisors SA for background, information and discussion purposes only and does not purport to be full or complete. No information in this document should be construed as providing financial, investment or other professional advice.
Authors: Salman Farmanfarmaian and Richard Rimer