For Subscribers

Why Small Companies Have the Innovation Advantage Why big companies would rather buy your company instead of launching their own competitive version.

By Sam Hogg

Opinions expressed by Entrepreneur contributors are their own.

Buy vs. BuildWhen I first started my company, I hit the business plan competition circuit for funding and feedback. At each event, I encountered the same question from a judge or a member of the audience: "This seems pretty simple, why doesn't [insert large competitor] just do this?" My response was always the same: "I don't know­--they just don't." The answer was always oddly sufficient, probably because the asker had no idea either.

That question ultimately became rhetorical, in the eventual sale of my company and in general observations on how big companies and startups act. Why do large companies more successfully acquire instead of innovate? They certainly have the talent, the money and the existing market share to launch startups with ease, yet they don't do it very well. What's clearly missing is something in their DNA, but also something in the numbers. As big companies look at growing internally or via a shopping spree, it's important to consider the underlying motivations and math.

People and culture: Startups require innovative entrepreneurs, and that typically isn't in a job description for a large company. Big companies hire people when the workload demands it, not when they can come up for air and think about innovation.

By the same token, people work for big companies when they want a stable paycheck, an eight-hour workday and projects lined up on their desk. Mechanically, the ability to break away from a billable workload to pursue something innovative requires significant buy-in and resources from managers. Those managers are likely evaluated by their higher-ups on the profitability of existing, not future, business.

Cost and organizational structure: Large companies simply can't compete with startups on a cost and execution basis. Organizational hierarchies slow decisions that could be made over lunch or beers in a startup, and established salaries and service providers create costs that would bury almost any early stage company. While startups beg, borrow and barter, large companies follow established processes, protocol and prices to accomplish the same things at a much slower speed and a heavy multiple of the cost.

Risk: Unfortunately, all of those extra dollars and time spent do little to mitigate the risks of the actual concepts and, unlike startups, big companies have a lot to lose. Failed internal ventures not only hurt the balance sheet, but the corporate brand companies invest significant resources in building and protecting. The only risk in acquiring established and derisked companies is overpaying. That premium debatably trumps the risk of having several internal failures to get something right. Like everything else in business, it boils down to math--mainly probability and statistics.

For instance, if a large company knows it could replicate a startup concept for $1 million, but only has a 33 percent chance of competing successfully long term, it could mathematically justify waiting around to pay $3 million for the derisked version. This allows it to leave the founding, flailing and failing to entrepreneurs, and acquire the company and competition in one fell swoop--no disruption to current projects, no need to retain internal innovators on payroll and no reason to change the corporate machine that put them in the acquiring position in the first place. No-brainer.

So why is this important? Knowing why big companies buy little ones is critical to positioning and pricing a company for an acquisition. Large companies are cash heavy and innovation poor, and when they seemingly sit on the sidelines, chances are they aren't being dumb, they are just doing the math. Making sure your company fits their price and formula requires thinking like they do.

It would be easy to just abandon a startup altogether because a bigger company could compete with it. Instead, knowing the innovation challenges of large companies transforms them from competitors into strategic acquirers. Building startups right in the wheelhouse of potential competitors isn't stupid--it's smart. And next time I'm asked why a competitor isn't replicating my concept, I'll confidently answer this way: "Because they are waiting to buy me."

Image from Shutterstock.com / Orla

Sam Hogg

Entrepreneur Contributor

Sam Hogg is a venture partner with Open Prairie Ventures, a Midwest-based venture-capital fund investing in agriculture, life-science and information technology.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Buying / Investing in Business

Former Zillow Execs Target $1.3T Market

Co-ownership is creating big opportunities for entrepreneurs.

Business Ideas

70 Small Business Ideas to Start in 2025

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2025.

Science & Technology

3 AI Tools to Help You Start a Profitable Solo Business in 2025

Ready to automate your business and scale without a team? This video is your step-by-step guide.

Business News

Warren Buffett Says to Forget About 10,000 Hours of Practice — If You Want to Master Something, Do This Instead

At the 2025 Berkshire Hathaway shareholders meeting, the "Oracle of Omaha" described the systematic approach to success that has worked so well for him over his storied career.

Business News

AI Helped a Major Social Media Company Grow Its Revenue 16% in a Year, According to Its CEO

Pinterest also reported that its monthly active users increased 10% year-over-year, to 570 million.

Growing a Business

Here's How Scaling a Business Really Works (It's Not What You Think)

Scaling isn't just about growth. It's about reinvention.