One of the great mysteries of capitalism is the nature of the "firm". It's a question that is near and dear to my heart as someone that's been "doing startups" for the last six years, and almost every startup founder has considered it whether they realize it or not.
There are two ways of asking The Mystery of the Firm, depending on your initial inclination. The most generic way to ask it is: When and why do businesses transact with each other, instead of doing things in-house? What determines the shape and size of businesses, in different sectors of the economy?
A more pointed way to ask the question is: Why isn't there just one big corporation? One Big Corporation would have a lot of advantages; it doesn't have to pay someone a gross margin on its inputs, it'd have massive advantages of scale in place like media or software, and (presumably) it'd have a much easier time sharing information between components that would ordinarily be different firms.
Economists have many ways of answering this question. My preferred explanation, which is compatible with a lot of others, is that the primary bottleneck on firm size are Moral Mazes. Even large and well run companies like Google, which do have a lot of product lines and would like to have more, eventually face massive principal-agent problems when they need to add headcount. Ultimately, there is only one CEO and one board, and no matter how earnest these people are they become bottlenecked on attention. Google has a lot of money, internal technology, and a cool brand, but each new product they have to oversee requires them to add new layers of management whose introductions makes everything about the company run worse. And so Google ends up focusing a lot on their core moneymakers, and goes as far as shuttering a lot of side projects that are profitable on the margin but aren't "lucrative enough" for Google.
Startups, on the other hand, lack money, an existing brand, or infrastructure, but what they do have an abundance of is per-capita human-capital, and incentive-alignment. A startup (at least in the early days) consists entirely of people with large shares of equity, and those people can focus their entire lives on one new business area or category at the expense of everything else. In doing so these startups can "beat" larger businesses that would otherwise be able to crush them in a head-to-head fight.
Unfortunately for startup founders, AGI is changing this. Yes, eventually superintelligences will be able to compete with startup founders by starting businesses directly. But I think even before that what we're going to see, is that the startup's one edge (alignment and focus) gets neutralized, while the incumbent's edges (capital, distribution, data, compute) are untouched. Because with ubiquitous, mostly-aligned intelligence on-tap, this problem of managing your thousands of workers becomes much more tractable. Sundar Pichai no longer needs to trust the information fed to him by layers upon layers of middle managers; his AI can just summarize through all of the emails and recorded calls and internal metrics what arms of the company are profitable and which aren't. He can turn the entirety of Google into a giant surveillance state, where the principal-agent problems go away and everybody is promoted on merit. Once Google is a surveillance state, suddenly it makes sense to actually start competing with everybody again, if you can have Mythos 6 oversee all of those projects itself.
As these incumbents get larger and larger over the coming years, it may be that startups still exist, but that they are either dependent on other structural advantages, or else that these businesses are really quasi-employees of the large companies.[1]
I am reminded of all of the data companies who have chosen to ink exclusivity agreements with Anthropic. Many of them make a lot of money, but if you only have one customer and have to do everything they say, aren't you basically an employee?
One of the great mysteries of capitalism is the nature of the "firm". It's a question that is near and dear to my heart as someone that's been "doing startups" for the last six years, and almost every startup founder has considered it whether they realize it or not.
There are two ways of asking The Mystery of the Firm, depending on your initial inclination. The most generic way to ask it is: When and why do businesses transact with each other, instead of doing things in-house? What determines the shape and size of businesses, in different sectors of the economy?
A more pointed way to ask the question is: Why isn't there just one big corporation? One Big Corporation would have a lot of advantages; it doesn't have to pay someone a gross margin on its inputs, it'd have massive advantages of scale in place like media or software, and (presumably) it'd have a much easier time sharing information between components that would ordinarily be different firms.
Economists have many ways of answering this question. My preferred explanation, which is compatible with a lot of others, is that the primary bottleneck on firm size are Moral Mazes. Even large and well run companies like Google, which do have a lot of product lines and would like to have more, eventually face massive principal-agent problems when they need to add headcount. Ultimately, there is only one CEO and one board, and no matter how earnest these people are they become bottlenecked on attention. Google has a lot of money, internal technology, and a cool brand, but each new product they have to oversee requires them to add new layers of management whose introductions makes everything about the company run worse. And so Google ends up focusing a lot on their core moneymakers, and goes as far as shuttering a lot of side projects that are profitable on the margin but aren't "lucrative enough" for Google.
Startups, on the other hand, lack money, an existing brand, or infrastructure, but what they do have an abundance of is per-capita human-capital, and incentive-alignment. A startup (at least in the early days) consists entirely of people with large shares of equity, and those people can focus their entire lives on one new business area or category at the expense of everything else. In doing so these startups can "beat" larger businesses that would otherwise be able to crush them in a head-to-head fight.
Unfortunately for startup founders, AGI is changing this. Yes, eventually superintelligences will be able to compete with startup founders by starting businesses directly. But I think even before that what we're going to see, is that the startup's one edge (alignment and focus) gets neutralized, while the incumbent's edges (capital, distribution, data, compute) are untouched. Because with ubiquitous, mostly-aligned intelligence on-tap, this problem of managing your thousands of workers becomes much more tractable. Sundar Pichai no longer needs to trust the information fed to him by layers upon layers of middle managers; his AI can just summarize through all of the emails and recorded calls and internal metrics what arms of the company are profitable and which aren't. He can turn the entirety of Google into a giant surveillance state, where the principal-agent problems go away and everybody is promoted on merit. Once Google is a surveillance state, suddenly it makes sense to actually start competing with everybody again, if you can have Mythos 6 oversee all of those projects itself.
As these incumbents get larger and larger over the coming years, it may be that startups still exist, but that they are either dependent on other structural advantages, or else that these businesses are really quasi-employees of the large companies.[1]
I am reminded of all of the data companies who have chosen to ink exclusivity agreements with Anthropic. Many of them make a lot of money, but if you only have one customer and have to do everything they say, aren't you basically an employee?