Solopreneur: Why Is This Recent Business Trend Growing?

solopreneur

You’re already indifferent to this, but let’s think about it for a few secs:

The internet has just changed how we run businesses.

Imagine the excitement for someone who wanted to start a business 20 years, if they had access to the same technology.

 

solopreneur_excitement

 

Of course, they would jump for joy!

You can do so much now:

You can spread ideas and stories and virtually reach anyone in the world. You have access to an amount of knowledge nobody has ever dreamt of before. You can design and build things with people you’ve never met. You can do all of these at scale, without any need to be hired by a firm.

“How dare you settle for less when the world has made it so easy for you to be remarkable?”

— Seth Godin, author of the Purple Cow

Firms—large organisations—are less indispensable than ever. Any solopreneur has virtually all the tools in hands to make a living… and make a difference.

But why is that?

nature-of-the-firm_ronald-coase

Do You Know Why Firms Exist?

Let’s go back to the 1930s…

It’s at that time that Ronald Coase, who won the Nobel Prize in Economics (1991), explained why our economy is mostly based on firms instead of a multitude of independent, self-employed people who contract with one another.

The reason?

Transaction costs… There are costs involved in doing business. Think about startups costs, financing costs, production costs, marketing costs, sales costs, negotiation costs…

The transaction costs illustrate the inherent friction that occurs when you do business and contract with various stakeholders. Setting up a firm is a way to reduce these costs. A company is a node of contracts, which brings stability and economy of scale to business relationships. Since it’s cheaper, it allows you to be more competitive.

Then, why is there not just one big firm? Why are firms the size they are, not larger or smaller?

Transaction costs have to be balanced with organisational costs.

“A firm consist of the system of relationships which comes into existence when the direction of resources is dependent on an entrepreneur… As a firm gets larger, there may be decreasing returns to the entrepreneur function, that is, the costs of organizing additional transactions within the firm may rise.”

— Ronal Coase, Nobel Prize in Economics (1991)

It makes sense to have a firm as long as the organisational costs of doing business are lower than the transaction costs.

“What counts is a balance between two factors: the cost of achieving a transaction on the market, versus the organizational cost of achieving the same result through a managerial mechanism.”

— Geoffrey Sampson on the Myth of Diminishing Firms

But things are changing. The internet has significantly reduced transaction costs.

You noticed this too:

There are more and more solopreneurs and self-employed people. [1]

The Law of Diminishing Firms in Unleashing the Killer App

The Law of Diminishing Firms: When Solopreneurs Win

One of the reasons is what Larry Downes and Chunka Mui’s Unleashing the Killer App calls the Law of Diminishing Firms:

“As transaction costs in the open market approach zero, so does the size of the firm.”

(It’s a consequence of Coase’s theory about the nature of the firm.)

Platforms like Etsy and Upwork have considerably reduced the transaction costs.

And market-networks even go further in reducing the friction of doing business with one another. Besides being a marketplace, they provide tools to help business partners manage their workflow (and therefore reduce the transaction costs).

(Here’s an article where you can learn more about how market-networks operate.)

Getting back to our Law of Diminishing Firms, here’s another good definition:

“The Law of Diminishing Firms suggests that as transaction costs decrease, as in the case of technology and communication advances, the size of the firm will also decrease. Trends toward downsizing, outsourcing, and otherwise distributing activities support this view. The ‘diminished’ firms will reside in a complex relationship network of customers, suppliers, and regulators.”

So for most activities where transaction costs are less than organisational costs, it’s likely that these are performed by solopreneurs and freelancers.

To use the economics lingo: the means of production are becoming more and more distributed.

What Does Solopreneur Mean?

Solopreneurship is a consequence of the Law of Diminishing Firms. Solopreneurs do not need to hire employees to run businesses at scale. They’re not just local merchants. Many of them run global businesses.

Urban Dictionary has a good definition of solopreneur:

“An entrepreneur who works alone, ‘solo’, running their business single-handedly. They might have contractors for hire, yet have full responsibility for the running of their business.”

There’s a big difference between a solopreneur and a freelancer.

A freelancer gets paid for his or her work—charging by the hour or by the project. Being a freelancer is an easy way to start a new business. You jump on a platform and start contracting.

A solopreneur is an entrepreneur. This means that solopreneurs use capital to build a business bigger than themselves. Solopreneurs make money when they sleep. They focus on scaling their business, even if they don’t plan on hiring employees.

platform-access_worldwide

Platforms Lower the Transactions Cost and Startup Threshold

Platforms connect you to the rest of the world. They offer infinite opportunities to do business with customers who are interested in what you do.

They reduce the frictions of doing business. And they empower solopreneurs to outsource various tasks. The transactions costs for outsourcing are often lower than for hiring. This makes it more profitable to be a solopreneur than to start a firm.

The burgeoning platform ecosystem lowers the startup threshold.

Think about the costs of running a business (market research, experimentation, product development, marketing, negotiation, supply, sales, administrative tools, personal assistance…). Now, there are many cases when transaction costs < organisational costs.

So you can build a global business on your own.

The WhatsApp Effect

When Facebook acquired WhatsApp for $16 billion, the WhatsApp team had 32 engineers and the app had 450 million active users.

The WhatsApp Effect

Platforms allow you to sell. They allow you to collaborate. But they also allow you to leverage other people’s ideas and work—e.g. open source and APIs.

The consequence is the WhatsApp Effect.

In the connection economy, a small team can do as much as a large one.

“On relatively little capital, Instagram got to 100m users. Then, WhatsApp got to 500m. Eventually, a solo entrepreneur will get to 1B users.”

— Chris Dixon, Investor at Andreessen Horowitz (June 2014)

The WhatsApp team benefited from the power of platforms. They had access to the technological backbones that allowed the development of WhatsApp. And they could take advantage of the network effect that mobile has created to reach millions of users.

“WhatsApp was able to build a global messaging system that served 900M users with just 50 engineers, compared to the thousands of engineers that were needed for prior generations of messaging systems.”

— Chris Dixon (again)

But there’s even more impressive:

A solopreneur built a self-driving car by himself

In 2015, George Hotz built in his garage a fully autonomous car. While Google, Uber, and Tesla have hired dozens of smart people to work on self-driving cars, George did it by himself.

The WhatsApp Effect illustrates that solopreneurs and small teams can even compete with tech giants. It’s a consequence of the Law of Diminishing Firms.

Today, making a difference is more a matter of ideas and bravery than resources.

guerric-de-ternay_teaching-at-university-college-london_ucl

University vs Solopreneurship: What Works Best?

The academic year 2015-2016, I was teaching digital strategy and marketing at University College London (UCL).

My only job was to prepare the lectures, engage with the students, and make sure they learnt some things that will end up being useful for the rest of their life.

(Yes. This is an ambitious goal.)

Since the academic year ends in April at UCL, I organised a few workshops on my own in May an June.

My job was totally different. In addition to what I was doing at UCL, I had marketing costs (advertising the workshops and selling the tickets), operation costs (renting a space and having a payment system)…

At UCL, I relied on a firm to reduce the transaction costs. Doing it on my own, I had to rely on internet services to reduce these costs. [2]

lifestyle-design

Homo Economicus and Lifestyle Design

We’re all homo economicus, but we’re also all humans.

The Law of Diminishing Firms sounds convincing. Yet, there’s another reason that explains the increasing number of solopreneurs and freelancers: the ability to design your own lifestyle.

Want a proof of this?

Get into a Uber car and have a chat with your driver. Ask him or her: “Why did you choose to be a Uber driver?”

Listen to what he or she says. The answer is almost always the same: “I make more money and I can choose when I work.”

You can design your lifestyle. Your way to prosperity is no longer limited to having a successful corporate career. You can even go as far as being a digital nomad. Tim Ferriss illustrated the concept very well in the 4-Hour Work Week.

You’re not bound to any location, not bound to any career path. This doesn’t only work in books. Solopreneurs also exist in reality.

Airbnb cofounder, Nathan Blecharczyk, wearing a GoudronBlanc T-shirt

Airbnb co-founder, Nathan Blecharczyk, wearing a GoudronBlanc T-shirt

Selling Great T-shirts, Studying, and Traveling

In 2012, I started GoudronBlanc in Paris.

I didn’t have to build a sewing shop, rent a store, and hire an ad agency. While I was still a student, I designed an elegant V-neck T-shirt, created an online store, and started doing online marketing on my own.

GoudronBlanc is doing well. (We’re launching a new collection in July 2016). In the meantime, I got two Master degrees and worked from London, Brussels, Corsica, San Francisco, Los Angeles…

I wanted to conclude saying: “In the coming years, more and more people will have the ability to be solopreneurs.”

My bad…

Actually, you already have the ability to be a solopreneur. It’s just a question of choice. There’s no excuse.

If you choose to work in a firm, you can’t complain. Be grateful for what they provide you. Because there are still missing elements in the lives of solopreneurs and freelancers. They have to take care of everything.

Being a Solopreneur: What Are the Consequences?

Firms are no longer the only way to make a decent living. But not pursuing a corporate job has some consequences.

The reason?

Firms are convenient because they cover the social costs, which I haven’t mentioned yet. Firms are supported by a legal and social ecosystem that has been built for centuries and polished during the last industrial revolution.

And there’s not yet a strong ecosystem to support solopreneurs and freelancers. If you embrace this path, you get more freedom of making things happen and a less favorable social safety net.

Platforms reduce transaction costs but they don’t take care of social costs.

Firms not only provide a flow of work and projects but also stability, training, structure, colleagues and human presence, coaching, stock options, health insurance, pension, financial guarantee (mortgage), reputation and a brand name, office space… [3]

But this is a manageable trade-off compared to the opportunity to make your vision real.

It’s Your Turn to Choose Who You Want to Be and What You Want to Do

If you find yourself complaining about doing a job that doesn’t fulfill you, you have no excuse.

Just be grateful for benefiting from the social safety net.

It’s your decision. Today, you already have everything in hands to make something great.

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Notes about The Rise of Solopreneurs

[1] Even people who are full-time employee often work on side project activities that make them solopreneurs too.

[2] For those who are interested in running their own workshops, let me know. In the most recent case, I advertised the workshop on to BoostCompanies subscribers, to my former students, and on a marketplace called Monkfeet.

[3] Here are some new challenges for solopreneurs (and society in general):

  • How do you guarantee a steady flow of income?
  • How do you borrow money without a stable employment contract?
  • How do you counterbalance your dependence to a specific platform without having the security of stable job?
  • Your ability to get gigs depend on your reputation capital. How do you deal with the fact that you don’t own the ratings/reviews that translate “measure” your reputation?
  • How can you deal with a lower social safety net?