The Elephant and the Flea

The age of giant corporations is over. The age of the entrepreneur is here. This idea will change the way you think about your portfolio. It may well change the way you think about business. And if you follow it to its logical conclusion, it should inspire you to invest in the kinds of ideas best fitted for this new age.

I’ve been kicking this idea around. It is a sort of vision of what the future will look like. In many ways, we’re already seeing it unfold. The idea is not totally refined, but I’d be curious to hear what you think.

Here goes.

The 20th century was a century dominated by giant corporations. In fact, business historian Robert Sobel wrote a book about this. The Age of Giant Corporations, he called it. On the eve of World War I, America’s business landscape was a land of sole proprietorship and small partnerships. Yes, there were big trusts in railroads, banks and steel. But as Sobel says, “they were islands in the industrial-commercial sea of small units.”

It was only later, post-World War I, that wealth and industrial power began to concentrate in the folds of the giants. In this age, it was financial muscle and organizational power that triumphed. As an investor, you could park your money with Ford or Standard Oil and do well over the decades.

So we arrive at today, when we have companies worth hundreds of billions of dollars. Exxon Mobil is worth $400 billion, for example — an incomprehensible amount of money, really. Today’s giants have incredible wealth and influence. And I believe that will probably remain true.

But I think something’s changed. The greatest value-creation stories going forward won’t be in these giants. They will be in small companies led by talented entrepreneurs. It is here that their ideas will have the greatest impact and the conditions for the creation of new ideas are most fertile. The most-talented people won’t stand working in bureaucracies of companies worth hundreds of billions of dollars.

The idea itself isn’t totally new. Charles Handy, a sort of business philosopher, saw all this happening more than a decade ago. He wrote a book about it called The Elephant and the Flea. The elephants were the giants. The fleas were small or independent operators. For him, we were turning into a world with a lot more fleas (not a flattering metaphor, I know). Handy saw the fleas as the innovators, the source of new ideas. The elephants needed them for these things. So a symbiotic relationship existed.

The elephants provide security mostly. As Handy writes, they provide “secure household incomes for most, a convenient tax-collecting mechanism, a way of parceling society into boxes so that you knew where… they would be, and what they would be doing in the years to come.”

The fleas are about freedom and uncertainty. And while the elephants would continue to get all the attention, the fleas would have the bigger impact — especially in the game of wealth creation. What I want to own and back are the fleas.

I think of longtime holding Contango Oil & Gas (AMEX:MCF) as a model of this kind of organization. Contango focuses on that part of the oil and gas business that creates the most value — the funding and drilling of an exploratory well to create reserves. This is when you make the most money — when you sink a well and find a bunch of reserves that didn’t exist before. Everything else Contango outsources. The company has only eight employees.

There is no doubt that Contango has created enormous value. Since inception in September 1999, every $1 invested in Contango is worth $7.50 today.

This is an example of a kind of high-impact flea organization. The merit of collecting the Contangos of the world is that you can make a lot more money on the fleas. How hard is it for Exxon Mobil’s stock to double? It would have to be worth $800 billion to do so. How hard is it for Contango, worth only $869 million, to double? It is much easier. One big find and it could double.

Handy had another word for the leaders of these flea organizations. He called them “alchemists, meaning people who create something out of nothing, or turn base metal into gold. The word sounded less brash and thrusting than entrepreneur; it captured some of the idealism we saw in these people.”

CEO Ken Peak is an alchemist. There was nothing before. Contango was his creation. Born of an idea on how an exploration and production company should operate and what it should focus on.

Handy found several characteristics among such alchemists. They had a passion for what they were doing. This passion, Handy felt, came from their ownership of the idea. The alchemists often had their identity bound up in the enterprise, and it may have even borne their name. (Handy writes how we forget sometimes that companies were originally the idea of a person or group of people. How many know that the great engineering firm ABB used to stand for Asea Brown Boveri? “The names of real people, once,” Handy writes.)

The alchemists, too, had an ability to stick with their dream, even in the face of lots of doubters. And finally, he found they had a third eye — they looked at the world in a different way than others. Put these characteristics together and you will not likely find them happy in a corner office of a bureaucracy.

Where these people tend to go, where they tend to have the biggest impact, is in smaller organizations. As Handy writes, the big challenge for elephants is that efficiency and creativity are often antagonists. “Could large organizations allow creative individuals the space to experiment and, if successful, the right to be identified with the final product and to have some degree of legal ownership?” he asks. “Could they tolerate the waste created when experiments don’t work out as they should?”


There are exceptions, of course. Great alchemists will eventually find themselves at the top of giant companies that they created — think of Jeff Bezos at Amazon or Steve Jobs at Apple. By then, however, the greatest gains are behind them. The really big winners were the people who invested with Bezos and Jobs when they were still working in flea organizations, before they became elephants.

This has always been true. But it is more true now in an age when the giants are really enormous. And the rewards for creating something on your own (and possibly selling your idea later to the elephants) are so great.

As an investor, I’d prefer to collect promising flea organizations than invest in elephants.


Chris Mayer,
for The Daily Reckoning

The Daily Reckoning