Recently I raised Coase’s Theory of the Firm in discussion with Mark Kuznicki, Remarkk! Consulting, in an attempt to address the question: How do we determine if an organization or company should exist or not, and what should its size be? This conversation was specifically about the proliferation of non-profits, but, having revisited the theory I began to think about the theme of the NAO’s last Summit, Age of the Angel.
Simply put, Coase’s theory states that a firm is established to reduce transaction costs. That is, for example, costs associated with:
- Search and information costs;
- Bargaining costs; and
- Policing and enforcement costs.
So what? What does this mean for Angels?
One of the great things about investing at this time is that, over the last two decades, the communication and transaction costs of high-potential companies (especially in the ICT and clean technology space) have decreased by an incredible margin. No longer are search and information costs the barrier to entry for high-potential innovative companies.
Because of the drastic drop of transaction costs over the past two decades the core of firms has decreased, with the periphery expanding. As such, the economic climate has become increasingly entrepreneur, and therefore Angel, friendly; enabling high-potential, nimble, entrepreneurial companies to bring new technologies to market with greater ease than ever before.
As these transactional barriers to company formation and execution have fallen away, more high-potential entrepreneurial companies have been emerging whose needs to get to market are much less than they have been in the past.
Web-based start-ups, for example, rather than needing a seed round of $2-million can now gain market traction, reach significant milestones, and generally develop their companies with much less financing. Examples such as Well.ca, AideRSS, or StandoutJobs illustrate this point.
Might companies still need higher amounts of finding? Certainly! The point here is that many can now reach more milestones with less cash than ever before, giving Angels a much more significant role to play in the commercialization of world-class Canadian technology.
