Will Companies Continue to Become More Uneven in Size?
Reflections #12
Welcome to this week's edition of Reflections. Last week, we received an great question from , who asked:
This sparked an interesting discussion, and it ties directly into today’s topic: "Will companies continue to become more uneven in size?
Extremistan
The concept of Extremistan, as explored in Nassim Nicholas Taleb’s The Black Swan, is a framework for understanding environments where a small number of players dominate the landscape. In contrast to Mediocristan, where outcomes are evenly distributed (like human heights), Extremistan is defined by disproportionate successes and power concentrated in the hands of a few.
Globalisation, combined with network effects and the scalability of technology, has accelerated the shift towards Extremistan. Markets today are more connected than ever, creating fertile ground for large companies to grow even larger. This has enabled the rise of mega-cap companies that dominate entire sectors and shape economic trends, while smaller businesses often struggle to break through.
Species Density: How Globalisation Takes Us Into Extremistan
Taleb uses the concept of species density to explain how large, interconnected systems favour dominant players. In isolated environments, like small islands, diversity thrives because there is less competition for resources. But in larger, connected systems, the biggest species—or in this case, companies—crowd out the rest.
“Simply, larger environments are more scalable than smaller ones—allowing the biggest to get even bigger, at the expense of the smallest, through the mechanism of preferential attachment.”
In the corporate world, globalisation has created a landscape where scale is rewarded. Larger companies benefit from network effects, economies of scale, and easier access to capital, which allows them to outcompete smaller players. Over the last decade, this has led to more large-cap companies growing into mega-caps, while fewer small-caps have successfully made the leap to large-caps. This mirrors the "winner-takes-all" dynamic that Taleb discusses in The Black Swan.
Addressing Matthew’s Question
Matthew’s observation highlights a key shift in how companies grow today. While it’s true that larger companies have been dominating growth trends, smaller companies still offer unique opportunities. Their smaller starting size often gives them more room for growth, even if the pathway is less predictable or comes with greater risks.
The increasing dominance of large companies can be attributed to factors like global scalability and network effects, which create compounding advantages for those already ahead. However, this doesn’t mean small-caps should be overlooked. Their ability to capitalise on niche markets or emerging trends makes them just as compelling—if not more so—for investors willing to do the work.
The point we want to make after all of this is simple: At Schwar Capital, we remain flexible in the size of companies we look for, always prioritising asymmetric opportunities, whether they come from large, established players or small, growing businesses with untapped potential.
ICYMI
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Have a great rest of your week.
The S.C. Team
Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.
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