We live in an age of big data, and so called data-driven transformation is one of the buzzwords of our age.  Consultants and technologists alike believe that data has the potential to reinvision how business is done, but does that potential apply as much for small businesses as it does for large ones?

That was the question posed by a recently published study from researchers at MIT’s Sloan School of Management.  The research suggests that smaller firms are at a disadvantage compared to bigger ones when it comes to capitalizing on big data to benefit their business.  The authors argue that big data helps to reduce any uncertainty felt by investors and lowers the cost of capital, but only for big firms.

“Think about the Exxons of the world,” the authors say. “Older firms have more data available to investors that makes them more willing to finance the firms, whose cost of capital falls as investors get better at processing data.”

Using data to thrive

The team suggest that small firms struggle in large part because they lack access to data, either to capitalize on themselves or for investors to process to understand about the firm.  This then creates a level of uncertainty that is translated into a reluctance to invest in smaller firms.

Data on small firms highlights their plight, with the rate of new startups slowing in the last three decades.  By comparison, the fortune of companies with over 1,000 employees is thriving, such that big companies employ around a third of all employees, which is up from a quarter in the 1980s.  Their share of revenue also continues to grow.  The authors argue that if the cost of capital is too high for small businesses, their value to the economy will diminish.

“The growth rate of the economy is very much driven by smaller businesses,” they explain. “Small firms, generally speaking, have larger growth prospects. They’re newer, they’re innovative, and they have more room to potentially improve the unemployment rate and to increase the productivity of the economy.”

The study strives to leave on an optimistic note however, and suggests that the more data a small business can generate, the better their chances of accessing lower cost financing.

“I think it’s important for firms to understand that producing data is an asset because the data they produce about their activities will be used by investors to learn about them,” they conclude. “If investors can better understand their returns, they will face lower risk and will be more willing to finance them. That decreases the cost of capital faced by these firms and helps them explore growth opportunities.”