Small Is Increasingly Beautiful

There is a trend underpinning Web 2.0. It is a turn to the small - the micro, the nano - whether in payments, transactions, communications, niche, enterprise or economy. It may be too early to label this as a paradigm shift, but the expansion of the microsphere is clearly underway.

While the "micro" prefix may be largely associated with international development - finance, lending, enterprise - the increasing acceptance and adoption of the Web 2.0 model ensures that the microsphere will grow to underpin mainstream economic expansion as well. The opportunities are many, and as the global financial behemoths are distracted by the credit crisis, the development of the microsphere is well underway in several areas.

• Social Financial Applications: The microsphere emphasizes the "sovereign self" and as such urges and empowers individuals and small enterprises to assume ever greater control of their lives, and to interact in a manner which is both social and self-interested. This is particularly true in the realm of financial services, and as a result there will be an increasing need for social financial apps which enable individuals to originate, develop, and maintain social financial relationships.
• Micro VC/PE: There is an increasing demand for micro investments in Web 2.0 start-ups. The most vivid example of this phenomenon is the booming demand for Facebook app financing.
• Virtual Finance: The emergence of virtual worlds and their underlying economies has created a demand for financial services - virtual banks, brokers, and exchanges. Second Life's decision to ban unregulated real world financial institutions from providing virtual banking services will encourage the creation of legitimate virtual and hybrid institutions structured to meet this booming market demand.
• MicroBanking: The increasing acceptance of P2P as a legitimate platform for borrowing and lending will drive the micro trend even further as smaller customers - individuals and small businesses - find greater success in capitalizing each other.

It seems fitting, then, that we would see a potential strategic opportunity emerging within a subsector of the microsphere - the microcap financial services space. Microcaps in general are typically shunned by mainstream institutional investors as they tend to be illiquid, volatile, and, generally unloved, and a cursory examination of data reveals that the case is no different for microcap brokers (National, Regional) and asset managers. On closer examination, however, it appears that many have a promising infrastructure in place, or interesting technologies, but perhaps are suffering from strategic drift. We believe that microcap brokers and asset managers would benefit greatly by retooling their business models to better reflect this changeover to the Web 2.0 model. With a little imagination, clever financial engineering, and a modest amount of capital, these companies could be at the forefront of the expansion of the microsphere.