https://every.to/p/rise-of-the-silicon-valley-small-business?sid=16613
Anu Atluru is a startup builder, angel investor, and frequent Every contributor who spent two years at Clubhouse as its first head of community. In this article, she explores the rise of a new type of company, one that merges big tech dreams with small business values. Check out Anu’s Substack for more of her work.
We’re entering a new era in Silicon Valley, and the playbooks are changing.
Many founders are rethinking what can feel like a one-size-fits-all, Silicon Valley approach to building startups. They’re embracing a more diverse set of paths and experimenting with a middle-ground approach—one that combines the fiscal discipline of small businesses with the scaling ambition of Silicon Valley.
I call this phenomenon the Silicon Valley Small Business, or SVSB for short. We’re going to see more SVSBs, and some of them will have big outcomes…perhaps even billion-dollar wins.
The archetypes
While traditional SMBs, tech startups, and Silicon Valley Small Businesses all share similarities, they’re defined by the differences across their business objective, team, strategy, financing, operating model, and endgame (or exit strategy).
The traditional small business
When we think of a traditional small business, it’s often a local mom-and-pop shop or trade professional (e.g., a carpenter, a photographer) as a sole proprietor. They offer a known product or service to a localized market. Small business “owners” might lack formal business knowledge, but they know their customers and niche operation. The company stays small, hiring modestly just to meet demand.
These small businesses are capital constrained yet may avoid outside capital, fearing dependence or debt. On top of this, they often operate relatively capital-intensive businesses (whether materials, labor, or otherwise). And with low margins and scarce working capital, any volatility is a risk. At the same time, they’re in it for the long run; they’re not thinking about an exit. Financially, they might think in thousands and dream about millions.
The traditional Silicon Valley startup
Silicon Valley startups are famous for their “founders,” the visionary early leaders. They bring new tech or tech-enabled products and services to market, serving a niche customer first, then expanding to a large, distributed base. It’s common for teams to be technically skilled and experienced with startups and big tech. Teams expand to support the existing business but also to unlock and spur new growth.
The quintessential Silicon Valley “thing” is to raise venture funding from a top-tier institutional VC, build a team, run at their vision for years, and hope for a huge exit. They do it all with the benefit of financial stability and some social status. The model SV startup seeks capital and aspires to build a high-growth, highly capital-efficient business with it. Success isn’t a lock until there’s a big exit — for founders, investors, and employees.
The Silicon Valley Small Business
The Silicon Valley Small Business, the SVSB, is a hybrid of sorts—it intertwines small business values and discipline with big-tech know-how and ambition.
- Founding teams may look like that of a “traditional” Silicon Valley startup. They’re native to Silicon Valley ethos, skills, and playbooks. But beneath the surface, they’re different. They value autonomy and flexibility. You might see more solopreneurs and studios (and LLCs instead of C-corps) taking multiple shots. They envision a range of potentially good outcomes—not binary, all-or-nothing scenarios. Many peers who’ve founded or worked at high-growth VC-backed startups are now considering starting an SVSB.
- Teams stay small and run fast for as long as they can. I define a Silicon Valley Small Business as having 20 or fewer employees (and often fewer than 10). In my experience, startup teams above this size are forced to operate very differently—much slower, with more bureaucracy and less alignment. Below this threshold, there’s little hierarchy, redundancy, or purely managerial roles. And a savvy, small team can still create leverage and punch above its size.
- They’re growth-oriented and going for efficient scale. Unlike small businesses (and contrary to the common characterization of teams that bootstrap), SVSBs aren’t just trying to build “lifestyle” businesses or modest passive income streams. They want to scale as quickly and efficiently as possible. Many of them know how to scale businesses, and their desire to do so separates them from traditional small businesses. Their focus on profitability and efficiency while scaling separates them from the traditional SV startup.
- They try to bootstrap to profitability instead of relying on venture capital. They’re VC-literate yet aren’t charmed by the potential status, signal, or stability. They bootstrap until they see signs of VC-compatibility. Or perhaps they raise the equivalent of a friends and family or pre-seed round but not much more. With less money going in, there’s a lower bar for financial return. Moreover, “success” doesn’t require a billion-dollar exit. Making millions is a win (and thousands keeps the team afloat).
It’s important that these archetypal attributes are deliberate operating choices and not mere symptoms of a fleeting stage. Otherwise, it’s easy to look at every early-stage tech startup as a Silicon Valley Small Business.
It’s worth noting that not every SVSB has to be built from scratch. The same archetype of the team can buy an SMB and transform it into an SVSB with their know-how and ambition. Established operators in this model will tell you that the best SMBs generate lots of free cash flow and hence, when purchased at comfortable multiples (i.e., 2–4x revenue) and scaled, have a fantastic and fast return on capital.
There’s a significant overlap in the philosophy of teams that build versus buy. That said, the interests and skills needed to build a company from the ground up versus running a search and acquisition process for each differ quite a bit. (3)
The tailwinds
So, why are we poised to see more Silicon Valley Small Businesses now? Well, there are a few conditions that make this archetype more feasible and compelling right now.
1. Big-tech and capital market pullback
In the past year, the markets, and especially tech stocks have taken a big hit. This is the latest and arguably the biggest accelerant for the SVSB archetype. Less than two years ago, the venture industry was booming. Now funding has been pulled back, valuations have dropped, it’s harder to raise at every stage, and profitability matters a lot more. At the same time, the ongoing big-tech layoffs mean there are less options to “rest and vest” in safe, lucrative jobs. Hence, would-be entrepreneurs have less to lose by embracing startups, specifically the SVSB approach, given the venture market pullback.
2. Decreasing technology cost and complexity
It’s become dramatically easier to start and run a tech or tech-enabled business in the past few years. Tools like AWS and Firebase let you scale infrastructure cheaply without needing to rip out and replace in the initial growth stages. Small teams with small budgets can build and handle significant growth. Many are predicting that AI will increase efficiency and drop costs even more, especially in pure software businesses (i.e., imagine an AI-powered bot or “co-pilot” for every operation). “Revenue per employee,” which has increased for decades, is an interesting metric to watch and should be more pronounced for companies with more technology leverage.
3. Democratized go-to-market channels
The multitude of mature social platforms and accessible online channels helps teams, however small, reach target users. Savvy growth marketers can upskill fast and figure out how to acquire users at little to no cost, iteratively running experiments across many platforms. Marketing might be as meritocratic as it’s ever been—out with paid, in with organic. Create enough on-brand viral memes and you can dramatically drop your CAC (customer acquisition cost). This is most valuable in sectors where the content consumers are the buyers and the buyers are the end users.
4. Trough of disillusionment with venture scale bets
In a hype cycle, the “trough of disillusionment” comes after experiments fail and limitations appear. We’ve seen promising startups raise big venture investment rounds in fast succession, then fail to meet expectations. Their product-market fit (PMF) wasn’t as strong, enduring, lucrative, or defensible as predicted. Founders and investors are left quietly wondering if theirs is a truly venture-scale bet. Amid this uncertainty, more entrepreneurs are considering alternate routes that could generate wealth more predictably. Building a $10 million business or even a $100 million business—“success” for an SVSB—feels far more attainable than building a profitable decacorn and timing an exit just right.
5. Lower social opportunity cost
The opportunity cost of not doing something can be financial, educational, or even social —e.g., status, identity, and community. The social benefits of running a VC-backed startup seem relatively fewer than they were two, five, or 10 years ago. I’ve been struck by how fleeting the fanfare is now even for startup IPOs. Just as being a college dropout has become destigmatized for founders, so will opting out of a quintessential SV startup path.
It’s clear why an SVSB philosophy is well suited for the downturn, but I expect these high-level tailwinds to continue even beyond the market cycle. Just as the adoption of remote work is outlasting the COVID-19 lockdowns, the adoption of the SVSB model will outlast this cycle. Once builders experience the benefits and share their stories, SVSBs should become a staple of the startup ecosystem.
The paths
Companies that start with the SVSB archetype can stay SVSBs forever—either continuing to operate as private, profitable companies or considering a sale. SVSBs can also morph into traditional venture-backed startups as they see rapid growth and raise aspirations. It’s hard to spot true SVSBs without inside knowledge, but a little transparency can help pattern match.
Within the SVSB model, I see a few funding paths: no funding, minimal funding, and delayed funding. To understand the differences, let’s look at the paths of a few SVSB startups.
- No outside funding: The teen consumer social app Gas scaled with just four core team members in summer 2022. By the end of the year, it passed 10M downloads and $6M sales, reportedly without any outside funding. In January 2023, Discord announced it would acquire Gas and the team, with speculation of a price between $40-100M. (4) Another recent example in the B2B space is Formswift, which reportedly had no outside funding prior to its $95M acquisition by Dropbox in December 2022. Lean teams with no outside stakeholders are, rightly so, attractive acquisition targets.
- Minimal or delayed funding: Calendly, a prosumer scheduling tool, was founded in 2013 and initially bootstrapped with savings, then raised a $500K seed out of need later that year. It didn’t raise again until after an explosion of growth during the COVID-19 pandemic (with $70M revenue in 2020). In 2021, it announced a massive $350M Series B. GitHub and Braintree Payments are other examples of massively successful startups that prioritized profit early and delayed taking outside funding for the first several years.
The practical implication here is that startups might operate like an SVSB in the “0 to 1” phase (perhaps even in the “1 to 2” phase). At this point, teams must ask themselves if the next round of VC funding will supercharge their growth enough to justify leaving the SVSB path.
The later the stage of the business, the better that founders can assess its unicorn/decacorn potential, informing their decision to raise more outside capital (or not) for the “2 to n” phase. Contrast this with startups that take significant VC money on day one and are locked into the pursuit of “venture scale” returns, often even at a detriment to their business.
Of course some transitions between these archetypes (Silicon Valley Small Business → traditional Silicon Valley startup) work and others don’t. What’s telling is that in the graveyard of failed venture-backed companies, you’ll find many that may have flourished if they had operated as an SVSB instead.
The funders
The current Silicon Valley funding ecosystem largely operates on a one-size-fits-all model. To be fair, it’s been a feature of the industry, not a bug, to streamline investment structures (e.g., the poetic SAFE note). But this also ignores non-traditional business paths like the SVSB.
So the fundamental question for SVSBs is “Who will invest?” Can the traditional, institutional VC ecosystem serve SVSBs, or do we need entirely different structures in place? There are a few things to consider:
- Minimum viable funding. The SVSB doesn’t seek large amounts of outside capital, but it might need early investment for three things: team, tech, and GTM experiments. It will want to take shots over a period of time (e.g., 12 to 24 months) at building a profitable business rather than shooting for hyper growth. At the same time, teams have to be cautious not to take in too much outside capital and raise the expectation of return (5). Doing so might “price them out” of building a small- or medium-sized business.
- Non-power law returns. According to Peter Thiel, “The best investment in a successful fund equals or outperforms the entire rest of the fund combined.” Investors want to fund companies that could single-handedly return their fund, measured by a discrete exit event. But if you’re going to invest in SVSBs, you have to accept non-power law returns, i.e., healthy multiples but fewer decacorns or larger. You also have to be patient and prepare for longer time horizons. Prioritizing profit will likely lead to slower growth. Who’s best suited to back these types of deals already? Angel investors, accelerators, and small, early-stage venture capital funds.
- Returns on investment. What happens if an SVSB is slow to exit or never has a liquidity event? You need a way to pay distributions. But debt, royalties, and revenue sharing have downsides for founders and their business. One option that better aligns builders and investors is profit sharing up to a fixed-multiple return. Alternatively, what happens if an SVSB wants to convert to a traditional SV startup and raise big outside capital? You’d need to be able to convert existing investors to equity holders. I’ve seen a few unique approaches here, including Indie.VC and Calm Fund.
- Role of angel investors. The “classic” angel investors were successful entrepreneurs and high-net-worth individuals who bet their own money. But in the past decade, we've seen angel investing move more toward a fund structure. In a world with more SVSBs, the classic angel archetype may reemerge at the center of the funding ecosystem. And furthermore, SVSBs could also be attractive to a newer, growing class of angel investors—those writing small or even tiny checks.
The ideal investor for an SVSB today is supportive of a non-deterministic path—which means either a low probability of a huge return or a high probability of a modest return. In the near term, traditional SV investors may continue to fund the “best” SVSBs because, well, there’s still the chance of the power law return.
All said, there’s no denying that financing an SVSB could be a bit complex. My belief is that finding the “right” economic structure won’t be as hard as making it simple and standardized so that founders and LPs both trust it.
The optimism
If you’re starting a company now, or you’re early in your journey of building one, consider the Silicon Valley Small Business path. While it may not be the right fit for every product or sector, this model can truly serve entrepreneurial teams well and in any market environment.
To be clear, I’m not suggesting the quintessential SV startup path isn’t a good one—there are many great reasons to raise venture capital and adopt the playbooks we’ve seen over the past decade. The SVSB is just one alternate path that’s resonating outside of public discourse. As one startup builder said in response to my original thesis: “New games, new rules.”
I believe the next generation of founders (whether first-time or serial entrepreneurs) will reflect this in the companies they create. We’ll see more SVSBs rise up this year, and new success stories will emerge. And I’m optimistic that as the archetype enters the tech cultural mainstream, the startup ecosystem will adapt to serve it.
If this working theory resonates, please like it, share it, or give it a little love on Twitter. 🙏 I also want to hear your thoughts on the intersection of Silicon Valley and small business. Which startups do you think fit the archetype? My DMs are open. 📨