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The next wave of startups: smaller, scrappier, and making money

I think we're about to see a resurgence in smaller, more capital efficient startups. This new breed of company will be a startup by definition - a company that is still figuring out what it is, and how to best serve its customers - but won't necessarily be funded by venture capital. Correspondingly, it will have less of a financial cushion to sit on while it's figuring things out, and will need to start taking revenue earlier.

My prediction is based on a few things. Firstly, venture capital has been shielded by the "what if" stories told about a few mega-unicorns that seem to be getting more and more valuable. Those mega-unicorns - companies like Uber - are now finally finding liquidity, and the rubber will meet the road. Uber's IPO isn't likely to go as well as some investors might have hoped, and that's nothing compared to WeWork, which has also filed to go public. Stories about growth will give way to market realities, and the serious losses incurred by these companies will be felt in the returns of every venture capital fund that invested in them.

Secondly, we're hearing some noises about antitrust reform - from both sides of the political aisle. It remains to be seen if Elizabeth Warren's proposal to break up big tech companies bears fruit, but it's likely that there will be some changes here. Venture capital depends on companies that grow incredibly quickly and own a market - or, to put it another way, companies that tend towards monopoly. If they are disallowed from becoming monopolies, their growth potential is limited, and the amount of money that will be readily invested is correspondingly reduced.

Thirdly, some LPs - the people who put money into venture capital funds - are slowing down or being blocked from investing at all. Investors from Saudi Arabia are, rightly, now being turned away in the wake of the Kashogghi scandal (although its human rights record was indefensible long before). China's economy is also slowing down. This, together with knock-on effects from my previous two points, may affect LP enthusiasm, and it might start to get harder to raise a VC fund as investors look to other markets.

Finally, we're beginning to see more viable alternatives to VC, both for ethical reasons and because it's becoming more apparent that not all startups have the right growth profile. Alternative funding sources tend to be revenue-bound, and these necessarily mean lower investment amounts. Because these deals tend to promise to return a fixed multiple of the initial investment amount, startups need to be careful: if the multiple is 5X (which is pretty standard for these deals), taking a $10M check becomes harder to argue for. Nobody wants to commit to paying out $50M if they can avoid it.

All of which means that time to revenue will need to be reduced, and burn rate (the amount of money you spend beyond the money you take in) will need to shrink significantly. Correspondingly, services and tools that allow you to hit revenue milestones quickly (vs, say, user growth hacking) will become much more valuable parts of the ecosystem than they are today. Similarly, reducing burn by letting teams build revenue-generating software more quickly and with fewer engineers will be key. I'd expect Microsoft to be in front of this very quickly. Finally, remote teams who aren't located in the usual, high-rent cities will become more commenplace, and tools to manage those teams will become more necessary.

There's a common fallacy that startups should ape Twitter's early strategy - which is to say, grow really fast and figure out a business model later. It's a bad idea: most entrepreneurs aren't Ev Williams and don't have his resources or investor goodwill. This has always been true, but figuring out a business model early will become even more imperative in the future. For example, most founders don't think about performing revenue experiments - something we're trying to make easier with Unlock - until much later in their lives. It's something that I'd argue founders should now be thinking about in week one.

In some ways, it's a return to an era of tech that I honestly enjoyed more: one that isn't so much about making billions of dollars as people getting ventures off the ground to become viable businesses that produce cool software. Even if my predictions turn out to be wrong (and they may well), I think we're seeing a swing of the pendulum back to smaller businesses, and a tech world that's much more about possibilities than it is about being a financial vehicle for billionaires. I, for one, welcome this with open arms.