The way we build startups is changing.
Software didn’t just eat the world; it spewed out a new one. The internet enabled us to build an intangible global economy, and software is both the mechanism, and much of the output.
Those building know it’s becoming easier to do so. An AWS economy, barriers to entry falling away on a near-daily basis and the potential for infinite distribution. It might be the make-up of the intangible economy, but building software can be highly tangible: pattern-recognition, predictable growth levers, to constantly foreground an up-and-to-the-right journey of growth and profitability.
The underbelly of building is, and always has been, funding. That’s changing too – and in concert with changes in the market. It’s these shifting sands that I’m concerned with in this post.
We’ve touched on it being cheaper and easier to build software companies. Understanding this in combination with funding requires us to think about what can be built at this stage of the market.
Hyper-specific, profitable, company-building
The answer is narrow, vertical businesses designed to solve single, specific problems. Companies like Headlime, which helps writers generate better headlines, ConvertKit, email marketing software for creators, Fathom, who are building a privacy-focused alternative to Google Analytics, and Transistor, a podcast hosting and distribution platform.
These businesses share a couple of things in common. They focus on one thing, which they do extremely well. They’ve also all hit yearly revenues of six or seven figures, with no outside capital, and with tiny teams – often just one or two people.
Here’s Danny Postma, founder of Headlime, talking on IndieHackers about selling the business for a seven-figure sum within 8 months. He’s now (post sale) working on Tailory, a marketplace to buy and sell Tailwind CSS components. ConvertKit, under founder Nathan Barry, has grown into a $29m a year business – from a bootstrapped ‘solo’ (just Nathan, a former freelancer, funding it) business. Fathom targets bootstrapped companies because it is one. Its founders Jack and Paul run a small team and deliberately small tech. And Transistor makes over $1m ARR with just three employees.
These are micro-startups making and selling great products in a meaningful way. They are deliberately small and mighty, and are, by design, rejecting the VC model we so closely associated with how you shape and build a software company and its growth.
So we now have SaaS founders – often serial, having done it a number of times – funding and running profitable companies.
The VC’s lunch
To date, the standard VC routine has covered off both growing your business, and exiting it. Outside investors join the board and cap table and keep the pressure on, often from pre-product to exit.
That’s fine, and it’s an incredible model which has underpinned software for well over three decades. For a founder, it means a decade plus of intensely hard work, followed by – if you stay alive – walking away with 5 or 10 percent of your business. It’ll likely be no small sum (you’ll make between $50m to $100m on a “unicorn”) – the dilution is likely worth the effort.
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But now, we’ve got an alternative route. Founders – often serial – know the SaaS/startup playbook and it takes them a matter of months to take a deliberately small, self-funded startup from inception to tens, if not hundreds of thousands a month in revenues. They’re answerable to no-one but their customers, themselves (if they choose to keep running it), and can sell it for a healthy multiple of revenue.
If they need to plug any growth-stage gap, they can now do so with non-dilutive funding mechanisms – cheaper than when capital is for equity. Companies like Pipe, Founderpath and others are enabling software businesses (well, any business with recurring revenues) to advance the value of their contracts, or borrow against their stable, recurring revenue.
In this universe, of bootstrapping to several hundred thousand per month in revenue, a founder can walk away with $5m, $10m, $20m (depending on the multiple) in around half the time it’d take to build a “unicorn”. That capital can be deployed or invested straight back into the ecosystem.
Buy a job, sell a job
And now, we have companies making selling – and buying – companies really easy. A couple of weeks ago, I got the opportunity to invest in MicroAquire. This is the company, run by the brilliant Andrew Gazdecki, enabling companies to be acquired: a marketplace for builders on both sides of the equation.
I first spoke to Andrew after tweeting that someone should build a fund specifically to buy up companies on the MicroAquire platform (we’re now truly in the era of the DM investor!).
What I find fascinating is that a SaaS founder-investor can now do a number of unprecedented things: one, they can buy a job – purchase and run a $4-7k MRR SaaS business as (in place of) having a job. Profitable SaaS, and a shortcut to founding a business.
Two, continue the trend of emulating private equity at a far, far smaller level: raise capital – or use your own – and roll-up companies. It’s too early to see what the network effects of this are, but I don’t think we should assume that rolling up will invariably mean consolidation: these businesses could remain independent, stronger because of each other and how they’re owned, funded and managed, but part of an essentially decentralised system.
The solo PE fund
Other (micro-PE) companies deserve a mention here, like Microangel and XOXO Capital. The beauty of the PE model – and now being enacted in miniature – is that it brings liquidity to a business – and to its founder(s) – while also building out a new asset class. Software is built for it, not just because margins can be so significant, but because now, profitability can occur fast and early. Bundle these businesses, and you’ve got a potent chunk of value: sellable, investible and growable.
What does that mean for founders? There’s certainly never been a better time to be in the market. We can invest as well as build: operators and backers at once.
It probably also means we’re in a vanguard of builders and that, in theory, we’ll see one-person unicorns. Profitable, powerful businesses that are also (thanks to MicroAcquire) liquid and tradable assets in and of themselves.
I’m interested in speaking to anyone building in this space – and those building and investing. Let’s move the needle even faster.
This piece was editorially supported by HSG, the content firm that helps startups, investors and entrepreneurs become media companies.