Tech Startups are Shrinking!
The high burn, big spending technology startup might be dead.
Richard Branson once famously announced that a business should not employ more than 100 people to stay agile and innovative. Instagram only had 13 employees when it was bought by Facebook for $1 billion in April 2012. They had closed a $50 million private financing at a valuation of $500 million right before the sale and had accrued 30 million users. Not bad for a 13 man crew. Today a tech startup with more than 2-3 people at inception looks unusual. And, using AI correctly this same mini-team could scale a business through to early product launch without adding significant numbers of employees. Each original team member, in effect, becomes an expert in scaling their function with AI, not people.
Instagram getting bought for $1 billion in 2012 with just a few employees was an outlier - or just the way it swung for Zuckerberg. After all, a little while later he bought WhatsApp for $19 billion and they only had 50 employees. But maybe he was just prescient or digged small teams - perhaps something he should remind himself of today. And those companies were outliers. But the average number of employees in a blockchain company at Series B is around 50. So for that to be average it means something has changed. What was extraordinary in earlier tech times has become normalised in the 2020’s. And isn’t that the way of technology?
With the AI barrier having been breached it means a quantum leap in automation and an emerging AI enabled generation.
The implications for technology newbies, venture capital funding and the entire venture model will be fundamental. An entirely new model is emerging. All hail innovation 3.0!
Today a tech startup is unlikely to begin with more than a couple of people and could continue like this until it is ready to launch in the market with a minimum viable, yet commercially sound product. With one of the initial founders worrying about the tech, one focused on the product and one worrying about the customers. They all worry about money.
The founders will increasingly become architects and not day to day builders. The technology leader plans, designs and develops the solution - software code is cut by Gemini or Builder AI. Testing is automated. The process of software development is accelerated. What took years takes months.
Designs are developed by Adobe and Figma AI and not pixel for pixel by humans. Customer marketing is generated and delivered by ChatGPT and MidJourney with the optimal bundle of new marketing AI apps. Customer support is automated with AI FAQ’s and support bots, not by people. Even the work around compliance, legals and multi-country regulations can be short cut using AI.
“Startup leaders will become conductors of a new kind of orchestra with dystopian, android musicians.”
After successfully launching their product this new model tech startup will not likely employ more than the equivalent of 5 full time employees to scale the venture and after this it could scale more widely and achieve profitability with a team of just 10 equivalent full time employees. For each employee, the function they operate becomes a series of interconnected AI enabled software systems and robots. One employee will be able to do the work of 10 people or more with the right AI automation around them. Retaining these team leaders will be more important than ever - until AI replaces them too!
“Leaner is meaner - than ever.” A fitting strap line for the cost of living crisis generation.
And perhaps this ‘equivalent full time employee’ thing is not actually 5 full time employees and more like 10 half time employees or 15 third of time employees. Like slices of a Domino pizza pie! They will work remotely and maybe half of them will be robots and not humans. Virtual office systems will rule. Google Workspace AI versus Microsoft-cum-Open AI. Notion loitering in the background trying to nibble at their vegan salad buffet bar.
The number of human workers will stay fixed and it's just the number of AI functions and robots that grow.
The investment required to build these ventures will be increasingly in software, machines and data, less so in people. The founders and leaders will need to be domain experts more than ever with deep insights into the new ways of working and the markets in which they operate. Experience might become ever more valuable - more than sheer youthful energy and startup hutzpah! You know, more Donald Trump than Nikki Haley. Oh, wait…
After all, the skills to architect, puzzle together and operate the right products, processes, data and delivery will be different to just bashing out raw code and separate A/B testing teams. It requires computer design skills and machine handling more than picks and sticks. Startup founders will be the business equivalent of SAS special ops troops that operate in very small teams but have the capability, intelligence and technology to win an entire war - behind enemy lines. Like dropping in behind customer lines - being, for once, actually with them. Kind of creepy really.
As a result of this, the capital required for pre-Seed and Seed stages of financing could shrink - perhaps even by a factor of 5. Founding teams will be able to get further into the commercial launch of their product through their smarts and new technology rather than good old fashioned, analogue money. Series A rounds - with all the ‘investor preference’ terms that come ‘along for the ride’ might become smaller and easier for all. The start-up world just might be set to get bigger and badder. Just not in the traditional way.
Forget the smartphone, the smart-venture will be the future.
Cycle times will be quicker and founding teams increasingly empowered. Investors will need to adapt - responding faster, working more collaboratively, evolving their deal terms and restructuring to support a larger volume of smaller investments in a larger number of startups. They will use AI to help with pitch deck reviews, research, due diligence, pricing and to add operational and strategic value to the businesses they invest in. They will want to get in earlier as that is where the smart-money will go.
New venture operators like LettsGroup are pioneering this shift - even going as far as developing their very own AI venture factory based around an innovation methodology they have been developing over 15 years. They build and invest in ventures that have disruptive inventions but also disruptive ways of scaling through AI and automation. They are major players in the shift to AI - not just passive investors in it. They have their own ‘lean’ methodology called the Size Zero philosophy.
Perhaps AI will not just change the nature of work, but the very mechanism by which innovation happens. If we can build new ventures in fundamentally new ways then perhaps the economic value that they create will enhance the society in which they operate - not just maximising the profit they extract from that society. And if this does happen, we can truly make the shift to Web 3 - the third and potentially the most important phase of the internet. The distributed internet, designed to empower us all - just more equally this time.
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