Building Mighty Small Businesses

Pushing Back Against The Loudest Models in Venture Capital

Feb 15, 2025

This is a weekly newsletter about the art and science of building and investing in tech companies. To receive Investing 101 in your inbox each week, subscribe here:

What Is The American Dream?

More and more, American Exceptionalism is being put on trial. Declining quality of earnings, healthcare, home ownership; it has all called into question the quality of life in America.

But the concept of the American Dream wasn't just marketing fluff. It was a tangible force that moved millions of people. From 1850 to 1930 the number of foreign-born people in the US increased from 2.2M to 14.2M. Immigrants became almost 15% of the population. In one generation, 12M people found their way to America. Through intense sacrifice, they came looking for something here that they didn't think was available anywhere else.

So what were they looking for?

In one survey, when asked "What does achieving the American dream mean to you?" the results shed light on what people came to America looking for.

Freedom to live how you want (67%)
Homeownership (47%)
Education & a job (41%)
Starting your own business (35%)

Freedom, first and foremost, to live how you want. That was, and still should be, the goal. But once you have that freedom, what do you want to pursue? A home to call your own, and the education and livelihood to enjoy that life. The only other thing that comes close to making its mark on what it means to achieve the American Dream? Owning your own business.

Immigrants and natural-born US citizens alike took to self-employment as a key component of their self-actualization. In the early 1900s, a key way people made their living was owning their own business (think farms, general stores, repairs). But since the 1950s, the percentage of people who are self-employed has decreased from 18.5% to ~6.3% in 2022.

While the number of people who are self-employed has been trending down, you also had a sort of downward-to-stable trend of new firms being created, at least until Covid.

Source: FRED

Amjad Masad, the CEO of Replit, made a great point in a recent interview about how entrepreneurship has been defined at different points in time:

"The way we define entrepreneurship today in Silicon Valley is you build a venture scale business. The way America defined entrepreneurship pre-Silicon Valley is ‘anyone is able to build the business.’ If you look at the numbers of firm creation, it [was] trending down since like the 1960s or 70s. There was an uptick with Covid because Covid got a lot of people to quit their jobs and start online businesses. I think the form of entrepreneurship that will come back is the more small business entrepreneurship."

Despite the feelings of yearning in the American soul for business ownership, its been trending down. Covid represented enough of an economic upset that we saw a surge in new businesses getting started. That is good news. But the bad news is that this new generation of entrepreneurs is teetering on the edge of being co-opted by a very loud minority of single-minded "hustle hacker" VCs solving for a very specific economic outcome.

Don't Let Your VCs Dream For You

The Social Network inspired a generation to normalize startups as a career path. The amount of time, energy, attention, hype, and capital being thrown at startups is like nothing we've ever seen. Already this year, we've seen several companies raise more in funding than the entire venture industry was deploying each year during the 90s. Today, we actively traffic in denominations of "multi-billion dollar outcomes," forget about billion dollar outcomes, or hundreds of millions of dollars.

Now, don't get me wrong. That isn't necessarily bad. There is a lot of progress that gets driven forward by building large businesses — SpaceX, Anduril, Stripe — these are great businesses that can be even greater by being even bigger.

The problem is that the majority of the energy driving the "massive ambition + massive capital = massive outcome" paradigm we currently are living through, it doesn't benefit the founders, or the employees. It benefits the investors.

I've written over and over and over again about the business model of venture capital. The reason I think I spend so much time trying to articulate that business model is because I'm shocked by how rarely founders fully grasp the implications.

There is so much math to indicate that the power law of 20% of companies driving 80% of returns is real. But the ungodly amounts of hype, energy, and capital that has been poured into that funnel has transformed the power law to the point where really, only 1-5% of the companies actually end up mattering.

Now, when you're a VC with a portfolio. That's fine. It used to be 3 in 10 would matter, now 1 in 10 matter. That's fine as long as I find a "one" to matter. But for a huge swath of founders and startup employees, that means that 90%+ of you are getting left on the scrap heap of history with the tattered remains of a business that could have been something special, but instead it was over-burned into a rounding error on somebody's billion dollar fund math.

The Leavings of a VC's Playtime

This image is insane:

I once tweeted this image and said "We should build a monument of this image as a memory to an age of hubris and excess." And I meant it. But not as a way to throw shade at the founders of these companies, but shade at the investors who set this system up.

Think about it. 1,191 startups valued at $1B+. Some of them are worth tens of billions. But even if you assume that each one is just worth $1B, that's $1.2 TRILLION of equity value. For a typical investor, you hope to at least generate a 3x return, which means the VC ecosystem writ large is assuming that, from this pool, they can generate $3.6 trillion in value from these companies.

Again, maybe that's not insane. But think about this. From 2012 to 2023, ALL of the tech IPOs after Facebook generated just ~$700B of market cap.

Here's a key point: for VCs this model can actually work fine. If they get into the ONE company that matters, all the math can shake out.

But when it comes to the power of entrepreneurship to provide founders, and founder-adjacent early employees, with the self-actualization inherent in the American Dream... it doesn't really work.

In a Bloomberg piece this week, Katie Roof articulated the stark reality for the vast majority of companies that get left behind in the wake of the current venture paradigm:

"In 2021 more than 354 companies received billion-dollar valuations... Only six of them have since held IPOs. Four others have gone public through SPACs, and another 10 have been acquired, several for less than $1 billion. Others, such as the indoor farming company Bowery Farming and AI health-care startup Forward Health, have gone under.

Many startups, though, were built to chase growth with little concern for near-term profitability in their early years, assuming they could continue fundraising at increasing valuations. In many cases, that formula no longer works. Fewer than 30% of the unicorns from 2021 have raised financing in the past three years. Of those, almost half have done so-called down rounds, where investors value their companies at lower levels than they’d received in the past."

This is, in simplest terms, a lack of product market fit. Venture capital has orchestrated a specific product: "massive ambition + massive capital = massive outcome.” And what this data is indicating is that that product wasn’t a fit for the vast majority of startups who took part in it.

My fear, as I've talked about over and over again, is the danger of venture capital's formula coming from the loudest voices. People with multi-billion dollar funds are shouting from the rooftops: "massive ambition + massive capital = massive outcome." And for a small percentage of businesses, that can be true.

But for the vast majority of entrepreneurs, startups, (and even smaller investors) that does not work. And the danger is that those voices are SO LOUD that they drag a generation of business builders into their very eccentric model, and in the process destroy a generation of businesses that COULD have mattered, but now will never be more than write-offs and disappointments.

There has to be a better way. In fact... there IS a better way. And people are executing on it. And more people should take a page out of that book. Because I want more people to build awesome businesses and be successful. For most of you, you won't be the next OpenAI or Databricks or Shopify. And that is okay. Honestly, you don't need to be the next behemoth tech outcome. And if most of you were honest with yourselves, you wouldn't WANT to be the next behemoth tech outcome.

There is a better way.

Building Mighty Small Business

Last week, Natasha Mascarenhas had an amazing, exceptional, eye-opening piece in The Information called "Why Early-Stage Founders Are Opting to ‘Seed-Strap’ Their Startups." You should just read it all because its so important. But I'll quote extensively from it here to, so I can drive home my point:

"Startups such as coding assistant Cursor and legal AI software-maker Harvey have become fundraising beasts, raising hundreds of millions of dollars in rounds just months apart. But some founders are bucking that trend, instead opting to “seed-strap” their businesses, using revenue to expand operations after an initial round of venture capital.

Wesley Tian, CEO and co-founder of Aragon AI, is an example of a seed-strapped founder. Tian raised less than $1 million from angel investors. The company hasn’t touched the capital and has no plans to raise more, said Tian. It’s also been profitable over the last two years, generating more than $1 million in operating profit since launch. Tian said he’s been able to keep costs low with a small team and a lot of “eating PB&J sandwiches.”

Not every entrepreneur dreams of running a 100,000-person company and going public. Some think that “if they can take control, have a good life, build cool shit and make $5 [million] to $10 million a year,” they’re probably better off than founders who end up with small stakes in their own company after selling most of it to venture capitalists to raise cash.

“So many founders have heard so many stories of people swinging for the fences, having these massive valuations, only to hear that the outcomes” weren’t as successful as they had hoped."

So good. This is exactly what I'm talking about. Even if you could snap your fingers, get a wish from a genie, or sell your soul, and ensure with 100% certainty that you would be successful and build a $100B business, most people would actually not enjoy that experience. I have a whole other piece I want to write on what kind of person wants to run an empire, but for the majority of normal people the idea of what these founders are describing — "take control, have a good life, build cool shit and make $5-10M a year?" That's the goddamn American Dream.

When people hear "small business" they think boring mom & pop shops. But that description above? That's a small business. Albeit an incredible small business.

I think ALL THE TIME about Think-cell. A Berlin-based tech company that built a PowerPoint plug-in. Boring, right? Welp. Turns out it was used by 80% of Fortune 100 companies, had 800K users, only ~75 employees, and was generating $200M+ in revenue with 62% profit margins. And it never raised money. That means the founders were printing $100M+ in cash each year.

And here's the craziest part. In our world of $10B+ outcomes and trillion dollar markets? Think-cell is a small business. That is achievable. And you don't need to raise $1B+ across 6+ rounds of funding to achieve that type of outcome.

Even if you’re still not successful, it is SO much easier to try and fail if you’ve raised ~$1M vs. if you’ve raised $200M+ at a $1B valuation. You should start a business because of what you can achieve in building a business — not because you want to make your VCs money.

And that has never been more true than it is today. With better and better distribution mechanisms — YouTube, TikTok, Substack, X, Discord. With better and better creation mechanisms with generative AI. It has NEVER been easier to build a business than it is today.

What makes starting something feel hard is not the ability to start, but the weight of the expectations. But you have to stop and ask yourself... why do you have those expectations?

And if its because the loudest models with the most capital have been shouting "this is the way" since before you got to high school, then you need to step back and recognize that you've been programmed. That expectation of "I need to raise a lot of money to grow super fast to raise a ton more to get really big to hire a ton of people to be a platform to own a huge swath of a massive market..." It's programmed. It is not reality.

It doesn't mean you can't pursue those things. But what it does mean is that you DO NOT HAVE TO. There is a different way. You have to pick a path that best suits your personality, ambition, and desires. And I have to be honest. Even though it spits in the face of my job as a venture capitalist. The vast majority of you should not raise venture capital. At least not the institutional kind. Friends and family? Great. Angels? Amazing. Small funds with measured expectations? Outstanding.

Institutional venture capital has morphed into an intense ambition machine.

They are solving for the 1% of companies.

Don't let them force you into becoming part of their 99%.

Don't let your VCs dream for you.

Dream your own dream.

Thanks for reading! Subscribe here to receive Investing 101 in your inbox each week: