Rise of the Silicon Valley Small Business

Theory #7 | An emerging entrepreneur archetype & prediction for the 2023 startup ecosystem and beyond

Jan 12, 2023

Update: An expanded version of this essay was featured in the tech publication Every.

In 2023, we’ll see more Silicon Valley startups that operate like small businesses.1

And some of them will have big outcomes. Perhaps even billion-dollar ones.

I call this phenomenon the Silicon Valley small business (an SV-SB for short).

So what’s the archetype of a Silicon Valley small business? How do they differ from traditional SMBs and tech startups? And, why now?

The Archetypes

I see 3 relevant archetypes — (1) the traditional small business (2) the traditional Silicon Valley startup, and (3) the Silicon Valley small business. While they have similarities, they’re defined by the differences across their business objective, team, strategy, financing 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. carpenter, 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.2

These small businesses are capital constrained and 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 count hundreds, 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 it for years, and hope for a huge exit (and get some status and stability while doing it). 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 SV-SB, 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. You might see more solopreneurs and studios (and LLCs instead of C-corps). They value autonomy and flexibility. They envision a range of potentially good outcomes — not binary, all-or-nothing scenarios.
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 less than 10). In my experience, startup teams above this size are forced to operate very differently — much slower, with more bureaucracy, and less alignment. But below the threshold, a savvy team can 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), SV-SBs aren’t just trying to build “lifestyle” businesses or modest passive income streams. They want to scale, as quickly and efficiently as possible. The desire and often the know-how to scale separates them from traditional small businesses, and their focus on doing it leaner and profitably can separate 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. Perhaps they raise the equivalent of a friends & family or pre-seed round but not much more. They look for capital-efficient businesses and prioritize profit alongside growth early on. 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.”

The teen social app Gas, which has scaled with <5 team members, is a recent model of the SV-SB archetype. Still, companies that start with the SV-SB archetype can morph into traditional Silicon Valley, venture-backed startups as they see early success and raise aspirations. Calendly was initially bootstrapped with savings and a small business loan before taking in significant VC money.

Of course some transitions between these archetypes work, and others don’t. What’s perhaps telling is that in the graveyard of failed venture-backed startups, you’ll find many that might have flourished if they operated as an SV-SB instead.

The Tailwinds

So, why are we poised to see more Silicon Valley small businesses now? Well, I see a few conditions that make this archetype more feasible and compelling right now.

Decreasing technology cost & 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 for a while. Small teams with small budgets can build and handle significant growth.
Democratized go-to-market channels.
The multitude of mature social platforms and accessible online channels let teams, however small, reach target users. Savvy growth marketers can test and upskill fast, figuring out how to acquire users at scale for little to no cost. This is most valuable in sectors where content consumers = buyers = users.
Big tech & capital market pullback.
This is the latest and arguably biggest accelerant for the SV-SB archetype. Less than 2 yrs ago the venture industry was booming, but funding has pulled back, valuations have dropped, it’s harder to raise at every stage, and profitability has become just as important as growth now. Couple this with big tech layoffs and many would-be entrepreneurs have a lot less to lose. It’s not only easier to be an SV-SB than it once was, it’s harder to do the opposite.
Lower social opportunity cost.
The opportunity cost of not doing something can be financial, educational, or even social — e.g. status, identity, community. The social benefits of running a vc-backed startup seem relatively fewer than they were 2, 5, 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, so will opting out of quintessential SV startup paths. Social benefits will accrue non-linearly.

I expect these tailwinds to continue through the downturn and beyond. For most of 2022, startups were told that they needed to aggressively adapt to new times. While it may not be the right fit for every product or sector, the “Silicon Valley small business” is an adaptation that can serve truly entrepreneurial teams well. Regardless, I expect to see more SV-SBs rise up this year and more success stories emerge. And I’m hopeful the archetype will enter the tech cultural mainstream, and perhaps the startup funding ecosystem itself will even adapt to serve it.

If this working theory resonates, please consider sharing it with someone who might like it too (and give it a little love on Twitter). 🙏 I’d love to hear your thoughts on the archetype and startups that might fit it — DMs open. 📨

‘Silicon Valley’ here is used, as eloquently explained on Wikipedia, “as a synecdoche for the American high-technology economic sector … a global synonym for leading high-tech research and enterprises.” I use it as an archetype, not a geographic limitation.

The size of a “small business” varies by who defines it. The OECD (Organisation for Economic Co-operation and Development) outlines different categories according to size. “Small and medium-sized enterprises (SMEs) employ fewer than 250 people. SMEs are further subdivided into micro enterprises (fewer than 10 employees), small enterprises (10 to 49 employees), medium-sized enterprises (50 to 249 employees).”