The golden age of bootstrapped startups is about to begin

The startup ecosystem of the last 3-ish decades has revolved largely around funded players, and it had the assumption ingrained in it that only those funded with deep pockets will be able to play, survive, and win. It has become even more true as the years have passed, even with the trends around "democratization of x"; the irony is not being lost on people. This period has also been about chasing growth, as the highest good, as the highest value, as the highest goal. It has been about measuring the value of companies by metrics like marketing spend or headcount, metrics that might not inherently speak of a company's fundamentals or health. I posit here that the rules of the game are about to change fundamentally; they are about to be rethought.

The great lever of this transformation is the democratizing and barrier-lowering or barrier-demolishing power of AI, though there are some other adjacent trends that will help boost this new paradigm of business building. Before we talk about those, let's pick at the most consequential catalyst and shaper of this megatrend. Gen AI is bringing down the cost of production, the cost of operation, and the cost of distribution, by enormous degrees. The imminent entry of agents to the fore is only going to accelerate this drop in cost, for all three areas of primary concern for a startup. Startups want VC money primarily for 1 capital, 2 validation, 3 network, and 4 resources.

With the sharp decline that we can expect in production costs, and others, capital requirements are going to start nosediving commensurately. As for validation, with the size of the media industry catering to startups, with the extensive interest that more and more people have in the startup ecosystem, with the increasing cultural impact and entrenchment of startups in the lives of people far removed from the tech world, with the number of influencers in the market, validation can now come from far more sources, sources that could be more dynamic, more effective.

As for networks, in a world of Angellist-like platforms, in a world that is so well connected, in a world where the "6 degrees of separation" has gone from being merely something fun to ponder upon to something very real, very usable, in a world where getting access to the kinds of people and networks that might be useful for your purpose has become ever so easy, "the network advantage" that VC firms could provide just doesn't cut it anymore. As for resources, there is a cottage industry of startups catering to any and all needs of startups, helping startups solve the kinds of problems they would have needed VC expertise for a few years back. All of these are allowing startups to become ultra-efficient in doing business, on their own, needing minimal assistance.

Then there is the issue of returns, which for most VCs are worse than S&P 500. That is some glaring indictment, but it also is a sign of things to come - of a state that cannot sustain itself. From one perspective, their hits ratio is no better than if you'd a chipmunk to select a batch of prefiltered companies. VC has been a glamourous industry because of the outliers, the promise these outliers have created for the hoi polloi [the startup world is exactly the same in this regard, it has far more allure and glamour from the outside-in than the actual ground reality]. These results are noticed not just by those who fund VC firms, but also by founders, many of whom have in mind the reputation that VCs are smart enough to be in tech, but not smart or ambitious enough to actually build, and so lack the very smarts or the very alpha or the very edge you need to win out these ultra-competitive tournaments. Bring all this together and you start to see that VC money is just not as shiny as it used to be. In fact, the many stories of VC-funded founders who end up with pennies on the dollar despite their babies getting a bonanza deal are only deterring more founders from choosing the path of a VC raise. Adding to this is the fact that in most cases, choosing the VC fundraising path takes away from the very autonomy and freedom the founders got into the game for. As the saying goes, as soon as you raise your first dollar, you stop being the owner. Or something along these lines.

The trend lines too point in interesting directions - the accrued wealth in a large group of the population is increasing, and this increasing disposable income allows far more to take the bets, on themselves no less [the very best kind] that would have been simply inconceivable back in the day. An illustration of this could be those who might have been interested in business, in doing an MBA. They could attain far more knowledge and far greater skills, at the same or lower costs, by actually building and selling, the very point of business. A lot more people have started to think along these lines.

We are also likely going to see more capital accumulation at the top companies, with a decrease in the number of unicorns, for reasons ranging from a deeper focus on hardware and the really hard problems, as the lower-hanging software fruits have been picked clean off, the lower margins as AI diminishes the moat size of almost all but the behemoths, even them, in many cases. Then, we have the market conditions - increasing debt and interest rates, which make the ZIRP-era bets look absolutely ridonculous.

As software has taken over the world, and as AI will take over the world again, the evergreen opportunities will become ever more lucrative - local businesses, community businesses, and physical businesses, as the ROI in software for almost everyone but in the 0.1% echelon becomes unexciting.

We will also see more local versions of established businesses.

Because beyond a certain point, economies of scale don't apply, and sometimes, the curve inverts past a certain point, among other reasons like EU's and China's regulatory stances. Take Uber, for instance. We will see an open-source Uber equivalent, that will be adopted regionally, taking in consideration all the nuances of the place. We will be seeing many local Uber-like businesses pop up around the world.

This model just doesn't excite VCs, with their aversion for anything below a centi-million dollar outcome which means an ever larger proportion of businesses are not going to be VC-compatible.

Most companies don't need VC funding, more so today than ever.

Most companies shouldn't be optimizing for hypergrowth, more so when there are fewer and fewer growth pockets to pick at.

More and more founders and companies will realize that focusing on sustainable KPIs like user satisfaction and user retention is by far the better path than focusing on things like user growth, marketing spend, etc.

They will, in other words, go to the central tenet of a founder's Bible - providing great user experiences. For too long, the tech world's success metrics place funds raised as the target, and as Goodhart reminded us, when a measure becomes a target, it ceases to be a good measure.

My prediction:

Competitive, global-scale, bootstrapped startups are in. And they are about to become sexy.