Small is the New Big: Start-Ups, Micro-Funds, and Beyond

By Allison and Maria
June 12, 2024

Three weeks ago, we caught up with a good friend who is a former successful entrepreneur. He sold his company a couple of years ago and is now advising several startups. He was amazed by one particular company he’s coaching: a consumer business with $25M in revenue, 70% gross margins, and $6M EBITDA. They have a tiny team—just three full-time employees and a couple of part-timers. They raised a small amount from friends and family and are very content with their business. Our friend reflected on his own experience with the larger company he built and sold, where he had raised significant capital. What really struck us were his words: "If I were to do it all over again, I wouldn't want to raise big VC. I would keep the team very small and do things differently."

We hear stories like this more often lately and are seeing a trend: More people are deliberately choosing to stay small and build companies differently. We have noticed that the happiest businesspeople we meet these days are entrepreneurs running smaller, profitable businesses deeply involved in their communities. Many have experienced success in bigger corporations and understand that the bigger you get, the harder it is to maintain your culture and keep a growing team happy. While there are certainly advantages to being big, and amazing companies like Patagonia that manage to keep their soul after they grow, we're noticing a trend of successful people who could go big choosing instead to stay small.

We see similar advantages in running a small fund. Despite opportunities to grow our AUM and raise more money, we have deliberately chosen to stay small. The reasons? We can truly stay true to our core values, we like the discipline of capital constraints, we don’t want to have a big team, we can find good deals that most VCs don’t find interesting because they are too "niche", and ultimately, we can make decisions that are not just purely financial, which is what sometimes happens when you have too much capital and too many LPs.

It also took us a few mistakes to understand that as a smaller fund, we need to invest with a different approach than traditional VCs to make our numbers work. This approach is more focused on hyper capital efficiency and survival skills in the early stages. We still benefit tremendously from venture “home runs” in our portfolio, but our portfolio composition and risk profile need to be a bit closer to private equity than most VCs. We believe that this approach not only benefits small businesses but also provides a stronger foundation for companies going the traditional venture route. It’s all about minimizing waste in the early stages when most companies pivot anyways and take a lot of time to nail their product-market fit and business model. We believe that capital constraints at that stage will only make your company stronger once you get to the growth stage.

We have many examples of this in our portfolio. For instance, Uqora, one of our early investments focused on women’s health, raised less than $2M, had a team of 2.5, and went from launch to exit to strategic in four years. In retrospect, they benefited a lot from staying very lean and not having the opportunity to raise as much as they initially intended because that increased their optionality. Had they raised more capital, they would have to grow a lot more to get a good outcome. This capital constraint kept them very focused; they nailed PMF and their business model quickly. They had a lot of options by the time they reached 8-digits in revenue. They ultimately decided to sell their company to a strategic buyer, and it was a very successful exit for founders and investors alike. But they could have kept growing the company and raised growth capital with great terms and a very good business foundation.

Whether in the realm of micro-funds or startups, the trend toward smaller scales is driving significant innovation and success. We believe that small is the new big. There is a lot of energy in a generation of entrepreneurs who are pragmatic, innovative, and want to use their business as a way to serve others and make the world a better place. These entrepreneurs are not so interested in getting in the next YC batch or getting Sequoia’s funding. They understand that “small is the new big” and are ready to do it differently this time.

Do you know any entrepreneurs ready to do things differently? Do you know other fund managers who see their small fund size as their greatest strength? Send them our way! We need to grow this new entrepreneurial ecosystem where we, small funds and non-traditional entrepreneurs, can thrive.

Maria and Allison

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