Some Tiny AI Startups Are Reaching $100,000 a Month Without Venture Money
Investors say already profitable teams are skipping fundraising, which could force giant funds to justify their size.
This Week in Startups · Why a Do-Nothing Congress could be great for markets | E2359Startup investor Jason Calacanis says he is regularly seeing tiny AI startups reach $10,000 to $100,000 a month without raising venture money.
He calls these companies alicorns. He says a unicorn is a company valued at $1 billion, while an alicorn has wings and flies over funding rounds.
Calacanis says two or three people can build a product with AI, sometimes on weekends, and get to revenue. He says many of the companies he sees then come to investors and ask whether the business is ready for venture money.
He says many do not want to raise money because they are already profitable. When they ask why they should raise, he suggests a rainy day fund that could let them buy others and become the acquirer in a market pullback.
Investor D.A. Wallach says these founders often do not want a venture capitalist on their board or the fundraising process of the past 20 years. He says they're "financing their companies through their social network."
Wallach predicts this pattern could challenge giant funds, including one that recently raised $10 billion. He argues it is very hard for a fund that large to deliver the very high rates of return venture backers historically expected.
He predicts small, agile funds deeply connected to young founders' social networks could have the best shot at backing these capital efficient companies. Venture investor Tomasz Tunguz offers one version of that model, with a roughly three-year-old firm that has raised less than $800 million, backs roughly 10 startups in each fund, and sends staff to help build sales operations.
Questions people ask
Why would a profitable startup ever take venture money?
It can provide a cash cushion, help hire faster, fund acquisitions, and lend credibility with customers and recruits. The tradeoff is giving up ownership and accepting outside control, including a board seat and pressure to grow very fast.
Why is a $10 billion venture fund harder to run than a small one?
A venture fund usually must return two to three times its size to satisfy its backers. A $10 billion fund must therefore create $20 billion to $30 billion in gains, which requires many huge winners or very large ownership stakes, both harder to find.
What does a small venture fund actually do besides write checks?
Along with money, they often help with hiring, introductions to customers, and building sales and marketing. In Tunguz's example, his firm places experienced staff inside young companies to build those sales functions.