The VC-Funded Company Is an Obsolete Organizational Form
Here’s a story you’ve heard before. A smart motherfucker has an idea and a pitch deck. Some equally (?) smart VCs hand over $5 million for 20% of the company. Thirty equally (?) smart engineers get hired. An office in SoMa gets leased. A product gets built. Eighteen months later, there is a Series A. Then Series B. Then either an IPO that makes everyone rich or an acquisition that makes some people rich or a flameout that the VCs write off as one of their nine expected failures out of ten.
Good story!
Great story!
Made sense for fifty years!
But it’s a story I think is now mostly ~wrong.
The specific economic conditions that made VC funded companies the dominant organizational form are eroding so fast that clinging to it is starting to look like a category error. And I think a lot of people in tech know (or at least, suspect)this but aren’t sure what to do about it yet.
The old justification for the excesses and cultural idiosyncracies of VC was that software companies have enormous fixed costs and near-zero marginal costs. You spend $10 million building the thing, but once it exists, the 10,000th copy costs nothing to deliver. You need a big pile of money before you have any revenue, and banks won’t touch you because there’s nothing to collateralize. You can’t repossess a SaaS app. So you need equity investors willing to eat a high failure rate in exchange for the occasional 100x return.
And the fixed costs were real! In 2005, building a web application meant 5-15 engineers at $150-250K each, servers you racked yourself, an office (nobody was doing distributed work yet, or at least nobody admitted to it), a year or two of runway, and a sales team because distribution meant humans talking to humans on the phone. Add it up: $2-5 million before you even knew if the idea worked. That’s a lot of money to spend on a hypothesis.
Venture capital solved that problem. High upfront costs, massive uncertainty, no collateral, need for risk-tolerant money. To a degree, it made sense.
But every single one of those line items has been cratering. And I mean all of them.
I sat down last month and tried to figure out what it would actually cost me to build a serious SaaS product right now, in 2026, compared to what it would have cost in 2015.
The big one is labor. In 2015 you needed maybe 8 full-stack developers at $180K/year loaded. That’s $1.44 million just in engineering salaries for a single year of building, before anyone’s used the thing. Today? I’ve talked to people who say AI coding tools are “just autocomplete” and I’ve talked to people who say they’ve 10x’d their output. Varies by domain. The conservative surveys say 2-3x for experienced developers on greenfield work. So call it 2 engineers instead of 8. Maybe 3 if you’re cautious. (My bet is 2.) Meanwhile, servers used to run $50,000 upfront before you’d written a line of code, and now serverless means you pay literally zero until someone uses your product. Offices? Remote work won that argument. These aren’t even interesting conversations anymore.
Distribution might matter more than the engineering costs. Getting your first 10,000 users used to mean a 5-person marketing team with a real budget. I’ve tried “build it and they will come” and believe me, they will not come. But a single founder with good instincts and a Twitter account can now get there through content marketing, TikTok, open source, social media. Not guaranteed. Getting attention is a different skill than building products, and this gap is part of why it’s hard. But the cost floor has dropped to a place where a founder who’s good at it can reach a real audience without spending money.
Add all that up. Two people, working from home, AI tools, serverless, organic distribution. Burn rate: two salaries. $30K/month if you’re paying yourselves well. Six months to build and launch. Total: $180K.
That’s a seed round from friends and family. It’s what a mid-career tech worker has in savings. You could put it on a credit card (God help you). None of this requires giving up 20% of your company to a fund on Sand Hill Road.
“But JA,” you might say, “venture capital isn’t just about money. VCs provide mentorship, connections, credibility, recruiting help, and strategic guidance.”
Depending on the fund and their degree of LARP, this may or may not be true. Some VCs do provide these things. But do they provide $5 million worth of these things?
Start with mentorship - it’s the strongest claim and also the hardest to evaluate. Some founders credit their VCs with advice that saved their company. But there’s a massive survivorship bias problem here. We hear from founders whose companies succeeded, and successful founders tend to credit everyone who helped them. We almost never hear from the founders who followed VC advice and it destroyed their company, because those founders are off doing something else and don’t write blog posts about it.
Connections? Made more sense when getting a meeting with a potential enterprise customer or a key hire required a warm introduction from a known investor. LinkedIn and Twitter and the general flattening of professional networks has weakened this a lot. Not eliminated (knowing Marc Andreessen still opens doors that are closed to you and me) but weakened to the point where it’s maybe worth a dinner, not a fifth of your equity.
And credibility is just circular. VCs provide credibility because other people believe VCs provide credibility. If bootstrapped companies come to be seen as legitimate, and I’d argue this shift is already well underway, then the credibility premium evaporates.
If these are the benefits, what are they meant to outweigh?
VCs need 10x returns on their winners to cover the losers. Which means they need every company they fund to pursue a strategy that’s either worth $1 billion or worth $0. The billion-or-bust thing is not founders being reckless. It’s what the math actually requires.
And it produces some weird pathologies. Companies raise more money than they need (VCs want to deploy large checks, founders feel pressure to “raise as much as you can”) and then spend it on premature scaling. Fifty employees when ten would do. Super Bowl ads before product-market fit. Three new markets at once.
Then you chase growth metrics that look good in fundraising decks rather than economics that work. The “we lose money on every transaction but we’ll make it up in volume” thing sounds like a joke. It described the actual strategy of multiple billion-dollar startups from the last decade.
I know a guy who built a very nice $8 million/year B2B tool. His investors told him it wasn’t big enough. He tried to scale it into something it wasn’t, burned through his runway, and shut down. The $8 million/year business was right there. Companies that could be profitable, healthy $20 million/year businesses get pushed to “swing for the fences” and destroy themselves. The VC model has no room for a $20 million/year business. A $200 million fund can’t move the needle investing in something that tops out at $20 million in revenue. They need unicorns.
Which means there’s this whole category of businesses the VC model either ignores or damages. Real businesses, real profits, real employees. Just no plausible path to a billion-dollar valuation.
Too fucking bad.
The counterargument I take most seriously: “Some things require massive upfront capital. You can’t build a semiconductor fab with $180K.”
Right! If you’re building physical infrastructure, doing drug discovery, launching satellites, you still need large pools of patient capital. VC is a reasonable source for that.
But most VC dollars over the past fifteen years have gone to software and consumer apps. Not to fabs. Not to drug discovery. Not to anything hard. To the exact categories where costs have collapsed. Every time I look at a Crunchbase report on where venture money goes, it’s SaaS and marketplaces and consumer social, over and over. VC has been a software financing vehicle for decades, and software stopped needing it.
“Even in software, some ideas need large teams. You can’t build an enterprise CRM with two people.” I think that was true until about 2024. AI coding tools, pre-built components, APIs, cloud infrastructure: the minimum team for building serious software is shrinking fast. Not to one person for everything. But the trend line is clear and it’s accelerating.
So what fills the gap?
Small self-funded teams, for one. Two to five people building profitable software from day one, using AI tools, keeping costs low, owning 100% of what they build. The “indie hacker” and bootstrapper communities have been doing this for years and getting condescended to by the VC world the entire time.
Funny how that works.
Revenue-based financing is another piece. Borrow $500K, pay it back as a percentage of revenue, nobody takes a board seat or tells you to blitzscale. Pipe, Clearco, and others do this already. I’d expect that market to grow a lot.
There are weirder // more interesting arrangements, too. Fluid teams that form around a project, ship it, and dissolve. This is how most creative work already happens; AI tools are making it feasible for software too. Open source projects that give the core product away and charge for hosting and enterprise features. Dozens of companies have proven this works when development costs are low enough for community contributions to carry the load.
I’m not saying Venture capital is not a scam.
Partly because I have an agency to run and some of those clients have venture backers and I’m not entirely financially suicidal.
For the era in which it emerged, it was a brilliant financial innovation that funded Google and Amazon and plenty of other companies that put a dent in the universe (for better or worse.) Some businesses today still benefit from a large upfront capital infusion, and some VCs add real value beyond money.
But the default assumption, that a software startup needs venture capital, is an artifact of cost structures that no longer exist. The economics have shifted underneath us. The organizational forms will follow. They always do, even if it takes longer than you’d expect.
The East India Company lasted for centuries and then it was gone. Steamships replaced sailing ships. The telegraph replaced packet boats. An integrated trade-and-governance monopoly stopped making sense once transaction costs dropped a hundredfold.
Sound familiar?
The fixed costs of building software are dropping by orders of magnitude. I keep seeing posts about why this means SaaS is doomed. I think VC has a bit more to worry about, to be honest. The organizational forms that existed to finance those fixed costs will be replaced by forms better suited to the new economics. I don’t know what those forms look like yet. Probably messier and more varied than the VC model they’re replacing.
But if you’re a founder starting something today, I’d think long and hard about whether you need venture capital, or whether you’re just following a playbook that expired five years ago.
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