Welcome to the Era of the Gritty Startup

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Silicon Valley is Silicon Valley partly because the stories we tell about it tend to come true. The whiz kid really can beat the giant. Mark Zuckerberg actually did kill MySpace. Anyone under employee count 250 at Google is probably flying private.

This, by and large, has been the case in Silicon Valley for over a decade. The story we tell ourselves is that disruption is inevitable, and the numbers will always go up. Even when the going gets rough, we tell ourselves that the next round of capital will always come through.

And this was a true story, until it wasn’t. Global venture capital investment fell from $83.8 billion to $75.9 billion between the fourth quarter of 2023 and the first quarter of 2024. During the same period, the number of VC deals plummeted from 9,458 to 7,520, representing a stark 20 percent decrease in deal volume. As we move into the fourth quarter of this year, all signs seem to be pointing to the reality that funding has dried up. Even AI companies are struggling to raise capital. Higher interest rates coupled with uncertainty over how AI would play out cooled off the markets indefinitely. 

Over the course of conversations with more than a dozen VCs, they all told me that the bar for them deciding to invest in a company is higher than ever. Our belief that the numbers will always go up is also no guarantee. As of June of this year, according to Benchmark partner Chetan Puttagunta, there wasn’t a single public software company projected to grow its revenue by 30 percent or more in the next year. And public software companies are typically the most dependable companies to work for or invest in. 

At the risk of sounding overly optimistic, I think this is a good thing. 

Many of the assumptions underlying the startup boom of the 2010s were fundamentally misguided. In my opinion, we are now exiting the age of glut and entering the era of the gritty startup—companies that take the best of what we learned and reject the harmful habits of yesteryear. This is not just about being “lean” or cash-flow positive. I genuinely believe that we are on the cusp of a spiritual and operational revolution in how we build organizations. 

Three lessons for the age of grit

To paint a fuller picture of “the gritty startup,” I’ll outline what I see as the three great sins of the previous age—and what companies navigating today’s landscape can do instead.

1) Stock-based compensation (SBC)

During the boom years, companies relied heavily on stock-based compensation to attract and retain talent. This was viable when valuations were soaring—stock didn’t cost cash and, after all, the number usually went up. SBC was essentially a free way to pay employees! However, in a lower-multiple environment, SBC has led to significant dilution for existing shareholders. Now that we’ve exited the age of glut, founders are beginning to see this practice for what it is: giving away parts of your company. 

The worst sinner here is probably Snap. Since the company went public in 2017, existing shareholders have been diluted by 50 percent. And because the shares have no governance rights, its founders can essentially do whatever they like, making for a fundamentally broken relationship between management and everyone else. Empowered founders are good, but only when there is some degree of oversight.

Assuming that the stock will go up can also hurt employees, such as when founders make stupid decisions like allowing employees to take out loans to buy options. Plus, as the value of stock options diminishes (and for the vast majority of companies, they do), the intended motivational effect of SBC wanes. Very few people are able to ignore their net worth swinging by 20 percent every quarter.

Until recently, too many companies acted as though they thought they were going to be the size and scale of big tech. For reference, the Magnificent Seven were responsible for 117.8 percent of the S&P 500's total returns in 2023. Yes, that means that last year, the S&P 500 would’ve been down if not for Google, Apple, Nvidia, Meta, Tesla, Amazon, and Microsoft. But because an entire generation of startup founders came of age immersed in the mythos of these companies, they ended up constructing equity packages as though they, too, were poised for a trillion-dollar outcome, giving too much stock to employees with too few share buybacks.

Gritty startups will still provide generous equity packages, but they won’t hire the same volume of people. They’ll be smaller, faster, weirder, different. Employees will use AI to do 10 times more work than what previous generations of employees did. It’ll be a hard transition for most—it is tough to accept that expectations are 10 times what they were before—but it is also deeply empowering. At Every, we like to say that AI will make you the most creative you’ve ever been. 

2) Growing the wrong way

During the gluttony period, high burn rates became the norm, with companies operating under the assumption that continuous rounds of funding would help cover their ballooning expenses. Because startups were told to keep 18-24 months of runway, they had no choice but to orient their companies around hitting “investable milestones,” i.e., doing things investors wanted to see. 

If you ask me, the great benefit of being a private company is being able to do the exact opposite. You can make the kind of long-term bets that a public company’s shareholders would never tolerate. When you become beholden to doing something every 12-18 months that makes investors’ pocketbooks open, however, you sacrifice the core competitive advantage that comes with being a startup—which is having 10 years of relative secrecy to cook up something incredible. 

Instead, because the north star guiding every company in the age of glut was growth, short-termism became the law of the land, especially when it came to user acquisition. Growth hacking emerged as a popular approach for rapidly scaling user bases, often through aggressive and unsustainable tactics like heavy discounting, referral bonuses, and delayed monetization. 

Growth hacking was supposed to be about cheaply acquiring users, but it eventually morphed into buying users as quickly as possible—sometimes with disastrous results. Fast, a one-click checkout startup, notoriously burned through vast amounts of cash to fuel its growth, with reports suggesting a burn rate as high as $10 million per month. The company raised $120 million from investors, only to generate $600,000 in revenue. This was dumb. This was also the ethos of the age of glut.

In 2024, startups still need to find ways to acquire users cheaply. But a gritty founder knows that the best way to get more users is to build something people want. Now, as always, there is no cheaper monetization strategy than your existing customers saying, “This shit rules.”

3) Excessive fundraising and overcapitalization

In the age of glut, the biggest sin of all was supposed to be a good thing: abundant capital. At first glance, raising money is awesome! More cash in the bank means more runway. More runway means you have more chances to build a startup that gets its founder a yacht.

The problem with this logic is that it reduces a company to a poker table where you take a series of risk-adjusted bets. Sure, that is part of it. But at its core, a company is a spiritual pursuit. Excessive capitalization fattens the soul of a startup. It changes what a company is, almost always for the worse. Too many founders mistake the soul of an organization with being “mission-oriented.” Missions are great, but soul is a state of being. It is a company’s unique culture that allows it to win the market.

Some startups can and should raise tens of billions of dollars. OpenAI should be raising tens of billions at a $100 billion valuation. It needs that capital to build AGI. But in the age of gritty, your SaaS startup should be ignoring VCs. Don’t need ’em, don’t want ’em. Capital is like caffeine. It’s only long-term helpful in low doses.

So what does a gritty startup look like?

In many ways, gritty startups will look the same as what came before. They’ll still be scrappy and hard. They will still pursue big visions—and if anything, their visions will be even bigger. But crucially, they will know what they are—and that starts with the recognition that AI means you can build a fundamentally more effective company. You don’t build the next Google by acting in the same way it did. You do it by building something new. 

While the exact shape of a gritty startup depends on the market, here are three signs of one: 

1. Slash roles: Every person at the company has the skills and responsibilities of multiple functions. These can be designers who can code their own front end, marketers who feel comfortable closing customers, or lead writers at media publications who take on  the duties of a chief financial officer (I’m talking about myself here). 
2. Power matters more than margins: Too many choices last cycle were made on the basis of which markets had attractive margin profiles rather than where a founder’s passion lay. We became so enamored with the structural advantages of software that we ignored all other strategic considerations. A gritty startup doesn’t worry about margins; it worries about gaining power in its market and keeping it. 
3. Build on cash flow: As a function of having power, a gritty startup can focus on cash flow-driven growth. It’ll want to start selling things to customers as quickly as humanly possible. That doesn’t mean the company won’t raise capital! But it does mean that there is a focus on getting cash—and getting it fast. 

Have you seen other signs of gritty startups? Let me know in the comments.