Maybe I was a bit overzealous, suggesting a company could reach $US1B in value without any full-time employees… but startup value per person (whether measured in users, or dollars, or some other way) is rising fast. Why?
Another way to look at the question: why do companies of more than one person exist at all? Why did we need firms with many employees to produce valuable things?
In the 1930s, the economist Ronald Coase theorised that companies exist because the cost of doing business inside a firm is less than the cost of doing business with parties outside of the firm. Trust, shared culture, more information, and other factors made it so you were more likely to trust an accountant who worked for your company than one who worked for someone else.
So, if the cost of doing business with outsiders falls, firm sizes might shrink — dramatically. As the quality of outside services goes up, and their way of doing business becomes more transparent to customers, and many companies who work together share a common culture (including communication tools, norms of behaviour, and other patterns), companies might use outside partners for functions they’d have previously run themselves.
On relatively little capital, Instagram got to 100m users. Then, Whatsapp got to 500m. Eventually, a solo entrepreneur will get to 1B users.
— Chris Dixon (@cdixon) June 1, 2014
Those companies can focus on what they do best — and that advantage might be delivered (as it was in the cases of Instagram and WhatsApp) by a tiny team. Maybe, one day, by a single person.
This trend is not new. Bloomberg, in its earliest days, outsourced its legal and accounting functions entirely. That practice — of focusing a company’s resources where they can do the most good — is clearly a winner.*
Ideally, a company might want to outsource all the functions where they think “we need to do this, but we won’t win by doing it well.” In the past, that was hard. If you wanted your website to stay up, you had to have a data center operations team, buying boxes, racking and stacking, operating and troubleshooting and wearing the company t-shirst. Today, AWS, Digital Ocean, and other cloud providers do all that until you’re ready to claim some unique advantage by owning it yourself.
Several successful startups have emerged in traditional “back office” areas — ZenPayroll, Zenefits, Xero, etc. — where the job needs to be done right, at a minimum of distraction to a startup, but where success in these areas is unlikely to make a startup succeed.
As this trend continues, the platforms that serve startups can go up the stack to ever more valuable functions, like payments (Stripe) or maps (Mapbox).
That’s why our fund, Bloomberg Beta, invested in Layer, which provides a platform for communications — a service essential to a startup’s success. The stakes are high for Layer; errors in communications with customers can be costly for a customer. By the same token, having thousands of companies all build near-identical messaging stacks seems like an enormous waste of effort.
Unsurprisingly, Layer has had enormous developer interest, which it has begun to serve.
Another platform that’s begun delivering mission-critical value to startups is AngelList — delivering capital from a network of investors. Even a one-person billion-dollar startup will likely need (at least a little) capital. It might make sense for that capital to come bundled with one or more of the services a startup uses…
So today, Layer is taking the next logical step, putting together a fund to back companies that use its services. Our fund focuses on making the business world work better, so we backed Layer Fund I, to support companies that understand how to focus only on what they do best. (The fund is a Syndicate on AngelList — it’s only natural for one platform to support another, and this was also the easiest way to administer this new fund.)
These are still early days in figuring out how to help founders stand on the shoulders of giants to get things done. The idea that communication with your customers might also deliver some of the capital you need to grow, at just the right time, could be a powerful one. We’re enthusiastic to see where this fund, and Layer, go. If you’re building a service on Layer, apply!
* Professors I respect explained to me that the data suggest the reverse — on average more people are working for big companies, and that the average firm size is getting bigger not smaller. I’m struggling to reconcile that with my observation that valuable startups are getting smaller and smaller. Maybe what we see here is a barbell: either you need enormous scale (in people, users, etc.) or you need to be nimble and make something valuable. The folks in the middle are the ones who falter. To deliver AWS, Amazon did need to become pretty big…