The Transition from Indiehacking to Micro Companies

With the launch of Indiehackers.com in 2016, a counter-culture of startups emerged seeking to build businesses without venture capital funding. The trend followed established independent companies such as 37Signals, but also emerging makers such as Levels.io and Danny Postma.

Seven years since the start of the trend, a polarizing discussion between Pieter Levels and Arvid Kahl asked whether indie hacking is dead. The evidence they present is that it’s now mainstream, competitive, and saturated.

I have a different perspective. I believe that AI is causing a convergence of traditional startups and indie companies because AI decreases the cost of starting new software businesses dramatically. As “startup” and “indie” converge, we’ll instead recognize a divergence of “micro” versus “growth” technology companies. AI will decrease the cost of starting new software companies so much that many will become profitable before pitching VCs, and these companies be able to decide whether to stay small or to raise money for growth. With these changes, “Micro” will become the new “Indie.”

In Oslo this week, I enjoyed visiting one of my favorite coffee companies, Tim Wendelboe. The business started in 2007 and has grown to be an influential coffee brand served by discerning customers such as top restaurant Noma. With this success, Tim Wendelboe still has a single cafe location. I saw his company described as a “Micro roaster,” and that’s where the inspiration for this essay came from. Between quantity and quality, this company chose a craft mindset - to stay small and focus on quality instead of growth. Compare this to a coffee roaster like Starbucks, which scaled to multiple locations and gradually offered commoditized products instead of specialty ones. I’m sure Tim Wendelboe could pursue more locations and scale, but doing so would compromise the quality - and its customers might change. “Micro” companies already exist outside of technology, and represent a focus on quality instead of scale that customers appreciate.

The word “Indie” describes companies that don’t raise external money. But, the definition is blurry - The Hustle described itself as “Bootstrapped” because, though it raised money, it was a relatively small amount from individuals instead of from institutional venture capitalists. Then, The Hustle stayed small and capital-efficient, which made its exit a major success for the founders. At the other end of the scale are businesses that achieved scale without raising money, but later chose to raise investment. Take GitHub, which raised no external money for years, building a large book of recurring revenue as an “indie” company. But, this indie approach gave GitHub access to minimally dilutive capital, and in 2012 they raised a first round of funding of $100m at nearly a billion-dollar valuation. Companies can raise some money, but stay indie - or, inversely, start indie but then raise growth capital.

The nature of software businesses is that they are expensive to design and develop, but inexpensive to scale. They have high upfront costs and zero marginal costs. For example, if I make an iPhone app for editing photos, then that app has the same development cost whether 1, 1k, or 1m people buy and use it - but the revenue is a function of the number of users.

Software businesses typically have two phases - a development phase, where they iteratively make a product until they have figured out something that customers want. What follows is a scaling phase, where the unit economics of the business are positive, so the company needs to decide and how to grow. Within growth, the general idea is to “spend money to make money” - whether using ads, marketing, sales, or new features to attract new customers or increase revenue from existing customers. Typically, the scaling phase is where you see companies raise large amounts of venture capital - any investment over $5m is typically for growth, not initial development.

“Indie” has typically referred to businesses that try to raise little or no money to develop their product. This attracts motivated builders, who typically make a product themselves, whether by coding or using low-code tools. Capital constraints filter for founders who have a specific vision of what to build and can fulfill that vision. Indie founders have a reputation for being scrappy and bohemian in their approaches to business, in contrast to VC-backed founders who want to project a more polished facade to potential investors.

What has changed in the last year is AI. While casual users may see ChatGPT as an amusing tool for writing emails or memos, it has begun to dramatically change how software gets written. Experienced engineers who embrace tools such as Cursor can more efficiently design and build complicated systems in much less time, turning them into “cyborgs”. In the past, a software team would be built with two senior developers to design the systems, four junior developers to implement the code, a project manager to handle work distribution, and a people manager to help with hiring and teamwork. With AI, a senior engineer can give directions to an AI agent instead of junior developers - thus making the rest of the team redundant. In short, AI is turning senior engineers into one-person teams. This isn’t the future - it’s happening right now, and my one-person software company is an example of the productivity gains that AI can afford.

With AI productivity advances, the amount of capital required to start most software businesses is dramatically plummeting. Unless you’re building physical products or developing moonshot intellectual property, I believe the cost of making a new software startup will decrease by 50-90%. This means that most startups will have pressure to raise significantly less capital if any at all. People with compelling ideas can just go build a prototype to validate their hypothesis, instead of needing millions in funding just to launch a minimally viable product. People will no longer waste lots of money and time pursuing bad ideas - the market will be able to offer concrete feedback much earlier in the process

With the decrease in upfront costs due to AI, the majority of technology companies will look like what we call “indie” today. These companies may still raise a small amount of money, but it will primarily be to cover the salaries of three or four people, rather than 20. My prediction is that investors will write smaller seed checks more frequently, but that the total amount of seed funding will decrease.

As “indie”-style building becomes the norm, most companies will first consider raising venture capital after they have initial traction. Among startups that get traction, this capital can be spent to double down on growth. However, the smaller headcounts of these more efficient companies mean that companies can achieve profitability sooner in their lifecycles. With a smaller team, you need less revenue to break even on costs. Over time, the timing of profitability will converge with opportunities to raise growth funding - meaning that the need for capital will no longer be urgent or existential. Historically, $10k in monthly recurring revenue is a Schelling point among seed investors that a startup that has achieved reasonable traction to raise additional capital. But, that $10k MRR line can now mean profitability for a tiny team.

The convergence of profitability and growth funding opportunities means that startups can decide whether to stay “micro” or chase growth. And, increasingly - instead of a division between “traditional startups” and “indiehackers”, we’ll see a division between “micro” versus “growth” startups. Micro companies will choose to stay small and focus on profitability, craft, quality, and lifestyle. Growth companies will invest external capital into more revenue, more markets, more products, and more team members in pursuit of a larger outcome.

This shift toward smaller seed rounds will catch many repeat founders off guard. Over the past decade, building a startup required raising a lot of money upfront. So, the system naturally selected founders who were good at impressing investors and raising money. But, some of these founders lacked the skills to build a business and make something that customers wanted. I’ve personally observed founders raise and spend over $10m before investors realized that no product traction was being made.

Lower upfront funding and more growth funding create a more egalitarian building environment, where founders will have to compete for customer attention instead of investor adoration. And, this happens to be exactly what the Indie community exemplifies today - founders who put their energy into impressing customers instead of impressing investors. With this shift, I think you will see the “indie” outcasts of today become the same companies that go on to raise large growth rounds of capital in the future. More companies will follow the GitHub model of proving market demand with minimal capital, and investors will seek evidence of traction before meaningfully investing. Innovative venture capital funds are already exploring this market - such as Indie.vc and Calm Company Fund. But, soon all the traditional funds will be competing for these deals.

Indie isn’t dead - it’s becoming the norm. AI means that founders need significantly less capital to start a company. Investors will expect firm evidence of traction to raise venture capital. But, traction will also converge with profitability for most of these startups. So, more companies will have the choice of whether to stay “micro”, or whether to raise money in pursuit of a growth path. This change in incentives will benefit founders who can build and show traction with minimal or no funding, which happens to be the indie community today. But, more “indie” founders may begin to raise venture capital in pursuit of growth - while others may make the intentional decision to stay micro.

It will be an exciting few years for software companies. But, I’m excited to see more small, craft-focused software companies. Tim Wendelboe’s coffee is fantastic because he chose to stay small, and pursuing a niche created a customer community passionate about his product. I’m excited that AI will lead to more, smaller software companies - which will increase the diversity of products and business models available to customers.