We’re building Rhinos, Not Chasing Unicorns.
The SME Renaissance | Interesting Stuff this week
The SME Renaissance - Reimagining Resilient Small Businesses in the Age of AI.
Silicon Valley has made a habit of inflating valuations and burning through VC cash faster than a Tesla on Ludicrous mode. However, some Founders are rethinking whether the VC-fuelled moonshot is the best path, especially now that the era of cheap money is essentially over, which may lead to an SME renaissance.
It’s almost as if some Founders have begun to rediscover the idea of ‘cash flow’ and they liked how it felt.
The SME - Small to Medium Size Enterprise, has long played second fiddle to the flashy venture-backed startup. You might remember them from an era before big tech and ZIRP (that’s ‘Zero Interest Rate Phenomena’).
Boring businesses don’t require endless rounds of venture capital to keep afloat, don’t seek growth at all costs, and don’t scale headcount needlessly.
They offer real-world practical solutions that humans who don’t spend all their time on X or LinkedIn might actually need. From Plumbers and Personal Storage businesses to Commercial HVAC, old is suddenly becoming new again.
Only this time, things are a little different.
There’s a third approach to business building. A hybrid of the Silicon Valley pursuit of Unicorn status and the traditional hyperlocal SME - we’re calling it, The Rhino.
The Rhino, a term I first encountered via entrepreneur Jay Bhatti, is an approach that combines the fiscal and operational discipline of small businesses with the best parts of the lean methodology, a startup-led mentality and an ambition to scale beyond what was previously possible for the traditional SME.
And it’s largely thanks to artificial intelligence.
The Great Disillusionment & How We Got Here
A ‘Unicorn’ is a startup with a valuation of over $1B.
It was aptly named by Venture Capitalist Aileen Lee, who opted for a mythical creature to reflect the statistical improbability of Founders ever achieving the milestone in the first place.
Unicorn Founders are outliers.
For perspective, in 2013, only 39 startups were worth a billion dollars or more. Fast forward to mid-2023, and the number of unicorns skyrocketed to 1,214 globally.
I still recall leaving a meeting with a venture capitalist who offered a prophetic piece of unsolicited advice that has stuck with me all these years - “Andy, statistically speaking, you have a greater probability of playing in the NBA than becoming a unicorn founder.”
That is all the more remarkable when you consider that I’m 180cm tall, depending on how my hair is sitting on any given day, and haven’t thrown a basketball in anger since about 1999.
Yet, that Silicon Valley allure is strong.
We need ambitious Founders to believe in their mission and embrace their struggle to push humanity forward. Our great leaps of progress still ahead of us depend on it.
On average, Founders might take one or two big swings in their life.
Now that Venture Capital investment has slowed, more Founders are beginning to realise that cash-flowing businesses may offer an alternative path, or potentially provide a launchpad for their future careers as startup Founders with fewer risks and less capital required to get started.
So, there are traditionally two tracks here:
The Traditional Small to Medium-Sized Business
When we think of a traditional small business, we sometimes imagine the local Mum-and-Dad store or maybe a trade professional (e.g., a carpenter, or a plumber) who works as a sole proprietor. They offer a known product or service to a localised market.
These businesses tend to be geographically and/or capital-constrained. They often fear a dependence on debt. They tend to remain small, hiring modestly to meet demand. They tend to be bootstrapped, and may even optimise for lifestyle.
On top of this, SMEs are often relatively capital-intensive businesses operationally, due to plant & equipment requirements, labour, and physical premises etc.
Meanwhile, margins are often low due to competition, and owners are frequently navigating scarce working capital. At the same time, SME owners tend to take the long-term view, succession is the objective.
Small business owners know their customers intimately and run a niche, tight-knit operation.
For Founders, this is The Cashflow Play: Start, build, or buy a business that generates revenue from $10K to $1M+. These are the more traditional, legacy-style businesses that some may consider ‘boring’ given the benefits of raw speed and scale associated with tech startups are often absent.
The Traditional Technology Startup
At its core, Founders test, validate and bring to market innovative technologies or tech-enabled products and services, initially focusing on niche customer segments before expanding to larger, more distributed user bases. This approach allows for rapid iteration and product-market fit discovery before scaling.
A critical component of the Silicon Valley model is the interrelationship between startups and venture capital.
High-growth, capital-efficient businesses are ideal, with founders seeking funding from top-tier institutional VCs to fuel their ambitious visions. This capital influx enables aggressive team expansion, not just to support existing operations but to unlock new growth. The teams assembled are often composed of highly skilled individuals, many with prior startup or big tech experience, creating a self-reinforcing cycle of talent and innovation within the ecosystem.
The endgame for many Silicon Valley startups is a significant liquidity event – either through an acquisition or an initial public offering. This exit serves multiple purposes: it provides a return on investment for VCs, creates wealth for founders and early employees, and often injects new talent and capital back into the ecosystem.
However, as I’ve pointed out, success is far from guaranteed.
The high-risk, high-reward nature of this model means that while the potential upside is enormous, the vast majority of startups will not achieve the outsized returns they aspire to. This inherent uncertainty is a defining characteristic of the Silicon Valley approach, driving both its dynamism and its excesses.
For Founders, this is The Unicorn Play: High-risk, high-reward moonshots using cutting-edge technology. It requires raising often vast amounts of venture capital and has a long-term focus.
Enter the Rhino
A new paradigm is emerging. One that challenges the conventional wisdom of the Silicon Valley playbook and offers a hybrid approach - The Rhino Play.
A Rhino is a business that prioritises resilience, profitability, and sustainable growth over breakneck expansion and sky-high valuations.
The core attributes of a Rhino are reminiscent of its namesake: strength, resilience, and a formidable singular focus.
Resilience
Rhinos are characterized by their ability to withstand market pressures and competitive threats, much like a rhino's thick hide. This resilience is not merely a passive trait but an active stance – Rhinos are known for their tenacity in the face of challenges, whether it be a one-in-a-hundred-year pandemic, or rapidly rising inflation, Rhinos become even more determined when confronted with obstacles.
This quality is also evident in its Founders, who embody authenticity and unwavering commitment to their vision.
Momentum
Another feature of the Rhino is its emphasis on building unstoppable momentum.
This momentum is often seen through consistent month-over-month growth, albeit not reaching the rapid, VC-fuelled growth rates in traditional technology startups. Rhino growth is more considered, sustainable and capital efficient. It seeks a greater market share than conventional SMEs but it likes to own deep relationships with its customers, much like the local store, a feature that doesn’t scale in a startup.
Laser-Focus
Product strategy in the Rhino is laser-focused on developing a single, exceptional offering – it’s the metaphorical "horn." The goal is to create a product that is closely aligned with the needs of its customers, establishing a dominant market position and surprising and delighting an army of loyalists (i.e. customers).
Resilience, momentum and focus are crucial differentiators that single out the Rhino, but it’s important to note that the best technology startups and SMEs may often share these qualities.
Operational & Financial Discipline
Financially, the Rhino prioritizes free cash flow and profitability over growth at all costs.
This philosophy represents a key departure from the traditional venture capital-driven approach. Instead of seeking large funding rounds and postponing profitability, Rhinos focus on generating cash flow and achieving sustainable growth. This approach often leads to bootstrapping or minimal external funding, allowing founders to maintain control and focus on long-term value creation rather than short-term valuation metrics.
The Rhino also encompasses a different cultural ethos. It rejects the "hustle culture" often associated with Silicon Valley in favour of a more balanced approach to work and life.
Companies like Basecamp exemplify this philosophy, maintaining profitability and innovation with a small team and a clear operating rhythm. Basecamp has launched multiple hit products, written bestselling books, and even sparked a remote work revolution, all while keeping their team small.
Their approach challenges the notion that building a successful tech company requires sacrificing personal well-being or work-life balance.
Small & Nimble Founding Teams
Founders who might otherwise opt for the traditional startup track are now prime candidates to lead a Rhino.
At first glance, the founding teams of Rhinos may appear indistinguishable from those of startups. They are well-versed in the playbooks that have defined the tech sector for the last two decades.
A defining characteristic of the Rhino is its commitment to maintaining a lean team. These businesses typically may operate with as few as five to ten employees, and may even function effectively with just one or two Founders.
This size limitation is not an early-stage constraint but a strategic choice to maintain agility and efficiency.
Small teams can operate with minimal hierarchy, reduced bureaucracy, and greater alignment. The absence of purely managerial roles and organisational redundancy allows these small teams to leverage their skills effectively, often achieving results that belie their size.
Sustainable Growth
Despite being small, Rhinos remain distinctly growth-oriented, aiming for efficient scale but not necessarily setting their sights on a growth-at-all-costs trajectory to attempt to capture a last-mover advantage.
This growth mindset sets them apart from traditional small businesses. Many Rhino founders may bring experience in scaling companies, applying this knowledge to achieve rapid yet sustainable growth.
However, a focus on achieving profitability and operational efficiency differentiates them from the typical startup, which often prioritizes growth at the expense of profitability.
The Capital Environment
Perhaps the most significant departure from the traditional startup model is the Rhino’s approach to funding.
These businesses prioritise bootstrapping to profitability over a reliance on multiple rounds of venture capital. While Rhino founders are typically well-versed in the VC landscape, they are not swayed by the potential status or perceived stability that VC backing might provide.
Instead, they may bootstrap entirely or raise a one-and-done round from strategic investors, equivalent to a friends and family or pre-seed round. This approach lowers the bar for financial returns and redefines success metrics. A million-dollar exit can be considered a significant win.
Importantly, a Rhino needn’t be started from scratch. Both startups and many traditional SMEs can become Rhinos by a tactical shift in operating strategy or through an acquisition.
David's New Slingshot - Artificial Intelligence
In business, timing is everything.
It’s no surprise then that we’re about to enter a golden age for Rhinos just as we’re simultaneously entering the age of artificial intelligence (‘AI’). AI and automation are not merely ancillary to the Rhino model; they are fundamental enablers that make this new approach both viable and potentially disruptive.
AI is David’s new slingshot.
At its core, the Rhino is predicated on maintaining high productivity and scalability with a small team, typically ten or fewer employees. This lean structure would be challenging to maintain while pursuing ambitious growth without the force multiplier effect of AI and automation. These technologies allow Rhinos to punch far above their weight class, competing effectively with larger, more resource-rich competitors.
One of the primary ways AI powers the Rhino is through the amplification of individual productivity.
AI can now handle tasks that previously required significant human intervention, from customer service chatbots and lead generation to sophisticated data analysis.
This allows the small teams to focus on product and the customer experience, while AI manages routine operations at scale.
Last week, I wrote about the Bionic Employee Thesis and this is another great example of it in action. For instance, a single developer leveraging AI-powered coding assistants can potentially match the output of a small team, allowing Rhinos to maintain their lean structure without sacrificing capability.
Automation plays a crucial role in enabling Rhinos to scale efficiently, a key attribute that distinguishes them from traditional small businesses.
By automating repetitive tasks and processes, Rhinos can increase their operational capacity without a corresponding increase in headcount.
This is particularly evident in areas like marketing automation, where AI-driven tools can manage complex, multi-channel campaigns that would traditionally require a dedicated team. The result is a business that can grow its customer base and revenue without the linear scaling of operational costs typically associated with headcount expansion.
The bootstrap-to-profitability approach favoured by Rhinos is also significantly enabled by AI and automation.
These technologies reduce the capital intensity of starting and scaling a business. The democratization of technology reduces the need for large initial capital investments, aligning well with the Rhino’s preference for bootstrapping over venture funding.
Moreover, AI and automation contribute to the flexibility and autonomy that Rhino founders value.
These technologies allow for rapid prototyping, A/B testing, and iterative development at a pace that would be challenging for larger organizations. This agility enables Rhinos to pivot quickly in response to market feedback, a crucial advantage in the fast-paced tech industry.
The ability to experiment and adapt rapidly without significant resource reallocation is a key factor in the Rhino model's appeal to experienced tech professionals seeking alternatives to the startup track.
It's important to note that the relationship between AI/automation and the Rhino model may be symbiotic. As more Rhinos deploy AI and automation to compete effectively, they may also contribute to the further development and refinement of these technologies.
Rhinos, with their focus on efficiency and innovation, often become early adopters and innovators in applying AI and automation to business processes. This creates a virtuous cycle where the tools enabling Rhinos are themselves improved through this application.
These tools give the Davids a fighting chance against the Goliaths.
It’s an Archimedes lever that enables small teams to operate at a scale and level of efficiency previously reserved for much larger businesses.
As AI and automation continue to evolve, we can expect the Rhino to become increasingly viable and attractive, potentially reshaping the landscape of entrepreneurship.
This shift may lead to more diverse and resilient local business ecosystems, including a more sustainable, durable and appealing capital environment, where success is not solely defined by rounds of venture capital and unicorn valuations, but by sustainable, profitable businesses built on the intelligent application of cutting-edge technology.
Cities like Perth may no longer need to feel compelled to attempt to become just like Silicon Valley. Instead, it might attract a new type of business that doesn’t relocate to the East Coast once it’s raised venture capital, and attract a new cohort of investors and operators eager to lean into a more sustainable and durable business model.
Like Rhinos in the wild, its numbers in the business world are relatively few. But, we hope that in time, and given the right kind of capital environment (more on that to follow soon), dedicated communities and support networks, and the emergence of AI and automation, we can realise thriving Rhino ecosystems popping up all over the world.
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