In 2001, Mailchimp sprouted as a humble side project to an otherwise floundering design agency.
In running their agency, Ben Chestnut and Dan Kurzius saw clients struggle to navigate email marketing. To toss them a lifeline, the duo created a simple email marketing tool–called "Mailchimp."
Mailchimp's appeal surged, luring customers in with its inviting interface and wallet-friendly pricing. Riding this wave of success, Chestnut and Kurzius scrapped their design agency and let Mailchimp steer the ship. In 2021, Intuit acquired Mailchimp for $12B.
Mailchimp's journey stands apart, a tale of a struggling small business transforming an in-house tool into a unicorn. Fascinatingly, it's not a story of venture capital but one of bootstrapping, pivoting, and branding. Mailchimp offers invaluable lessons for structuring startups in a world empowered by AI.
With the shifting sands of the current landscape, what can Mailchimp tell us about building a startup in 2023? Can the old venture playbook still light our path, or is it fading into obscurity?
However, this pullback has not impacted all industries the same. If there has been a winner, it’s AI, accounting for 19% of investment dollars in 2023.
AI is breathing new life into startups. From crafting harmonious tunes with the likes of Drake to birthing self-sufficient digital beings, it is revolutionizing industries and leaving the inefficient behind. With AI, English is the default language, and startups can launch websites in seconds, pitch decks in minutes, and mobile games in hours.
Harnessing AI, startups unlock newfound capital efficiency. They craft superior products at breakneck speeds, and like Mailchimp, they may even elevate humble tools into unicorns.
Andre Retteratah articulates this next level of efficiency in The Impact of AI on the Cost of Starting and Running a Business.
Clearly, companies will get more done with less resources. This will have two implications. Firstly, considering a fixed target output (users, revenue, growth etc.), the input and required resources can be reduced. This would mean less hiring, less replacements and more lay-offs to reduce the workforce. Secondly, considering a fixed input (workforce), the output can be increased. In this scenario, it’s questionable whether there will be natural limits to growth. In any case, both scenarios mean more efficient operations.
For more on AI’s disruption, check out Will AI Take Our Jobs? Exploring AI's Impact on Society by Rex Woodbury.
In a world where venture retracts, and AI fuels unprecedented efficiency, perhaps we should reconsider the conventional startup playbook. The prevalent belief that tech companies should organize as Delaware C-Corps may need reevaluation, as C-Corps carry hefty costs—not just in terms of formation and operations, but when it is time to exit.
Selling a startup as a corporation proves pricey for many founders. Most acquirers aim to acquire a startup's assets, like intellectual property and its team, rather than the entire corporate entity. This approach helps them sidestep hidden liabilities and capitalize on tax benefits, such as a step-up in basis and the ability to deduct the team’s wages. Given these advantages, buyers often pay a premium to buy a startup’s assets.
However, this arrangement proves costly for startups structured as C-Corps due to the double taxation. When a C-Corp sells its assets, it faces taxes twice—first at the corporate level and then again when distributing the proceeds from the sale to shareholders. So, from a tax perspective, a potential acquisition may be less appetizing if the buyer has its choice.
AI has firmly planted its roots, yet that doesn't rule out a ".com bubble"-like scenario as we navigate society's evolving relationship with AI. Drawing lessons from the early 2000s, we can anticipate a surge in consolidations and acquisitions as established players seek to enter the arena.
Startups leveraging AI for capital efficiency don't necessarily need to raise a large round to scale or exit–look at Mailchimp. Instead, they would be better off organizing as an LLC, which offers many of the same benefits as a C-Corp (e.g., limited liability, profit units, a board) at a fraction of the tax cost. Considering the tax benefits, a startup can exit faster with a higher net return.
Being a tech startup doesn't mean you have to start as a C-Corp. A wise game plan might be to begin as an LLC, where convertible funding rounds can occur without a corporation, and see how far you can go. Remember, you can always convert to a C-Corp later if necessary.
Mailchimp's journey is an inspiring reminder that there are alternative paths to success in the startup world. As venture capital retracts and AI drives unparalleled efficiency, startups should reconsider traditional playbooks and the necessity of organizing as C-Corps. By harnessing the power of AI and considering alternative structures like LLCs, startups can potentially achieve greater capital efficiency, reduce tax burdens, and exit with higher net returns.
The tech landscape will continue to evolve, and the key to thriving in this dynamic environment lies in staying adaptable and open to new strategies. Learning from Mailchimp's story, entrepreneurs can better navigate the world of AI and redefine success on their terms.
Disclaimer: While I am a lawyer who enjoys operating outside the traditional lawyer and law firm “box,” I am not your lawyer. Nothing in this post should be construed as legal advice, nor does it create an attorney-client relationship. The material published above is only intended for informational, educational, and entertainment purposes. Please seek the advice of counsel, and do not apply any of the generalized material above to your facts or circumstances without speaking to an attorney.