Tech startups discovered profitability after interest rates made venture capital scarce
Linear's founder champions lean teams and early profits, but the timing suggests necessity dressed as philosophy
Linear's founder has a revelation to share: profitability isn't a compromise, it's freedom. His project management company hit profitability just twelve months after launch with a team of ten people. They stayed deliberately small, hiring slowly, preserving culture. It's an elegant story about founder discipline winning out over venture capital excess.
Then you notice the dates.
Linear became profitable in 2020. Shortly after, they raised $82 million at a $1.25 billion valuation. And that timing coincides almost perfectly with the moment venture capital became dramatically scarce. In the first three quarters of 2021, startups raised $347 billion. By 2023, that figure had collapsed to $125 billion—a 64 per cent decline. The money didn't just get more expensive. It largely disappeared.
The profitability movement sweeping through startup culture isn't primarily about founders discovering wisdom. It's about founders adapting to macroeconomic forces whilst reframing necessity as choice.
When Treasury bonds started paying more than venture funds
The shift happened quickly. Between late 2020 and early 2022, US interest rates sat near zero. Government bonds yielded 0.5 to 0.7 per cent annually. For investors, this made venture capital attractive despite its risk. Why accept meagre returns from safe investments when startups offered potential for massive gains?
Then central banks raised rates to combat inflation that peaked above 8 per cent in 2022. By 2023, 10-year Treasury notes yielded 4 to 5 per cent. Suddenly investors could earn meaningful returns from government bonds without gambling on unproven companies. As Wesley Chan, managing partner at FPV Ventures, explained bluntly to reporters: limited partners began asking why they should invest in venture capital when treasuries paid nearly 5.5 per cent risk-free.
The impact on startup valuations was brutal. Free-cash-flow-negative software companies had traded at over 20 times forward revenue in 2020 and 2021. By late 2022, those multiples collapsed to below five times. Companies built around the assumption of abundant, cheap capital discovered that money simply wasn't coming anymore. The 2024 fundraising environment confirmed the new reality: venture firms raised just $76.1 billion, the lowest total since 2019.
Founders who had planned to raise Series B rounds to fund continued losses found themselves with two options: become profitable or shut down.
The efficiency that only some business models can achieve
Linear targets $500,000 to $1 million in revenue per employee. That sounds aspirational until you examine the data. The median for private SaaS companies is $129,724. Even enterprise SaaS firms with more than $20 million in annual recurring revenue—typically the most efficient cohort—achieve just $186,661 per employee.
Linear operates at roughly four times the industry standard.
This level of efficiency isn't universally achievable. It depends entirely on business model. Project management software scales beautifully: significant upfront development, minimal ongoing cost per customer. Now compare that to hardware companies needing manufacturing investment, infrastructure platforms requiring data centres, or network-dependent businesses that must acquire users rapidly to create value. The unit economics differ fundamentally.
Research from Dealroom examining European venture-backed SaaS companies found the top 10 per cent show three to four times more revenue per employee than the median. Linear sits in this exceptional tier. But the gap between top performers and everyone else reaches ten times. The vast majority of companies cannot achieve such efficiency without completely different economics.
Bootstrapped companies illustrate the trade-off sharply. At the $1 million to $3 million revenue stage, bootstrapped firms manage $104,186 per employee whilst equity-backed companies achieve just $64,286. The bootstrapped companies are more efficient because they must be—they have no choice. But that same constraint limits their ability to invest in growth, capture market share quickly, or make bold bets that sometimes create category leaders.
Linear's story isn't "profitability is achievable for everyone." It's "certain business models can sustain exceptional efficiency, and if you're not one of them, you need capital."
The casualties that nobody mentions
A Hacker News commenter offered a different profitability story. His co-founder obsessed over reaching profitability. The company succeeded—and millions accumulated in company accounts. Money that could have funded hiring, product development, market expansion. The business still exists, the commenter noted, but it's now just another agency. Not the technology company it could have been.
This is the other side of the efficiency story. Roughly 70 per cent of startups fail at the scaling stage, often because decisions optimised for surviving small become expensive constraints later. A Series B founder explained the problem to researchers: architectural decisions that work for ten people building a minimum viable product need complete rebuilding at scale. Companies end up raising larger rounds just to redo cheap early work—suffering the very equity dilution they tried to avoid.
The human cost of scaling complicates the small team ideology further. ThirdLove grew from two founders to hundreds of employees in six years. By 2018, only two people from the original 2015 team remained. Not because the early team was incompetent—the founders explained that skills required at ten-person startups differ fundamentally from those needed at structured, growth-stage companies. Most people cannot or will not make that transition.
Then there's the existential risk. When you claim to hire only exceptional engineers, losing anyone removes institutional knowledge and capabilities that are genuinely difficult to replace. Hiring only "great engineers" sounds admirable, but allowing capable engineers to contribute meaningfully often works better long-term because it reduces dangerous key-person dependencies.
The capital that chose itself
The 2024 venture capital data reveals something illuminating. Whilst overall fundraising collapsed, capital became dramatically concentrated. The top 30 funds secured $57 billion—75 per cent of all capital raised. Just nine funds captured 46 per cent. Andreessen Horowitz alone raised roughly 10 per cent of all venture capital deployed that year.
This "flight to quality" meant limited partners directed money exclusively to established firms with track records of returning capital. Emerging fund managers struggled to raise anything. For startups, this created a harsh binary: either you had backing from a top-tier firm or you needed profitability to survive. There was no middle ground.
The exit market offered no relief. Companies generated $149.2 billion in exit value during 2024 through acquisitions and public offerings—better than the previous two years but well below historical peaks. The troubling detail: 21 exits exceeding $1 billion contributed 42 per cent of the total. Whilst a handful of companies achieved spectacular outcomes, the vast majority of exits involved small, early-stage companies selling to avoid shutdown.
Founders writing essays about the virtues of profitability weren't necessarily discovering philosophy. They were describing the only strategy that remained viable.
What actually changed
Linear's achievements are real. Converting 100 beta users to paying customers demonstrates genuine product-market fit. Reaching profitability within twelve months shows strong execution. Raising $82 million at a $1.25 billion valuation proves that investors value sustainable economics.
But examine the broader pattern. The profitability movement gained momentum precisely when interest rates made venture capital scarce. Founders who might have raised large rounds in 2021 were writing essays about bootstrapping virtues in 2024—not necessarily because they discovered wisdom, but because they discovered changed capital markets.
The research on successful bootstrapped companies creates survivorship bias. Mailchimp, Basecamp, and Zoho built substantial businesses without external funding. But for every Zoho that reached $600 million in revenue with 10,000 employees, how many companies stayed small, stagnated, lost market position, or failed entirely?
The honest assessment requires examining specific circumstances. If your business model supports high revenue per employee, if you can reach product-market fit with a small team, if your market doesn't require rapid scaling to defend position, then early profitability makes sense. But if you need significant upfront investment, if network effects determine winners, if moving slowly means losing to competitors, then efficiency becomes a constraint rather than a strength.
Macroeconomic reality determines strategy more than founder ideology. Interest rates set the cost of capital. The cost of capital determines investor behaviour. Investor behaviour determines startup options. When rates were near zero, growth-focused startups raised unlimited capital to pursue market share. When rates reached 5 per cent, that capital vanished.
Linear's founder writes that experiencing profitability makes it hard to imagine alternatives. Perhaps. But it's worth noting that this discovery happened precisely when alternatives stopped existing. Would the profitability philosophy have emerged quite so conveniently if venture capital remained abundant?
The lesson isn't that profitability beats growth, or small teams outperform large ones. It's that business strategy responds to available capital, and founders reframe constraints as choices. In an environment where venture funding collapsed by two-thirds and government bonds pay 5 per cent, profitability stopped being optional. What changed wasn't founder wisdom. It was the price of money.