These Ambitious Startup Founders Aren’t Raising Venture Capital Funding, At Least For Now—But They’re Still Growing Their Companies Rapidly. Welcome To Ecosystem 2.

Patrick Murray is founder of On Air Parking, a startup that brings in $9 million in annual revenue helping consumers find unsold airport parking for a discount, via an app similar to Hotwire. Murray partnered with a private investor in the parking lot industry to get the business off the ground and has hired a president to run the company and its team of about 10 contractors. However, he hasn’t opted to go the venture capital route.

The Los Angeles area entrepreneur is ambitious about growth, but he’s decided to do things his own way. To make sure he has time to enjoy his family—he’s both a husband and father to two children ages two and four—he’s designed his business to scale up while he’s working only works four hours a week, relying on both his team of contractors and a variety of apps and tools to run it efficiently. His inspiration came from both Richard Branson’s autobiography Finding My Virginity, in which Virgin Group’s founder discusses his reasons for working from home, and Tim Ferriss’ classic The 4-Hour Workweek.

Murray held back emotion as he talked about the freedom he has on a recent community event I moderated recently at the New York Public Library. “It brings tears to my eyes, talking about it now, because I love my kids so much, and there were times I thought I wouldn’t be able to have that flexibility,” he said.

Murray is part of a universe of entrepreneurs that doesn’t get as much attention as the startups making the rounds of Silicon Valley for funding—a universe that venture capitalist Allison Long Pettine calls “Ecosystem 2.” She is president of Crescent Ridge Partners, a venture fund, and co-founder of Ad Astra Ventures, another fund that backs high-growth startups with at least one female founder, both based in San Diego.

Entrepreneurs in Ecosystem 2 are ambitious founders running startups where growth and profits matter but not at the expense of the entrepreneurial ideas that drove them to launch a business in the first place or at the cost of prioritizing people—their families, employees, customers, and community. If Ecosystem 1 is about maximization—of funding rounds, the size of the business and the size of the exit—Ecosystem 2 is about optimization and resourcefulness. “This new ecosystem is built on rigor and skill but also compassion and empathy,” says Pettine.

The founders of startups in Ecosystem 2 often find a way to start and grow their businesses that does not depend on following the rules of winning traditional venture funding—rules that have become as well-defined as applying for a job on Wall Street and often require founders to go through training at accelerators so they can pitch in a specific way and make the right impression. Though founders in Ecosystem 2 are often fully capable of playing that game, they are often more committed to building a business and a life that fits their unique vision than conforming to the rules and opt for other routes to funding, including self-funding. “If you are that innovative, you may not fit a pattern,” says Pettine. If they do raise venture capital, it is at a stage where they have more agency over how their startup will be run after the deal or from funds that support them in doing things their own quirky way.

In some cases, founders don’t have much access to the networks that open the door to capital. Rather than wait a lifetime for systemic change, they take creative routes to finding funding, so they can start and grow their businesses now. “These entrepreneurs and innovators aren’t trying to win a game that is stacked against them,” says Pettine. “They learn to play the game and create a new game—one they know they can win. “

I’ve come across many startups that embody Ecosystem 2 as a journalist in the past few years, and was very interested to learn that Pettine was observing a similar trend in her own work when we collaborated on several writing projects supported by one of my nonprofit clients. We both agreed that the growth of these scrappy, innovative and capital-efficient businesses is one of the most exciting, democratizing and underreported trends in business. Graham Cochrane, a digital entrepreneur and author who participated in the panel, calls these firms “life-giving businesses.”

One benefit of staying part of Ecosystem 2 is freedom. The freedom to be an old-school entrepreneur who is driven by passion for their idea above all. The freedom to allow the business to grow at its natural pace, not a fund’s timeline. The freedom to participate fully in their personal lives and communities, something that is hard to do when trying to meet relentless funding goals. If the entrepreneurs do go the traditional funding route, it’s usually when the business has reached the stage where the owners will have more of the agency they want over the future of the business and their own lives.

It’s hard to put a number on the startups in Ecosystem 2 because not all startups raise their hands to stand up and get counted. However, there were 16,465 venture deals in the U.S. in the U.S. in 2022, according to research firm Statista, and 359,000 new businesses formed in the U.S. in the second quarter of 2022 alone. While many of these new businesses are more likely to be traditional small businesses than scalable startups, no doubt there are many traditional startups among them that are bootstrapping or turning to other types of funding.

The growth of technologies like artificial intelligence seems to bode well for founders in Ecosystem 2. Just as cloud-based tools made it less expensive to run a startup, and lowered the barriers to entry for founders who lacked much startup capital, it appears that artificial intelligence and tools like ChatGPT will do so, as well.

Ultimately, we’ll probably always need venture capital, or a substitute, to scale businesses to the size of a Google or Facebook. But many founders, while looking to scale, aren’t bent on reaching that size and are content to find other routes to funding and growth. Maybe they don’t want to go through the training and grooming required to become part of the funding ecosystem. Maybe, like Murray, they want to enjoy each day of their lives with the people who matter most to them while still scaling up. One of the most interesting stories to cover in the years to come will no doubt be the trajectory of the many startups that are part of Ecosystem 2.