The startup era is back, but this time founders are using AI to avoid one of their biggest early costs—hiring employees.
A report this week by the Bank of America Institute found the number of “high propensity businesses,” or businesses the Census Bureau identifies as likely to hire employees, jumped by 15.1% year over year in January. Meanwhile, the number of business applications with explicit plans to hire employees fell by 4.4%.
The trend comes amid the record-high investment small companies are making on tech services, which includes AI, according to the Bank of America analysts, who said spending jumped 14% year over year last month.
“This might be linked to a productivity push,” the report said.
Among small businesses, retail led the charge in tech spending last month with a gain of more than 25% followed closely by manufacturers, BofA added.
Small businesses, usually defined as a company with fewer than 500 workers, employ about 45% of Americans, and a major drop in hiring among this group of companies could hit the labor market hard.
Following the Federal Reserve’s decision to keep rates unchanged this week, Chairman Jerome Powell said private sector hiring had stalled. In February, employers cut 92,000 positions and the unemployment rate stood at 4.4%.
“Effectively, there’s zero net job creation in the private sector,” Powell added in a press conference this week.
Larger companies are also increasingly leveraging AI to try to do more with less. The latest evidence: fintech firm Block’s decision last month to lay off around half of its workforce, with CEO Jack Dorsey citing intelligence tools that are “enabling a new way of working which fundamentally changes what it means to build and run a company.”
Some have said Block’s move constituted “AI washing” and that the layoffs last month were actually meant to correct over-hiring during the pandemic. Block’s chief financial officer and chief operations officer, Amrita Ahuja, told Fortune earlier this month this was not the case.
Meanwhile, AI has been cited in around 8% of all job cut announcements in 2026, or about 12,304 announcements, according to a study by executive outplacement firm Challenger, Gray & Christmas.
To be sure, Apollo Chief Economist Torsten Slok predicted the skyrocketing number of companies being created will be a boon for the labor market overall.
“As these firms scale, they will create jobs, underscoring that AI is likely to strengthen, not disrupt, the US labor market,” he wrote in a note earlier this month.
Replacing engineers
Others, such as Andy Tang, a partner at Silicon Valley venture capital firm Draper Associates, aren’t so sure. On average, the startups he talked to last month are reducing their engineering teams by a third, he told Fortune, revealing just how beneficial AI tools are to early-stage founders.
Often, these startups are finding that putting money into AI tokens is a better investment than increasing headcount by producing three to five times the code for a nominal cost.
“If you do the math, you don’t need nearly as many engineers” he said, adding that most knowledge work is easy to replace.
In the future, AI tools may even enable solo entrepreneurs to cut their staff entirely, and instead create an army of agents who then go on to create their own “founderless unicorn companies,” according to Tang.
The new playbook
The idea of using AI tools to scale rapidly has quickly caught on with a new generation of young, tech-savvy entrepreneurs.
Two years ago, Rudy Arora and Sarthak Dhawan started TurboAI, an AI-powered tool that converts lecture notes into flashcards and quizzes, with an initial investment of less than $300 while still college students at Northwestern University and Duke University, respectively.
In the past two years, the now 21-year-old childhood friends have been able to grow their company to 8.5 million users and are generating about $1 million per month with only 13 employees, partly because of AI, the pair told Fortune. And despite raising $750,000 in a funding round two years ago, Arora said they have preferred not to spend it because they are profitable.
“If we were a company two-and-a-half years ago, it would take over 100 employees,” Arora said. “The only reason we’re able to do it with 13 employees right now is because of AI.”
What used to require a product manager and five engineers can now be handled by a single technical employee armed with AI agents, he added.
Arora’s cofounder Dhawan added that he believes startups are only just discovering how AI can supercharge their businesses. Still, technology is already changing how entrepreneurs function. During the post-2008 startup boom more than a decade ago, creating a company often required experienced programmers and venture capital money, said Dhawan. Yet, the cofounders’ experience building TurboAI proves this isn’t necessarily the case anymore.
“We’re going to see people even younger than ourselves, building companies with even less resources,” Dhawan said.
