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We need a middle class for startups

• clean_send 4y ago
  I feel like this is just trying to rebrand “lifestyle businesses” or small businesses in general. Where I grew up it wasn’t uncommon for people to have businesses that did a few million in sales and the whole family worked at. While not as sexy as getting angel investment, it sustained a quality of life that met their needs. In order to run a successful business you don’t NEED mass profits or VC dollars.
  • mathattack 4y ago
    Indeed, the majority of businesses don’t have Angel or VC funding. The majority are built on sweat equity.
  • seibelj 4y ago
    Local banks can provide the capital, often collateralized by your house. Also small business loans from the government and accelerator awards can provide 6 figure amounts. I know some "generic" business people who are fairly wealthy and they own things like food franchises and apartment complexes. There are many paths to becoming rich that don't involve VCs and billion dollar exits. 99% of entrepreneurs don't talk to or know anything about the VC system. But if you are in tech and want to hire the best possible team to create something new, you need a lot of capital because those people are super expensive labor. And VCs don't want to give you $XX millions of dollars if the potential return is 2x. So that's the system we have in tech.
    • esotericimpl 4y ago
    • claytonjy 4y ago
      at the risk of stating the obvious, our labor is only so expensive because of that VC money, and the money-printing machines they've funded
    • scarface74 4y ago
      My question is why does everyone with the next CRUD SaaS app think they need to hire the “best people”? I’ve seen plenty of job openings where companies want “ninja rockstar 10x developers” to write what ends up being something that anyone who knows the latest MVC framework with three years of experience can do competently. And most “entrepreneurs” who own franchising are barely middle class and “bought a job”. The average fast food franchise, convenient store averages about $70K a year and that’s with the owner working insane hours and putting their family to work as free labor.
      • atentaten 4y ago
        > The average fast food franchise, convenient store averages about $70K a year. Where can I find industry stats to explore this assertion?
        • scarface74 4y ago
          McDonalds is $150K in net profit after investing 2.7 million https://www.mashed.com/178309/how-much-mcdonalds-franchise-owners-really-make-per-year/ https://www.mashed.com/178309/how-much-mcdonalds-franchise-o... 7-11 is between $50-$75K. https://mobile-cuisine.com/franchise/7-eleven-cost/ https://mobile-cuisine.com/franchise/7-eleven-cost/ Subway is about $40K a year https://www.eposnow.com/us/resources/how-much-do-franchise-owners-make/ https://www.eposnow.com/us/resources/how-much-do-franchise-o...
      • treeman79 4y ago
        A 10x programmer can get things off the ground very fast. Back at my peak. Me and another guy got a new startup to 1,000 paying clients in b2b space in 2 years. We had a few “regular” guys that helped out, but they would have taken 20 years to do what we did.
        • scarface74 4y ago
          I consider myself a “regular guy” (and 80% of drivers think they are above average). But I believe I can go through my LinkedIn profile and find a bunch of “regular guys” that I’ve worked with through the years that if you combine us with a “product guy”, an empty AWS account and a budget. We could put together a standard SaaS app.
    • passivate 4y ago
      With the recent emphasis on remote work, you can hire from the global talent pool. The US labor market is indeed very expensive.
  • boringg 4y ago
    Also there was a time when "lifestyle business" was getting shade as if it an inferior product for inferior people. I think that was probably just VC shade being thrown at it because they couldn't do anything with the kind of business. That and platforms probably ate away at their core offerings...
    • klaaz0r 4y ago
      Of course, they are on the back foot. If you have a successful indie business, make good money why would you accept VC investment? If you do it's on your terms and that often means worse deals for VC's. I can't blame VC's because their business modal is really different, they need to make a 100x not a value investment.
    • ttcbj 4y ago
      As someone who owns a lifestyle business, I think the domain of lifestyle businesses is almost entirely distinct from that of startups. Something that has the potential to be a startup (massive growth), could not be "held back" to remain a lifestyle business. And things that are lifestyle business generally cannot be grown at the pace of a startup. Almost by definition, a lifestyle business lacks the potential for massive growth. If it has it, and the owner tries to 'hold it back' someone else will come along and capture the rest of the market. The incentive to do so is large. Occasionally, you will see privately held businesses that have the potential of startups, but they are not lifestyle businesses (maybe mailchimp). They grow into full fledged businesses that just happen to be privately held. They will often find ways of funding their growth (and have options for doing so), even if that isn't VC. That said, lifestyle businesses are awesome for your lifestyle. I didn't think I wanted one until I ended up with one, and it turns out high-ish income, total control of your time, and direct positive relationships with customers are a great lifestyle for me.
      • djhn 4y ago
        What kind of business do you operate? Mobile apps or desktop software? Consumer or business SaaS? Developer tools? Something else entirely?
  • thanedar 4y ago
    I'm trying to split SMB into two categories. Lifestyle small businesses are great too, but I'm really talking about companies with $10M+ revenue potential. You can get top-tier VC returns by building a portfolio of Mittelstand businesses ($10M-$1B in revenue).
    • phamilton 4y ago
      > I'm trying to split SMB into two categories. The fact that SMB is literally two categories (Small and Medium Business) but effectively one category is a great way to capture the frustration here.
    • mbreese 4y ago
      > top-tier VC returns by building a portfolio of Mittelstand businesses I’m not sure this is true. You could get good relative percentage returns, but in terms of absolute returns, I’m not sure the math is there. Meaning, if you invest $1M in a smaller company and get a 20X return, that’s pretty good. But smaller companies won’t have much more need for investment capital. So, your absolute return is limited to $20M. Now, if you have a larger company that needs $100M in investments (over multiple rounds), but still gets a 20X return, that’s a $2B return. You have the same relative rate, but a massive difference in absolute numbers. To get the same absolute return, you’d need 100X more companies in a portfolio, which is just not manageable. Even with a 2X return in a $100M investment, you’re still way ahead in absolute terms. ($100M >> $19M) What I think you’re really trying to argue for is that there needs to be smaller VC portfolios with smaller expectations. I think this is possible, but it’s more difficult to hedge bets with smaller expected returns.
    • einarvollset 4y ago
      Hey, I'm the co-founder of TinySeed (and also a YC alumn), would be happy to connect: einar@tinyseed.com
    • spitfire 4y ago
      > You can get top-tier VC returns by building a portfolio of Mittelstand businesses ($10M-$1B in revenue). Constellation software does exactly that. They've quietly been the Warren Buffet of SaaS business for like 20+ years now.
  • chadash 4y ago
    There's somewhere between a "lifestyle business" and a unicorn though. You can be a contractor with a focus on re-doing roofs and pull in $1m/year without too much work once you have things running. You will be wealthy, but you won't ever pull in $20m/year. I think it's fair to call that a "lifestyle business". I know of a company near me that has $300M/year revenue (gross, not net) that sells cables and other equipment to ISPs in the region. It's owned by one person. I don't know their margins, but that person might be making $20M/year. They might be able to grow that business and sell it for $500M dollars if they play their cards right. I wouldn't call that a "lifestyle" or "small" business. It's somewhere in the middle. I think it's the latter type that the article is referring to.
    • xmaayy 4y ago
      I think what you just described is called "A Business"
      • DoubleDerper 4y ago
        Seems more like a lucrative "job" than a "business"
        • wbsss4412 4y ago
          How do you define a “business” then?
    • mc32 4y ago
      These are the businesses all up and down I-880 on the bay side from Fremont to Oakland. They’re just businesses.
    • rglullis 4y ago
      Oh, come on. You are putting one third of the economy as "lifestyle businesses"? How many fast food franchises make less than that per year, are they "lifestyle businesses"? Seriously, please get out of the SV bubble.
  • vmception 4y ago
    and you can always just be an investor in a business with simple % ownership and splitting net revenues at any interval you want. no multiple share classes, no liquidity preferences, no need for infinite growth or growth at all all this is still around ya know people act like they just forgot
    • deleted 4y ago
      [deleted]
  • matchagaucho 4y ago
    This is where the term "Mittelstand" gets lost in translation, and speaks to the Author's point that the Americanized definition of start-up has become too polarized and absolute. It is neither a lifestyle business nor a shareholder-driven business.
    • LosWochosWeek 4y ago
      Mittelstand doesnt even have agreed upon definition here in Germany. I've heard people call everything and anything that lies between your local mom and pop show and Volkswagen "mittelständisch". My (very wrong) opinion on what Mittelstand is: I think of a small-to-medium sized company that manufactures (I've never thought of service providing companies as Mittelstand) one group of things at a very high and competitive level. I think of companies that are pretty much strictly B2B. These are mostly family-owned businesses, but for me that doesnt need to be true. Companies that you only know of, when you need to know. And when you do need to know about them, you most definitely will know about them. Again, this definitely isnt what most people consider to be Mittelstand. Just my view on it.
  • julianeon 4y ago
    Is Berkshire Hathaway a lifestyle business? Because it started out as one. That’s his point. Small businesses can become unicorns - but they need space and time to grow. We need a better environment, and a more nuanced understanding, of them.
    • bityard 4y ago
      > Is Berkshire Hathaway a lifestyle business? Because it started out as one. My skept-o-meter went off-scale upon reading this. Can you point to exactly when BH was a lifestyle business and what they were doing at that point that would classify them as a lifestyle business?
      • missedthecue 4y ago
        He raised $105,000 from friends and family and started a hedge fund which became BH.
        • PeterisP 4y ago
          Yes, but why would you say that it was a lifestyle business? I mean, it's not about size or being family-funded, I'd argue that this hedge fund was something entirely different from a lifestyle business since day 1.
  • marcosdumay 4y ago
    It's about financing, not about branding. It's just yelling "hey, people stop ignoring 80% of the market!"
• roflyear 4y ago
  Am I the only one not interested in taking advice from someone who has largely been massively successful? I always feel like these are the people who generally have nothing of real value to say, they just think they do because of their bias from their success.
  • dmueller39 4y ago
    IMO it's good to take the advice of consistently successful investors who seem to prioritize honesty. Warren Buffet, Charlie Munger, and Chamath Palihapitiya are my favorites. My reasoning is that you can't make consistently good investment decisions without having a reliable mental framework for how to look at the world. For other classes of successful people it makes more sense to read a biography (or autobiography if you feel the subject is intellectually honest) of successful people to understand how they think and operate. Many of these people won't be looking to give advice, but it is worthwhile to learn from them. For instance you can read the biography of Rockefeller, Carnegie, Franklin, and listen to "How I made this" featuring Michael Dell, and see the threads that are common amongst them. You may then compare that to yourself and understand the differences. IMO there's plenty of value in the article, but it's an example of something you should critically analyze and verify against other sources before acting on.
  • Clubber 4y ago
    Yes, I feel more useful information would be a story from someone who failed a bunch of times, then finally found success, and what the differentiating factors would be in his particular case.
    • roflyear 4y ago
      I agree - usually what I am looking to read about!
  • brightball 4y ago
    I think it's important to take advice from a lot of people. It's up to you how to frame what to do with it or how much you think it applies to your current situation.
• scotuswroteus 4y ago
  We need a startup for the middle class
• dontreact 4y ago
  My sense is that in general, and especially in software, the world is becoming more of a winner take all place. This is not a good thing.
  • chadash 4y ago
    Yes, but there will always be niches where you can make good money, but not enough for the big fish to be interested. For example, my wife uses some statistical software that is apparently pretty popular in her field, but it's still only used within a niche of academia. You might be able to find a niche that brings you $10M/year in profit which is enough to live a lavish lifestyle, but not enough for VCs to fund you or for Amazon to bother competing with you.
    • granshaw 4y ago
      Man I'd settle for 200K/year
  • deleted 4y ago
    [deleted]
  • cortesoft 4y ago
    With near zero marginal costs associated with software, it makes sense for a winner take all outcome to be the equillibrium.
    • munificent 4y ago
      ...which is why you need strong regulatory oversight if you want the software market to have any functioning level of efficiency. The economies of scale are enormous in software (and data-oriented businesses in general). That's good for the efficiency of any given enterprise, but it pushes very heavily towards monopolization and zero competition without regulatory force to counterbalance.
      • kortilla 4y ago
        That doesn’t hold at all unless there is significant lock-in that raises switching cost. If there is a company sitting there with no overhead collecting $10m/year for software all of its customers hate, it’s ripe for competition to take it overnight.
• mgdev 4y ago
  Gazelles? https://www.investopedia.com/terms/g/gazellecompany.asp https://www.investopedia.com/terms/g/gazellecompany.asp
  • mccorrinall 4y ago
    No, the author talks specifically about the "Mittelstand" https://en.wikipedia.org/wiki/Mittelstand https://en.wikipedia.org/wiki/Mittelstand
    • mgdev 4y ago
      I'm proposing an alternative to the same goal.
• esotericimpl 4y ago
• andrewedstrom 4y ago
  Powerful message, but what is going on with the formatting of this post? Why are lines highlighted with two different colors?
  • thanedar 4y ago
    I use my own "outline" style to make my posts easier to read fast. The brighter highlights are intended to be the most important points. Is that confusing? I can change the shade of the lighter highlights.
  • ravitation 4y ago
    I found it essentially impossible to read. Great note/outline format, if I already know the key ideas/takeaways and where they are relative to each other, but really awful to follow reading it for the first time.
• wollsmoth 4y ago
  There are a lot of random "startups" or rather, tech companies that managed to keep their customers happy while never really seeming to explode to huge capsizes.
• user_7832 4y ago
  While some comments here are criticizing the author, I'd like to add that what the author says matches with my (extremely) limited experience. The most "glamorous" are YC-type funds, while others seem to be built with money more locally pooled from friends/family/banks. There are a few <X City> entrepreneurship centres and startups, but these unsurprisingly aren't as famous as funds with billions of dollars. I wonder if there's a way to increase the visibility of the middle kind of organized-but-not-10s of millions of $ funds - both as a social experiment but also as an aspiring entrepreneur.
  • di4na 4y ago
    Please yes. As a founder aiming for the kind of outcome described above, finding the original 500k of funding is the hardest part right now. No idea who to ask or what they expect.
    • dv111 4y ago
      republic.co
• jrochkind1 4y ago
  I don't think it's an issue of making middle-sized businesses "cool", I think it's an issue of capital, right? The reason "VC" or "bootstrapped from zero" (both are the author's words) are seen as the two available paths is... because they are seen as the two available paths. Where do you get the funding to do a "middle-sized" business? The OP goes into this a little bit, but it seems to me that's the thing at the center of the whole discussion. If people saw that it was feasible to find funding for a business that could grow faster and/or with less personal risk than what he is calling "bootstrapped from zero" (or is sometimes pejoratively called a "lifestyle business"); but without giving up the control that you do with VC funding -- of course people would be interested in starting a business like that, the appeal is obvious, right? It doesn't need to be made "cool". But, how? OP suggests "New non-dilutive funding sources are now available for revenue-generating businesses", okay, more on this, and hopefully it doesn't sound like a pyramid scheme or scamming retail "investors". The things OP links to sound like... loans? OK... So this is just a variation of "bootstrapped from zero" where instead of just taking out credit card debt and loans from family and maybe a line of credit at your bank, you access loan products intended for new businesses? Are they secured by personal property? This doesn't sound so different from "bootstrapped from zero" to me, like these new sources of debt are going to make an entirely different business plan and category of business possible? Then he moves on to advising that investors fund these businesses... in ways different than VC? Which would mean... without taking significant equity? Or without trying to maximize their payout? They're going to invest just planning on making money from dividends instead? And investors are going to do this because... it's been made "cool"? I would love there to be more stable medium-sized sustainable businesses that don't pursue growth at all costs, treat their employees well, treat their communities well, etc. I feel like the OP weirdly seems to think the reason they aren't is becuase it's not "cool", rather than because of the economic factors. Businesses need capital, those with capital want to maximize their profit. So the two paths are either try for a capital-intensive startup that tries to give VC what they want; or you try to minimize the amount of capital you need by finding a way to start very small and have very slow but sustainable growth (the "bootstrapped from zero" "lifestyle business"). Making it "cool" to do something else does not solve these economic constraints. What might is talking about, say, changing the tax code to encourage a new type of business model or investment, or providing government subsidy for it, or something. Am I missing something?
• plehoux 4y ago
  > We Need a Middle Class for Startups You mean a bourgeoisie?
• akhilpotla 4y ago
  Good article from a few years ago, but it still stands up. https://nothingventured.rocks/what-startups-can-learn-from-the-mittelstand-399842086221 https://nothingventured.rocks/what-startups-can-learn-from-t...
• tptacek 4y ago
  I'm a fan of bootstrapped companies and have started and operated a couple of them, sometimes quite successfully. But I don't understand how the economics of funding them are supposed to work. VC is a star-search business. Most businesses fail, and that includes businesses run conservatively with organic growth. In a portfolio like that, the winners have to pay for the losers, or the math just doesn't work.
  • thanedar 4y ago
    I dig into the economics in the post. The data shows the median VC would get better net IRR returns with a Mittelstand PE strategy. It works because Mittelstand revenue and profitability is much more predictable. If you're on the Midas List, VC is still a better business. But many investors, especially solo GPs, should consider building a portfolio of middle class startups.
    • throwaway98797 4y ago
      but how will the LPs brag to their friends about their brilliant investments? sure 13% IRR is amazing, but it is not going to make my neighbor jealous
    • tptacek 4y ago
      I wonder if the numbers you're giving are tripping up a mismatch between what you mean by "Mittelstand" or "mid-market startup" and what HN generally thinks of. You're saying the numbers are attractive given a "mid-market" definition that spans all the way to 9 figures of annual revenue. It's true that there's much less risk in quickly getting a company to 6 figures of annual revenue and growing organically from there. But there's a lot of risk --- risk equivalent I think to the typical VC-funded startup --- trying to get it to 10MM/yr within the time horizon of a typical VC investment. Another sticking point with me is that claim that even services companies can get to this level of profitability with good management. Well, yeah, they can. But they don't exit at the same valuation as product companies, because they tend to fall apart when their founders leave.
  • bombcar 4y ago
• di4na 4y ago
  As someone that has been working hard in this domain, there is one major problem to this in software. Initial funding. There is a lot of growth non dilutive capital available but the first 500k are near impossible to get without a network in old money. You used to raise that money through other local mittrlelstands. At the Masons lodge. At the local kiwanis or Rotary. But these have closed to young member decades ago when said younguns moved to uni degrees as a path in. There is a lot of money idling out there to do that, but as Indie.vc showed, the usual LP are super frigid to it. I do not have a good answer to this. The current young people simply are too unstable and too close to poverty to take the risks. And there is noone taking a risk on them either. There is a looooot of value to make though. These markets are ripe for productivity enhancement through good software by small teams. But the people that have the domain knowledge and the tech skills do not have the risk taking capability to execute. Whoever find out how to provide them this will unleash massive growth on the world. I advice to look at what calm fund is doing. https://calmfund.com/ https://calmfund.com/ The solution may end up being some kind of crowdfunding from other tech specialists with high income. Like FAANG devs.
  • engineeringwoke 4y ago
    This is an English-speaking board where people have individualistic preferences so it isn't surprising that people default to an answer from private capital, but in Europe the government does this, and it works. Starting a company in the Netherlands was a breeze, and the tax breaks are very generous in the first few years.
    • di4na 4y ago
      I am in France, and i can tell you, the government only really support "want to be a unicorn" or companies that are already established or company that generate a ton of local jobs. I went to talk to our local chamber of commerce and industry, which handle navigating the subsidies, and their answer was "how many local jobs are you creating ? Just you for now ? Then we cannot help you, come back when you create a dozen in the region"
  • TuringNYC 4y ago
• bradleybuda 4y ago
  Businesses that are shooting for the "middle class" (say, less than $50M in earnings at their peak) are of course possible and healthy and good for the economy. What's missing in this analysis is that those businesses are not going to be "founder-friendly" the way that the prototypical YC-seed-stage startup is. To use the article's definitions: * "Bootstrapped from zero" is, of course, founder-friendly - no investors and no board means you get to do what you want! * "Raised $100M+ from VCs" is also pretty founder-friendly, at least in the early days, because you're selling those VCs on the lottery-ticket dream that they could earn 3-5 orders of magnitude ROI. With such an incredibly high upside, VCs and angels are willing to take risks with zero due diligence on unproven founders and small dilution. If you remove the long tail of upside from the possible outcomes and tell your early investors "the best case for you is 100x return, but zero is still just as possible" then the market will compensate in these ways: * Less availability of capital * More dilution * Less faith in "visionary founder" CEOs and more desire by investors to bring in professional management * Long and protracted due diligence processes before the check even lands All of that is fine! There's nothing wrong with building a business this way. But there's no free lunch here - companies that don't chase astronomical outcomes will have a harder path to getting those first few dollars in funding.
  • thanedar 4y ago
    The key is that Mittelstand businesses are much less likely to fail. (This is why PEs on average outperform VCs. I go into these economics in my post.) This can be the Goldilocks deal for founders where you raise <$5M from angels or PEs who are happy with consistent 5x returns and get to $10M+ revenue and $50M+ value with majority ownership. And there are orders of magnitude more of these opportunities available vs. VC-backed unicorns. And being VC-backed is only great if you're one of the winners. If you're one of the >90% that's written off, you're back to zero. I hit the wall at Series B with my startup Labdoor. We pivoted to profitability and are now headed to Mittelstand land, but this all would've been way easier if we just headed straight to middle class.
    • bradleybuda 4y ago
      > The key is that Mittelstand businesses are much less likely to fail I think you're getting at the crux of it here. The question is, how does one of these businesses "prove" to investors that they are less likely to fail? The failure rate for new business starts is famously high, whether that business is a tech startup chasing unicorn status or the corner deli. I think this will manifest itself in the due diligence phase, bringing back a bunch of things that tech founders have eschewed: detailed business plans, fundraising towards specific initiatives (as you point out in your post), and harsh measurement of progress towards those goals in board meetings with rapid consequences if goals are missed.
• Bubble_Pop_22 4y ago
  Microsoft should be the example to follow for any new business. They never raised money, never talked to VCs or consultants. They just went in the market and poached other companies to become stronger until they had to face the ultimate boss of the corporate world : IBM. They beat that and only had to surrender to the really last boss which nobody ever beats: The U.S. Federal Government. Without VCs you can stop at any point of the climb and rest, then you can decide to initiate descent or pass the baton or even camp there indefinitely
• givemeethekeys 4y ago
  The problem with micro services is that your CEO drank the Kool-Aid. Now your CTO has to get it done and your VP of Engineering is stuck with a large bag of feces.
• onion2k 4y ago
  Isn't this what everyone calls a "scaleup"? https://en.wikipedia.org/wiki/Scaleup_company https://en.wikipedia.org/wiki/Scaleup_company
• synergy20 4y ago
  there are plenty, they're called 'business', or 'small business', or 'grocery store' etc. they have to make money first day to survive, unlike VC 'startup's that burns other's money without worrying about profits for a while.
• ajross 4y ago
  I've made this comment verbally to a lot of people who seem to agree, but now that we seem to be in a firm correction maybe it's safe to say it here on HN: The clearest, most obvious sign that the End of the Bubble was imminent was that the discussion about "startups" you'd seen in public was completely dominated by discussion of fundraising and not products. And this blog post, even though it argues against extravagant fundraising, is no different. It's not about funding, it just isn't. Basically zero historical Unicorns needed billions of dollars in cash to bootstrap. Software companies all did it for almost free, but even Tesla (a heavy industry player competing directly with established outfits with hundreds of billion dollars in revenue!) did it on a few tens of million dollars and one too-visionary-for-his-own-damn-good angel. The obsession with fundraising reflects the investor dollars looking for a home. It's an inherently inflationary conceit. And even now that the gravy train turned over, it's frustrating that people don't see that.
• thenerdhead 4y ago
  These are the two businesses you see on social media. It does not mean the middle class doesn't exist. Perhaps they are busy delivering value to their customers to brag about it on social media and/or source their revenue from "building in public"? I don't see how this is any different than social media itself. You only see the "bootstrapped from zero" or the "industry plants". The middle class of social media however? They are there, they make a decent living, and they still create. They may not be recommended on the front page of feeds, but they still exist and are arguably how the platforms became big in the first place. I'll be honest and say I hate articles that only talk about raising money or valuations. That's like half of twitter and it's annoying. Startups are more accessible than ever today and can happen organically from like a HN, Reddit, or Twitter post. People find pain in their daily lives, and they create a painkiller. You don't need millions to create a v1.0 to assess product-market fit.
• kaheofwkw 4y ago
  Killer you
• anonimul 4y ago
  Killer you
• temptemptemp111 4y ago
• toss1 4y ago
  Reminds me of talking to a VC who said that one of his investments 'turning into a $20MM company is the WORST outcome'. The reasoning was that if the company just tanked, he had no ongoing issues, it was gone. Now, he still has his time & resources occupied by an ongoing company, even if minimally, it's a distraction...
• Havoc 4y ago
  I think the type of industry here matters. A big chunk of the classic Middelstand is something physical, not knowledge work. And startups turn that effect up to 11. Either it works or it doesn't. It is by its nature not conducive to middle ground.
• michaelbuckbee 4y ago
  This post is describing a structural issue on the funding side of new ventures: - - bootstrapping is very hard - traditional credit/loans aren't structured well for the "mid" type risks of starting software businesses (not much collateral) - and on the VC side there is much less opportunity for the Unicorn 1 in 10 exits. Tackling this problem are two funds that I didn't see mentioned in either the article or the comments so far: TinySeed and Calm Fund. https://tinyseed.com/thesis https://tinyseed.com/thesis https://calmfund.com/shared-earnings-agreement https://calmfund.com/shared-earnings-agreement Broadly both invest much less than a traditional VC would and are compensated differently. The details are different (and matter) between the two but it's more along the lines of profit sharing than looking for big exits.
  • deleted 4y ago
    [deleted]
  • limedaring 4y ago
    Tracy here from TinySeed, thanks for linking to our thesis! Point of clarification: we don't do profit-sharing. Instead, we are equity owners. So when a company gets to the point of success where they want to take money off the table, they can issue dividends (and TinySeed get's a pro-rata amount of those dividends). I find this is one of our most unique points and aligns the incentives of the founder with TinySeed. As mentioned in that page, by investing broadly into B2B SaaS, we can succeed as a venture firm without needing to count on unicorn exits. We're about to back our 80th company, and our founders tend to be older, more likely to have families, and tend to be "unsexy" businesses. We're only a few years old, but we've had very promising results (as a VC firm) so far.
    • bradgessler 4y ago
      You should add that you cap founder salaries at $250-$300k/year (if I remember your terms correctly) If you’re a founder looking at TinySeed, what this means is that if your business reaches a level of success you can pay yourself over $250k-$300k through your W-2, you’ll either have to cap it there or pay the rest through dividends. That said, this isn’t really a terrible setup if you plan to go down this route. The IRS takes issue when tightly held C-corps pay themselves large amounts via W-2’s because they would want to reclassify those as dividends. They won’t say what the “large amount” is, but I’ve been advised that its around $250k-$300k if you don’t have disinterested stockholders or board members voting on your comp. As always, consulting with your accountant before making tax and/or fundraising decisions.
• substation13 4y ago
  I was expecting this article to be about how a middle-class is required for innovation. If we end up in a world where 90% of the population are struggling to meet basic needs, 0.1% live off generational wealth and 9.9% act as a highly technical servant class, then there will be fewer innovators and fewer innovations.
• tylertringas 4y ago
  Sounds like you're describing calm companies: https://calmfund.com/thesis https://calmfund.com/thesis
• eric4smith 4y ago
  No. Already most businesses are started in this broad middle. It's where the TRUE root of entrepreneurship starts. Heck, you are sure you will get no funding. For sure you will fight for every last customer. You will wonder how you will pay the rent every month and your staff. Most of these businesses fail. But enough of them keep going to keep the economies of almost all countries going. These are the people that struggle. There is no need for "funding" or someone to "buy" these businesses. These business will always exist, and for every one that goes down 3 more spring up in their places. Jesus.
• Zaskoda 4y ago
  This sorta thing would mean the world to me and my team at our little bootstrapped startup. We may go broke before we turn revenue and we're now blowing enough smoke in front of mirrors to get VC funding.
• coderholic 4y ago
  Totally agree with this article. It's not just about funding methods, but also playbooks for these types of businesses, and best practices. I've bootstrapped IPinfo.io to millions in revenue and a team of over 20 - so we're squarely in the "Middle class", and there's a tension between the "bootsrapper advice" (which mostly applies to optimizing for lifestyle and eliminating any risk) and "VC backed advice" (which mostly seems to optimize for scale and speed) - and a lack of advice for anything that balances those 2 (let's be ambitious and serve a large market and create the best products with great people, but let's run this as a marathon and not a sprint, and let's not risk everything on a big outcome).
  • bradgessler 4y ago
    Same! I think the middle ground is somewhere between paying dividends or distributions from the revenue and most importantly, becoming comfortable with the idea and ignoring the “growth at all costs” mentality that people (and press) are so attracted to. Where does this community exist?
    • hooande 4y ago
      this community simply does not exist yet in significant form. if you build it, they will come by "it" I mean a sustainable company that pays dividends and isn't focused on constant growth
    • quartesixte 4y ago
      > paying dividends or distributions from the revenue Traditionally, isn’t this what a bonus was, back in the day?
  • chrisweekly 4y ago
    Your story with IPinfo.io is profoundly compelling; have you written anything about your journey? > "let's be ambitious and serve a large market and create the best products with great people, but let's run this as a marathon and not a sprint, and let's not risk everything on a big outcome" This sounds so great.
• czbond 4y ago
  You have funding... it's called nights and weekends. Most founders are "nights and weekends" to scrimp buy for YEARS [3-5?]. Anti-risk, security seeking, founders who think they should get funding in `3 months really haven't assessed "startups" as a profession too well. You get funding when capital has a reason to believe it isn't simply gambling. "But I have kids and a family". Yep, so do many... and they made it work. Decide if you will.
• alexashka 4y ago
  This describes a problem, a potential solution but not the steps needed to get there, the steps in-between. Those are the tricky bits :) It reminds me of the 'how to draw an owl' meme where you have a couple of circles on the left as step 1, a finished drawing of an owl on the right as step 2. Great, but uh, what did you do to get from circles to an owl? :)
• mbesto 4y ago
  This already exists in the US. How do you think <insert X project management software for devs> has 10k customers? One of the biggest trends is now that PE is gobbling them up and rolling them up into $100M+ revenue businesses.
• paxys 4y ago
  From an investor side, what I see is that I'd have to keep my risk the same (these "Mittelstands" have the same chance of succeeding as any other VC backed company) while drastically reducing returns. Why would anyone go for this?
  • unixhero 4y ago
    Sample size is much higher. VC's are rejecting thousands of applications.
• goodpoint 4y ago
  Some aspects listed on the wikipedia page: Family ownership or family-like corporate culture, Long-term focus, Nimbleness, Investment into the workforce, Social responsibility ...are very much feared or despised in SV and, to a lesser extent, in US in general.
• smeej 4y ago
  > Vision: Promote employee stock ownership for American Mittelstands. I'm especially interested in this last bit and I'm wondering if anyone has any recommendations for learning about the different models people have tried for this. I have what I can only really describe as a hunch or an instinct (not even a theory at this point) that there's something good for people about owning what they help create. But I keep getting caught in the brass tacks of it. When I've earned small ownership stakes in companies, the only real way that had any direct monetary value to me was if the company had an exit and I stopped being an owner. Would some sort of dividend or profit-sharing agreement solve this? Are there long-established means of allowing small-scale owners to profit from their ownership that I've just failed to come across? The accredited investor laws in the U.S. make it such that most working class people can't buy ownership in private companies, but if they could earn it and profit from that ownership, that seems like a much stronger way of "investing in what they know" and potentially seeing outsized returns rather than just investing broadly in the stock market as it goes up.
  • simulate-me 4y ago
    Middle-sized companies usually pay dividends because that’s how the profit is moved from the business to the owners. Unlike many public companies that focus on stock growth as the main driver behind of providing shareholder value.
• formerkrogemp 4y ago
  Unpopular opinion: Paul Graham and a generation of startups with Silicon Valley magical thinking has inculcated this belief that startups are the solution to everything. Don't get me wrong: startups have their place, but they're no panacea. Most of our problems are political and, more and more often now and moving forward, environmental. But, yes, opening up funding to people of different socioeconomic backgrounds at different "risk" levels might lead to more innovation and entrepeneurship. So would a population of citizens who don't have healthcare tied to their job, childcare tied to their location or reliant upon wealth, and so forth. People who don't have to worry about bankruptcy due to an accident or disease, and people who can have their children taken care of during the day while they're off starting a company can focus more on a company and less on the risk of failing in everything else.
• jjmorrison 4y ago
  Agree with this - that fundraise treadmill is brutal abyss to live in.
• dustingetz 4y ago
  The investment terms would be terrible; monopoly math is what makes early stage risk worth it. Alternatively, VC underwriting would need to get 100x better. (Which such a disruption IMO is entirely feasible by a new younger/smarter cohort of investors)
• asellke 4y ago
  I once pitched a fairly well-known Bay Area VC in 2015. We were looking to raise a $2.5M Seed round. The VC looked at me through his steepled fingers and said: "This is great. I'm just trying to figure out if you're a $100M business or a $1B business..." And while it was flattering to be considered either, there was only one business they were going to invest in. I understand the mechanics involved in some of these funds and the myriad of considerations that go into their investment theses, but it was also sad and frustrating that a lowly "$100M business" (with 4.5M registered users, mind you) couldn't get funded. Don't hear me bemoaning the fact that we didn't get funded or that we somehow didn't receive our due. I'm just adding my experience with the gap that Neil is citing. And just like in broader societal terms, I think a healthy startup "Middle Class" would make for a healthier overall economy.
• westcort 4y ago
  My key takeaways: 1. Remote work, no code, social media, and ecommerce platforms all make it easier to bootstrap new businesses from zero to revenue 2. (From Wikipedia) Mittelstand commonly refers to a group of stable business enterprises in Germany, Austria and Switzerland that have proved successful in enduring economic change and turbulence. The term is difficult to translate and may cause confusion for non-Germans. It is usually defined as a statistical category of small and medium-sized enterprises with annual revenues up to 50 million Euro and a maximum of 500 employees 3. There are hundreds of YC-backed startups stuck at ~$1M revenue that can predictably grow to $10M+ revenue with the right team and funding structure 4. Many VC-backed startups would be better as Mittelstands 5. My first business, Avomeen, is a classic Mittelstand 6. Mittelstands are already about one-third of our whole economy 7. Mittelstands can launch and get profitable for <$1M
  • englishrookie 4y ago
    The original article uses the plural too, Mittelstands, but it sounds really weird in German since it's more of mass noun (it's as if you referred to various pots of sugar as 'the sugars'). I believe the correct word would be Mittelständler, but if you're going to anglicize it, Mittelstanders would much better than Mittelstands in my opinion. Then again, I'm not a native speaker of either German or English...
    • Quanttek 4y ago
      the "-stand" comes from the German word for "estate" in the medieval sense [1]. It's typically translated with small- and medium-sized enterprises, which is also the lingo used at EU level. As you said, it's a mass noun, so if you want to refer to an individual enterprise belonging to the "Mittelstand," you'd effectively use it as an adjective and speak of e.g. a Mittlestand firm. [1]: https://en.wikipedia.org/wiki/Estates_of_the_realm https://en.wikipedia.org/wiki/Estates_of_the_realm
      • englishrookie 4y ago
        How would you call a person belonging to the Mittelstand in German? In another Germanic language, Dutch, you would say "middenstander" (or plural"middenstanders"), derived from "middenstand".
• calltrak 4y ago
• danschumann 4y ago
  For real, most VC's could take 100 different shots on solo devs who just need their living expenses paid... like me.
  • Sohcahtoa82 4y ago
    This is what UBI is supposed to enable. People think it allows people to be slackers and just sit around smoking weed and playing video games all day and otherwise be an unproductive member of society, and yes, there's some truth to that. But there's also a lot of people that have the desire to create some cool and useful stuff, but are already burnt out by working 40 hours a week at a job they have to work at to pay the bills. That fits me, as well. I've got two projects that are half-written and probably just need another 200 hours or so of work to release an MVP, but after looking at code all day, more code is the last thing I wanna do when I log off for the day.
• steve76 4y ago
• laurex 4y ago
  I think one myth that exists in both American culture and startups in particular is that you can "make it" if you just have the skills and the chutzpah. Without some system that isn't inherently about 'move fast, big returns, oh and also it really helps if you're a young man with a Stanford connection and a way to get through the period of time where you have no income' then we get the technology that results from that. And the 'system' reflects a funding situation where big investors, often having 'good' missions (the LPs I mean) look to folks from SV VC to pattern-match their way into high returns. If you are building a business and it's a "good business" that can be profitable early then great, but you will be stuck at scale (or in almost anything consumer-facing in tech) with only the companies willing to maximally exploit the systems that I think we know are extractive and unsustainable. Like with most systems problems, it's hard to know what the 'answer' is- if you buy into this line of thinking- but I hope we'll start trying new ways to approach the problem, whether it's by putting some pressure on the LPs or by making it easier to crowdfund or by some more radical means...
• adamqureshi 4y ago
  Yes.100% with that this guy said. I have a 1 man shop marketplace startup. I been at it since 2016. I have to literally figure shit out on the fly. I can't afford a full time engineering time ( i have a pay for play engineer). I pay for the platform from the sales i make. I have no goals to raise VC. I am under no illusion of raising series ABCDFU. My goal is to make sales and put food on the table for me and my family. For me, as a 1 man shop. Surviving IS Succeeding. I am very happy being a thousandaire. techCrunch will never write about me or my start up. So if you have an idea, build it and start testing. your #1 goal should be making sales / money ASAP. Thats it. Do not fall in to the trap of I have an idea i will raise funding and i will exit making billions. That is NOT reality / real world. What you read on techcrunch is not reality, those unicorns are very rare. Good lucky out there. Make sales. Charge money.
• lumost 4y ago
  I suspect that there is a self full-filling prophecy for VC funding. If you aim small (read 50-500 million dollar business), then odds are a DecaBillion dollar business will eat your lunch sooner or later. The only middle ground would appear to be in businesses which serve defensible tight niches, but in software these mostly appear to boil down to consultancies with a small set of customers.
• deleted 4y ago
  [deleted]
• dv111 4y ago
  this is what we're building! https://docsend.com/view/petujc3wgtnj5ghy https://docsend.com/view/petujc3wgtnj5ghy
• davidw 4y ago
  Rob Walling's TinySeed looks relevant: https://tinyseed.com/ https://tinyseed.com/
• deleted 4y ago
  [deleted]
• cseleborg 4y ago
  I like some of what the article proposes, but some parts leave me skeptical. The author sketches out an industry of funds to buy and scale small businesses to Middelstand level. I think one of the reasons for Germany's strong Mittelstand is that many of these are privately owned, sometimes even family-owned, and can take a long-term view on business and innovation. I lack the imagination to see how the proposed kinds of funds could be content with dividends year after year rather than the exits I suspect they'd prefer. I wish there were more dividends-only VCs...
  • tptacek 4y ago
    Which is another way of saying you wish there were more LPs to invest in funds that were structured that way.
    • cseleborg 4y ago
      Is it, though? I'd imagine throwing more partners into the mix only increases the pressure to generate big returns in the short run. Do you have any examples?
• AussieWog93 4y ago
  >Problem: There are only two types of businesses on social media: >Bootstrapped from zero. >Raised $100M+ from VCs. Does anybody else see the irony in this being discussed on a website owned by a huge company whose entire business model is lending medium-sized amounts of money to startups?
• stjohnswarts 4y ago
  we need a middle class for western civilization * limited terms for government offices, all of them * limited funding and/or public funding for top X candidates * _Heavily_ regulated lobbying and audits of said lobbying, and complete transparency of All Meetings (time, date, topic, audio recording) * free public higher education Only then will we get a little bit closer to fair government and healthy middle class (which is starting to dwindle in the USA)
• brotoss 4y ago
  No we dont
• bsimpson 4y ago
  I studied entrepreneurship in college. They didn't know what to do with me when they realized I was planning on running a lifestyle business. Everybody else's forecasts were in the millions. I would have been happy making more than I spend.
  • russdpale 4y ago
    Exactly what I find also, everyone wants to take over the world, as if everything is a zero sum game with one winner and billions of losers.
• deleted 4y ago
  [deleted]
• hoerzu 4y ago
  It's called lifestyle business
• phendrenad2 4y ago
  Didn't the 21st century establish that if something is valuable, it'll be way more valuable if you throw millions of dollars it and run all of the other penny-ante competitors out of business? If you do manage to find some niche, you'll have to either become the one to get VC funding, or watch as someone gets VC funding and eats your lunch. Very few remain under the radar long enough to grow too large to leapfrog.
• techsin101 4y ago
  with devs salaries in 200k+ range is regular startup even possible now?
  • conductr 4y ago
    There's plenty of decent <$15/hour devs up for grabs if you look for them. If you're more interested in building a cool company culture with a fancy office in an expensive city or just trying to do incredibly difficult things that require top of top devs then maybe just re-evaluate if that's the right business for you in this moment with attainable resources
  • ttymck 4y ago
    Surely the answer is yes, but the question is: will "regular startup" now be more selective for founders with higher risk-appetite (paying the opportunity cost to forgo 200k salary) or higher self-delusion (to think they can replace their salary with whatever idea they have). And if they are more deluded, are their ideas any better/worse as a result?
• Uptrenda 4y ago
  I get the sentiment but how exactly is raising literal millions in funds 'middle class' in startups? If I had a million dollars I could put together a team of founders who needed about 20k per year each to survive and we wouldn't need to raise until shit was actually finished with substantial revenue. Granted, this assumes you're not in Le Bay (I know) and your expenses are very low (like owning your house) but in my mind this is how startups should be done. Get a bunch of people to move into one of the founders houses. Sleep on the floor if you have to. Have a coffee pot making bulk coffee for the whole house day-over. Live on nice healthy foods that require no cooking so you can code more. No take away obviously because its horribly over-priced. Plenty of cash for hosting services. Obviously no meme shit like cloud hosting. Use real servers for everything. There are even enough services that provide free resources to startups that you may not need to pay for this. You want to avoid the trap though: becoming dependent on services designed to screw your time and wallet later on. Anyway, it seems like investors in startups only care about companies with million or billion dollar potential. You hear much less about people who build smaller profitable businesses, period. I'm guessing if it's a small business with limited growth potential you just have to bootstrap it with your own money.
  • robbie-c 4y ago
    Just a bit more info on free services - when we were starting out AWS were offering $10k credits a year for 2 years or $100k credits for one year. I believe we got access to this through one of our investors, but most VCs and incubator programs will be able to do this.
    • d_t_w 4y ago
      Stripe Atlas cost me US$500. For that I got a Delaware C-Corp, an SVB bank account, and $5k of AWS credits that expired after 12 months. Our AWS bill in that first 12 months was roughly $5k. Money well spent.
  • robocat 4y ago
    > If I had a million dollars Did you know you can get $500k by applying to this fund: https://www.ycombinator.com/deal https://www.ycombinator.com/deal
• bredren 4y ago
  I don't see discussion of the conclusion, which seems to be creation of a "studio" that repeatedly aims to create Mittelstands. I have seen this idea before, but am not aware of that many successful outcomes. IIRC, the idea of placing multiple bets made it challenging to focus.
• tptacek 4y ago
  I'm having a hard time understanding how you could do a funding mechanism for "mid-market" startups. Contra the subtext of this post, it is not in fact low-risk to take a company from 0 to $5-10MM annual revenue. Companies that do this quickly tend do it with substantial funding, which is predicated on them aiming for much, much higher revenue and valuation numbers. Companies that don't take funding that eventually hit those numbers run for a long time before they get there. And those kinds of companies fail all the time; failure is their default mode. As I understand it, a basic fact of life for venture funding is that the winners have to pay for the winners. Do the math with a portfolio of 10 companies taking $1 each to see what the winners have to make just to break even at various hit rates. Further, targeting "mid-market" startups with growth targets low enough to somehow derisk them would also drastically reduce the amount of funding you could provide. You can't give $10MM to a company that's going to grow slowly and organically from low-7-figures; that company has such a low valuation that $10MM would buy too much of it. My first impression is that you'd be able to do something early-stage-YC-ish, giving a single founder ramen wages for a year or two, and not much more than that. But you'd have to take a huge chunk of equity to do that, so it'd be a terrible deal for the founder. This model would make sense if there was a reliable path to get to $5MM/yr, such that you could build a portfolio of a bunch of companies taking that path with a very high hit rate. But there isn't? You are very likely to fail trying to start a company like that. Worse: the resources you'll need to operate a company doing $5MM/yr will rapidly outstrip any amount of funding a VC could provide. The VC-funded companies doing $5MM/yr got that money because they promised they'd soon be doing $500MM/yr. What am I missing? Obviously, I'm not a golfer.
  • svnt 4y ago
    There a couple of subtle things going on from my reading, both potentially but not necessarily fatal: 1) Author is success biased because his dad handed him a playbook that worked on company #1 and then they were able to pivot the second time, so a reasonable outcome appears guaranteed (pro tip: if you founded a company with your dad and you were under 30, he gifted you, and you are both rare, even among founders) 2) acting like a VC with companies that are not VC suited is prone to failure because of something like the observer effect: you cannot just add funds and get a better outcome, adding funds can create worse outcomes by changing the way the company is run: priorities, timeframes and metrics, etc. Maybe it would work if you could add funds without the company knowing they had them until they were at the moment of failure? It is always possible that what we are apparently calling the Mittelstands market is somewhat underfished or modified since previous efforts (less overhead is required for many opportunities) and the new fund will find success there. A diversity of approaches is a good thing.
• bxtt 4y ago
  I think about this quite a bit as my parents likely fit this category in the early 90s in Silicon Valley. At peak, they were bootstrapped a company from nothing to eventually at peak with ~40 employees at 100M USD annual revenue, no idea on income as it was a fairly large operation (distribution, warehousing, engineering team, sales team, operations, etc) They exited out of business within 6 years and retired in their 40s. My family grew up relatively poor and extremely frugal. My dad was formerly a professor in machine learning, but decided to enter the private sector. He didn’t speak much English if at all, and entered the field when it was still immature. After he was laid off, and with little options left, they decided to use their remaining savings and likely a loan from family & friends to bootstrap a company. My parents never wanted a business, but they had to out of survival. They never discussed the business with us, so I don’t fully understand the operating model behind their company, but it involved with semiconductors/hardware, etc. What I think about is was this simply a business or during that time a “startup”. It was in a hyper growth period on relatively emerging technology, they were learning as they went, and exited quickly. Recently, though my dad unretired in his 70s working at a FANG… Amazon warehouse worker. He says he does it for the exercise and $20/hour.
• gw67 4y ago
  It’s a PR problem. I think it matters the name we use to call them and how they are interpreted by general public. Currently we call them like IndieHackers, bootstrapped startup, life style business. All not fancy as “unicorn” it is. We need a new PR that makes this kind of business cool for the general public. In these day if you have a profitable bootstrapped business (<1M$) people say that you should raise capital to grow and become an unicorn and your are not cool or not get PR attention until you raise funds. I think is a PR problem. There is an opportunity for a new media space. Like IndieHackers but without the term “hackers” in the title which reminds something dark for the general public.
  • notatoad 4y ago
    I think the whole point is that it's not cool. If you're not okay with boring success, then this type of business isn't for you.
    • gw67 4y ago
      I am ok with boring success. The problem is that the media or common public cheer to VC-startup because terms like indieHackers, bootstrapped business or lifestyle business are not cool. I can definitely bet that if we a have fancier name for this kind of business or funding strategies it will be different. It must be cooler to create a profitable privately-owned business than a VC-owner business in loss
  • 8note 4y ago
    What's wrong with "small business" ?
    • gw67 4y ago
      The term "small" is not so cool. A founder is an ambitious person, so it doesn't say "i want to build a small business" even if in the end, it's likely it will build a SB. Therefore media coverage tends to focus on unicorn and vc-startups. Write article on "small business" is no so cool and entertainment. That's why we need to find a new term if we want to make "small business great again". I would like to see more PR coverage for bootstrapped/small business instead of VC-startups.
• Ken_At_EM 4y ago
  Bootstrapped our way to a B2B Hardware and Software product company. On target to hit about $10M in revenue this year, 35 employees. This take really speaks to me and does a great job conveying frustrations that I have felt with the startup world for years. I could go on and on about the downsides of the different funding models and how none of them have ever really worked for us.
  • jadbox 4y ago
    Congrats on the growth! What raising modal worked for your startup?
• fortuna86 4y ago
  You mean small businesses ?
• saq7 4y ago
  I think most businesses fall into this so called middle class already. Perhaps this group could be labeled The Silent Majority of businesses given how these folks get up and do their work everyday without particularly expecting to escape the grind or becoming billionaires. I see this in my extended family where almost everyone runs this kind of business and is so for several decades. They make much more money than if they worked for someone else, but none of them are going to break the $100M mark
• brentm 4y ago
  Couldn't agree more on this, my company is there now. One difficult problem to solve is hiring. This is due to a number of things but one big one is a lack of external validation. When you raise from a known VC you're gaining a stamp of approval similar to having attended a top tier school. When you're selling product and investing profits into hiring that's cool but it's harder to assess from a potential employee perspective.
• togaen 4y ago
  “Secret: Mittelstands are already about one-third of our whole economy.” That’s… not a secret. Anyone with even rudimentary knowledge of the economy knows that. You need to get out more.
• elasticventures 4y ago
  while i concur this is a nice notion, it's a special type of rare investor who wants to do all the dilligence, take the risk, and not pursue a large reward.
• glenngillen 4y ago
  When I left SF (circa 2014) I had this general unease about what a bunch of my friends, who were now founders, had done to themselves. Quite a few that had what were perfectly great businesses, doing good things, giving people an enjoyable place to work, solving valuable problems for other companies. But they'd raised multiple rounds of funding which meant a billion dollar exit was only barely an acceptable outcome for anybody. It just blew my mind that these people could at that point have invested 5-6 years of their lives building a great business, and that a $1B exit would no longer be something to celebrate. Instead it looked like they were contorting themselves and their priorities into chasing highly speculative new ideas in the hope that found the next big success. Their future was either multi-billion outcome or flame out trying. Coupled with all of this was a certain level of frustration that the startup game hand changed in the past couple of decades. Very few companies were having to overcome the type of feasibility risk from back in the silicon days of Silicon Valley. Lots of them already had a product in market generating revenue! Cloud had made it cheap and fast to make something real. So funding was increasingly going toward pure execution and go to market/marketing. It was a materially lower risk proposition for investors. Most were still taking their ~20% equity stake though because of the perceived risk, and just inflating it with a higher valuation. So when I got back to Australia I started exploring different models that gave founders better options. A way to have a stake in the business that felt more aligned with the value/risk. A way to give founders their company back if their ambition or outcomes changed without forcing that go big or flame out dynamic. I was also inspired a lot by what Bryce @ Indie.VC was trying to do around the same time. Unfortunately my co-founder (Matt) and I never managed to get quite enough capital together to get it off the ground. A few years have passed though, and Matt has managed to tweak the ideas, get the capital, and a team together to make it happen (https://www.tractorventures.com https://www.tractorventures.com). I have to think we'll see this type of model grow more successful and more popular over time. Not every company needs VC investment. For lots of them it's actually a terrible idea. But lots of founders have grown up buying into all the hype and thinking it's the only viable way to build a really successful company.
• hnbad 4y ago
  What this guy doesn't seem to grasp about the Mittelstand is that those companies are ones that traditionally don't get acquired. They're usually generational family-owned businesses. They're the legacy of the lean bootstrapped startups he contrasts them with except they didn't aim for growth and acquisition but sustainability. Getting acquired is antithetical to being a Mittelstand business because acquired Mittelstand businesses stop being Mittelstand. The "exit" for Mittelstand business founders is death and inheritance. The reason there's no "middle class for startups" is that both sets of startups he describes are growth-oriented investment/acquisition-seeking ventures, not sustainable businesses. You either get fast tracked by finding an investor or you have to take the long route and try to become profitable, but the end goal is to either get bought out (and die) or to go public (and become large enough to buy the competition). Investors along the way buy you out piece by piece betting on you successfully reaching either of those two outcomes. Since investors are in it for big ROI they're willing to take some risks and overfund hopeful "unicorns" while underfunding startups that can't credibly promise (or don't aim for) that kind of ROI. Basically, the groups he describes are self-selecting. If you start bootstrapped as a growth-oriented startup either you wither and die or you grow successful enough to get acquired (and die) or get overfunded (and become part of the latter group). If you start overfunded either you overexert yourself (and die) or get acquired (and die) or continue growing bigger (or go public, leaving the VC bubble). Any "middle class" in between the two can only either be a transitional step from bootstrapped to overfunded (or from overfunded to bankrupt) or a consequence of low ROI expectations. I'm not saying this middle class can't exist, but it can't be a growth-oriented startup and thus is only tangentially related to the kind of companies VCs think about. Another Siemens, Miele or Aldi isn't attractive to VCs because sustainable businesses aren't high enough ROI.