6 ms·

Y Combinator for Mittelstands?

80 points by thanedar 4y ago

thanedar 4y ago
This is a follow-up to my most popular post, We Need a Middle Class for Startups: https://news.ycombinator.com/item?id=31327219 https://news.ycombinator.com/item?id=31327219 Both of these ideas are on my list of solutions to The World’s Biggest Problems. I want to raise a $1M+ per year rolling fund to build this accelerator. Who would be ideal investors for this fund? I'm thinking angels to start and family offices and PE as we scale.
- raylad 4y ago
  These kind of companies don't do IPOs, so is your only exit strategy that they get acquired by a larger company?
  - boberoni 4y ago
    It would seem so, although there's a distinction between (1) being acquired for the product/team vs. (2) being acquired by a private equity firm. For case (1), you would want to build a mittelstand product that is strategically aligned with the acquirer. For case (2), you would want to build a mittelstand business that with consistent and reliable earnings/dividends. Perhaps I'm forgetting another type of acquisition, but these are the two that I can think of off the top of my head.
- yieldcrv 4y ago
  Maybe equity investment isn't the best form of financing for these kind of organizations.
- chadash 4y ago
  How do you plan to do due diligence? With YC, the strategy seems to be to throw a bunch of money at a bunch of early startups and hope one of them has a $1B+ exit. For arguments sake, let's say they are putting down 200 investments knowing 1 or 2 will provide (basically) all their returns. So 99% can fail and they are fine. But if I'm investing in a Mittelstand, I'm not looking for unicorns. It's more like I want 100 out of 200 businesses to return 10x and boom, I've got a great overall return. The problem is that I'd imagine you need a lot more due diligence for this, since you need more consistent (but smaller) winners. I would think it's hard to consistently find great businesses, particularly if you are investing at the 0 revenue stage, which your posts says you want to do.
  - thanedar 4y ago
    Pre-Mittelstand investing is also driven by power-law 100x+ returns. Let's say the deal is $100K for 10-20% of pre-revenue/pre-product pre-Mittelstands. You will get 100+ out of 200 businesses that are >1X+, 20+ that are 10X+, and 2+ that are 100x+. So I'd do diligence like YC - wide open applications, largely focused on the team, one or two interviews max, global focus.
    - hash872 4y ago
      But how would you exit? VCs exit via an IPO or an acquisition. The whole point of the Mittelstand is that they do neither. Do you somehow force the owner to buy you out? What if they don't have the liquidity, how does this work? I very strongly suspect that if investors could be getting returns of '20 that 10x+ and 2+ that are 100x+' as you say, they would already be doing so, and we wouldn't have to be theorizing about it. The fact that VC has for decades only existed for software & pharma and not, like, a new type of cable harness or industrial process or anything else in the physical/manufacturing world should probably tell us something
      - thanedar 4y ago
        These $10M-$1B revenue businesses are great buyout targets for corporate and private equity firms, and these companies are increasingly going public at the higher range. (About 1/3 of PE exits last year were via IPO). I dig into the data here: https://neilthanedar.com/we-need-a-middle-class-for-startups/ https://neilthanedar.com/we-need-a-middle-class-for-startups... Mittelstands are allowed to partially or fully exit. PEs do invest in Mittelstands at $10M+ revenue. But there's not a great market yet for pre-Mittelstands, which is where I'm focusing here.
        MichaelZuo 4y ago
        If they exit they wouldn’t be Mittelstands anymore. They would just be regular mid sized companies that were sold off.
    - 4y ago
- rexreed 4y ago
  Since exits are limited and risk is still high, your accelerator for "Mittelstands" will end up looking like a traditional financing vehicle, providing loan funds in return for profit or revenue share, or some other earnings distribution. In which case it will look like a high-interest loan. You'll find yourself competing with all the alternative financing and "fintech" companies ranging from Stripe Capital to Paypal financing to local bank financing. I'm not sure the accelerator model really works here given the exits and risk.
- guender 4y ago
ricardobayes 4y ago
I don't think it will happen with traditional VCs as Mittelstands require the same amount of initial funding in their seed phase. But offer way less returns. Maybe through some sort of social/cooperative/income sharing investment vehicle.
- 0des 4y ago
  People forget its about making money, not goodwill and charity.
  - RalfWausE 4y ago
    And because of that, its cancer
Barrin92 4y ago
Having worked most of my life in the German Mittelstand, unless the term has a drastically different meaning in the US a 'Mittelstand accelerator' is a complete oxymoron. The entire point is to not accelerate. The idea of Mittelstand business is to be conservative, low in debt, turn a profit, keep a company private, usually under multi-generational family control and from the very beginning make decisions for the long term, and keep employees around for life. Software companies that come to mind that are like this are say, IntelliJ or Valve maybe, not startups. There's nothing to IPO, there's usually not that much interest in outside money, so how does this square with the VC industry?
- lifeisstillgood 4y ago
  I don't think it squares with the VC industry - but the VC industry is just one way of moving money from those that have money but cannot build new wealth, to those that have talent but no money. The initial move from talent to profitable business is what we need - not because we can see a runway to 18 months IPO but because what the duck else do you do with money other than create new better wealth for the world. Previously this has been solved by government taxing rich and giving it to innovators through schools, universities and arms spending (simplifying slightly). But apparently tax is bad now, and governments don't know how to pick winners to VCs are going to take over. If this is not a great idea we should try some other options - the OP has an idea. It's not bad. Others exist (including that tax one which apparently no one with money likes)
  - layer8 4y ago
    But VCs aren’t a charity issuing the equivalent of bank loans. They hope for substantial ROI (enough to offset all the failing investments), which isn’t very compatible with the non-accelerated-growth non-IPO Mittelstand model.
    - lifeisstillgood 4y ago
      Yeah - which is why I don't think the VC industry as it is currently formulated is the right vehicle to do the next leg of the journey. But that's ok. We don't have to stick with the current formula - other options exist in the phase space. We don't want to throw out the fanta aston growth of the past 200 years, but we do want to ... fine tune it to provide similar benefits, at different social costs/benefits. From a longer term perspective, the VC money is not "theirs" - this is an investment in the future of the species. I think there are three questions 1. How do we discover fundamental breakthroughs (steam turbines, E=mc2, new drugs). Tax funded edication and universities is mostly the answer (R&D labs at companies so big they look like government departments also help). I think we could double the science budget in every western country every five years for decades before hitting some negative feedbacks 2. How to build out the skeletons of these breakthroughs (ie when we got electricity in the 1900s the question was how to build wires to every house. Yes the initial rush was privately funded but that was about two blocks of NYC. The continent wide rollout was ... tax funded. How will we move from oil and gas to (Inpresume) solar. It will need more wires, different home and industry power plants (gas boilers etc). 3. finally the foam on top - the tech startups etc. How to encourage these - speed them up, have them deliver different social and industry outcomes. my take is to stop doing what we currently do, which give us the current outcomes (oh look another MIT graduate being asked to scale for growth) and find different founders in different places. I think YC itself is trying to answer many of these questions - they have pushed out to fund startups outside USA, they are choosing outside the SaaS window and are looking at fundamental ideas (fusion startups!). But honestly compared to (effective) government funding they are a drop in the ocean. but it seems they point in the direction Inwoukd too.
lifeisstillgood 4y ago
I am a fan of this, not because I agree with all the words, but because we live in an amazing global technicalogival world, and that sprang from a certain financial / fiscal culture in the 19C - and that US/UK culture (laissez faire, government investment in infrastructure etc), and that culture is incredibly valuable, but it is not the only way of arranging taxation, government spending and private investment. The fact we are talking about Mittelstand is notice that the German approach (arch enemy of UK/US culture through 19C) might suggest a wider phase space than is feared. We should try something. While the benefits of steam/oil/electricity/silicon/pharmacy are great there are downsides to how we have arranged our societies - and it would be good to explore some of those options rather than say "the solution is always to copy USA, see Meijei for details". (no this is not some anti-USA rant) I personally think taking the SoftBank fund and attempting to launch a million startups globally is just as likely to get us results the OP is talking about (even if that's because kicking off 500,000 new companies between Chennai and Jakarta is going to do something, and it cannot be a worse ROI than WeWork But whatever, there is a phase space outside the standard approach here. VC is going to be good for taking fundamental tech breakthroughs and pushing them into the public - but the fundamental tech break thoughts have almost always come from government funded programs (transistors, pharmacy (mid-19C chemistry) etc) - so we should not forget that just more VC is unlikely to solve the big problems (sorry people who want to fix fusion on VC money. Weirdly Turbine engines might be the best privately funded example. But that basically was a rich guy funding his own itch. That's not a good bet (or as a UK citizen a good way to run a country) Anyway I am rambling so - yeah go for it. spread the money around as best we can - give it not to the rich or those with success behind them but find other indicators (phd might be one, just lucky is another, old and still passionate if you can measure that or helll just helicopter money in. Try goddammit because none of us are taking it with us.
catchmeifyoucan 4y ago
This is solid, but my biggest question is how this fares different than something like Pipe. I saw it called out as an existing solution, but didn't find an advantage point speaking to it. If you had the metrics, and could give up no equity, isn't that a better deal?
- thanedar 4y ago
  There is an opportunity to invest in these businesses pre-revenue and even pre-product. Pipe doesn't do that. TinySeed is probably the best example of a YC for Mittelstands now. I love what Einar is doing there and am trying to refine a model that works here. Getting to enough revenue where they can be Pipe funded isn't trivial. We can be a bridge to those funding sources.
throw457 4y ago
I don't understand the obsession with slighlty mispronounced german words in tech. Can anyone fill me in?
- samuelstros 4y ago
  Because of the pluralization? Mittelstands instead of Mittelstand? Now that I see it, I can't unsee it! How ugly! (what a German saying by itself -> "wie hässlich") :D
- q-big 4y ago
  Also "Mittelstand" is already the German word for the whole group of such companies. It thus hardly makes sense to pluralize this word. If you are talking about an individual company of this group, the correct term is "mittelständisches Unternehmen".
- rexreed 4y ago
  Because calling it what it is - loan for equity for SMB businesses - isn't as sexy . Using some exotic name for an old thing makes the old boring thing seem better, even when it isn't.
rvnx 4y ago
It's truly difficult to sell a company that makes 10M USD revenue for 50M USD, I think the author is really too optimistic. If we take [Valuation = Next 12 Month Revenue * EV/Revenue * Marketability Discount], we arrive barely at 15M/20M USD (if you are even profitable!), and still, the majority of these companies will not reach this state and just disappear :/
elil17 4y ago
Why would I buy equity in a new business shooting to become a medium sized business? I get all the disadvantages of investing in a startup: 1) the business, like many new businesses, will probably fail within 10 years 2) when the business fails, I won’t be able to recoup my losses because bond holders will be first in line for the liquidation money However, it’s even worse because: 3) the business isn’t even trying to become large enough for a buyout or IPO, so it will be very hard for me to sell my equity.
- julianeon 4y ago
  The main advantage is: mittelstands are going for a zone that VC's actively avoid, that has tremendous underutilized potential. Logically, which is easier: trying to earn 10 million a year in revenue, or 1 million? We can simplify that even more: which is easier, trying to earn 1 million or $100,000? Trying to earn $100,000 or $10,000 a year? At every level, for every step down, the answer is: much, much easier. Given two numbers for revenue, the smaller one is easier to achieve, every time. As a rough approximation, for each comparison given above, one value is about 10x easier to achieve than the other. The problem is that VC's exclude, and filter out, the easiest class of money to make, that in the $1-$10 million range. But there's always been a follow up question here which I've thought a lot about: which is easier - going from $0 to $100 million in revenue, or going from $1 million to $100 million? The easy rebuttal to "the $1 million business may not be able to go to $100 million" is "then they can pivot and still be far ahead of the person or team starting from $0." They already know how to run a business, how to do idea validation, how to be ramen profitable - they've done all that. It's going to be easier. They've done it before. Yet right now no one targets them as the safest bet, as in fact where the smart money should go. So a mittelstand, by one treating these smaller amounts of worthy of pursuit (amounts which are also easier to achieve), and two leaving the door open to going beyond those amounts when the time comes, might even be able to outcompete many VC's, over time.
  - beambot 4y ago
    You've captured all the economic incentive of the portfolio companies, but what of the investor? The presence of "underutilized potential" doesn't mean that there's a triage opportunity. Free cash flow (and liquidity thereof) still needs to pencil out. If exits are mostly a no-go into perpetuity, then the only way to realize actual cash-on-cash returns (e.g. for a net present value calculation) is ultimately dividends -- that, or creating a marketplace for private stock transactions in such companies.
rwalling 4y ago
TinySeed is the closest thing you’ll find to this idea. About 10 years ago I wrote the phrase “YC for bootstrappers” in a notebook. That was the initial vision, and what ultimately became TinySeed, the first startup accelerator for bootstrappers.
- tchock23 4y ago
  That was my first thought reading this… isn’t this basically TinySeed? (Not that there can’t be multiple funds like this)
onlyrealcuzzo 4y ago
Best of luck. I hope I'm wrong, but I'm a cynic here. Ideas are cheap. If you have a good idea, and not even access to $100k in debt, then that's a decent proxy that you either don't believe enough to take the debt yourself or that you maybe aren't qualified to run the business. Especially when you consider a huge majority of successful businesses are founded by more than one person...
- Destiner 4y ago
  I believe even in US not many ppl have access to 100k in debt (and usually that debt would be tied to you not the company) But even besides, there’s plenty of third world-ish countries with lots of talent and no easy money.
  - onlyrealcuzzo 4y ago
    They also don't have a path to easy money like in the US. It's a lot harder to make $10M per year in Zimbabwe than it is in the US.
- danenania 4y ago
  Many YC-backed founders wouldn’t have been able to access 100k in debt before getting into YC. I imagine quite a number of very successful companies wouldn’t have been pursued if debt was their only option early on. It also just isn’t smart to start a startup with personally-guaranteed debt if you aren’t wealthy to begin with. Of course you need to believe in yourself, your idea, and your business, but that doesn’t mean pretending that there’s zero chance of failure—that’s just hubris.
ricardobeat 4y ago
I'm curious about the valuation aspect. How can you 'exit at $50M' with your 20% if there is no IPO? And public or not, who is going to buy those shares if their prospect is now down to a 2.7x return: invest $10M for a $27M return ($27m revenue in 5 years, x5 revenue multiple, 20% ownership), and an even less likely exit? The whole VC pipeline is based on growth.
arb-spreads 4y ago
Plenty of SMB/middle market companies out there. Which is honestly the most common outcome for a YC company, other than failure. Not sure how many are growing at >40% CAGR with minimal capital requirements... Fine if you wanted to fund HVAC, plumbing, construction, etc. businesses that are generally ignored by YC. Wouldn't count on startupy growth from companies YC screens against
nojs 4y ago
One problem with this model is that founders shooting for “Mittelstands” may not need/want to give away equity. The author’s previous post actually advised this [1]: > Advice for Founders: Stay indie as long as possible. > Take advantage of new bootstrapping tools and non-dilutive funding sources. Raising VC funding increases growth potential but reduces optionality. Startups can always raise money later. >It’s near impossible to return money raised and get your equity back. > Trend: It’s easier now to fund businesses without giving up equity. 1. https://neilthanedar.com/we-need-a-middle-class-for-startups/ https://neilthanedar.com/we-need-a-middle-class-for-startups...
andrewedstrom 4y ago
The highlighting and formatting makes this next to impossible to read for me. It reads like an outline, not an article.
andrew_ 4y ago
maybe someone can help me understand this: why does an investor think that a small business can grow to $1mil ARR on a $100k investment? that would almost certainly mean instant success or a quick death, no? If the author is targeting the "middle class" of startups, why hasn't their expectations adjusted with that? I'm very confused.
adtac 4y ago
From an investor's perspective, why would I invest in the middle when I can put 90% in super conservative securities and the remaining 10% in super speculative startups? I get all nearly all the upside (unicorn) with very little downside (-10% at worst). (Yes, this is Taleb's barbell strategy.)
jacksonkmarley 4y ago
I think this is quite confusing because the word 'Mittelstand' is repeatedly used in a way that doesn't seem consistent with its usual meaning.

80 points by thanedar 4y ago

This is a follow-up to my most popular post, We Need a Middle Class for Startups: https://news.ycombinator.com/item?id=31327219 https://news.ycombinator.com/item?id=31327219 Both of these ideas are on my list of solutions to The World’s Biggest Problems. I want to raise a $1M+ per year rolling fund to build this accelerator. Who would be ideal investors for this fund? I'm thinking angels to start and family offices and PE as we scale.

raylad 4y ago
These kind of companies don't do IPOs, so is your only exit strategy that they get acquired by a larger company?
- boberoni 4y ago
  It would seem so, although there's a distinction between (1) being acquired for the product/team vs. (2) being acquired by a private equity firm. For case (1), you would want to build a mittelstand product that is strategically aligned with the acquirer. For case (2), you would want to build a mittelstand business that with consistent and reliable earnings/dividends. Perhaps I'm forgetting another type of acquisition, but these are the two that I can think of off the top of my head.
yieldcrv 4y ago
Maybe equity investment isn't the best form of financing for these kind of organizations.
chadash 4y ago
How do you plan to do due diligence? With YC, the strategy seems to be to throw a bunch of money at a bunch of early startups and hope one of them has a $1B+ exit. For arguments sake, let's say they are putting down 200 investments knowing 1 or 2 will provide (basically) all their returns. So 99% can fail and they are fine. But if I'm investing in a Mittelstand, I'm not looking for unicorns. It's more like I want 100 out of 200 businesses to return 10x and boom, I've got a great overall return. The problem is that I'd imagine you need a lot more due diligence for this, since you need more consistent (but smaller) winners. I would think it's hard to consistently find great businesses, particularly if you are investing at the 0 revenue stage, which your posts says you want to do.
- thanedar 4y ago
  Pre-Mittelstand investing is also driven by power-law 100x+ returns. Let's say the deal is $100K for 10-20% of pre-revenue/pre-product pre-Mittelstands. You will get 100+ out of 200 businesses that are >1X+, 20+ that are 10X+, and 2+ that are 100x+. So I'd do diligence like YC - wide open applications, largely focused on the team, one or two interviews max, global focus.
  - hash872 4y ago
    But how would you exit? VCs exit via an IPO or an acquisition. The whole point of the Mittelstand is that they do neither. Do you somehow force the owner to buy you out? What if they don't have the liquidity, how does this work? I very strongly suspect that if investors could be getting returns of '20 that 10x+ and 2+ that are 100x+' as you say, they would already be doing so, and we wouldn't have to be theorizing about it. The fact that VC has for decades only existed for software & pharma and not, like, a new type of cable harness or industrial process or anything else in the physical/manufacturing world should probably tell us something
    - thanedar 4y ago
      These $10M-$1B revenue businesses are great buyout targets for corporate and private equity firms, and these companies are increasingly going public at the higher range. (About 1/3 of PE exits last year were via IPO). I dig into the data here: https://neilthanedar.com/we-need-a-middle-class-for-startups/ https://neilthanedar.com/we-need-a-middle-class-for-startups... Mittelstands are allowed to partially or fully exit. PEs do invest in Mittelstands at $10M+ revenue. But there's not a great market yet for pre-Mittelstands, which is where I'm focusing here.
      - MichaelZuo 4y ago
        If they exit they wouldn’t be Mittelstands anymore. They would just be regular mid sized companies that were sold off.
  - 4y ago
rexreed 4y ago
Since exits are limited and risk is still high, your accelerator for "Mittelstands" will end up looking like a traditional financing vehicle, providing loan funds in return for profit or revenue share, or some other earnings distribution. In which case it will look like a high-interest loan. You'll find yourself competing with all the alternative financing and "fintech" companies ranging from Stripe Capital to Paypal financing to local bank financing. I'm not sure the accelerator model really works here given the exits and risk.
guender 4y ago

ricardobayes 4y ago

I don't think it will happen with traditional VCs as Mittelstands require the same amount of initial funding in their seed phase. But offer way less returns. Maybe through some sort of social/cooperative/income sharing investment vehicle.

0des 4y ago
People forget its about making money, not goodwill and charity.
- RalfWausE 4y ago
  And because of that, its cancer

Barrin92 4y ago

Having worked most of my life in the German Mittelstand, unless the term has a drastically different meaning in the US a 'Mittelstand accelerator' is a complete oxymoron. The entire point is to not accelerate. The idea of Mittelstand business is to be conservative, low in debt, turn a profit, keep a company private, usually under multi-generational family control and from the very beginning make decisions for the long term, and keep employees around for life. Software companies that come to mind that are like this are say, IntelliJ or Valve maybe, not startups. There's nothing to IPO, there's usually not that much interest in outside money, so how does this square with the VC industry?

lifeisstillgood 4y ago
I don't think it squares with the VC industry - but the VC industry is just one way of moving money from those that have money but cannot build new wealth, to those that have talent but no money. The initial move from talent to profitable business is what we need - not because we can see a runway to 18 months IPO but because what the duck else do you do with money other than create new better wealth for the world. Previously this has been solved by government taxing rich and giving it to innovators through schools, universities and arms spending (simplifying slightly). But apparently tax is bad now, and governments don't know how to pick winners to VCs are going to take over. If this is not a great idea we should try some other options - the OP has an idea. It's not bad. Others exist (including that tax one which apparently no one with money likes)
- layer8 4y ago
  But VCs aren’t a charity issuing the equivalent of bank loans. They hope for substantial ROI (enough to offset all the failing investments), which isn’t very compatible with the non-accelerated-growth non-IPO Mittelstand model.
  - lifeisstillgood 4y ago
    Yeah - which is why I don't think the VC industry as it is currently formulated is the right vehicle to do the next leg of the journey. But that's ok. We don't have to stick with the current formula - other options exist in the phase space. We don't want to throw out the fanta aston growth of the past 200 years, but we do want to ... fine tune it to provide similar benefits, at different social costs/benefits. From a longer term perspective, the VC money is not "theirs" - this is an investment in the future of the species. I think there are three questions 1. How do we discover fundamental breakthroughs (steam turbines, E=mc2, new drugs). Tax funded edication and universities is mostly the answer (R&D labs at companies so big they look like government departments also help). I think we could double the science budget in every western country every five years for decades before hitting some negative feedbacks 2. How to build out the skeletons of these breakthroughs (ie when we got electricity in the 1900s the question was how to build wires to every house. Yes the initial rush was privately funded but that was about two blocks of NYC. The continent wide rollout was ... tax funded. How will we move from oil and gas to (Inpresume) solar. It will need more wires, different home and industry power plants (gas boilers etc). 3. finally the foam on top - the tech startups etc. How to encourage these - speed them up, have them deliver different social and industry outcomes. my take is to stop doing what we currently do, which give us the current outcomes (oh look another MIT graduate being asked to scale for growth) and find different founders in different places. I think YC itself is trying to answer many of these questions - they have pushed out to fund startups outside USA, they are choosing outside the SaaS window and are looking at fundamental ideas (fusion startups!). But honestly compared to (effective) government funding they are a drop in the ocean. but it seems they point in the direction Inwoukd too.

lifeisstillgood 4y ago

I am a fan of this, not because I agree with all the words, but because we live in an amazing global technicalogival world, and that sprang from a certain financial / fiscal culture in the 19C - and that US/UK culture (laissez faire, government investment in infrastructure etc), and that culture is incredibly valuable, but it is not the only way of arranging taxation, government spending and private investment. The fact we are talking about Mittelstand is notice that the German approach (arch enemy of UK/US culture through 19C) might suggest a wider phase space than is feared. We should try something. While the benefits of steam/oil/electricity/silicon/pharmacy are great there are downsides to how we have arranged our societies - and it would be good to explore some of those options rather than say "the solution is always to copy USA, see Meijei for details". (no this is not some anti-USA rant) I personally think taking the SoftBank fund and attempting to launch a million startups globally is just as likely to get us results the OP is talking about (even if that's because kicking off 500,000 new companies between Chennai and Jakarta is going to do something, and it cannot be a worse ROI than WeWork But whatever, there is a phase space outside the standard approach here. VC is going to be good for taking fundamental tech breakthroughs and pushing them into the public - but the fundamental tech break thoughts have almost always come from government funded programs (transistors, pharmacy (mid-19C chemistry) etc) - so we should not forget that just more VC is unlikely to solve the big problems (sorry people who want to fix fusion on VC money. Weirdly Turbine engines might be the best privately funded example. But that basically was a rich guy funding his own itch. That's not a good bet (or as a UK citizen a good way to run a country) Anyway I am rambling so - yeah go for it. spread the money around as best we can - give it not to the rich or those with success behind them but find other indicators (phd might be one, just lucky is another, old and still passionate if you can measure that or helll just helicopter money in. Try goddammit because none of us are taking it with us.

catchmeifyoucan 4y ago

This is solid, but my biggest question is how this fares different than something like Pipe. I saw it called out as an existing solution, but didn't find an advantage point speaking to it. If you had the metrics, and could give up no equity, isn't that a better deal?

thanedar 4y ago
There is an opportunity to invest in these businesses pre-revenue and even pre-product. Pipe doesn't do that. TinySeed is probably the best example of a YC for Mittelstands now. I love what Einar is doing there and am trying to refine a model that works here. Getting to enough revenue where they can be Pipe funded isn't trivial. We can be a bridge to those funding sources.

throw457 4y ago

I don't understand the obsession with slighlty mispronounced german words in tech. Can anyone fill me in?

samuelstros 4y ago
Because of the pluralization? Mittelstands instead of Mittelstand? Now that I see it, I can't unsee it! How ugly! (what a German saying by itself -> "wie hässlich") :D
q-big 4y ago
Also "Mittelstand" is already the German word for the whole group of such companies. It thus hardly makes sense to pluralize this word. If you are talking about an individual company of this group, the correct term is "mittelständisches Unternehmen".
rexreed 4y ago
Because calling it what it is - loan for equity for SMB businesses - isn't as sexy . Using some exotic name for an old thing makes the old boring thing seem better, even when it isn't.

rvnx 4y ago

It's truly difficult to sell a company that makes 10M USD revenue for 50M USD, I think the author is really too optimistic. If we take [Valuation = Next 12 Month Revenue * EV/Revenue * Marketability Discount], we arrive barely at 15M/20M USD (if you are even profitable!), and still, the majority of these companies will not reach this state and just disappear :/

elil17 4y ago

Why would I buy equity in a new business shooting to become a medium sized business? I get all the disadvantages of investing in a startup: 1) the business, like many new businesses, will probably fail within 10 years 2) when the business fails, I won’t be able to recoup my losses because bond holders will be first in line for the liquidation money However, it’s even worse because: 3) the business isn’t even trying to become large enough for a buyout or IPO, so it will be very hard for me to sell my equity.

julianeon 4y ago
The main advantage is: mittelstands are going for a zone that VC's actively avoid, that has tremendous underutilized potential. Logically, which is easier: trying to earn 10 million a year in revenue, or 1 million? We can simplify that even more: which is easier, trying to earn 1 million or $100,000? Trying to earn $100,000 or $10,000 a year? At every level, for every step down, the answer is: much, much easier. Given two numbers for revenue, the smaller one is easier to achieve, every time. As a rough approximation, for each comparison given above, one value is about 10x easier to achieve than the other. The problem is that VC's exclude, and filter out, the easiest class of money to make, that in the $1-$10 million range. But there's always been a follow up question here which I've thought a lot about: which is easier - going from $0 to $100 million in revenue, or going from $1 million to $100 million? The easy rebuttal to "the $1 million business may not be able to go to $100 million" is "then they can pivot and still be far ahead of the person or team starting from $0." They already know how to run a business, how to do idea validation, how to be ramen profitable - they've done all that. It's going to be easier. They've done it before. Yet right now no one targets them as the safest bet, as in fact where the smart money should go. So a mittelstand, by one treating these smaller amounts of worthy of pursuit (amounts which are also easier to achieve), and two leaving the door open to going beyond those amounts when the time comes, might even be able to outcompete many VC's, over time.
- beambot 4y ago
  You've captured all the economic incentive of the portfolio companies, but what of the investor? The presence of "underutilized potential" doesn't mean that there's a triage opportunity. Free cash flow (and liquidity thereof) still needs to pencil out. If exits are mostly a no-go into perpetuity, then the only way to realize actual cash-on-cash returns (e.g. for a net present value calculation) is ultimately dividends -- that, or creating a marketplace for private stock transactions in such companies.

rwalling 4y ago

TinySeed is the closest thing you’ll find to this idea. About 10 years ago I wrote the phrase “YC for bootstrappers” in a notebook. That was the initial vision, and what ultimately became TinySeed, the first startup accelerator for bootstrappers.

tchock23 4y ago
That was my first thought reading this… isn’t this basically TinySeed? (Not that there can’t be multiple funds like this)

onlyrealcuzzo 4y ago

Best of luck. I hope I'm wrong, but I'm a cynic here. Ideas are cheap. If you have a good idea, and not even access to $100k in debt, then that's a decent proxy that you either don't believe enough to take the debt yourself or that you maybe aren't qualified to run the business. Especially when you consider a huge majority of successful businesses are founded by more than one person...

Destiner 4y ago
I believe even in US not many ppl have access to 100k in debt (and usually that debt would be tied to you not the company) But even besides, there’s plenty of third world-ish countries with lots of talent and no easy money.
- onlyrealcuzzo 4y ago
  They also don't have a path to easy money like in the US. It's a lot harder to make $10M per year in Zimbabwe than it is in the US.
danenania 4y ago
Many YC-backed founders wouldn’t have been able to access 100k in debt before getting into YC. I imagine quite a number of very successful companies wouldn’t have been pursued if debt was their only option early on. It also just isn’t smart to start a startup with personally-guaranteed debt if you aren’t wealthy to begin with. Of course you need to believe in yourself, your idea, and your business, but that doesn’t mean pretending that there’s zero chance of failure—that’s just hubris.

ricardobeat 4y ago

I'm curious about the valuation aspect. How can you 'exit at $50M' with your 20% if there is no IPO? And public or not, who is going to buy those shares if their prospect is now down to a 2.7x return: invest $10M for a $27M return ($27m revenue in 5 years, x5 revenue multiple, 20% ownership), and an even less likely exit? The whole VC pipeline is based on growth.

arb-spreads 4y ago

Plenty of SMB/middle market companies out there. Which is honestly the most common outcome for a YC company, other than failure. Not sure how many are growing at >40% CAGR with minimal capital requirements... Fine if you wanted to fund HVAC, plumbing, construction, etc. businesses that are generally ignored by YC. Wouldn't count on startupy growth from companies YC screens against

nojs 4y ago

One problem with this model is that founders shooting for “Mittelstands” may not need/want to give away equity. The author’s previous post actually advised this [1]: > Advice for Founders: Stay indie as long as possible. > Take advantage of new bootstrapping tools and non-dilutive funding sources. Raising VC funding increases growth potential but reduces optionality. Startups can always raise money later. >It’s near impossible to return money raised and get your equity back. > Trend: It’s easier now to fund businesses without giving up equity. 1. https://neilthanedar.com/we-need-a-middle-class-for-startups/ https://neilthanedar.com/we-need-a-middle-class-for-startups...

andrewedstrom 4y ago

The highlighting and formatting makes this next to impossible to read for me. It reads like an outline, not an article.

andrew_ 4y ago

maybe someone can help me understand this: why does an investor think that a small business can grow to $1mil ARR on a $100k investment? that would almost certainly mean instant success or a quick death, no? If the author is targeting the "middle class" of startups, why hasn't their expectations adjusted with that? I'm very confused.

adtac 4y ago

From an investor's perspective, why would I invest in the middle when I can put 90% in super conservative securities and the remaining 10% in super speculative startups? I get all nearly all the upside (unicorn) with very little downside (-10% at worst). (Yes, this is Taleb's barbell strategy.)

jacksonkmarley 4y ago

I think this is quite confusing because the word 'Mittelstand' is repeatedly used in a way that doesn't seem consistent with its usual meaning.