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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

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.
thanedar 4y ago
Mittelstands (defined as $10M-$1B in annual revenue) are very stable, profitable companies once they get to that stage. But there are very few funding options for pre-Mittelstand businesses. I would like to create a small fund to invest in these pre-Mittelstands at the earliest stages and help them go from $0 to $10M faster. These businesses need much less funding (usually <$1M) to get to this stage, so it's a different model than VC. But if you invest early enough at the right valuation, the returns could be VC-style with a much lower risk profile.
- dluan 4y ago
  Neil! Check out purpose ventures, based in Berlin and SF.
  - thanedar 4y ago
    Hey Denny! Thanks, I'll check them out!
- anyfoo 4y ago
  But then you are VC-funded. As Barrin92 hinted at, VCs tend to want to see returns and consequentially optimize for growth. Or is the idea for VC to pull out and realize profits once the company got to Mittelstand?
  - thanedar 4y ago
    I mentioned this in another comment - pre-Mittelstand investing is also driven by power-law 100x+ returns. If you invest $100K at <$1M valuation pre-revenue in 100 pre-Mittelstands, 1-5% of those companies are going to get to $100M+, 10-30% will get to $10M+, and 50%+ will get a positive exit. There is a robust buyout market between PEs and corporates for these companies. Yes, this is a form of venture capital. But most VCs today would not consider pre-Mittelstands VC-backable startups. This post and my last one We Need a Middle Class for Startups (https://neilthanedar.com/we-need-a-middle-class-for-startups/ https://neilthanedar.com/we-need-a-middle-class-for-startups...) make the argument to VCs that they can get big exits and returns investing in Mittelstands.
tablespoon 4y ago
> 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. Aren't there a fair number of startups that could achieve that, but get blown up because the VC model only allows for abject failures or unicorns.
- johannes1234321 4y ago
  Yes, once you take the VC track, you have to grow or will fail. You gave away control for money. For the "Mittelstand" path you have to look for growth paths with the aim of sustainability. Find a niche and fullfil the needs there.
  - MichaelZuo 4y ago
    Also seems like an opportunity for a couple of perceptive and honest VCs to invest in companies before they get blown up by less discerning folks who get cold feet in the Series B round. Walking away with $50 mil is a lot better than with liquidation value.
IfOnlyYouKnew 4y ago
I'm not sure if you're working from the right definition. At least by revenue and number of employees, SpaceX would still be Mittelstand, I believe. If you're thinking smaller, the term "lifestyle business" was once coined for such endeavors by, I believe, 37signals. As for the larger scale: every startup is expected to settle into some size with little further growth at some point. The "unicorn" is a rather new trend, and it's only a small fraction of even VC-funded startups (although it's a larger fraction by funding or attention).
- anyfoo 4y ago
  According to German Wikipedia, SpaceX absolutely does not correspond to the definition (suggested, because there is no official one) of what "Mittelstand" is. That means less than 500 employees and less than 50 Mio. € revenue, family business or at least involvement of one founder, and most importantly (called out as such) economical independence of the owners. Or is this a case where the German word has been co-opted for a different meaning in English? (Though other words like Kindergarten or Zeitgeist are very close to their original meaning, now that I look them up.)
  - socialdemocrat 4y ago
    Us non-native English speakers do the same with English. In Norway for instance “mail” means e-mail. “Spam” never means the cheap ham. I find the English usage of “Angst” really confusing, as it really just means anxiety or anxious.
    - IncRnd 4y ago
      > I find the English usage of “Angst” really confusing, as it really just means anxiety or anxious. USA: While angst and anxiety come from similar roots, angst is not just anxiety but a dread or anguish. Often angst is focused in a certain way, such as towards a particular condition one person has or a group of people have. Anxiety is more general. There may also be differences between the two words in certain fields, such as with professional definitions. There are also other derivative uses, such as teenage angst, that are more akin to feeling overwhelmed but not necessarily anxious.
lliamander 4y ago
> 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. TIL that my current and previous employer are both (more or less) Mittlestand businesses. I must say, I really do prefer working for these kinds of companies. The lack of outside influence, the robustness in the face of economic uncertainty, the long-term focus, etc. all I think contribute to a more responsible leadership than I've come to expect from any other type of enterprise.
- davidw 4y ago
  How does one go about finding these places in the US? I think they are not the ones employing recruiters to sing their praises and send zillions of emails.
  - lliamander 4y ago
    I wish there was an easier way to find them. In my experience, it was former colleagues who recruited me. At the time I didn't have any sense of how business model might affect the work environment, all I knew was that my colleagues really liked their new jobs, but in retrospect it clearly makes a difference. That doesn't mean it's all roses. My last company brought in a terrible middle-manager who was at least part of the reason I left. If I were searching in the market right now, I'd probably apply to a bunch of different companies and ask some variation of the following questions: 1. Are you privately-owned (and plan to stay that way)? 2. Are you profitable? There's obviously a bunch of other questions that are important to job satisfaction (is the work relevant to the companies revenue goals, work/life balance, etc.) but those two questions determine whether the company has at least the economic independence to make the right decisions over the long-term.
Melatonic 4y ago
But why could someone trying to start a company like that not get some funding from a company like YC? The expectations would of course be different but it could still end up profitable for everyone.
- thanedar 4y ago
  If I were starting a Mittelstand today, yes one great option would be to take YC's funding, take little to no additional capital, and exit as a Mittelstand with most of your equity. But having gone through YC in W15, they're definitely not built for Mittelstands. YC pushes you to keep iterating and changing your pitch and product until you're targeting a multi-billion dollar market. I do believe there's room for a YC for Mittelstands: Be like Paul Graham circa 2005 – find people who others didn’t think could be founders and coach them from the very beginning to control their companies.

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.

thanedar 4y ago

Mittelstands (defined as $10M-$1B in annual revenue) are very stable, profitable companies once they get to that stage. But there are very few funding options for pre-Mittelstand businesses. I would like to create a small fund to invest in these pre-Mittelstands at the earliest stages and help them go from $0 to $10M faster. These businesses need much less funding (usually <$1M) to get to this stage, so it's a different model than VC. But if you invest early enough at the right valuation, the returns could be VC-style with a much lower risk profile.

dluan 4y ago
Neil! Check out purpose ventures, based in Berlin and SF.
- thanedar 4y ago
  Hey Denny! Thanks, I'll check them out!
anyfoo 4y ago
But then you are VC-funded. As Barrin92 hinted at, VCs tend to want to see returns and consequentially optimize for growth. Or is the idea for VC to pull out and realize profits once the company got to Mittelstand?
- thanedar 4y ago
  I mentioned this in another comment - pre-Mittelstand investing is also driven by power-law 100x+ returns. If you invest $100K at <$1M valuation pre-revenue in 100 pre-Mittelstands, 1-5% of those companies are going to get to $100M+, 10-30% will get to $10M+, and 50%+ will get a positive exit. There is a robust buyout market between PEs and corporates for these companies. Yes, this is a form of venture capital. But most VCs today would not consider pre-Mittelstands VC-backable startups. This post and my last one We Need a Middle Class for Startups (https://neilthanedar.com/we-need-a-middle-class-for-startups/ https://neilthanedar.com/we-need-a-middle-class-for-startups...) make the argument to VCs that they can get big exits and returns investing in Mittelstands.

tablespoon 4y ago

> 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. Aren't there a fair number of startups that could achieve that, but get blown up because the VC model only allows for abject failures or unicorns.

johannes1234321 4y ago
Yes, once you take the VC track, you have to grow or will fail. You gave away control for money. For the "Mittelstand" path you have to look for growth paths with the aim of sustainability. Find a niche and fullfil the needs there.
- MichaelZuo 4y ago
  Also seems like an opportunity for a couple of perceptive and honest VCs to invest in companies before they get blown up by less discerning folks who get cold feet in the Series B round. Walking away with $50 mil is a lot better than with liquidation value.

IfOnlyYouKnew 4y ago

I'm not sure if you're working from the right definition. At least by revenue and number of employees, SpaceX would still be Mittelstand, I believe. If you're thinking smaller, the term "lifestyle business" was once coined for such endeavors by, I believe, 37signals. As for the larger scale: every startup is expected to settle into some size with little further growth at some point. The "unicorn" is a rather new trend, and it's only a small fraction of even VC-funded startups (although it's a larger fraction by funding or attention).

anyfoo 4y ago
According to German Wikipedia, SpaceX absolutely does not correspond to the definition (suggested, because there is no official one) of what "Mittelstand" is. That means less than 500 employees and less than 50 Mio. € revenue, family business or at least involvement of one founder, and most importantly (called out as such) economical independence of the owners. Or is this a case where the German word has been co-opted for a different meaning in English? (Though other words like Kindergarten or Zeitgeist are very close to their original meaning, now that I look them up.)
- socialdemocrat 4y ago
  Us non-native English speakers do the same with English. In Norway for instance “mail” means e-mail. “Spam” never means the cheap ham. I find the English usage of “Angst” really confusing, as it really just means anxiety or anxious.
  - IncRnd 4y ago
    > I find the English usage of “Angst” really confusing, as it really just means anxiety or anxious. USA: While angst and anxiety come from similar roots, angst is not just anxiety but a dread or anguish. Often angst is focused in a certain way, such as towards a particular condition one person has or a group of people have. Anxiety is more general. There may also be differences between the two words in certain fields, such as with professional definitions. There are also other derivative uses, such as teenage angst, that are more akin to feeling overwhelmed but not necessarily anxious.

lliamander 4y ago

> 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. TIL that my current and previous employer are both (more or less) Mittlestand businesses. I must say, I really do prefer working for these kinds of companies. The lack of outside influence, the robustness in the face of economic uncertainty, the long-term focus, etc. all I think contribute to a more responsible leadership than I've come to expect from any other type of enterprise.

davidw 4y ago
How does one go about finding these places in the US? I think they are not the ones employing recruiters to sing their praises and send zillions of emails.
- lliamander 4y ago
  I wish there was an easier way to find them. In my experience, it was former colleagues who recruited me. At the time I didn't have any sense of how business model might affect the work environment, all I knew was that my colleagues really liked their new jobs, but in retrospect it clearly makes a difference. That doesn't mean it's all roses. My last company brought in a terrible middle-manager who was at least part of the reason I left. If I were searching in the market right now, I'd probably apply to a bunch of different companies and ask some variation of the following questions: 1. Are you privately-owned (and plan to stay that way)? 2. Are you profitable? There's obviously a bunch of other questions that are important to job satisfaction (is the work relevant to the companies revenue goals, work/life balance, etc.) but those two questions determine whether the company has at least the economic independence to make the right decisions over the long-term.

Melatonic 4y ago

But why could someone trying to start a company like that not get some funding from a company like YC? The expectations would of course be different but it could still end up profitable for everyone.

thanedar 4y ago
If I were starting a Mittelstand today, yes one great option would be to take YC's funding, take little to no additional capital, and exit as a Mittelstand with most of your equity. But having gone through YC in W15, they're definitely not built for Mittelstands. YC pushes you to keep iterating and changing your pitch and product until you're targeting a multi-billion dollar market. I do believe there's room for a YC for Mittelstands: Be like Paul Graham circa 2005 – find people who others didn’t think could be founders and coach them from the very beginning to control their companies.