3 ms·

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, li

by 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.
- deleted 4y ago
  [deleted]
ska 4y ago
> Why would I buy equity in a new business shooting to become a medium sized business? It's at least conceivable that there is a spot on the risk/reward tradeoff this kind of thing could address quite distinct from VC or PE backed companies. Not at all clear, and liquidity would have to be contracted around.

by elil17 4y ago

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.
deleted 4y ago
[deleted]

ska 4y ago

> Why would I buy equity in a new business shooting to become a medium sized business? It's at least conceivable that there is a spot on the risk/reward tradeoff this kind of thing could address quite distinct from VC or PE backed companies. Not at all clear, and liquidity would have to be contracted around.