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.
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.
Let's imagine the bottom level of the mittlestand as 2.4M pa revenue - call that 200k pmth, 40/400 licenses at 500/5k. I think that is the barest level.
Now there is very little technology risk in most B2B saas. (Inam not talking about fusion startups here. That's what VC/gov is truly useful).
But a team of 2-5 people at 100k pa is feasible here.
This is not VC shoot for the moon, but it is also not worth putting in 2 years of runway (400k-1M) for equity. But it is worthwhile as a loan.
So IMO VC money could start handing out ridiculously low interest rate loans with big forgiveness clauses (dies with the bankruptcy of company?). The founder takes the equity swap or the loan depending on their vision of future. Add in some conversion later on and it seems one way to divide the market
I suppose the point is, if you have 100M to invest, which is riskier - 100 1M investments or 1 100M investment? And if you wait till later stages before deciding you probably miss out.
I believe your last paragraph illuminates the answer: how does a fund with $100M to invest come up with the sales funnel to generate 100 $1M quality deals? You arguably have to do the same amount of work per deal (let’s be generous and say somehow it is 1/2) and your profit is 1/100. So your costs/workload are 50 times higher.
(edit: looking back at this I believe I’m not even being pessimistic enough, but I’m too lazy to do the math. We’ve got 5% of 5% sorts of things going on here. So using these numbers to fill your funnel you need 400 initial meetings for one big deal, or 40,000 initial meetings for 100 small deals. That’s one person vs 100 people on payroll. But with small deals you have higher people noise and so you probably need more stages in your funnel and specialization. So it’s probably much worse.)
Then you have to engage with the company, take a board seat, etc. Only way it pans out operationally is if you can still succeed while being really passive (hasn’t worked yet) or automate it. But if you automate it people will know it is automated and game it.
I have seriously suggested that there should be a "million startups" fund - I think it was when softbank lost X billions and I reckoned it was feasible to fund a million YC style / cost companies globally. Yeah it's not viable in SV but there are a lot of cities outside USA.
Do all of the problems you allude to there exist - yes absolutely. But we need something to spin the flywheel.
There is a story that inspires me is https://en.m.wikipedia.org/wiki/Arunachalam_Muruganantham - he invented a low cost tampon making machine - it was not the technology but the marrying of tech, social entrepreneur and local
cultural knowledge that increased wealth - and that's the next stage - we don't need another social media giant - we need thousands of locally useful social media (for definitions of local, social, useful etc)
And finally to be brutal - if some fund has 100M to invest and it's too tough to build out their deal funnel, no one is going to sympathise :-(
There's very little technology risk, but there's absolutely enormous business risk in any technology venture. There's a reason no bank will loan 250k-650k to a 2-5 person tech startup with no revenue.
There is a "super" risk issue I am trying to put into words.
Somewhere there is a different approach to capital structure and corporation structure. The one we have ... it works yes. But it's not the only one and we can see problems. And we should try to encourage some experimentation- Mittelstand is one divergence from the UK Limited company model that kind of came packaged with the industrial revolution. (That it came from the UKs big rival in the revolution says a lot)
Why should Bezos or Musk or any early founder get so much of the upside ? Is having a hierarchical command structure stable ? As the oil / Electric / Silicon revolutions start to come to an end, will we need different corporate and capital structures to handle a more sustainable model?
Why should public markets demand quarter on quarter growth as if that was a natural state of affairs (which tends to force every PLC to be a conglomerate whether it wants to or not (tech giants not withstanding). Should companies not be like Unix commands and just do one thing well?
All these are choices - we could have smaller companies, democratic companies, different companies. But we choose not to. (Don't say they are competed away in the market - how many co-operatives exist to be competed away?)
Maybe we can continue the kind of tech-social change we have been seeing for past 200 years. If so keep the scaffolding up. But otherwise maybe we should experiment with new forms of organisation. Because that's what has helped humans rise out of the mud - how we worked together to build something ... less muddy.
And choosing the right kind of organisation for the job at hand is crucial. And an equity corporation controlled by one or two people employing millions who have no say in its direction, might not be the right choice.
So fund a few wild cat companies - we might surprise ourselves.
Edit: literally just ran over this comment :
https://news.ycombinator.com/item?id=31346487 (ignore my dumb sarcasm after). But the point is that a congress with 5,000 congressmen is a wildly different beast to the current one. And potentially better (very arguable). But that it's such a crazy, reject it without thinking idea is the whole point - there are alternatives to our current system (and yes that does include fucking it all up and crashing the economy - but we are risking that anyway).
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.