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?
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.
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?
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.
It's very well possible that I either did not understand how your answer relates to my question, or that my definition of "exit" (namely, that a company gets sold, usually to a larger entity, and is not held by founders anymore) is incorrect or too narrow, but, again, how is an exit compatible with a company being part of the Mittelstand?
You say "pre-Mittelstand", so I guess it's not about investing in companies that are aready Mittelstand (and effectively lifting them out of that) either.
But by definition if a company grows for decades it doesn't 'exit' (=it isn't sold or renamed or repurposed). So I think that the Mittelstand definition should prohibit an exit, maybe not for the individual (=founder/owner) but for the company as a whole. In my opinion this is why in german you don't really use the term for companies anyway except when econonomists look back and analyze your company history.
I begin to think that OP just took the word "Mittelstand" to mean "$10M-$1B", which at least to several other people in the thread is rather confusing.
Generally another Mittelstand family can provide funding, that's how it goes in Chile. It's not like they've never met in eg Swiss ski slopes, parties, that sort of thing. And they have capital, not only are they high net worth individuals, they are also high absolute worth individuals, because they don't really get into debt. The German economy is a macrocosm (you can think of it as a constellation if you don't like "macrocosm") of the Mittelstand, there's actual profits and defensible business, and the money piles up year after year, spending less, saving more, investing the savings, export the savings, repeat.
In fact generally Germany was the largest net exporter, up until not long ago, despite China being better known for its trade balance. Losing WW2 was in the purely economic aspect the best thing that ever happened to them, although it's seasonal because sometimes foreigners tell them they should be more into finance and insurance instead of manufacturing.
That makes Germans feel bad, they're really good at feeling bad, ie guilty, it's cultural, but they don't really do things differently. They just stick to analog tech and work like fuck, that's it. Just work, that's how they have fun. Socially? More awkward, much happier working. That's why they drink like they do.
Don't get bored that badly. And that's where the analog magic begins, in the subtle subtle subtleties, which are huge and obvious if you put in the time without getting bored, there's a whole world down there. The digital equivalent is this: What if I just leave this comment written without hitting reply? What if I bookmark it, will the text get saved? Is there a time limit to how soon I can reply, or how late? What if I do it right on a time limit? Where does one thing end and the other begin? In the analog realm: What if superstition is good? What is superstition, what is science? Science means cutting, where to draw the line? At what point do I call out a man in a lab coat as a bullshit artist, or do I let him tell me black is white, 7 equals 12, 60 equals 100? Do I draw a line, or do I use my spine to make decisions better, let my hands do the typing like right now, eye-hand spinal coordination, the spine as the second skull talking without the skull's thoughts?
The analog world is infinite. And there might be a Mittelstand for you too somewhere in that little world of subtleties.
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)
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.
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.
> 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.
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.
> 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.
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.
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).
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.)
> 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.
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.
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.
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.
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
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).
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.
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.
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.
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.
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.
> 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.
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 :/
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.
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.
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?
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".
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
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.
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
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?
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.
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...
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.
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).
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.
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?