[HN Gopher] We need a middle class for startups
       ___________________________________________________________________
        
       We need a middle class for startups
        
       Author : thanedar
       Score  : 663 points
       Date   : 2022-05-10 14:01 UTC (8 hours ago)
        
 (HTM) web link (neilthanedar.com)
 (TXT) w3m dump (neilthanedar.com)
        
       | akhilpotla wrote:
       | Good article from a few years ago, but it still stands up.
       | 
       | https://nothingventured.rocks/what-startups-can-learn-from-t...
        
       | brotoss wrote:
       | No we dont
        
       | roflyear wrote:
       | Am I the only one not interested in taking advice from someone
       | who has largely been massively successful? I always feel like
       | these are the people who generally have nothing of real value to
       | say, they just think they do because of their bias from their
       | success.
        
         | mprovost wrote:
         | Someone once asked the Duke of Westminster for career advice:
         | "Make sure they have an ancestor who was a very close friend of
         | William the Conqueror." At least he was honest.
        
         | robocat wrote:
         | Understand your motivations. There are plenty of detestable
         | successful people that still have plenty one can learn from.
         | 
         | It is up to you to be able to filter good information from bad.
         | Wealthy founders do share some opinions that will help you be
         | wealthy. However you need to learn to discriminate between good
         | advice and bad advice. Your blanket ban seems poorly thought
         | out to me.
         | 
         | Bonus unwelcome advice: you appear to be using the word
         | successful to mean wealthy. Perhaps deconstruct your worldview
         | a bit.
        
         | Clubber wrote:
         | Yes, I feel more useful information would be a story from
         | someone who failed a bunch of times, then finally found
         | success, and what the differentiating factors would be in his
         | particular case.
        
           | roflyear wrote:
           | I agree - usually what I am looking to read about!
        
         | brightball wrote:
         | I think it's important to take advice from a lot of people.
         | It's up to you how to frame what to do with it or how much you
         | think it applies to your current situation.
        
           | roflyear wrote:
           | I guess my point is I always feel like such advice is really
           | just a bunch of hot air (so little or no substance) and not
           | really advice at all.
        
             | brightball wrote:
             | I'd just recommend not painting with too broad of a brush.
             | 
             | One of my favorite stories about Dabo Swinney, Clemson's
             | football coach, came when he had just gotten the job and
             | very few people had any confidence in him. ESPN rated him
             | as a D+ hire at the time. He sat down at a coaches dinner
             | event and a much older retired coach named Bill Curry was
             | at his table. They struck up a conversation and Bill said,
             | "Dabo, congratulations on the job! Can I give you 3 pieces
             | of advice?"
             | 
             | And Dabo took out a pad and pencil from his pocket.
             | 
             | The advice was good, but the fact that Dabo was humble
             | enough to actually take notes. Think about how much advice
             | we just let go in one ear and out the other.
             | 
             | Now he's the best coach we've ever had and won 2 national
             | titles.
        
               | roflyear wrote:
               | I agree, I don't mean to suggest you should discount
               | advice just because someone is successful.
        
         | ar_lan wrote:
         | I'm not 100% sure I agree, but I do think that people who have
         | hit wild levels of success generally don't have advice that
         | tangibly applies to most people.
         | 
         | Ironically, I'm going to mention Alex Hormozi (who is very
         | successful), but he said in an interview once that he spent
         | something like $150k to talk to Grant Cardone and thought "I'm
         | easily getting my ROI on that now because Grant's advice
         | applies to someone in my position, where I have $100 MM. 10
         | years ago, when I was broke, the advice he's giving me now
         | would have just put me further in insurmountable debt."
         | 
         | Most ultra-successful people somewhat forget the baseline that
         | most people live in. For example, if they were to "restart with
         | nothing", they usually assume that "nothing" still implies a
         | good credit score, housing, food, healthcare, etc. which _most
         | of America_ is really spending all of their time trying to
         | fight to secure. This translates to the out-of-touch and
         | generally vague advice they give.
        
           | roflyear wrote:
           | Yes absolutely. It would be a great experiment to see what
           | any ultra-successful person would do with even that massive
           | leg up - which puts you in the top 10% of the US, if not the
           | top 5%. And no, they aren't allowed to use any of their
           | connections ;)
           | 
           | The ultra-successful, in my experience, are there because
           | yes, they do have some strong, quantifiable qualities, but
           | they also have massive, massive advantages. Not just being
           | born into a home that gave them quality food, the best
           | education, and all of the other things needed to be healthy
           | in their developing years - but also the experience of their
           | successful parents, the connections their family has, and
           | many other things that I probably do not even know exist.
           | 
           | Some of these families that I know personally have it
           | ridiculously well. Not only were they born with amazing
           | portfolios, but they have great family jobs where they make
           | $8k+ (after tax) every 2 weeks. And they get as much time off
           | as they want - and you better believe they generally use it
           | :)
           | 
           | Of course, they still find things to complain about - as do
           | I.
           | 
           | There are a lot of brilliant and driven poor people. If they
           | are lucky, they will get into the 10% or the 5%. If they win
           | the lottery they make it into the .1%.
        
         | VictorPath wrote:
         | > Am I the only one not interested in taking advice from
         | someone who has largely been massively successful?
         | 
         | I think of Kevin Systrom selling Instagram to Mark Zuckerberg
         | at Facebook. Both success stories. Systrom went to high school
         | at Middlesex, Zuckerberg to Phillips Exeter. I can think of
         | many examples like this. Phillips Exeter high school starts at
         | $47,000 a year, Middlesex high school starts at $54,000 a year.
         | 
         | So my best advice is have your parents give you $200,000 before
         | you start high school so you can be off to a good start.
        
           | roflyear wrote:
           | Or just, good food, decent connections, a good education, and
           | general support during your most important developing years.
           | That goes a huge way and almost no one has these things.
        
         | thanedar wrote:
         | I think I actually learned this lesson from my failure to build
         | a billion dollar startup with Labdoor (this story is in the
         | post). We would've been better off raising less money and going
         | for profitability earlier. Labdoor made it to the middle class
         | the hard way, and I'm trying to help others avoid some of my
         | pain.
        
           | roflyear wrote:
           | Thanks Neil - I certainly do not mean to disparage your
           | success or work done with your writing. I think part of my
           | comment is driven by the need for someone on HN to post
           | something cynical.
           | 
           | I think there is just some mental fatigue that happens when
           | you read about other's success - maybe this is an unhealthy
           | reaction, I do not know.
        
           | avgcorrection wrote:
           | > I think I actually learned this lesson from my failure to
           | build a billion dollar startup with Labdoor
           | 
           | Failing to build a _billion dollar_ startup does not exactly
           | disprove the "massively succesful" point that GP made. Unless
           | your criteria for "failure" is completely ridiculous.
        
         | bityard wrote:
         | Do you believe that all successful people were simply lucky?
        
           | roflyear wrote:
           | Depends on your definition of all, successful, and lucky.
           | 
           | If you change successful to be defined as people like OP, I
           | believe a large majority of successful people are extremely
           | lucky. Probably over 99.9%. They owe their success to being
           | extremely fortunate in a combination of many factors, not
           | limited to:
           | 
           | - Where they were born
           | 
           | - Who their parents were
           | 
           | - What food their parents gave them when they were kids
           | 
           | - What other types of nurture they received
           | 
           | - Where they went to school
           | 
           | - When they went to school
           | 
           | - Who they met at school
           | 
           | - Who their parents knew
           | 
           | - The time they were born
           | 
           | - The time they ...
           | 
           | You can go on and on here ...
        
             | yibg wrote:
             | seems like a not useful definition. If we go with this what
             | is not from luck? Someone works hard? That's because they
             | got lucky with the right genes and upbringing. They're
             | smart, born to the right parents. If we go with this then
             | everything in life is a matter of luck.
        
         | baddash wrote:
         | If someone has been massively successful, that means they know
         | how to be successful. It must be the case they have something
         | of value to say. How can you make the argument they have
         | _nothing_ of value to say?
        
           | scarface74 wrote:
           | Or they had family with money and connections.
        
             | Sohcahtoa82 wrote:
             | Nearly every billionaire was born a millionaire.
        
             | benreesman wrote:
             | You're getting downvoted because it's almost always parents
             | and their friends.
             | 
             | Pull like any tech big shot at random, their parents are
             | rich and bought some part of their success. Gates' folks
             | had an IBM mainframe installed in his fucking high school.
             | 
             | Oh myGod, this kid Bill Gates is way ahead of the curve on
             | computers.
        
           | roflyear wrote:
           | First, I would argue that your statement is not true that
           | successful people always or even generally or on the average
           | know how to be successful. But even if it is true, because
           | they are good at one thing (starting businesses) does not
           | mean they have anything valuable to say, or that they can say
           | it in a way that transfers value to others, or that they are
           | good at anything else, really.
           | 
           | Anyway, you're attacking a premise I didn't put forward - I
           | didn't say his advice was not valuable, I said I feel that
           | way when presented with articles like these by wildly
           | successful people.
        
           | Taywee wrote:
           | If somebody has been massively successful from nothing
           | multiple times, it means they probably know how to be
           | successful. If somebody has been massively successful once,
           | it means there is a definite possibility that they know how
           | to be successful, and also a definite possibility that they
           | had connections and/or luck.
        
           | DebtDeflation wrote:
           | Simple. Survivorship bias. HBS and other business journals
           | have done many studies where they look at the key attributes
           | of a successful entrepreneur and it's always the usual stuff
           | like: hard work, persistence, willingness to take risks, etc.
           | The problem is that if you surveyed the key attributes of
           | UNsuccessful entrepreneurs you'd find the exact same
           | attributes.
        
       | lumost wrote:
       | I suspect that there is a self full-filling prophecy for VC
       | funding. If you aim small (read 50-500 million dollar business),
       | then odds are a DecaBillion dollar business will eat your lunch
       | sooner or later.
       | 
       | The only middle ground would appear to be in businesses which
       | serve defensible tight niches, but in software these mostly
       | appear to boil down to consultancies with a small set of
       | customers.
        
       | bsimpson wrote:
       | I studied entrepreneurship in college. They didn't know what to
       | do with me when they realized I was planning on running a
       | lifestyle business. Everybody else's forecasts were in the
       | millions. I would have been happy making more than I spend.
        
         | russdpale wrote:
         | Exactly what I find also, everyone wants to take over the
         | world, as if everything is a zero sum game with one winner and
         | billions of losers.
        
       | Ken_At_EM wrote:
       | Bootstrapped our way to a B2B Hardware and Software product
       | company. On target to hit about $10M in revenue this year, 35
       | employees.
       | 
       | This take really speaks to me and does a great job conveying
       | frustrations that I have felt with the startup world for years.
       | 
       | I could go on and on about the downsides of the different funding
       | models and how none of them have ever really worked for us.
        
       | tylertringas wrote:
       | Sounds like you're describing calm companies:
       | https://calmfund.com/thesis
        
       | synergy20 wrote:
       | there are plenty, they're called 'business', or 'small business',
       | or 'grocery store' etc. they have to make money first day to
       | survive, unlike VC 'startup's that burns other's money without
       | worrying about profits for a while.
        
       | calltrak wrote:
        
       | danschumann wrote:
       | For real, most VC's could take 100 different shots on solo devs
       | who just need their living expenses paid... like me.
        
         | Sohcahtoa82 wrote:
         | This is what UBI is supposed to enable.
         | 
         | People think it allows people to be slackers and just sit
         | around smoking weed and playing video games all day and
         | otherwise be an unproductive member of society, and yes,
         | there's some truth to that.
         | 
         | But there's also a lot of people that have the desire to create
         | some cool and useful stuff, but are already burnt out by
         | working 40 hours a week at a job they have to work at to pay
         | the bills.
         | 
         | That fits me, as well. I've got two projects that are half-
         | written and probably just need another 200 hours or so of work
         | to release an MVP, but after looking at code all day, more code
         | is the last thing I wanna do when I log off for the day.
        
       | scotuswroteus wrote:
       | We need a startup for the middle class
        
       | dontreact wrote:
       | My sense is that in general, and especially in software, the
       | world is becoming more of a winner take all place. This is not a
       | good thing.
        
         | chadash wrote:
         | Yes, but there will always be niches where you can make good
         | money, but not enough for the big fish to be interested. For
         | example, my wife uses some statistical software that is
         | apparently pretty popular in her field, but it's still only
         | used within a niche of academia. You might be able to find a
         | niche that brings you $10M/year in profit which is enough to
         | live a lavish lifestyle, but not enough for VCs to fund you or
         | for Amazon to bother competing with you.
        
         | cortesoft wrote:
         | With near zero marginal costs associated with software, it
         | makes sense for a winner take all outcome to be the
         | equillibrium.
        
           | munificent wrote:
           | ...which is why you need strong regulatory oversight if you
           | want the software market to have any functioning level of
           | efficiency.
           | 
           | The economies of scale are enormous in software (and data-
           | oriented businesses in general). That's good for the
           | efficiency of any given enterprise, but it pushes very
           | heavily towards monopolization and zero competition without
           | regulatory force to counterbalance.
        
           | dontreact wrote:
           | Makes sense for who? If all competition becomes winner takes
           | all, then most humans become losers.
        
         | [deleted]
        
       | mgdev wrote:
       | Gazelles?
       | 
       | https://www.investopedia.com/terms/g/gazellecompany.asp
        
         | mccorrinall wrote:
         | No, the author talks specifically about the "Mittelstand"
         | 
         | https://en.wikipedia.org/wiki/Mittelstand
        
           | mgdev wrote:
           | I'm proposing an alternative to the same goal.
        
       | [deleted]
        
       | AussieWog93 wrote:
       | >Problem: There are only two types of businesses on social media:
       | 
       | >Bootstrapped from zero.
       | 
       | >Raised $100M+ from VCs.
       | 
       | Does anybody else see the irony in this being discussed on a
       | website owned by a huge company whose entire business model is
       | lending medium-sized amounts of money to startups?
        
       | stjohnswarts wrote:
       | we need a middle class for western civilization
       | 
       | * limited terms for government offices, all of them
       | 
       | * limited funding and/or public funding for top X candidates
       | 
       | * _Heavily_ regulated lobbying and audits of said lobbying, and
       | complete transparency of All Meetings (time, date, topic, audio
       | recording)
       | 
       | * free public higher education
       | 
       | Only then will we get a little bit closer to fair government and
       | healthy middle class (which is starting to dwindle in the USA)
        
       | ajross wrote:
       | I've made this comment verbally to a lot of people who seem to
       | agree, but now that we seem to be in a firm correction maybe it's
       | safe to say it here on HN:
       | 
       | The clearest, most obvious sign that the End of the Bubble was
       | imminent was that the discussion about "startups" you'd seen in
       | public was completely dominated by discussion of fundraising and
       | not products. And this blog post, even though it argues against
       | extravagant fundraising, is no different.
       | 
       | It's not about funding, it just isn't. Basically zero historical
       | Unicorns needed billions of dollars in cash to bootstrap.
       | Software companies all did it for almost free, but even Tesla (a
       | heavy industry player competing directly with established outfits
       | with hundreds of billion dollars in revenue!) did it on a few
       | tens of million dollars and one too-visionary-for-his-own-damn-
       | good angel.
       | 
       | The obsession with fundraising reflects the investor dollars
       | looking for a home. It's an inherently inflationary conceit. And
       | even now that the gravy train turned over, it's frustrating that
       | people don't see that.
        
       | jjmorrison wrote:
       | Agree with this - that fundraise treadmill is brutal abyss to
       | live in.
        
       | kaheofwkw wrote:
       | Killer you
        
       | Uptrenda wrote:
       | I get the sentiment but how exactly is raising literal millions
       | in funds 'middle class' in startups? If I had a million dollars I
       | could put together a team of founders who needed about 20k per
       | year each to survive and we wouldn't need to raise until shit was
       | actually finished with substantial revenue. Granted, this assumes
       | you're not in Le Bay (I know) and your expenses are very low
       | (like owning your house) but in my mind this is how startups
       | should be done.
       | 
       | Get a bunch of people to move into one of the founders houses.
       | Sleep on the floor if you have to. Have a coffee pot making bulk
       | coffee for the whole house day-over. Live on nice healthy foods
       | that require no cooking so you can code more. No take away
       | obviously because its horribly over-priced. Plenty of cash for
       | hosting services. Obviously no meme shit like cloud hosting. Use
       | real servers for everything. There are even enough services that
       | provide free resources to startups that you may not need to pay
       | for this. You want to avoid the trap though: becoming dependent
       | on services designed to screw your time and wallet later on.
       | 
       | Anyway, it seems like investors in startups only care about
       | companies with million or billion dollar potential. You hear much
       | less about people who build smaller profitable businesses,
       | period. I'm guessing if it's a small business with limited growth
       | potential you just have to bootstrap it with your own money.
        
         | robbie-c wrote:
         | Just a bit more info on free services - when we were starting
         | out AWS were offering $10k credits a year for 2 years or $100k
         | credits for one year. I believe we got access to this through
         | one of our investors, but most VCs and incubator programs will
         | be able to do this.
        
       | dustingetz wrote:
       | The investment terms would be terrible; monopoly math is what
       | makes early stage risk worth it. Alternatively, VC underwriting
       | would need to get 100x better. (Which such a disruption IMO is
       | entirely feasible by a new younger/smarter cohort of investors)
        
       | tptacek wrote:
       | I'm a fan of bootstrapped companies and have started and operated
       | a couple of them, sometimes quite successfully. But I don't
       | understand how the economics of funding them are supposed to
       | work. VC is a star-search business. Most businesses fail, and
       | that includes businesses run conservatively with organic growth.
       | In a portfolio like that, the winners have to pay for the losers,
       | or the math just doesn't work.
        
         | bombcar wrote:
         | I think one thing that can help is many businesses (we read
         | about them on HN all the time) are "successful" and could be
         | $1m, $10m, even $100m/yr - but they have to be pushed to
         | $1b/year or more to satisfy the ICs.
         | 
         | Somehow to allow them to "exit" at 1/10/100 instead of trying
         | for 1b or crash would be nice. But it would need a different
         | type of "VC" partner.
         | 
         | One funding mechanism could be something akin to "guilds" -
         | once you have a group of ten or so of these businesses
         | "together" they could help fund additional ones. A "guild-like"
         | setup (think Union of workers that owns a percentage of the
         | companies, perhaps) could be used to fund new ones starting
         | out.
        
           | tptacek wrote:
           | Again: the winners have to pay for the losers. The unusually
           | large successes are what makes the model work. I'm sure
           | they're pushed past the point where they need to go to be
           | economically viable, but by the time you've reached that
           | scale, you're already out of the "mid-market" bracket.
        
             | bombcar wrote:
             | Sure, but if you're 9/10 on successes it's a lot easier
             | than if you have to deal with 1/100.
        
               | akerl_ wrote:
               | If you're able to pick successes with 90% accuracy at the
               | stage where they'd benefit from this level of investment,
               | I'd like to borrow your crystal ball.
        
               | tptacek wrote:
               | Right, where I think you're seeing pushback is on the
               | idea that you can reasonably get anything resembling
               | 9/10. Think about what that's saying: we're talking about
               | businesses doing 8 figures of annual revenue. If there's
               | a playbook for reliably creating those --- "reliably"
               | meaning "you can build a portfolio of them run by
               | different people serving different markets, and make
               | money" --- what is that playbook? Getting a 10MM/yr
               | company off the ground is _not a small achievement_.
               | 
               | Bear in mind also that as you scope down the size of the
               | companies you're starting, you necessarily also have to
               | scope down the investment (these companies have,
               | obviously, much smaller valuations, meaning $1MM of
               | equity buys a much bigger chunk of the company). But
               | companies today take A-B-round-scale investments to get
               | to 8 figures ARR. You get those investments by targeting
               | a much, much higher ARR.
               | 
               | This thesis doesn't hold up for me, I feel like I have to
               | be missing something.
        
         | thanedar wrote:
         | I dig into the economics in the post. The data shows the median
         | VC would get better net IRR returns with a Mittelstand PE
         | strategy.
         | 
         | It works because Mittelstand revenue and profitability is much
         | more predictable.
         | 
         | If you're on the Midas List, VC is still a better business. But
         | many investors, especially solo GPs, should consider building a
         | portfolio of middle class startups.
        
           | tptacek wrote:
           | I wonder if the numbers you're giving are tripping up a
           | mismatch between what you mean by "Mittelstand" or "mid-
           | market startup" and what HN generally thinks of. You're
           | saying the numbers are attractive given a "mid-market"
           | definition that spans all the way to 9 figures of annual
           | revenue. It's true that there's much less risk in quickly
           | getting a company to 6 figures of annual revenue and growing
           | organically from there. But there's a lot of risk --- risk
           | equivalent I think to the typical VC-funded startup ---
           | trying to get it to 10MM/yr within the time horizon of a
           | typical VC investment.
           | 
           | Another sticking point with me is that claim that even
           | services companies can get to this level of profitability
           | with good management. Well, yeah, they can. But they don't
           | exit at the same valuation as product companies, because they
           | tend to fall apart when their founders leave.
        
           | throwaway98797 wrote:
           | but how will the LPs brag to their friends about their
           | brilliant investments?
           | 
           | sure 13% IRR is amazing, but it is not going to make my
           | neighbor jealous
        
       | asellke wrote:
       | I once pitched a fairly well-known Bay Area VC in 2015. We were
       | looking to raise a $2.5M Seed round. The VC looked at me through
       | his steepled fingers and said: "This is great. I'm just trying to
       | figure out if you're a $100M business or a $1B business..."
       | 
       | And while it was flattering to be considered either, there was
       | only one business they were going to invest in.
       | 
       | I understand the mechanics involved in some of these funds and
       | the myriad of considerations that go into their investment
       | theses, but it was also sad and frustrating that a lowly "$100M
       | business" (with 4.5M registered users, mind you) couldn't get
       | funded.
       | 
       | Don't hear me bemoaning the fact that we didn't get funded or
       | that we somehow didn't receive our due. I'm just adding my
       | experience with the gap that Neil is citing. And just like in
       | broader societal terms, I think a healthy startup "Middle Class"
       | would make for a healthier overall economy.
        
       | esotericimpl wrote:
        
       | anonimul wrote:
       | Killer you
        
       | [deleted]
        
       | temptemptemp111 wrote:
        
       | dv111 wrote:
       | this is what we're building!
       | https://docsend.com/view/petujc3wgtnj5ghy
        
       | bxtt wrote:
       | I think about this quite a bit as my parents likely fit this
       | category in the early 90s in Silicon Valley. At peak, they were
       | bootstrapped a company from nothing to eventually at peak with
       | ~40 employees at 100M USD annual revenue, no idea on income as it
       | was a fairly large operation (distribution, warehousing,
       | engineering team, sales team, operations, etc) They exited out of
       | business within 6 years and retired in their 40s.
       | 
       | My family grew up relatively poor and extremely frugal. My dad
       | was formerly a professor in machine learning, but decided to
       | enter the private sector. He didn't speak much English if at all,
       | and entered the field when it was still immature.
       | 
       | After he was laid off, and with little options left, they decided
       | to use their remaining savings and likely a loan from family &
       | friends to bootstrap a company. My parents never wanted a
       | business, but they had to out of survival. They never discussed
       | the business with us, so I don't fully understand the operating
       | model behind their company, but it involved with
       | semiconductors/hardware, etc.
       | 
       | What I think about is was this simply a business or during that
       | time a "startup". It was in a hyper growth period on relatively
       | emerging technology, they were learning as they went, and exited
       | quickly.
       | 
       | Recently, though my dad unretired in his 70s working at a FANG...
       | Amazon warehouse worker. He says he does it for the exercise and
       | $20/hour.
        
       | di4na wrote:
       | As someone that has been working hard in this domain, there is
       | one major problem to this in software.
       | 
       | Initial funding. There is a lot of growth non dilutive capital
       | available but the first 500k are near impossible to get without a
       | network in old money.
       | 
       | You used to raise that money through other local mittrlelstands.
       | At the Masons lodge. At the local kiwanis or Rotary. But these
       | have closed to young member decades ago when said younguns moved
       | to uni degrees as a path in.
       | 
       | There is a lot of money idling out there to do that, but as
       | Indie.vc showed, the usual LP are super frigid to it.
       | 
       | I do not have a good answer to this. The current young people
       | simply are too unstable and too close to poverty to take the
       | risks. And there is noone taking a risk on them either.
       | 
       | There is a looooot of value to make though. These markets are
       | ripe for productivity enhancement through good software by small
       | teams.
       | 
       | But the people that have the domain knowledge and the tech skills
       | do not have the risk taking capability to execute.
       | 
       | Whoever find out how to provide them this will unleash massive
       | growth on the world.
       | 
       | I advice to look at what calm fund is doing.
       | https://calmfund.com/
       | 
       | The solution may end up being some kind of crowdfunding from
       | other tech specialists with high income. Like FAANG devs.
        
         | tmp_anon_22 wrote:
         | Disagree. This is like complaining rent in the big city is
         | $4k/mo and impossible. No, spend a week on craigslist and get a
         | great place with a roommate for $1.8k/mo.
         | 
         | The same is true for a medium sized business. Nothing is
         | stopping you from doing it, its just stopping you from doing it
         | from a hammock in the Caribbean.
        
         | munificent wrote:
         | _> The current young people simply are too unstable and too
         | close to poverty to take the risks. _
         | 
         | One piece of the solution that is very clear to me and contains
         | many other upsides is better access to healthcare. The fact
         | that Americans mostly get healthcare through large corporate
         | jobs significantly ratchets up the risk of entrepreneurialism.
         | A better healthcare safety net would make it safer to leave the
         | safe confines of a corporate job that provides health
         | insurance.
        
           | robocat wrote:
           | > better access to healthcare
           | 
           | If you are an entrepreneur under say 40, can't you just roll
           | a D10 and hope you don't get a 1? Surely most people before
           | middle-age won't need expensive healthcare?
        
             | di4na wrote:
             | Break a leg. Catch covid.
             | 
             | In my case have a cognitive trouble. Allergy. All kind of
             | disease you can catch. Breaking a tooth while tripping over
             | something.
             | 
             | Being young does not isolate you. And the trip to poverty
             | is far faster than getting out of it.
        
             | munificent wrote:
             | A 10% chance of a million-dollar healthcare bill you can't
             | pay and will spend the rest of your life dealing with is
             | still shitty odds on top of all of the other risks involved
             | in starting a business.
             | 
             | Also: parents. Childbirth is expensive and most parents
             | want some reasonable level of certainty that they can
             | afford good healthcare for their kids. Or, to put a finer
             | point on it, when forced to choose between health stability
             | for their children and starting a business, most will
             | sacrifice the latter to get the former.
        
         | TuringNYC wrote:
         | >> Initial funding. There is a lot of growth non dilutive
         | capital available but the first 500k are near impossible to get
         | without a network in old money.
         | 
         | For two tech founders, the first 500k is literally a year of
         | salary for the two founders. One option here is to bootstrap
         | without outside capital, de-risk, and raise a better round once
         | you've de-risked. For tech founders, the best form of capital
         | can be their own minds and time. (Doesnt work as well if you
         | have a family and if you're a single earner with dependents of
         | course!)
        
           | czbond wrote:
           | No founders are paying themselves $250k/each/yr until MANY
           | rounds of funding in. If you get seed/angel funding, you'd be
           | paying yourself like $40k in the U.S. if at all. Founders
           | take a lot of risk too, not just "play with funding money
           | earning a job salary"
        
             | TuringNYC wrote:
             | My post noted that founders working for themselves are
             | essentially contributing the _equivalent_ to hiring someone
             | at $250k /yr.
        
               | czbond wrote:
               | I like your concept - few come to the realization that
               | you do. I come to a different conclusion. I believe
               | founders can make good progress using their income to
               | replace themselves the first months (eg: outsource as
               | much as they can) rather than to initially work full
               | time..
        
           | di4na wrote:
           | As a tech person at a big tech company making 98k per year as
           | a senior with a rent to pay.
           | 
           | Maybe reconsider what i said and why.
           | 
           | In particular consider that what you said highly limit who
           | can do this and how that limit heavily the kind of company
           | that could grow from this.
        
             | TuringNYC wrote:
             | Totally considered. I did my bootstrapped startup while
             | working a day job for the first year. The point is the
             | _value of your free time_ is 250k /yr. If you are smart and
             | motivated, your time is incredibly valuable regardless of
             | what your employer is paying you -- because you cannot
             | easily hire that skillset with VC money.
             | 
             | In my case, when I was raising in 2012, the typical VC line
             | was "go move to SF/SV and work for ramen-pay", which is
             | ridiculous and only something rich people can do (things
             | have changed now.) So I bootstrapped and built it myself on
             | my spare hours (note, of course the start up should not be
             | competing in the same market with your dayjob which would
             | be a conflict of interest.)
             | 
             | Once you have a prototype and de-risking, the tables turn
             | and VCs chase _you_
             | 
             | I mean, what is the alternative? See the GP comment I was
             | replying to:
             | 
             | >> There is a lot of growth non dilutive capital available
             | but the first 500k are near impossible to get without a
             | network in old money.
             | 
             | If you're not in the circle where VCs are throwing money at
             | you for some juice squeezing appliance, then you just have
             | the option i've presented...or the option of not playing at
             | all. But i'm very interested in the topic, i'd love to hear
             | what your proposal is...because I think "poor people cant
             | found tech startups" is not the world I would want to live
             | in.
        
               | di4na wrote:
               | I mean the problem is not only poor people. It is that
               | access start at 250k a year which is really hard to get
               | even in tech.
               | 
               | The reason it is harder in tech to get funding for these
               | good ideas that could be profitable has multiple factors
               | 
               | 1. As pointed, decoupling of relationship between
               | entrepreneurs and "old money". This could be rebuilt even
               | a the local government level with reach out actions
               | 
               | 2. The untangibility of tech assets make banks loans near
               | impossible to get
               | 
               | 3. People cannot afford the risk. Better safety net would
               | help. Obamacare was a good first step. Far more are
               | needed.
               | 
               | 4. The winner take all model has failed to generate
               | profit. It generated capital returns but as pointed out
               | by OP, pretty bad one. But it needed a lot of capital and
               | LPs had a lot of money to throw around. The current
               | inflation and folding back to Value investment will help.
               | But we need to make the point.
               | 
               | 5. The rise of passive investing has reduced the amount
               | of money available to these kind of "semi anateur small
               | rounds". The return to a less bullish market may help.
               | 
               | 6. Housing. A lot of money and security rn for young
               | people is sinked in rent
               | 
               | 7. O'Reilly had amazing result with Indie.vc. The LPs
               | refused to invest. There is a story that need to be told
               | more. We need dozens of people banging the drum on this.
               | 
               | In the end... i don't have a solution sadly. We need a
               | return to fundamentals to make the story of these models
               | work. Focus on real possible profit and not some "we will
               | control the world". FAANG are the exception. Not the
               | rule. LP need to realise that.
        
               | TuringNYC wrote:
               | Agreed on most points. A couple of things:
               | 
               | >> 2. The untangibility of tech assets make banks loans
               | near impossible to get
               | 
               | Avoid bankloans and explore PIPE financing or similar
               | non-dilutive financing
               | 
               | >> It is that access start at 250k a year which is really
               | hard to get even in tech.
               | 
               | Not really. If you aren't VC funded, you can hire
               | anywhere and anyone. You make the rules. At that point,
               | you can hire in India, Indiana, Ukraine, Pakistan, or
               | Pennsylvania. You get a lot for your money. We hired
               | entirely outside major markets and saved a lot.
               | Unfortunately once you go the VC route you get forced
               | into hiring expensive talent and end up burning money.
               | 
               | Id love to reach out offline, we should chat!
        
         | keppy wrote:
         | This resonates with me. I have close friends who would be great
         | co-founders, 3 out of 4 have moved in to camper trucks or vans.
         | They work easy remote jobs and just enjoy life. We are mostly
         | in our early 30s, worked in startups together over the years as
         | engineers, sometimes as first or second hire. It's going to be
         | quite hard to talk one of them in to being a principal co-
         | founder at this point.
        
         | snarf21 wrote:
         | There is a simple solution. It also give middle class an actual
         | shot at an exit even without hitting a unicorn. This is for the
         | groups that went to state schools not the Ivys.
         | 
         | Take a group of 4-6 CS grads and maybe a business major. The
         | parents of these kids form a company and bootstrap the kids by
         | having them work from home and just covering legal costs and
         | cloud costs with a focus on keeping costs low. They go find a
         | problem and start finding customers. No salaries are needed as
         | each parent takes care of their own kids. This gets rid of the
         | problem of just giving 22 year olds $10M and hoping they figure
         | it out. The middle class doesn't have that kind of money, they
         | have to be smarter but it is possible. Someone who has the
         | knowledge could make a template that others could just use even
         | without the know how. I wish my parents would have done
         | something like this. I didn't have the chance to mess with a
         | start-up after graduation. I worked 40 hours/week while in
         | college. Graduation was about getting money asap to start
         | digging out. This is the thing that the 1% have over others, a
         | huge backstop and support self in case they fail.
        
           | ttymck wrote:
           | > They go find a problem and start finding customers
           | 
           | This is easier said than done, no?
        
         | splitstud wrote:
        
         | ant6n wrote:
         | I dunno. I feel like the first 500K aren't really the big
         | problem, since growing to, say, a 500M valuation as an upper
         | limit is still quite the upside. Also, non traditional funding
         | options are on the table at that level (some cash from you and
         | family, some equity in your home, perhaps some state funding or
         | loans).
         | 
         | I feel like the next rounds may become much more difficult. How
         | can I raise the next 10M, ..., 200M if the company is unlikely
         | to grow beyond 500M?
        
           | di4na wrote:
           | You don't need it as much or have that much problems if you
           | make a profit.
           | 
           | And sorry but as upper middle class, my family cannot fund
           | 500k. 100k max. And young people do not have a home.
           | 
           | Welcome to the real world.
        
       | laurex wrote:
       | I think one myth that exists in both American culture and
       | startups in particular is that you can "make it" if you just have
       | the skills and the chutzpah.
       | 
       | Without some system that isn't inherently about 'move fast, big
       | returns, oh and also it really helps if you're a young man with a
       | Stanford connection and a way to get through the period of time
       | where you have no income' then we get the technology that results
       | from that. And the 'system' reflects a funding situation where
       | big investors, often having 'good' missions (the LPs I mean) look
       | to folks from SV VC to pattern-match their way into high returns.
       | 
       | If you are building a business and it's a "good business" that
       | can be profitable early then great, but you will be stuck at
       | scale (or in almost anything consumer-facing in tech) with only
       | the companies willing to maximally exploit the systems that I
       | think we know are extractive and unsustainable.
       | 
       | Like with most systems problems, it's hard to know what the
       | 'answer' is- if you buy into this line of thinking- but I hope
       | we'll start trying new ways to approach the problem, whether it's
       | by putting some pressure on the LPs or by making it easier to
       | crowdfund or by some more radical means...
        
       | bradleybuda wrote:
       | Businesses that are shooting for the "middle class" (say, less
       | than $50M in earnings at their peak) are of course possible and
       | healthy and good for the economy. What's missing in this analysis
       | is that those businesses are not going to be "founder-friendly"
       | the way that the prototypical YC-seed-stage startup is. To use
       | the article's definitions:
       | 
       | * "Bootstrapped from zero" is, of course, founder-friendly - no
       | investors and no board means you get to do what you want!
       | 
       | * "Raised $100M+ from VCs" is also pretty founder-friendly, at
       | least in the early days, because you're selling those VCs on the
       | lottery-ticket dream that they could earn 3-5 orders of magnitude
       | ROI. With such an incredibly high upside, VCs and angels are
       | willing to take risks with zero due diligence on unproven
       | founders and small dilution.
       | 
       | If you remove the long tail of upside from the possible outcomes
       | and tell your early investors "the best case for you is 100x
       | return, but zero is still just as possible" then the market will
       | compensate in these ways:
       | 
       | * Less availability of capital
       | 
       | * More dilution
       | 
       | * Less faith in "visionary founder" CEOs and more desire by
       | investors to bring in professional management
       | 
       | * Long and protracted due diligence processes before the check
       | even lands
       | 
       | All of that is fine! There's nothing wrong with building a
       | business this way. But there's no free lunch here - companies
       | that don't chase astronomical outcomes will have a harder path to
       | getting those first few dollars in funding.
        
         | [deleted]
        
         | gumby wrote:
         | These deals work for smaller funds with fewer staff. The
         | current situation stems from the giant funds. Not so long ago
         | most A rounds were a couple of million or less.
        
         | marcosdumay wrote:
         | I think this would be much more healthy than the multi-phase
         | aim-for-the-moon approach everybody takes today. And quite
         | likely brings better results for both the investor and the
         | founders.
         | 
         | If the business is already on the path to a small
         | profitability, it is much more likely to get into large
         | profitability than something that wasn't even started. And much
         | less likely to get into a total loss.
         | 
         | Your points also seem a bit odd:
         | 
         | > Less availability of capital
         | 
         | There's no reason for that. If the investments are less risky,
         | there should be more capital, not less.
         | 
         | > More dilution
         | 
         | Yep, at least more dilution per round. Companies doing that
         | shouldn't do multi-round or have a very small first round
         | followed by a second one.
         | 
         | > Less faith in "visionary founder" CEOs and more desire by
         | investors to bring in professional management
         | 
         | Hum... Bringing management is a VC only thing. Their desire to
         | bring management is clearly one of the forces stopping them
         | form investing on less risky ventures. It's a non-performing
         | choice for risky startups, and it's a non-performing choice for
         | less risky ones. I'll just not call it stupid because there are
         | handful of contexts where it's not, but doing it by default is
         | clearly stupid. The good thing is that it's not viable for less
         | risky bets.
         | 
         | > Long and protracted due diligence processes before the check
         | even lands
         | 
         | Hell yes. That's the largest difference.
        
           | q-big wrote:
           | > I think this would be much more healthy than the multi-
           | phase aim-for-the-moon approach everybody takes today.
           | 
           | Healthy for whom?
           | 
           | - startups founders?
           | 
           | - angel investors?
           | 
           | - VCs?
           | 
           | - national economy?
           | 
           | - financial markets?
           | 
           | - ...
        
             | marcosdumay wrote:
             | Hum... I answered that just on the next phrase.
             | 
             | But now that you enumerated more, you can add "national
             | economy" too.
        
               | q-big wrote:
               | > Hum... I answered that just on the next phrase.
               | 
               | Concerning "And quite likely brings better results for
               | both the investor and the founders.":
               | 
               | That "[it] brings better results" for some groups does
               | not imply that it more healthy for this group. Also the
               | other way round: "more healthy for some group" does not
               | necessarily imply "better results for this group".
               | 
               | In this sense I did not think that this phrase was to be
               | considered an answer to my point.
        
               | marcosdumay wrote:
               | Hum, ok. You are interpreting "better results" in a
               | strict monetary sense, without accounting for second-
               | order problems from bad deals.
               | 
               | It looks more healthy for both groups. I do expect it to
               | bring better both first-order and second-order results.
               | (Those two are always correlated, and on investment
               | relationships they are very strongly correlated.)
        
         | thanedar wrote:
         | The key is that Mittelstand businesses are much less likely to
         | fail. (This is why PEs on average outperform VCs. I go into
         | these economics in my post.)
         | 
         | This can be the Goldilocks deal for founders where you raise
         | <$5M from angels or PEs who are happy with consistent 5x
         | returns and get to $10M+ revenue and $50M+ value with majority
         | ownership. And there are orders of magnitude more of these
         | opportunities available vs. VC-backed unicorns.
         | 
         | And being VC-backed is only great if you're one of the winners.
         | If you're one of the >90% that's written off, you're back to
         | zero.
         | 
         | I hit the wall at Series B with my startup Labdoor. We pivoted
         | to profitability and are now headed to Mittelstand land, but
         | this all would've been way easier if we just headed straight to
         | middle class.
        
           | clairity wrote:
           | most new businesses in the US are still bootstrapped, usually
           | through a combination of family (non-)wealth, non-
           | professional investment, (small) bank loans, supplier credit,
           | and plain ol' hard labor. most of those will be small
           | businesses, but many will grow to mid-sized businesses. most
           | will not be software businesses.
           | 
           | software doesn't have an investment problem. in fact, it's a
           | maturing industry where all the big money that investors can
           | squeeze out has mostly been squeezed out. that's where the
           | lack of interest in the sector lies, not some missing middle
           | investment. investors are looking for bigger opportunities
           | because the risks have risen, but there's such a glut of
           | money looking for return that we have risky sideshows like
           | crypto/nft's seeing billions pouring into it irrationally
           | just because it could be big.
           | 
           | what is actually happening in relation to the middle is the
           | hollowing out of the real middle class, where family wealth
           | and non-professional investment is going to zero and becoming
           | untenable for starting a new business, and economic rents
           | overwhelm even those where it's available. the problem is
           | that we're becoming feudal, and fewer people managing bigger
           | pots of money is less efficient and less dynamic.
        
             | ehnto wrote:
             | I had not considered the way crypto/nfts have been
             | commandeered to be a side effect of wealth not being able
             | to be allocated fully anymore. That's an interesting take.
             | I wish there were a way for that kind of wayward money to
             | do some real work improving our communities while it waits
             | for something more profitable to do.
             | 
             | I don't necessarily mind that people are trying to make
             | money with their money, but it is a shame that so much
             | capital is caught up in financial instruments that don't do
             | any real work while it's holding onto it.
        
               | jrochkind1 wrote:
               | > I had not considered the way crypto/nfts have been
               | commandeered to be a side effect of wealth not being able
               | to be allocated fully anymore.
               | 
               | If I point out that Marxist economic theory talks about a
               | "crisis of capital accumulation" where capitalists
               | (meaning those with capital to invest) don't have enough
               | places to invest their capital succesfully, and that this
               | is related to "financialization" as a method of opening
               | new places to put capital (also in some circumstances
               | "imperialism"), and that in different periods this can go
               | up and down... in the past I usually get down-voted.
        
               | marcosdumay wrote:
               | That used to happen periodically at Marx's time. One such
               | crisis was one of the factors that led to the first World
               | War (but then, what wasn't?)
        
               | clairity wrote:
               | that's exactly the crux of the problem: a misallocation
               | of resources due to the increasing distortions caused by
               | increased wealth concentration. it's directly observable
               | in investment markets like software startups or crypto,
               | but it's effects are felt all over the economy.
               | 
               | like most systems, balance is critical to optimality.
               | greed in moderation drives the economy, while greed in
               | excess grinds it to a halt (as does a dearth of greed, a
               | la communistic economies).
               | 
               | at least 50 years of poor financial policy fostered by
               | laissez-faire economic dogma led us to these distortions,
               | so it's no better time than now to start realizing this
               | and digging ourselves out of it, rather than being
               | distracted by outrage du jour.
        
           | bradleybuda wrote:
           | > The key is that Mittelstand businesses are much less likely
           | to fail
           | 
           | I think you're getting at the crux of it here. The question
           | is, how does one of these businesses "prove" to investors
           | that they are less likely to fail? The failure rate for new
           | business starts is famously high, whether that business is a
           | tech startup chasing unicorn status or the corner deli. I
           | think this will manifest itself in the due diligence phase,
           | bringing back a bunch of things that tech founders have
           | eschewed: detailed business plans, fundraising towards
           | specific initiatives (as you point out in your post), and
           | harsh measurement of progress towards those goals in board
           | meetings with rapid consequences if goals are missed.
        
             | sgift wrote:
             | > I think you're getting at the crux of it here. The
             | question is, how does one of these businesses "prove" to
             | investors that they are less likely to fail?
             | 
             | By having a business plan. That's why banks (at least over
             | here in Germany) ask for one when you ask for a loan. You
             | present a plan, someone reads it, you talk it through,
             | clarify a few things and if everyone is happy they give you
             | a loan and you start (or grow) your business with it.
        
               | webmaven wrote:
               | _> You present a plan, someone reads it, you talk it
               | through, clarify a few things and if everyone is happy
               | they give you a loan and you start (or grow) your
               | business with it._
               | 
               | In the US, unless you can put up property like a house or
               | land as collateral, or plan to use the loan to purchase
               | recoverable assets like industrial equipment (I suppose a
               | data center would qualify, but actual computer hardware
               | depreciates faster than banks like), you won't get the
               | loan, even if it's a local bank you're approaching.
               | 
               | In theory a software business could use IP assets as
               | collateral, but that usually doesn't apply to new
               | software businesses.
               | 
               | Getting to the point where a software business could get
               | a business loan from a bank more or less requires
               | bootstrapping.
        
               | cseleborg wrote:
               | > they give you a loan
               | 
               | Yes, they do, if you can provide a security for the loan.
               | More often than not, the founder is the guarantor, which
               | sucks for them if the business fails. This is moderately
               | founder friendly, to say the least.
        
               | fxtentacle wrote:
               | In Germany, there's the option to have the government
               | secure your loan towards the investment bank. For the
               | founder, that means you get capital into your new company
               | and only the company is legally liable for it, but not
               | you personally.
        
               | [deleted]
        
             | belval wrote:
             | I don't have a definitive answer, but I'd venture that
             | that's is something that can be addressed by your pitch,
             | how high you are aiming, etc...
             | 
             | Someone who wants to build niche business software vs "the
             | next Facebook" is a good example. The first case has
             | clients outlined, a good estimation of revenue,
             | competition, etc... The second is more abstract but aims
             | higher. Success (albeit highly unlikely) means billions in
             | revenues.
        
               | spaced-out wrote:
               | >The first case has clients outlined, a good estimation
               | of revenue, competition, etc... The second is more
               | abstract but aims higher. Success (albeit highly
               | unlikely) means billions in revenues.
               | 
               | It's a stereotype that startups don't have things like
               | estimates of revenue, a clear business plan, clients,
               | etc... A few crazy outliers get all the attention but the
               | vast majority that get funding have a clear and
               | convincing plan to get to profitability, and often
               | clients or at least partner businesses (in other words
               | clients that aren't paying yet, but are willing to spend
               | their own resources working with you).
               | 
               | The problem is that most new businesses fail, so if
               | you're investing in new businesses the winners can't just
               | make you a little money, they have to pay for multiple
               | losers too.
               | 
               | You also need to convince investors that it's worth
               | putting their money into these risky businesses instead
               | of say Microsoft/Apple/Google/Amazon/etc... which will
               | not go out of businesses anytime soon and produce
               | respectable returns.
        
               | justin wrote:
               | Even startups not aiming to be the next FAANG company
               | have trouble estimating revenue, product development
               | time, etc. It's just extremely hard to know all the
               | unknowns when you are starting a new business, especially
               | since it is likely that you are only an expert in one of
               | the required fields (eng, product, marketing, sales) to
               | bring your product to market and will have to learn
               | everything else on the fly. Most business plans for
               | startups are useless.
        
           | senko wrote:
           | > The key is that Mittelstand businesses are much less likely
           | to fail.
           | 
           | Citation needed.
           | 
           | Around half of new businesses in the US fail after five
           | years[0], and it is reasonable to assume the vast majority
           | are small.
           | 
           | Mom and pop businesses fail all the time, we just don't hear
           | about it very often.
           | 
           | Also, one of the key properties of Mittelstand, as I
           | understand it, is that you don't need, or indeed want, an
           | exit. It's (ideally) a cosy, lifestyle business.
           | 
           | I agree that this is a healthy approach and more people
           | should be aware this is a viable option, but I'm not so sure
           | it can be mixed with PE or VC (for the reasons I mentioned).
           | 
           | [0] https://www.lendingtree.com/business/small/failure-rate/
        
         | hodgesrm wrote:
         | > What's missing in this analysis is that those businesses are
         | not going to be "founder-friendly" the way that the
         | prototypical YC-seed-stage startup is.
         | 
         | I don't understand your definition of "founder-friendly." I
         | want to build a business that delivers real value to customer
         | and I want to do that from day one. I don't mind working harder
         | or working on boring problems (if necessary) to do that.
        
       | Bubble_Pop_22 wrote:
        
       | toss1 wrote:
       | Reminds me of talking to a VC who said that one of his
       | investments 'turning into a $20MM company is the WORST outcome'.
       | 
       | The reasoning was that if the company just tanked, he had no
       | ongoing issues, it was gone. Now, he still has his time &
       | resources occupied by an ongoing company, even if minimally, it's
       | a distraction...
        
       | phendrenad2 wrote:
       | Didn't the 21st century establish that if something is valuable,
       | it'll be way more valuable if you throw millions of dollars it
       | and run all of the other penny-ante competitors out of business?
       | If you do manage to find some niche, you'll have to either become
       | the one to get VC funding, or watch as someone gets VC funding
       | and eats your lunch. Very few remain under the radar long enough
       | to grow too large to leapfrog.
        
       | alexashka wrote:
       | This describes a problem, a potential solution but not the steps
       | needed to get there, the steps in-between.
       | 
       | Those are the tricky bits :)
       | 
       | It reminds me of the 'how to draw an owl' meme where you have a
       | couple of circles on the left as step 1, a finished drawing of an
       | owl on the right as step 2.
       | 
       | Great, but uh, what did you do to get from circles to an owl? :)
        
       | andrewedstrom wrote:
       | Powerful message, but what is going on with the formatting of
       | this post? Why are lines highlighted with two different colors?
        
         | ravitation wrote:
         | I found it essentially impossible to read.
         | 
         | Great note/outline format, if I already know the key
         | ideas/takeaways and where they are relative to each other, but
         | really awful to follow reading it for the first time.
        
         | thanedar wrote:
         | I use my own "outline" style to make my posts easier to read
         | fast.
         | 
         | The brighter highlights are intended to be the most important
         | points.
         | 
         | Is that confusing? I can change the shade of the lighter
         | highlights.
        
       | mbesto wrote:
       | This already exists in the US. How do you think <insert X project
       | management software for devs> has 10k customers?
       | 
       | One of the biggest trends is now that PE is gobbling them up and
       | rolling them up into $100M+ revenue businesses.
        
       | wollsmoth wrote:
       | There are a lot of random "startups" or rather, tech companies
       | that managed to keep their customers happy while never really
       | seeming to explode to huge capsizes.
        
       | user_7832 wrote:
       | While some comments here are criticizing the author, I'd like to
       | add that what the author says matches with my (extremely) limited
       | experience. The most "glamorous" are YC-type funds, while others
       | seem to be built with money more locally pooled from
       | friends/family/banks. There are a few <X City> entrepreneurship
       | centres and startups, but these unsurprisingly aren't as famous
       | as funds with billions of dollars. I wonder if there's a way to
       | increase the visibility of the middle kind of organized-but-
       | not-10s of millions of $ funds - both as a social experiment but
       | also as an aspiring entrepreneur.
        
         | di4na wrote:
         | Please yes. As a founder aiming for the kind of outcome
         | described above, finding the original 500k of funding is the
         | hardest part right now. No idea who to ask or what they expect.
        
           | dv111 wrote:
           | republic.co
        
       | paxys wrote:
       | From an investor side, what I see is that I'd have to keep my
       | risk the same (these "Mittelstands" have the same chance of
       | succeeding as any other VC backed company) while drastically
       | reducing returns. Why would anyone go for this?
        
       | techsin101 wrote:
       | with devs salaries in 200k+ range is regular startup even
       | possible now?
        
         | ttymck wrote:
         | Surely the answer is yes, but the question is: will "regular
         | startup" now be more selective for founders with higher risk-
         | appetite (paying the opportunity cost to forgo 200k salary) or
         | higher self-delusion (to think they can replace their salary
         | with whatever idea they have). And if they are more deluded,
         | are their ideas any better/worse as a result?
        
         | conductr wrote:
         | There's plenty of decent <$15/hour devs up for grabs if you
         | look for them. If you're more interested in building a cool
         | company culture with a fancy office in an expensive city or
         | just trying to do incredibly difficult things that require top
         | of top devs then maybe just re-evaluate if that's the right
         | business for you in this moment with attainable resources
        
       | cseleborg wrote:
       | I like some of what the article proposes, but some parts leave me
       | skeptical. The author sketches out an industry of funds to buy
       | and scale small businesses to Middelstand level. I think one of
       | the reasons for Germany's strong Mittelstand is that many of
       | these are privately owned, sometimes even family-owned, and can
       | take a long-term view on business and innovation. I lack the
       | imagination to see how the proposed kinds of funds could be
       | content with dividends year after year rather than the exits I
       | suspect they'd prefer.
       | 
       | I wish there were more dividends-only VCs...
        
         | tptacek wrote:
         | Which is another way of saying you wish there were more LPs to
         | invest in funds that were structured that way.
        
       | Havoc wrote:
       | I think the type of industry here matters.
       | 
       | A big chunk of the classic Middelstand is something physical, not
       | knowledge work.
       | 
       | And startups turn that effect up to 11. Either it works or it
       | doesn't. It is by its nature not conducive to middle ground.
        
       | czbond wrote:
       | You have funding... it's called nights and weekends. Most
       | founders are "nights and weekends" to scrimp buy for YEARS
       | [3-5?].
       | 
       | Anti-risk, security seeking, founders who think they should get
       | funding in `3 months really haven't assessed "startups" as a
       | profession too well. You get funding when capital has a reason to
       | believe it isn't simply gambling.
       | 
       | "But I have kids and a family". Yep, so do many... and they made
       | it work. Decide if you will.
        
       | formerkrogemp wrote:
       | Unpopular opinion: Paul Graham and a generation of startups with
       | Silicon Valley magical thinking has inculcated this belief that
       | startups are the solution to everything. Don't get me wrong:
       | startups have their place, but they're no panacea. Most of our
       | problems are political and, more and more often now and moving
       | forward, environmental.
       | 
       | But, yes, opening up funding to people of different socioeconomic
       | backgrounds at different "risk" levels might lead to more
       | innovation and entrepeneurship. So would a population of citizens
       | who don't have healthcare tied to their job, childcare tied to
       | their location or reliant upon wealth, and so forth. People who
       | don't have to worry about bankruptcy due to an accident or
       | disease, and people who can have their children taken care of
       | during the day while they're off starting a company can focus
       | more on a company and less on the risk of failing in everything
       | else.
        
       | michaelbuckbee wrote:
       | This post is describing a structural issue on the funding side of
       | new ventures: -
       | 
       | - bootstrapping is very hard
       | 
       | - traditional credit/loans aren't structured well for the "mid"
       | type risks of starting software businesses (not much collateral)
       | 
       | - and on the VC side there is much less opportunity for the
       | Unicorn 1 in 10 exits.
       | 
       | Tackling this problem are two funds that I didn't see mentioned
       | in either the article or the comments so far: TinySeed and Calm
       | Fund.
       | 
       | https://tinyseed.com/thesis
       | 
       | https://calmfund.com/shared-earnings-agreement
       | 
       | Broadly both invest much less than a traditional VC would and are
       | compensated differently. The details are different (and matter)
       | between the two but it's more along the lines of profit sharing
       | than looking for big exits.
        
         | limedaring wrote:
         | Tracy here from TinySeed, thanks for linking to our thesis!
         | 
         | Point of clarification: we don't do profit-sharing. Instead, we
         | are equity owners. So when a company gets to the point of
         | success where they want to take money off the table, they can
         | issue dividends (and TinySeed get's a pro-rata amount of those
         | dividends). I find this is one of our most unique points and
         | aligns the incentives of the founder with TinySeed.
         | 
         | As mentioned in that page, by investing broadly into B2B SaaS,
         | we can succeed as a venture firm without needing to count on
         | unicorn exits. We're about to back our 80th company, and our
         | founders tend to be older, more likely to have families, and
         | tend to be "unsexy" businesses. We're only a few years old, but
         | we've had very promising results (as a VC firm) so far.
        
           | flutas wrote:
           | On the thesis page it makes it sound like _only_ B2B are
           | considered, but here you stated primarily. Is this just a
           | mis-wording here, or is it more that the focus is B2B but you
           | won 't outright deny a B2C company, if you think they have a
           | good idea?
        
           | bradgessler wrote:
           | You should add that you cap founder salaries at
           | $250-$300k/year (if I remember your terms correctly)
           | 
           | If you're a founder looking at TinySeed, what this means is
           | that if your business reaches a level of success you can pay
           | yourself over $250k-$300k through your W-2, you'll either
           | have to cap it there or pay the rest through dividends.
           | 
           | That said, this isn't really a terrible setup if you plan to
           | go down this route. The IRS takes issue when tightly held
           | C-corps pay themselves large amounts via W-2's because they
           | would want to reclassify those as dividends. They won't say
           | what the "large amount" is, but I've been advised that its
           | around $250k-$300k if you don't have disinterested
           | stockholders or board members voting on your comp.
           | 
           | As always, consulting with your accountant before making tax
           | and/or fundraising decisions.
        
             | wuth2 wrote:
             | bradgessler, you have that completely backwards (might want
             | to edit your post so others don't get confused). Dividend
             | income is almost always taxed lower than w-2 income on
             | several levels. The IRS goes after C corps for distributing
             | dividends without a fair-wage w-2-- it triggers an
             | automatic inquiry which, if you're not paying a fair wage,
             | leads to an audit.
        
             | limedaring wrote:
             | That's correct. More info here on the full TinySeed terms
             | can be found here: https://tinyseed.com/faq
        
             | robocat wrote:
             | Salaries and benefits need to be capped, otherwise founders
             | can choose to pay themselves instead of paying dividends.
             | 
             | Honest founders often love the status that comes with big
             | salaries and expensive perks, so investors need some way to
             | cap that behaviour or otherwise investors get shafted.
             | 
             | It is perfectly fair: dividends do not overly cause
             | taxation imbalance.
             | 
             | Micro-optimising for success before you are successful is a
             | loser's game. It is, of course, critical to configure your
             | business so that you do indeed reap your rewards if you are
             | successful (watch out for VC's who have asymmetric
             | information about the end-game and they can optimise for
             | that against you).
             | 
             | If you are successful, then don't sweat the micro-
             | optimisations you missed out on. When founding, it is often
             | easier to make the business 5% more profitable, rather than
             | lose time pre-optimising for potential 5% gains.
        
             | JumpCrisscross wrote:
             | > _IRS takes issue when tightly held C-corps pay themselves
             | large amounts via W-2's because they would want to
             | reclassify those as dividends_
             | 
             | Isn't dividend income taxed less than W-2 income?
        
               | bradgessler wrote:
               | Yes and no. It depends on what bracket you're at on your
               | income tax. It also depends on whether or not you're
               | factoring in corporate income tax too, which is paid
               | before dividend distributions are made. For tightly held
               | C-corps, you'd probably factor in the corp income tax
               | since the concern would be about tax efficiency from
               | revenue to dollars in your pocket.
        
         | joshpadnick wrote:
         | I really appreciate these suggestions. We're a fully
         | bootstrapped ~20 person, $5M+ ARR company in the DevOps space.
         | We're growing quickly and often wonder what an extra $1.5 - $3M
         | could mean for us, but don't want the overhead associated with
         | a traditional investor, nor to invest the time in raising. We
         | get emails from 3 - 4 VCs per week, but never any alternative
         | funding options like the ones you listed. CalmFund in
         | particular could be worth exploring. I wish this space ("Tech
         | Mittelstands"?) were better established.
        
         | [deleted]
        
       | westcort wrote:
       | My key takeaways:
       | 
       | 1. Remote work, no code, social media, and ecommerce platforms
       | all make it easier to bootstrap new businesses from zero to
       | revenue
       | 
       | 2. (From Wikipedia) Mittelstand commonly refers to a group of
       | stable business enterprises in Germany, Austria and Switzerland
       | that have proved successful in enduring economic change and
       | turbulence. The term is difficult to translate and may cause
       | confusion for non-Germans. It is usually defined as a statistical
       | category of small and medium-sized enterprises with annual
       | revenues up to 50 million Euro and a maximum of 500 employees
       | 
       | 3. There are hundreds of YC-backed startups stuck at ~$1M revenue
       | that can predictably grow to $10M+ revenue with the right team
       | and funding structure
       | 
       | 4. Many VC-backed startups would be better as Mittelstands
       | 
       | 5. My first business, Avomeen, is a classic Mittelstand
       | 
       | 6. Mittelstands are already about one-third of our whole economy
       | 
       | 7. Mittelstands can launch and get profitable for <$1M
        
         | englishrookie wrote:
         | The original article uses the plural too, Mittelstands, but it
         | sounds really weird in German since it's more of mass noun
         | (it's as if you referred to various pots of sugar as 'the
         | sugars'). I believe the correct word would be Mittelstandler,
         | but if you're going to anglicize it, Mittelstanders would much
         | better than Mittelstands in my opinion. Then again, I'm not a
         | native speaker of either German or English...
        
           | Quanttek wrote:
           | the "-stand" comes from the German word for "estate" in the
           | medieval sense [1]. It's typically translated with small- and
           | medium-sized enterprises, which is also the lingo used at EU
           | level. As you said, it's a mass noun, so if you want to refer
           | to an individual enterprise belonging to the "Mittelstand,"
           | you'd effectively use it as an adjective and speak of e.g. a
           | Mittlestand firm.
           | 
           | [1]: https://en.wikipedia.org/wiki/Estates_of_the_realm
        
             | englishrookie wrote:
             | How would you call a person belonging to the Mittelstand in
             | German? In another Germanic language, Dutch, you would say
             | "middenstander" (or plural"middenstanders"), derived from
             | "middenstand".
        
               | Quanttek wrote:
               | Oh yeah, if we talk about a person, like the business
               | owner or founder, I'd use Mittelstandler and if I
               | desperately tried to anglicize it to Mittelstander
        
       | eric4smith wrote:
       | No.
       | 
       | Already most businesses are started in this broad middle. It's
       | where the TRUE root of entrepreneurship starts.
       | 
       | Heck, you are sure you will get no funding. For sure you will
       | fight for every last customer. You will wonder how you will pay
       | the rent every month and your staff.
       | 
       | Most of these businesses fail. But enough of them keep going to
       | keep the economies of almost all countries going. These are the
       | people that struggle.
       | 
       | There is no need for "funding" or someone to "buy" these
       | businesses.
       | 
       | These business will always exist, and for every one that goes
       | down 3 more spring up in their places.
       | 
       | Jesus.
        
       | bredren wrote:
       | I don't see discussion of the conclusion, which seems to be
       | creation of a "studio" that repeatedly aims to create
       | Mittelstands.
       | 
       | I have seen this idea before, but am not aware of that many
       | successful outcomes. IIRC, the idea of placing multiple bets made
       | it challenging to focus.
        
       | gw67 wrote:
       | It's a PR problem. I think it matters the name we use to call
       | them and how they are interpreted by general public.
       | 
       | Currently we call them like IndieHackers, bootstrapped startup,
       | life style business.
       | 
       | All not fancy as "unicorn" it is. We need a new PR that makes
       | this kind of business cool for the general public.
       | 
       | In these day if you have a profitable bootstrapped business
       | (<1M$) people say that you should raise capital to grow and
       | become an unicorn and your are not cool or not get PR attention
       | until you raise funds. I think is a PR problem. There is an
       | opportunity for a new media space. Like IndieHackers but without
       | the term "hackers" in the title which reminds something dark for
       | the general public.
        
         | notatoad wrote:
         | I think the whole point is that it's not cool.
         | 
         | If you're not okay with boring success, then this type of
         | business isn't for you.
        
       | goodpoint wrote:
       | Some aspects listed on the wikipedia page:
       | 
       | Family ownership or family-like corporate culture, Long-term
       | focus, Nimbleness, Investment into the workforce, Social
       | responsibility
       | 
       | ...are very much feared or despised in SV and, to a lesser
       | extent, in US in general.
        
       | jrochkind1 wrote:
       | I don't think it's an issue of making middle-sized businesses
       | "cool", I think it's an issue of capital, right?
       | 
       | The reason "VC" or "bootstrapped from zero" (both are the
       | author's words) are seen as the two available paths is... because
       | they are seen as the two _available_ paths.
       | 
       | Where do you get the funding to do a "middle-sized" business? The
       | OP goes into this a little bit, but it seems to me that's the
       | thing at the _center_ of the whole discussion.
       | 
       | If people saw that it was feasible to find funding for a business
       | that could grow faster and/or with less personal risk than what
       | he is calling "bootstrapped from zero" (or is sometimes
       | pejoratively called a "lifestyle business"); but without giving
       | up the control that you do with VC funding -- of course people
       | would be interested in starting a business like that, the appeal
       | is obvious, right? It doesn't need to be made "cool". But, how?
       | OP suggests "New non-dilutive funding sources are now available
       | for revenue-generating businesses", okay, more on this, and
       | hopefully it doesn't sound like a pyramid scheme or scamming
       | retail "investors".
       | 
       | The things OP links to sound like... loans? OK... So this is just
       | a variation of "bootstrapped from zero" where instead of just
       | taking out credit card debt and loans from family and maybe a
       | line of credit at your bank, you access loan products intended
       | for new businesses? Are they secured by personal property? This
       | doesn't sound so different from "bootstrapped from zero" to me,
       | like these new sources of debt are going to make an entirely
       | different business plan and category of business possible?
       | 
       | Then he moves on to advising that investors fund these
       | businesses... in ways different than VC? Which would mean...
       | without taking significant equity? Or without trying to maximize
       | their payout? They're going to invest just planning on making
       | money from _dividends_ instead? And investors are going to do
       | this because... it 's been made "cool"?
       | 
       | I would love there to be more stable medium-sized sustainable
       | businesses that don't pursue growth at all costs, treat their
       | employees well, treat their communities well, etc. I feel like
       | the OP weirdly seems to think the reason they aren't is becuase
       | it's not "cool", rather than because of the economic factors.
       | Businesses need capital, those with capital want to maximize
       | their profit. So the two paths are either try for a capital-
       | intensive startup that tries to give VC what they want; or you
       | try to minimize the amount of capital you need by finding a way
       | to start very small and have very slow but sustainable growth
       | (the "bootstrapped from zero" "lifestyle business"). Making it
       | "cool" to do something else does not solve these economic
       | constraints. What might is talking about, say, changing the tax
       | code to encourage a new type of business model or investment, or
       | providing government subsidy for it, or something. Am I missing
       | something?
        
         | thanedar wrote:
         | The capital for Mittelstands is in mid market PE funds.
         | 
         | Making it "cool" means getting founders who'd otherwise take VC
         | to target PE.
         | 
         | It also means convincing these PEs to invest earlier.
         | 
         | Thanks for the feedback. I'll try to center this more in my
         | post.
        
           | di4na wrote:
           | As a founder aiming at these, finding them and convincing
           | them is a pita
        
           | csa wrote:
           | I'm glad you touched on this topic.
           | 
           | I think this is the next opportunity for very large growth,
           | but the ecosystem isn't where it needs to be yet.
        
       | Zaskoda wrote:
       | This sorta thing would mean the world to me and my team at our
       | little bootstrapped startup. We may go broke before we turn
       | revenue and we're now blowing enough smoke in front of mirrors to
       | get VC funding.
        
       | givemeethekeys wrote:
       | The problem with micro services is that your CEO drank the Kool-
       | Aid. Now your CTO has to get it done and your VP of Engineering
       | is stuck with a large bag of feces.
        
       | onion2k wrote:
       | Isn't this what everyone calls a "scaleup"?
       | https://en.wikipedia.org/wiki/Scaleup_company
        
       | thenerdhead wrote:
       | These are the two businesses you see on social media. It does not
       | mean the middle class doesn't exist. Perhaps they are busy
       | delivering value to their customers to brag about it on social
       | media and/or source their revenue from "building in public"?
       | 
       | I don't see how this is any different than social media itself.
       | You only see the "bootstrapped from zero" or the "industry
       | plants". The middle class of social media however? They are
       | there, they make a decent living, and they still create. They may
       | not be recommended on the front page of feeds, but they still
       | exist and are arguably how the platforms became big in the first
       | place.
       | 
       | I'll be honest and say I hate articles that only talk about
       | raising money or valuations. That's like half of twitter and it's
       | annoying. Startups are more accessible than ever today and can
       | happen organically from like a HN, Reddit, or Twitter post.
       | People find pain in their daily lives, and they create a
       | painkiller. You don't need millions to create a v1.0 to assess
       | product-market fit.
        
       | [deleted]
        
       | coderholic wrote:
       | Totally agree with this article. It's not just about funding
       | methods, but also playbooks for these types of businesses, and
       | best practices.
       | 
       | I've bootstrapped IPinfo.io to millions in revenue and a team of
       | over 20 - so we're squarely in the "Middle class", and there's a
       | tension between the "bootsrapper advice" (which mostly applies to
       | optimizing for lifestyle and eliminating any risk) and "VC backed
       | advice" (which mostly seems to optimize for scale and speed) -
       | and a lack of advice for anything that balances those 2 (let's be
       | ambitious and serve a large market and create the best products
       | with great people, but let's run this as a marathon and not a
       | sprint, and let's not risk everything on a big outcome).
        
         | achillean wrote:
         | I'll second the lack of information about playbooks/ running a
         | middle-class company. It's a bit frustrating that everybody
         | assumes you want to follow the VC model. Probably the most
         | common question I get is when I'm going to sell the company -
         | not realizing that we're a profitable company that doesn't need
         | an exit. I also think middle-class companies are under-reported
         | on. I have to assume that there are a lot of companies like us
         | but it's not as sexy of a story: slowly and steadily building a
         | successful business.
        
         | Etheryte wrote:
         | Isn't what you're describing just running a regular company?
        
           | coderholic wrote:
           | No, I actually think it's much more closely aligned with a VC
           | business than a regular business. It's just a more "regular
           | business" approach towards it. That is, it's still serving a
           | large market, creating a competative advantage (which
           | "regular businesses" rarely have), has compounding growth -
           | it just doesn't need to rush to make it all happen in a few
           | years in a very high risk way.
        
             | hooande wrote:
             | what is the competitive advantage of ipinfo.io?
        
               | coderholic wrote:
               | Data.
               | 
               | This is a really incredible article about the economics
               | of data businesses, if you haven't seen it:
               | https://pivotal.substack.com/p/economics-of-data-biz?s=r
        
         | TA-blahhh wrote:
         | "millions in revenue and a team of over 20" are not "Middle
         | class"...
        
           | carimura wrote:
           | what is it then? $ raised and trajectory are also part of the
           | story.
        
           | kevinventullo wrote:
           | That's about the scale of a single Jimmy John's franchise
           | location.
        
             | sli wrote:
             | Yeah, this whole idea is ridiculous and wildly biased by
             | the incredible over-valuations of some of these startups.
        
           | JumpCrisscross wrote:
           | This article is about re-branding the middle market, which is
           | typically defined as $10mm to $1bm in revenue, as this middle
           | class. (Less than $10mm steady-state revenues is typically a
           | small or medium-sized business.)
        
         | philsnow wrote:
         | This size of company and mindset seems pretty well served by
         | MicroConf [0], which tends somewhat to the bootstrapping crowd
         | but is very much not the "4 hour work week" crowd.
         | 
         | ... Is that what you mean by "optimize for lifetyle"?
         | "lifestyle business" is used as kind of epithet in some
         | circles, as an "othering" term to identify people who don't
         | work as hard as they do, but the MicroConf audience has a lot
         | of people who want to grow their companies as much as is
         | reasonably possible, but with non-negotiable ideas about family
         | time, taking actual vacations instead of working vacations,
         | etc.
         | 
         | One of the creators of MicroConf also is one of the hosts of
         | the podcast "Startups for the Rest of Us" [1], which I don't
         | see talked about very much on HN but which is _very_ much my
         | jam.
         | 
         | [0] https://microconf.com/
         | 
         | [1] https://www.startupsfortherestofus.com/
        
           | noodle wrote:
           | Microconf is definitely more oriented towards smaller
           | businesses than the previous commenter seems to be.
        
             | rwalling wrote:
             | It depends on what you mean by "small." MicroConf focuses
             | on SaaS founders who are, or aspire to run, 7- or 8-figure
             | companies. We do also provide early stage education, but
             | with the idea of folks building ambitious startups, though
             | no in the traditional Silicon Valley Unicorn sense.
        
         | pkaler wrote:
         | >> Totally agree with this article. It's not just about funding
         | methods, but also playbooks for these types of businesses, and
         | best practices.
         | 
         | I think the word you are looking for is called "business".
         | There are tons of books for these types of businesses.
         | 
         | On the shelf behind me is E-Myth Mastery, 22 Immutable Laws of
         | Branding, Traction by Gino Wickman. You just have to look
         | outside of tech. All of these books and practices apply to
         | software businesses.
        
           | coderholic wrote:
           | Yep, I have all those books behind me too :)
           | 
           | I do think there is space for a new category, or way of
           | thinking about these businesses though. There's lots of great
           | "regular / non-tech business" advice and books etc on how to
           | operate in a non-VC way. But we're still talking about
           | startups / tech companies here. So it's how do you marry the
           | advice on operating a regular business with many of the
           | dynamics of a VC backed business (that is, competative
           | advantage, compounding growth, large market, high margins,
           | attracting talent etc).
        
         | bspear wrote:
         | > Promote employee stock ownership for American Mittelstands
         | 
         | This is crucial. Many bootstrapped companies don't offer much
         | stock ownership from employees. Yes, they can pay a good
         | salary, but these employees are laying down the business brick
         | by brick, but never see a dime of the upside. Mailchimp comes
         | to mind. I'm sure there are others.
         | 
         | This basically leaves stock ownership in VC-backed startups as
         | a way to get rich quick (albeit with low odds):
         | https://topstartups.io/startup-salary-equity-database/
         | 
         | In fact, Mittelstands will probably perform even better if they
         | can figure out how to attract the kinds of talent well-funded
         | startups do. And from there, it'll be a virtuous cycle.
        
           | cbetti wrote:
           | Sincere question: What benefit is there to owning equity in
           | such a company in employee sized quantities?
        
           | coderholic wrote:
           | Yes, I think this is one of the most important pieces to
           | solve! There have been some approaches (profit sharing, etc)
           | but I think there's room for a lot of improvement &
           | innovation here.
        
           | fxtentacle wrote:
           | Agree. In Germany, some Mittelstand companies do offer
           | employee stock options which allow you to buy a certain quota
           | of stocks per month at a pre-negotiated price which is
           | typically much lower than market value. The idea is that over
           | time, employees can choose to reinvest their salary into the
           | company, thereby becoming partial owners.
        
         | bradgessler wrote:
         | Same! I think the middle ground is somewhere between paying
         | dividends or distributions from the revenue and most
         | importantly, becoming comfortable with the idea and ignoring
         | the "growth at all costs" mentality that people (and press) are
         | so attracted to.
         | 
         | Where does this community exist?
        
           | hooande wrote:
           | this community simply does not exist yet in significant form.
           | if you build it _, they will come
           | 
           | _ by  "it" I mean a sustainable company that pays dividends
           | and isn't focused on constant growth
        
           | quartesixte wrote:
           | > paying dividends or distributions from the revenue
           | 
           | Traditionally, isn't this what a bonus was, back in the day?
        
         | bryans wrote:
         | The almost exclusive focus on exit strategies makes VC advice
         | mostly useless for many concepts, particularly those based
         | around community or specializations. To even have a built-in
         | exit strategy feels like the business plan equivalent of fast
         | fashion, and that mindset is harmful to everyone except
         | founders and investors. It really is absurd that there are so
         | few resources available to startups with modest or long term
         | plans, or those lacking the desire to minmax profit schemes at
         | the expense of their customers.
        
         | chrisweekly wrote:
         | Your story with IPinfo.io is profoundly compelling; have you
         | written anything about your journey?
         | 
         | > "let's be ambitious and serve a large market and create the
         | best products with great people, but let's run this as a
         | marathon and not a sprint, and let's not risk everything on a
         | big outcome"
         | 
         | This sounds so great.
        
           | coderholic wrote:
           | Thanks! Yeah I have talked about it a bit - I should probably
           | talk about it more :)
           | 
           | https://saasclub.io/podcast/ipinfo-ben-dowling/
           | 
           | https://codestory.co/podcast/bonus-ben-dowling-ipinfo/
           | 
           | https://www.youtube.com/watch?v=r79AuXgTy-4
        
             | folli wrote:
             | Probably a stupid question, but how does this work
             | technically, how does one correlate IP addresses to
             | geolocation?
        
           | hyperdimension wrote:
           | > have you written anything about your journey?
           | 
           | Well, he can't yet, since it's still a going concern!
        
         | rehash3 wrote:
         | That is why I love SmugMug.
        
       | substation13 wrote:
       | I was expecting this article to be about how a middle-class is
       | required for innovation.
       | 
       | If we end up in a world where 90% of the population are
       | struggling to meet basic needs, 0.1% live off generational wealth
       | and 9.9% act as a highly technical servant class, then there will
       | be fewer innovators and fewer innovations.
        
       | plehoux wrote:
       | > We Need a Middle Class for Startups
       | 
       | You mean a bourgeoisie?
        
       | davidw wrote:
       | Rob Walling's TinySeed looks relevant: https://tinyseed.com/
        
       | hoerzu wrote:
       | It's called lifestyle business
        
       | steve76 wrote:
        
       | tptacek wrote:
       | 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.
       | 
       | What am I missing? Obviously, I'm not a golfer.
        
       | adamqureshi wrote:
       | Yes.100% with that this guy said. I have a 1 man shop marketplace
       | startup. I been at it since 2016. I have to literally figure shit
       | out on the fly. I can't afford a full time engineering time ( i
       | have a pay for play engineer). I pay for the platform from the
       | sales i make. I have no goals to raise VC. I am under no illusion
       | of raising series ABCDFU. My goal is to make sales and put food
       | on the table for me and my family. For me, as a 1 man shop.
       | Surviving IS Succeeding. I am very happy being a thousandaire.
       | techCrunch will never write about me or my start up. So if you
       | have an idea, build it and start testing. your #1 goal should be
       | making sales / money ASAP. Thats it. Do not fall in to the trap
       | of I have an idea i will raise funding and i will exit making
       | billions. That is NOT reality / real world. What you read on
       | techcrunch is not reality, those unicorns are very rare. Good
       | lucky out there. Make sales. Charge money.
        
       | clean_send wrote:
       | I feel like this is just trying to rebrand "lifestyle businesses"
       | or small businesses in general. Where I grew up it wasn't
       | uncommon for people to have businesses that did a few million in
       | sales and the whole family worked at. While not as sexy as
       | getting angel investment, it sustained a quality of life that met
       | their needs. In order to run a successful business you don't NEED
       | mass profits or VC dollars.
        
         | mathattack wrote:
         | Indeed, the majority of businesses don't have Angel or VC
         | funding. The majority are built on sweat equity.
        
         | vmception wrote:
         | and you can _always_ just be an investor in a business with
         | simple % ownership and splitting net revenues at any interval
         | you want. no multiple share classes, no liquidity preferences,
         | no need for infinite growth or growth at all
         | 
         | all this is still around ya know
         | 
         | people act like they just forgot
        
           | [deleted]
        
         | seibelj wrote:
         | Local banks can provide the capital, often collateralized by
         | your house. Also small business loans from the government and
         | accelerator awards can provide 6 figure amounts. I know some
         | "generic" business people who are fairly wealthy and they own
         | things like food franchises and apartment complexes.
         | 
         | There are many paths to becoming rich that don't involve VCs
         | and billion dollar exits. 99% of entrepreneurs don't talk to or
         | know anything about the VC system. But if you are in tech and
         | want to hire the best possible team to create something new,
         | you need a lot of capital because those people are super
         | expensive labor. And VCs don't want to give you $XX millions of
         | dollars if the potential return is 2x. So that's the system we
         | have in tech.
        
           | scarface74 wrote:
           | My question is why does everyone with the next CRUD SaaS app
           | think they need to hire the "best people"?
           | 
           | I've seen plenty of job openings where companies want "ninja
           | rockstar 10x developers" to write what ends up being
           | something that anyone who knows the latest MVC framework with
           | three years of experience can do competently.
           | 
           | And most "entrepreneurs" who own franchising are barely
           | middle class and "bought a job". The average fast food
           | franchise, convenient store averages about $70K a year and
           | that's with the owner working insane hours and putting their
           | family to work as free labor.
        
             | atentaten wrote:
             | > The average fast food franchise, convenient store
             | averages about $70K a year.
             | 
             | Where can I find industry stats to explore this assertion?
        
               | scarface74 wrote:
               | McDonalds is $150K in net profit after investing 2.7
               | million
               | 
               | https://www.mashed.com/178309/how-much-mcdonalds-
               | franchise-o...
               | 
               | 7-11 is between $50-$75K.
               | 
               | https://mobile-cuisine.com/franchise/7-eleven-cost/
               | 
               | Subway is about $40K a year
               | 
               | https://www.eposnow.com/us/resources/how-much-do-
               | franchise-o...
        
             | treeman79 wrote:
             | A 10x programmer can get things off the ground very fast.
             | 
             | Back at my peak. Me and another guy got a new startup to
             | 1,000 paying clients in b2b space in 2 years. We had a few
             | "regular" guys that helped out, but they would have taken
             | 20 years to do what we did.
        
               | scarface74 wrote:
               | I consider myself a "regular guy" (and 80% of drivers
               | think they are above average). But I believe I can go
               | through my LinkedIn profile and find a bunch of "regular
               | guys" that I've worked with through the years that if you
               | combine us with a "product guy", an empty AWS account and
               | a budget. We could put together a standard SaaS app.
        
           | esotericimpl wrote:
        
           | passivate wrote:
           | With the recent emphasis on remote work, you can hire from
           | the global talent pool. The US labor market is indeed very
           | expensive.
        
           | claytonjy wrote:
           | at the risk of stating the obvious, our labor is only so
           | expensive _because_ of that VC money, and the money-printing
           | machines they 've funded
        
         | julianeon wrote:
         | Is Berkshire Hathaway a lifestyle business? Because it started
         | out as one.
         | 
         | That's his point. Small businesses can become unicorns - but
         | they need space and time to grow. We need a better environment,
         | and a more nuanced understanding, of them.
        
           | bityard wrote:
           | > Is Berkshire Hathaway a lifestyle business? Because it
           | started out as one.
           | 
           | My skept-o-meter went off-scale upon reading this. Can you
           | point to exactly when BH was a lifestyle business and what
           | they were doing at that point that would classify them as a
           | lifestyle business?
        
             | missedthecue wrote:
             | He raised $105,000 from friends and family and started a
             | hedge fund which became BH.
        
         | boringg wrote:
         | Also there was a time when "lifestyle business" was getting
         | shade as if it an inferior product for inferior people. I think
         | that was probably just VC shade being thrown at it because they
         | couldn't do anything with the kind of business. That and
         | platforms probably ate away at their core offerings...
        
           | ttcbj wrote:
           | As someone who owns a lifestyle business, I think the domain
           | of lifestyle businesses is almost entirely distinct from that
           | of startups. Something that has the potential to be a startup
           | (massive growth), could not be "held back" to remain a
           | lifestyle business. And things that are lifestyle business
           | generally cannot be grown at the pace of a startup.
           | 
           | Almost by definition, a lifestyle business lacks the
           | potential for massive growth. If it has it, and the owner
           | tries to 'hold it back' someone else will come along and
           | capture the rest of the market. The incentive to do so is
           | large.
           | 
           | Occasionally, you will see privately held businesses that
           | have the potential of startups, but they are not lifestyle
           | businesses (maybe mailchimp). They grow into full fledged
           | businesses that just happen to be privately held. They will
           | often find ways of funding their growth (and have options for
           | doing so), even if that isn't VC.
           | 
           | That said, lifestyle businesses are awesome for your
           | lifestyle. I didn't think I wanted one until I ended up with
           | one, and it turns out high-ish income, total control of your
           | time, and direct positive relationships with customers are a
           | great lifestyle for me.
        
             | btown wrote:
             | This framing assumes that venture capital is both efficient
             | and perfect at identifying potential for massive growth. In
             | reality, there are many technology companies with potential
             | for massive growth that are under-appreciated by the
             | venture community - they don't fit into the right boxes,
             | and if they were to get on the "fundraising treadmill" as
             | the OP describes it, they'd be stuck in a situation where
             | they're forced to spend aggressively without being able to
             | rely on future fundraising making that burn sustainable.
             | The good news is that would-be competitors would be in the
             | same situation. So it's very possible for such a company to
             | think like a startup in terms of its goals, but move at a
             | more sustainable pace than if it were given hundreds of
             | millions to burn. And those startups can still raise from
             | VC when they've proven out their model, if they choose to
             | do so - but it's important that they have a path to success
             | _as a startup_ that doesn 't require those levels of cash
             | injections.
        
             | djhn wrote:
             | What kind of business do you operate? Mobile apps or
             | desktop software? Consumer or business SaaS? Developer
             | tools? Something else entirely?
        
               | ttcbj wrote:
               | Desktop software with a subscription model, sold to
               | businesses (so, economics similar to SaaS).
        
           | klaaz0r wrote:
           | Of course, they are on the back foot. If you have a
           | successful indie business, make good money why would you
           | accept VC investment? If you do it's on your terms and that
           | often means worse deals for VC's. I can't blame VC's because
           | their business modal is really different, they need to make a
           | 100x not a value investment.
        
           | adamsmith143 wrote:
           | Might be an effort by VCs to sell their own lifestyle. "Start
           | a company in your dorm and become a billionaire by 25." Is
           | possibly more compelling than "Start a business that might
           | make 5M a year in 10 years and then live a relaxing well
           | funded life."
        
         | marcosdumay wrote:
         | It's about financing, not about branding. It's just yelling
         | "hey, people stop ignoring 80% of the market!"
        
         | thanedar wrote:
         | I'm trying to split SMB into two categories.
         | 
         | Lifestyle small businesses are great too, but I'm really
         | talking about companies with $10M+ revenue potential.
         | 
         | You can get top-tier VC returns by building a portfolio of
         | Mittelstand businesses ($10M-$1B in revenue).
        
           | einarvollset wrote:
           | Hey, I'm the co-founder of TinySeed (and also a YC alumn),
           | would be happy to connect: einar@tinyseed.com
        
           | spitfire wrote:
           | > You can get top-tier VC returns by building a portfolio of
           | Mittelstand businesses ($10M-$1B in revenue).
           | 
           | Constellation software does exactly that. They've quietly
           | been the Warren Buffet of SaaS business for like 20+ years
           | now.
        
           | mbreese wrote:
           | _> top-tier VC returns by building a portfolio of Mittelstand
           | businesses_
           | 
           | I'm not sure this is true. You could get good relative
           | percentage returns, but in terms of absolute returns, I'm not
           | sure the math is there. Meaning, if you invest $1M in a
           | smaller company and get a 20X return, that's pretty good. But
           | smaller companies won't have much more need for investment
           | capital. So, your absolute return is limited to $20M.
           | 
           | Now, if you have a larger company that needs $100M in
           | investments (over multiple rounds), but still gets a 20X
           | return, that's a $2B return.
           | 
           | You have the same relative rate, but a massive difference in
           | absolute numbers. To get the same absolute return, you'd need
           | 100X more companies in a portfolio, which is just not
           | manageable. Even with a 2X return in a $100M investment,
           | you're still way ahead in absolute terms. ($100M >> $19M)
           | 
           | What I think you're really trying to argue for is that there
           | needs to be smaller VC portfolios with smaller expectations.
           | I think this is possible, but it's more difficult to hedge
           | bets with smaller expected returns.
        
           | phamilton wrote:
           | > I'm trying to split SMB into two categories.
           | 
           | The fact that SMB is literally two categories (Small and
           | Medium Business) but effectively one category is a great way
           | to capture the frustration here.
        
         | chadash wrote:
         | There's somewhere between a "lifestyle business" and a unicorn
         | though. You can be a contractor with a focus on re-doing roofs
         | and pull in $1m/year without too much work once you have things
         | running. You will be wealthy, but you won't ever pull in
         | $20m/year. I think it's fair to call that a "lifestyle
         | business".
         | 
         | I know of a company near me that has $300M/year revenue (gross,
         | not net) that sells cables and other equipment to ISPs in the
         | region. It's owned by one person. I don't know their margins,
         | but that person might be making $20M/year. They might be able
         | to grow that business and sell it for $500M dollars if they
         | play their cards right. I wouldn't call that a "lifestyle" or
         | "small" business. It's somewhere in the middle.
         | 
         | I think it's the latter type that the article is referring to.
        
           | xmaayy wrote:
           | I think what you just described is called "A Business"
        
             | DoubleDerper wrote:
             | Seems more like a lucrative "job" than a "business"
        
               | wbsss4412 wrote:
               | How do you define a "business" then?
        
           | mc32 wrote:
           | These are the businesses all up and down I-880 on the bay
           | side from Fremont to Oakland. They're just businesses.
        
           | rglullis wrote:
           | Oh, come on. You are putting one third of the economy as
           | "lifestyle businesses"? How many fast food franchises make
           | less than that per year, are they "lifestyle businesses"?
           | 
           | Seriously, please get out of the SV bubble.
        
             | teucris wrote:
             | My interpretation of the comment was that tons of business
             | are just clumped into the "lifestyle" category just because
             | they don't aim to maximize valuation.
        
               | rglullis wrote:
               | > are just clumped into the "lifestyle"
               | 
               | By whom?
        
             | quickthrower2 wrote:
             | Lifestyle business doesn't mean what you think it means.
             | Supports a persons or family lifestyle (i.e. you need a
             | place to live, food, essentials, and could be more than
             | just that...), rather than being for investors to make
             | equity growth.
        
               | rglullis wrote:
               | That definition is still horrible. Plenty of investors
               | interested in buying equity in a franchise or retail
               | shops. What that has to do with "lifestyle"?
        
               | quickthrower2 wrote:
               | "franchise or retail shops" is a pretty broad definition.
               | Some of those shops will be lifestyle, and others could
               | be investments.
        
         | matchagaucho wrote:
         | This is where the term "Mittelstand" gets lost in translation,
         | and speaks to the Author's point that the Americanized
         | definition of start-up has become too polarized and absolute.
         | 
         | It is neither a lifestyle business nor a shareholder-driven
         | business.
        
           | LosWochosWeek wrote:
           | Mittelstand doesnt even have agreed upon definition here in
           | Germany. I've heard people call everything and anything that
           | lies between your local mom and pop show and Volkswagen
           | "mittelstandisch".
           | 
           | My (very wrong) opinion on what Mittelstand is: I think of a
           | small-to-medium sized company that manufactures (I've never
           | thought of service providing companies as Mittelstand) one
           | group of things at a very high and competitive level. I think
           | of companies that are pretty much strictly B2B. These are
           | mostly family-owned businesses, but for me that doesnt need
           | to be true. Companies that you only know of, when you need to
           | know. And when you do need to know about them, you most
           | definitely will know about them.
           | 
           | Again, this definitely isnt what most people consider to be
           | Mittelstand. Just my view on it.
        
       | smeej wrote:
       | > Vision: Promote employee stock ownership for American
       | Mittelstands.
       | 
       | I'm especially interested in this last bit and I'm wondering if
       | anyone has any recommendations for learning about the different
       | models people have tried for this.
       | 
       | I have what I can only really describe as a hunch or an instinct
       | (not even a theory at this point) that there's something good for
       | people about _owning_ what they help create.
       | 
       | But I keep getting caught in the brass tacks of it. When I've
       | earned small ownership stakes in companies, the only real way
       | that had any direct monetary value to me was if the company had
       | an exit and I stopped being an owner.
       | 
       | Would some sort of dividend or profit-sharing agreement solve
       | this? Are there long-established means of allowing small-scale
       | owners to profit from their ownership that I've just failed to
       | come across?
       | 
       | The accredited investor laws in the U.S. make it such that most
       | working class people can't _buy_ ownership in private companies,
       | but if they could earn it _and profit from that ownership,_ that
       | seems like a much stronger way of  "investing in what they know"
       | and potentially seeing outsized returns rather than just
       | investing broadly in the stock market as it goes up.
        
         | simulate-me wrote:
         | Middle-sized companies usually pay dividends because that's how
         | the profit is moved from the business to the owners. Unlike
         | many public companies that focus on stock growth as the main
         | driver behind of providing shareholder value.
        
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