[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. ___________________________________________________________________ (page generated 2022-05-10 23:00 UTC)