[HN Gopher] Y Combinator for Mittelstands? ___________________________________________________________________ Y Combinator for Mittelstands? Author : thanedar Score : 62 points Date : 2022-06-02 14:18 UTC (1 days ago) (HTM) web link (neilthanedar.com) (TXT) w3m dump (neilthanedar.com) | ricardobayes wrote: | I don't think it will happen with traditional VCs as Mittelstands | require the same amount of initial funding in their seed phase. | But offer way less returns. Maybe through some sort of | social/cooperative/income sharing investment vehicle. | 0des wrote: | People forget its about making money, not goodwill and charity. | lifeisstillgood wrote: | I am a fan of this, not because I agree with all the words, but | because we live in an amazing global technicalogival world, and | that sprang from a certain financial / fiscal culture in the 19C | - and that US/UK culture (laissez faire, government investment in | infrastructure etc), and that culture is incredibly valuable, but | it is not the only way of arranging taxation, government spending | and private investment. | | The fact we are talking about Mittelstand is notice that the | German approach (arch enemy of UK/US culture through 19C) might | suggest a wider phase space than is feared. | | We _should_ try something. While the benefits of steam | /oil/electricity/silicon/pharmacy are great there are downsides | to how we have arranged our societies - and it would be good to | explore some of those options rather than say "the solution is | always to copy USA, see Meijei for details". | | (no this is not some anti-USA rant) | | I personally think taking the SoftBank fund and attempting to | launch a million startups globally is just as likely to get us | results the OP is talking about (even if that's because kicking | off 500,000 new companies between Chennai and Jakarta is going to | do _something_ , and it cannot be a worse ROI than WeWork | | But whatever, there is a phase space outside the standard | approach here. | | VC is going to be good for taking fundamental tech breakthroughs | and pushing them into the public - but the fundamental tech break | thoughts have almost always come from government funded programs | (transistors, pharmacy (mid-19C chemistry) etc) - so we should | not forget that just more VC is unlikely to solve the big | problems (sorry people who want to fix fusion on VC money. | | Weirdly Turbine engines might be the best privately funded | example. But that basically was a rich guy funding his own itch. | That's not a good bet (or as a UK citizen a good way to run a | country) | | Anyway I am rambling so - yeah go for it. spread the money around | as best we can - give it not to the rich or those with success | behind them but find other indicators (phd might be one, just | lucky is another, old and still passionate if you can measure | that or helll just helicopter money in. | | Try goddammit because none of us are taking it with us. | elil17 wrote: | Why would I buy equity in a new business shooting to become a | medium sized business? I get all the disadvantages of investing | in a startup: | | 1) the business, like many new businesses, will probably fail | within 10 years | | 2) when the business fails, I won't be able to recoup my losses | because bond holders will be first in line for the liquidation | money | | However, it's even worse because: | | 3) the business isn't even trying to become large enough for a | buyout or IPO, so it will be very hard for me to sell my equity. | julianeon wrote: | The main advantage is: mittelstands are going for a zone that | VC's actively avoid, that has tremendous underutilized | potential. | | Logically, which is easier: trying to earn 10 million a year in | revenue, or 1 million? We can simplify that even more: which is | easier, trying to earn 1 million or $100,000? Trying to earn | $100,000 or $10,000 a year? | | At every level, for every step down, the answer is: much, much | easier. Given two numbers for revenue, the smaller one is | easier to achieve, every time. As a rough approximation, for | each comparison given above, one value is about 10x easier to | achieve than the other. | | The problem is that VC's exclude, and filter out, the _easiest_ | class of money to make, that in the $1-$10 million range. | | But there's always been a follow up question here which I've | thought a lot about: which is easier - going from $0 to $100 | million in revenue, or going from $1 million to $100 million? | | The easy rebuttal to "the $1 million business may not be able | to go to $100 million" is "then they can pivot and still be far | ahead of the person or team starting from $0." They already | know how to run a business, how to do idea validation, how to | be ramen profitable - they've done all that. It's going to be | easier. They've done it before. Yet right now no one targets | them as the safest bet, as in fact where the smart money should | go. | | So a mittelstand, by one treating these smaller amounts of | worthy of pursuit (amounts which are also easier to achieve), | and two leaving the door open to going _beyond_ those amounts | when the time comes, might even be able to outcompete many VC | 's, over time. | ska wrote: | > Why would I buy equity in a new business shooting to become a | medium sized business? | | It's at least conceivable that there is a spot on the | risk/reward tradeoff this kind of thing could address quite | distinct from VC or PE backed companies. Not at all clear, and | liquidity would have to be contracted around. | arb-spreads wrote: | Plenty of SMB/middle market companies out there. Which is | honestly the most common outcome for a YC company, other than | failure. | | Not sure how many are growing at >40% CAGR with minimal capital | requirements... | | Fine if you wanted to fund HVAC, plumbing, construction, etc. | businesses that are generally ignored by YC. Wouldn't count on | startupy growth from companies YC screens against | rwalling wrote: | TinySeed is the closest thing you'll find to this idea. About 10 | years ago I wrote the phrase "YC for bootstrappers" in a | notebook. That was the initial vision, and what ultimately became | TinySeed, the first startup accelerator for bootstrappers. | thanedar wrote: | This is a follow-up to my most popular post, We Need a Middle | Class for Startups: https://news.ycombinator.com/item?id=31327219 | | Both of these ideas are on my list of solutions to The World's | Biggest Problems. | | I want to raise a $1M+ per year rolling fund to build this | accelerator. | | Who would be ideal investors for this fund? I'm thinking angels | to start and family offices and PE as we scale. | raylad wrote: | These kind of companies don't do IPOs, so is your only exit | strategy that they get acquired by a larger company? | boberoni wrote: | It would seem so, although there's a distinction between (1) | being acquired for the product/team vs. (2) being acquired by | a private equity firm. For case (1), you would want to build | a mittelstand product that is strategically aligned with the | acquirer. For case (2), you would want to build a mittelstand | business that with consistent and reliable | earnings/dividends. | | Perhaps I'm forgetting another type of acquisition, but these | are the two that I can think of off the top of my head. | yieldcrv wrote: | Maybe equity investment isn't the best form of financing for | these kind of organizations. | rexreed wrote: | Since exits are limited and risk is still high, your | accelerator for "Mittelstands" will end up looking like a | traditional financing vehicle, providing loan funds in return | for profit or revenue share, or some other earnings | distribution. In which case it will look like a high-interest | loan. You'll find yourself competing with all the alternative | financing and "fintech" companies ranging from Stripe Capital | to Paypal financing to local bank financing. I'm not sure the | accelerator model really works here given the exits and risk. | chadash wrote: | How do you plan to do due diligence? With YC, the strategy | seems to be to throw a bunch of money at a bunch of early | startups and hope one of them has a $1B+ exit. For arguments | sake, let's say they are putting down 200 investments knowing 1 | or 2 will provide (basically) all their returns. So 99% can | fail and they are fine. But if I'm investing in a Mittelstand, | I'm not looking for unicorns. It's more like I want 100 out of | 200 businesses to return 10x and boom, I've got a great overall | return. The problem is that I'd imagine you need a lot more due | diligence for this, since you need more consistent (but | smaller) winners. I would think it's hard to consistently find | great businesses, particularly if you are investing at the 0 | revenue stage, which your posts says you want to do. | thanedar wrote: | Pre-Mittelstand investing is also driven by power-law 100x+ | returns. | | Let's say the deal is $100K for 10-20% of pre-revenue/pre- | product pre-Mittelstands. | | You will get 100+ out of 200 businesses that are >1X+, 20+ | that are 10X+, and 2+ that are 100x+. | | So I'd do diligence like YC - wide open applications, largely | focused on the team, one or two interviews max, global focus. | hash872 wrote: | But how would you exit? VCs exit via an IPO or an | acquisition. The whole point of the Mittelstand is that | they do neither. Do you somehow force the owner to buy you | out? What if they don't have the liquidity, how does this | work? | | I very strongly suspect that if investors could be getting | returns of '20 that 10x+ and 2+ that are 100x+' as you say, | they would already be doing so, and we wouldn't have to be | theorizing about it. The fact that VC has for decades only | existed for software & pharma and not, like, a new type of | cable harness or industrial process or anything else in the | physical/manufacturing world should probably tell us | something | catchmeifyoucan wrote: | This is solid, but my biggest question is how this fares | different than something like Pipe. I saw it called out as an | existing solution, but didn't find an advantage point speaking to | it. | | If you had the metrics, and could give up no equity, isn't that a | better deal? | thanedar wrote: | There is an opportunity to invest in these businesses pre- | revenue and even pre-product. Pipe doesn't do that. | | TinySeed is probably the best example of a YC for Mittelstands | now. I love what Einar is doing there and am trying to refine a | model that works here. | | Getting to enough revenue where they can be Pipe funded isn't | trivial. We can be a bridge to those funding sources. | Barrin92 wrote: | Having worked most of my life in the German Mittelstand, unless | the term has a drastically different meaning in the US a | 'Mittelstand accelerator' is a complete oxymoron. The entire | point is to not accelerate. | | The idea of Mittelstand business is to be conservative, low in | debt, turn a profit, keep a company private, usually under multi- | generational family control and from the very beginning make | decisions for the long term, and keep employees around for life. | | Software companies that come to mind that are like this are say, | IntelliJ or Valve maybe, not startups. There's nothing to IPO, | there's usually not that much interest in outside money, so how | does this square with the VC industry? | lifeisstillgood wrote: | I don't think it squares with the VC industry - but the VC | industry is just one way of moving money from those that have | money but cannot build new wealth, to those that have talent | but no money. | | The initial move from talent to profitable business is what we | need - not because we can see a runway to 18 months IPO but | because _what the duck else_ do you do with money other than | create new better wealth for the world. | | Previously this has been solved by government taxing rich and | giving it to innovators through schools, universities and arms | spending (simplifying slightly). | | But apparently tax is bad now, and governments don't know how | to pick winners to VCs are going to take over. If this is not a | great idea we should try some other options - the OP has an | idea. It's not bad. Others exist (including that tax one which | apparently no one with money likes) | layer8 wrote: | But VCs aren't a charity issuing the equivalent of bank | loans. They hope for substantial ROI (enough to offset all | the failing investments), which isn't very compatible with | the non-accelerated-growth non-IPO Mittelstand model. | lliamander wrote: | > The idea of Mittelstand business is to be conservative, low | in debt, turn a profit, keep a company private, usually under | multi-generational family control and from the very beginning | make decisions for the long term, and keep employees around for | life. | | TIL that my current and previous employer are both (more or | less) Mittlestand businesses. | | I must say, I really do prefer working for these kinds of | companies. The lack of outside influence, the robustness in the | face of economic uncertainty, the long-term focus, etc. all I | think contribute to a more responsible leadership than I've | come to expect from any other type of enterprise. | davidw wrote: | How does one go about finding these places in the US? | | I think they are not the ones employing recruiters to sing | their praises and send zillions of emails. | IfOnlyYouKnew wrote: | I'm not sure if you're working from the right definition. At | least by revenue and number of employees, SpaceX would still be | Mittelstand, I believe. If you're thinking smaller, the term | "lifestyle business" was once coined for such endeavors by, I | believe, 37signals. | | As for the larger scale: every startup is expected to settle | into some size with little further growth at some point. The | "unicorn" is a rather new trend, and it's only a small fraction | of even VC-funded startups (although it's a larger fraction by | funding or attention). | anyfoo wrote: | According to German Wikipedia, SpaceX absolutely does not | correspond to the definition (suggested, because there is no | official one) of what "Mittelstand" is. That means less than | 500 employees and less than 50 Mio. EUR revenue, family | business or at least involvement of one founder, and most | importantly (called out as such) _economical independence_ of | the owners. | | Or is this a case where the German word has been co-opted for | a different meaning in English? (Though other words like | Kindergarten or Zeitgeist are very close to their original | meaning, now that I look them up.) | thanedar wrote: | Mittelstands (defined as $10M-$1B in annual revenue) are very | stable, profitable companies once they get to that stage. But | there are very few funding options for pre-Mittelstand | businesses. | | I would like to create a small fund to invest in these pre- | Mittelstands at the earliest stages and help them go from $0 to | $10M faster. | | These businesses need much less funding (usually <$1M) to get | to this stage, so it's a different model than VC. But if you | invest early enough at the right valuation, the returns could | be VC-style with a much lower risk profile. | dluan wrote: | Neil! Check out purpose ventures, based in Berlin and SF. | anyfoo wrote: | But then you are _VC-funded_. As Barrin92 hinted at, VCs tend | to want to see returns and consequentially optimize for | growth. Or is the idea for VC to pull out and realize profits | once the company got to Mittelstand? | thanedar wrote: | I mentioned this in another comment - pre-Mittelstand | investing is also driven by power-law 100x+ returns. | | If you invest $100K at <$1M valuation pre-revenue in 100 | pre-Mittelstands, 1-5% of those companies are going to get | to $100M+, 10-30% will get to $10M+, and 50%+ will get a | positive exit. | | There is a robust buyout market between PEs and corporates | for these companies. | | Yes, this is a form of venture capital. But most VCs today | would not consider pre-Mittelstands VC-backable startups. | | This post and my last one We Need a Middle Class for | Startups (https://neilthanedar.com/we-need-a-middle-class- | for-startups...) make the argument to VCs that they can get | big exits and returns investing in Mittelstands. | tablespoon wrote: | > The idea of Mittelstand business is to be conservative, low | in debt, turn a profit, keep a company private, usually under | multi-generational family control and from the very beginning | make decisions for the long term, and keep employees around for | life. | | Aren't there a fair number of startups that could achieve that, | but get blown up because the VC model only allows for abject | failures or unicorns. | johannes1234321 wrote: | Yes, once you take the VC track, you have to grow or will | fail. You gave away control for money. | | For the "Mittelstand" path you have to look for growth paths | with the aim of sustainability. | | Find a niche and fullfil the needs there. | Melatonic wrote: | But why could someone trying to start a company like that not | get some funding from a company like YC? The expectations would | of course be different but it could still end up profitable for | everyone. | onlyrealcuzzo wrote: | Best of luck. | | I hope I'm wrong, but I'm a cynic here. | | Ideas are cheap. | | If you have a good idea, and not even access to $100k in debt, | then that's a decent proxy that you either don't believe enough | to take the debt yourself or that you maybe aren't qualified to | run the business. | | Especially when you consider a huge majority of successful | businesses are founded by more than one person... | Destiner wrote: | I believe even in US not many ppl have access to 100k in debt | (and usually that debt would be tied to you not the company) | | But even besides, there's plenty of third world-ish countries | with lots of talent and no easy money. | throw457 wrote: | I don't understand the obsession with slighlty mispronounced | german words in tech. Can anyone fill me in? | samuelstros wrote: | Because of the pluralization? Mittelstands instead of | Mittelstand? Now that I see it, I can't unsee it! How ugly! | (what a German saying by itself -> "wie hasslich") :D | q-big wrote: | Also "Mittelstand" is already the German word for the _whole | group_ of such companies. It thus hardly makes sense to | pluralize this word. If you are talking about an individual | company of this group, the correct term is "mittelstandisches | Unternehmen". | rvnx wrote: | It's truly difficult to sell a company that makes 10M USD revenue | for 50M USD, I think the author is really too optimistic. | | If we take [Valuation = Next 12 Month Revenue * EV/Revenue * | Marketability Discount], we arrive barely at 15M/20M USD (if you | are even profitable!), and still, the majority of these companies | will not reach this state and just disappear :/ | ricardobeat wrote: | I'm curious about the valuation aspect. How can you 'exit at | $50M' with your 20% if there is no IPO? | | And public or not, who is going to buy those shares if their | prospect is now down to a 2.7x return: invest $10M for a $27M | return ($27m revenue in 5 years, x5 revenue multiple, 20% | ownership), and an even less likely exit? | | The whole VC pipeline is based on growth. ___________________________________________________________________ (page generated 2022-06-03 23:00 UTC)