[HN Gopher] Y Combinator for Mittelstands?
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       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.
        
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