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