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