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).
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.
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.
> 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.
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.
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.
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"
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.
How about optmising for the customer. Where profits were required, and where there was legitimate competition, this generally used to be a necessity. The "VC backed advice" cannot be to optimise for the customer because it must optimised for the client investor first. This often relies on giving away work for free to non-customers and operating at a loss in order to achieve anti-competitive "growth" and "scale" (according to the "playbook"). The non-customers are the "product", marketed as advertising targets for customers. The race ("sprint") is to acquire unfettered access to the majority of non-customers by getting them to sign in to or otherwise visit cookie-setting websites, install mobile apps, and/or purchase always online computers with pre-installed apps and other surveillance built-in.
A sad casuality of "tech" VC mania is that small scale online businesses are passed over. Apparently internet-reliant startups must all subscribe to VC ideals because that is the only way they can be funded. Selling products and services for profit to non-advertisers is largely ignored as a viable option due the incessant focus on the www's feudual robber barons and the army of robot-like "tech" workers who ignore the lack of ethics and absence of long-term sustainability ("best practices") and want to be just like them. Few are interested in independently-owned, "Mom-and-Pop" online businesses, except for the opportunity to turn them into sharecroppers.
Serious question how exactly did you come up with the idea for selling what is essentially public available info then convincing people to buy it? Is it just rate limit removal. Why do people pay for what is essentially public info. I see john deer on customers list again just blows my mind. Out of all the companies in the world you guys were like yeah lets call john deer and see if they need better ip reg info LOL? I've used a lot of data broker services in my life and 9/10 times the area we were hoping they could provide better data is the exact thing we couldn't figure out and they are also missing it.
This comes from a place of amazement not some sort of passive aggressive thing It really astounds me just how bad a I am at judging potential markets. Maybe you could give hope to some of us soul sucked 9-5ers looking to escape. I'm really glad you figured something out.
>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
>> 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.
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.
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.
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.
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.
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.
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.
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...
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.
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.
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
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.
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.
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
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.
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.
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.
There a couple of subtle things going on from my reading, both potentially but not necessarily fatal:
1) Author is success biased because his dad handed him a playbook that worked on company #1 and then they were able to pivot the second time, so a reasonable outcome appears guaranteed (pro tip: if you founded a company with your dad and you were under 30, he gifted you, and you are both rare, even among founders)
2) acting like a VC with companies that are not VC suited is prone to failure because of something like the observer effect: you cannot just add funds and get a better outcome, adding funds can create worse outcomes by changing the way the company is run: priorities, timeframes and metrics, etc.
Maybe it would work if you could add funds without the company knowing they had them until they were at the moment of failure?
It is always possible that what we are apparently calling the Mittelstands market is somewhat underfished or modified since previous efforts (less overhead is required for many opportunities) and the new fund will find success there. A diversity of approaches is a good thing.
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...
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.
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.
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.
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.
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'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.
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.
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.
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.
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.
[+] [-] coderholic|3 years ago|reply
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).
[+] [-] philsnow|3 years ago|reply
... 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/
[+] [-] bryans|3 years ago|reply
[+] [-] bspear|3 years ago|reply
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.
[+] [-] achillean|3 years ago|reply
[+] [-] chrisweekly|3 years ago|reply
> "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.
[+] [-] Etheryte|3 years ago|reply
[+] [-] bradgessler|3 years ago|reply
Where does this community exist?
[+] [-] 1vuio0pswjnm7|3 years ago|reply
A sad casuality of "tech" VC mania is that small scale online businesses are passed over. Apparently internet-reliant startups must all subscribe to VC ideals because that is the only way they can be funded. Selling products and services for profit to non-advertisers is largely ignored as a viable option due the incessant focus on the www's feudual robber barons and the army of robot-like "tech" workers who ignore the lack of ethics and absence of long-term sustainability ("best practices") and want to be just like them. Few are interested in independently-owned, "Mom-and-Pop" online businesses, except for the opportunity to turn them into sharecroppers.
[+] [-] citizenpaul|3 years ago|reply
This comes from a place of amazement not some sort of passive aggressive thing It really astounds me just how bad a I am at judging potential markets. Maybe you could give hope to some of us soul sucked 9-5ers looking to escape. I'm really glad you figured something out.
[+] [-] rehash3|3 years ago|reply
[+] [-] DeathArrow|3 years ago|reply
I like that. But is it doable or viable?
[+] [-] pkaler|3 years ago|reply
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.
[+] [-] TA-blahhh|3 years ago|reply
[+] [-] bradleybuda|3 years ago|reply
* "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.
[+] [-] michaelbuckbee|3 years ago|reply
- 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|3 years ago|reply
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.
[+] [-] joshpadnick|3 years ago|reply
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] clean_send|3 years ago|reply
[+] [-] chadash|3 years ago|reply
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.
[+] [-] boringg|3 years ago|reply
[+] [-] seibelj|3 years ago|reply
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.
[+] [-] matchagaucho|3 years ago|reply
It is neither a lifestyle business nor a shareholder-driven business.
[+] [-] mathattack|3 years ago|reply
[+] [-] vmception|3 years ago|reply
all this is still around ya know
people act like they just forgot
[+] [-] di4na|3 years ago|reply
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.
[+] [-] roflyear|3 years ago|reply
[+] [-] westcort|3 years ago|reply
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
[+] [-] dontreact|3 years ago|reply
[+] [-] chadash|3 years ago|reply
[+] [-] unknown|3 years ago|reply
[deleted]
[+] [-] cortesoft|3 years ago|reply
[+] [-] bxtt|3 years ago|reply
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.
[+] [-] tptacek|3 years ago|reply
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.
[+] [-] svnt|3 years ago|reply
2) acting like a VC with companies that are not VC suited is prone to failure because of something like the observer effect: you cannot just add funds and get a better outcome, adding funds can create worse outcomes by changing the way the company is run: priorities, timeframes and metrics, etc.
Maybe it would work if you could add funds without the company knowing they had them until they were at the moment of failure?
It is always possible that what we are apparently calling the Mittelstands market is somewhat underfished or modified since previous efforts (less overhead is required for many opportunities) and the new fund will find success there. A diversity of approaches is a good thing.
[+] [-] laurex|3 years ago|reply
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...
[+] [-] formerkrogemp|3 years ago|reply
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.
[+] [-] tptacek|3 years ago|reply
[+] [-] bombcar|3 years ago|reply
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.
[+] [-] thanedar|3 years ago|reply
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.
[+] [-] cseleborg|3 years ago|reply
I wish there were more dividends-only VCs...
[+] [-] tptacek|3 years ago|reply
[+] [-] ajross|3 years ago|reply
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.
[+] [-] adamqureshi|3 years ago|reply
[+] [-] asellke|3 years ago|reply
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.
[+] [-] tylertringas|3 years ago|reply
[+] [-] akhilpotla|3 years ago|reply
https://nothingventured.rocks/what-startups-can-learn-from-t...
[+] [-] user_7832|3 years ago|reply
[+] [-] di4na|3 years ago|reply