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We need a middle class for startups

neilthanedar.com

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Re: We need a middle class for startups

#191

Post by coderholic »

pkaler wrote: post #184
coderholic wrote: post #103

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 mos…

>> 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 pr…

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).

Re: We need a middle class for startups

#192

Post by cseleborg »

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...

Re: We need a middle class for startups

#193

Post by csa »

thanedar wrote: post #41
jrochkind1 wrote: post #23

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 ce…

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.

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.

Re: We need a middle class for startups

#194

Post by marcosdumay »

jrochkind1 wrote: post #176
ehnto wrote: post #118

Earlier quoted context omitted.

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…

> 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 openin…

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?)

Re: We need a middle class for startups

#195

Post by tptacek »

cseleborg wrote: post #192

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…

Which is another way of saying you wish there were more LPs to invest in funds that were structured that way.

Re: We need a middle class for startups

#196

Post by robocat »

bradgessler wrote: post #139
limedaring wrote: post #125

Earlier quoted context omitted.

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.…

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…

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.

Re: We need a middle class for startups

#197

Post by AussieWog93 »

>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?

Re: We need a middle class for startups

#198

Post by tptacek »

thanedar wrote: post #56
tptacek wrote: post #40

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 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 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.

Re: We need a middle class for startups

#199

Post by yibg »

roflyear wrote: post #147
bityard wrote: post #130

Earlier quoted context omitted.

Do you believe that all successful people were simply lucky?

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 o…

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.

Re: We need a middle class for startups

#200

Post by hodgesrm »

bradleybuda wrote: post #45

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…

> 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.

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