We need a middle class for startups • Hacker News Board

Re: We need a middle class for startups

#291

Post by PeterisP » Wed, May 11, 2022, 5:06 AM UTC

bombcar wrote: post #211

tptacek wrote: post #178

Earlier quoted context omitted.

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.

Sure, but if you're 9/10 on successes it's a lot easier than if you have to deal with 1/100.

Choosing safer paths does not bring you from 1/100 of success to 9/10 - perhaps it brings you to 3/100 or 1/10, but at that level you still have to have the winners making it very big to pay for the losers.

Re: We need a middle class for startups

#292

Post by sizzle » Wed, May 11, 2022, 5:19 AM UTC

ec109685 wrote: post #270

folli wrote: post #204

Earlier quoted context omitted.

Probably a stupid question, but how does this work technically, how does one correlate IP addresses to geolocation?

Data sources that provide geo coordinates and ip addresses. E.g. an app that sells its analytics data and you have geo access turned on.

How is this legal? IP + location is public info like looking up property ownership in Cali? Can we opt out if our data was sold under our noses without consent?

Congrats on winning in this space btw, site is super slick!

Re: We need a middle class for startups

#293

Post by kortilla » Wed, May 11, 2022, 5:48 AM UTC

munificent wrote: post #85

cortesoft wrote: post #74

Earlier quoted context omitted.

With near zero marginal costs associated with software, it makes sense for a winner take all outcome to be the equillibrium.

...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.

That doesn’t hold at all unless there is significant lock-in that raises switching cost. If there is a company sitting there with no overhead collecting $10m/year for software all of its customers hate, it’s ripe for competition to take it overnight.

Re: We need a middle class for startups

#294

Post by DeathArrow » Wed, May 11, 2022, 6:01 AM UTC

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…

>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

I like that. But is it doable or viable?

Re: We need a middle class for startups

#295

Post by lifeisstillgood » Wed, May 11, 2022, 6:35 AM UTC

svnt wrote: post #264

tptacek wrote: post #239

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 h…

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)…

I'm trying to put some numbers on it

Let's imagine the bottom level of the mittlestand as 2.4M pa revenue - call that 200k pmth, 40/400 licenses at 500/5k. I think that is the barest level.

Now there is very little technology risk in most B2B saas. (Inam not talking about fusion startups here. That's what VC/gov is truly useful).

But a team of 2-5 people at 100k pa is feasible here.

This is not VC shoot for the moon, but it is also not worth putting in 2 years of runway (400k-1M) for equity. But it is worthwhile as a loan.

So IMO VC money could start handing out ridiculously low interest rate loans with big forgiveness clauses (dies with the bankruptcy of company?). The founder takes the equity swap or the loan depending on their vision of future. Add in some conversion later on and it seems one way to divide the market

I suppose the point is, if you have 100M to invest, which is riskier - 100 1M investments or 1 100M investment? And if you wait till later stages before deciding you probably miss out.

Re: We need a middle class for startups

#296

Post by fxtentacle » Wed, May 11, 2022, 7:29 AM UTC

bruce511 wrote: post #274

fxtentacle wrote: post #220

Earlier quoted context omitted.

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.

Personally I do not think employees should pay money to invest in the company where they work. Because if they do, then if the company goes bust they lose their job and their savings on the same day. See Enron as an example where employees were heavily invested in Enron. And the company doesn't even need to go bust - a downturn in the stock price leads to some cutbacks and redundancies, and you're the unlucky one...…

I believe you're seeing things through a US lens there. Many of these small Mittelstand companies are incredibly durable because they don't have high loans and they don't have investors.

Also, the idea here is not that it's a great investment (although it usually is), but that it transfers power to experienced employees. Imagine if you and your coworkers owned enough company shares so that you could veto the CEO together.

Re: We need a middle class for startups

#297

Post by Archelaos » Wed, May 11, 2022, 7:43 AM UTC

bspear wrote: post #206

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…

> 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 ric…

Employee stocks are a suboptimal investment strategy. It is putting all one's eggs in one basket. If the company runs into difficulties, one's job is at risk and at the same time one's investments.

Re: We need a middle class for startups

#298

Post by jason0597 » Wed, May 11, 2022, 7:54 AM UTC

TuringNYC wrote: post #49

di4na wrote: post #44

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…

>> 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 m…

Sounds to me like those founders don't really have the work ethic required to start a company if they immediately set out a red line that they won't work for less than $250k/yr. Who the hell makes that kind of money anyway? Only a very very few do.

Re: We need a middle class for startups

#299

Post by hnbad » Wed, May 11, 2022, 8:34 AM UTC

What this guy doesn't seem to grasp about the Mittelstand is that those companies are ones that traditionally don't get acquired. They're usually generational family-owned businesses. They're the legacy of the lean bootstrapped startups he contrasts them with except they didn't aim for growth and acquisition but sustainability. Getting acquired is antithetical to being a Mittelstand business because acquired Mittelstand businesses stop being Mittelstand. The "exit" for Mittelstand business founders is death and inheritance.

The reason there's no "middle class for startups" is that both sets of startups he describes are growth-oriented investment/acquisition-seeking ventures, not sustainable businesses. You either get fast tracked by finding an investor or you have to take the long route and try to become profitable, but the end goal is to either get bought out (and die) or to go public (and become large enough to buy the competition).

Investors along the way buy you out piece by piece betting on you successfully reaching either of those two outcomes. Since investors are in it for big ROI they're willing to take some risks and overfund hopeful "unicorns" while underfunding startups that can't credibly promise (or don't aim for) that kind of ROI. Basically, the groups he describes are self-selecting. If you start bootstrapped as a growth-oriented startup either you wither and die or you grow successful enough to get acquired (and die) or get overfunded (and become part of the latter group). If you start overfunded either you overexert yourself (and die) or get acquired (and die) or continue growing bigger (or go public, leaving the VC bubble). Any "middle class" in between the two can only either be a transitional step from bootstrapped to overfunded (or from overfunded to bankrupt) or a consequence of low ROI expectations.

I'm not saying this middle class can't exist, but it can't be a growth-oriented startup and thus is only tangentially related to the kind of companies VCs think about. Another Siemens, Miele or Aldi isn't attractive to VCs because sustainable businesses aren't high enough ROI.

Re: We need a middle class for startups

#300

Post by Etheryte » Wed, May 11, 2022, 9:45 AM UTC

coderholic wrote: post #281

Fomite wrote: post #276

Earlier quoted context omitted.

"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." You've just described a number of regular business I know. The idea that they're not trying to create competitive advantages is...flawed.

Happy to have my flawed thinking corrected - can you share the examples? I likely am thinking of a narrow set of "regular businesses" - what came to mind were corner shops, hairdresses, bars or restaurants etc. Even in those cases there are obviously large successful busniesses that do have competitive advantages - but I suspect they mostly get erroded away by competition rather than the business being able to sustai…

As an example, I would say Microsoft is a regular business. Sure, at this point they're one of the largest companies in the world, but the way they operate is still largely the same as it has been. It ticks all the boxes you described as well.