thanedar

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.

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.

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.

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.

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 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.

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 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.

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).

It seems like the question is talking about large, zero-revenue startups. Ecomom definitely doesn't fit here, since they were collecting over $1M/month in gross revenues. Of course, they were discounting so much that each order had a negative margin, but that is a different story.

I think the most dramatic example of this (other than WhatsApp) is Snapchat.