Creating A Post-Brexit Tech Culture: UK #Startup Mittelstand (Pt.1)

Wait! Mitten-What? Mittelstand is a German word for a certain type of medium sized businesses. It’s a very vibrant and resilient part of the German economy. They’re characterized by a common set of values and management practices, including: independence, innovativeness, entrepreneurialism, customer and social focus, nimbleness, emotional attachment, investment in their workforce, flexibility, lean hierarchies, and a long-term view. They typically have revenue up to €50million.

Sound familiar? Yeah, that’s what I was thinking. It sounds like startups!

As I have a self-imposed “Brexit Blackout” until the dust settles — I wear my heart on my sleeve on this so won’t mention it further — I’ve been thinking about what all this uncertainty that abounds right now actually means and whether (or not) we can use it as an opportunty to pause and reflect about what we’ve been doing.

This is my current thought: I’m thinking about a UK Startup Mittelstand, where we actually aim for and celebrate both the approach and wins that aren’t unicorns. I know we do a bit already, though there’s definitely lots of room to do more, much more.

I’ve nothing against unicorns, although they do distort the reality of startup and scale-up life to a frenzied point which doesn’t always seem rational versus the value that unicorn is actually creating or their growth trajectory. Uh-oh, I said it.

Though, of course, truly globally transformative ideas do require immense sums of capital to make them reality. That’s true! I’m certainly not saying stop creating unicorns.

My thought is that wouldn’t it be amazing to create a core engine of digital businesses aiming to grow to a valuation around £50 million, with an ever increasing focus on how they’re getting there? Imagine the ecosystem, environment, skills, focus and wealth that would create in the UK.

We all know the numbers — depending on the source - that between 70 and 90% of “startups” fail in the first year or so. What if we could reduce that by 5, 10 or 20 percent by accelerated closing down of poorly validated or executed ideas? I often see how so many founders (first time & other) can fall into a trap of chasing a dream, overlooking the flaws in their model, mortgaging the future by raising investment too early. How much capital (human, monetary) would killing ideas quicker free-up to invest in the next idea? How do we support these teams better? What do they need?

Back on track: how do we create this idilic, rich tapestry of startups and scale-ups intensely and fundamentally focused around reaching that £50 million valuation through their organic growth, combined with a laser focus on the ethos of how they get there?

As we all know, a lean entrepreneurs mission is to find scalable ideas — and as soon as you’ve found them you’re technically a scale-up not a start-up. An early UK Digital Mittelstand business might be one that takes as little investment as possible (Minimum Viable Investment, anyone?) and instead aims to reach a cash positive position rapidly, to transition through product/market fit to a growth curve profitably. By not taking external money early they’re forcing themselves to be lean and mean, or kill the idea quickly.

They seek out that point when they turn into scale-ups on the journey to joining Mittelstand — with constant reinvestment of free cash fueling the growth curve — maybe with a comparably light sprinkling of external money. The objective isn’t to attain a huge valuation (is it ever? I hear you say!), the objective is to be a member of the Mittelstand community and generate enough cash to self-sustain the growth curve, only raising investment when an extra boost is absolutely necessary (or, perhaps, to explore an adjacent or longer term idea). Wouldn’t that type of approach still be wildly interesting — with lower risk - for investors to get behind?

It’s different to the unicorn/”scale at all costs” model because it’s built into each business that they may reach a growth plateau, and that’s ok. They’re not constrained due to valuations to seek growth over everything else. Reaching the plateau for some businesses might be the top of their growth curve — so spending large amounts of investment money to break through might not be the best use of capital, it could be better deployed elsewhere on another problem that needs fixing.

Perhaps, from the outset, these types of businesses share these common attributes:

• Fail fast, quicker. Failure at every step is celebrated and embraced as learning. They shoot ideas in the head like the lame donkeys they are
• Goal is fundamentally not to achieve a high valuation
• Cash generative, profitable early on and if can’t see short term how to get there kill the business
• Raising investment only when necessary (possibly only to enter new or adjacent markets/geos at high speed to reach a cash positive there sooner)
• Focused on the macro, long term trends and addressing them in an iterative way
• They don’t have medium term exit strategy, though maybe a long term ideal objective in mind
• High proportion of employee equity — skin in the game, people — continuing after the initial few founders
• A key focus might be customer & employee delight, including how they skill employees (of whatever seniority) for the long term
• Actively mix younger/less experienced people into teams to support their growth and development
• Invest directly in employee ideas
• Involved in creating & propagating a framework for supporting others to do the same

If they don’t get to that £50 million arbitrary figure, they shouldn’t be disheartened; maybe they’ve created an awesome £5-30 million or more business that becomes part of the startup/scale-up Mittelstand ecosystem! 🎊

I have an image of hundreds of profitable startup/scale-ups across the spectrum of sectors and industries being “disrupted”, celebrating smaller wins and collaborating to support each other, unencumbered by the unicorn valuation day dream. This doesn’t preclude some breaking through to go on towards unicorn status; simply that the aim isn’t to have exponential valuations and raise huge sums of investment to get there. It’s more than that 😮. It’s about ecosystem, long term viability and managed technological progression.

It’d be badass to be a baby unicorn and be happy…after all, it’s tough enough to get there. We need to collectively help more early stage startups kill ideas quickly and cheaply; as well as support the transition into a scaling-up phase and beyond (I know, we already know this). After all, there are more important things than money in and of itself.

Maybe this is somewhat naive and the investment cycle is what fuels this whole crazy startup thing, with unicorns being the bellweather for how the system is doing; as well as companies needing to IPO to feed the stock market; or to sell a peak value to a more traditional company to maintain that companies shareholders (pensions!) and workforce. All I’m positing is if this is the only option, and whether now is a great time to redouble focus on growing another model side-by-side.

Whatever happens; I’m actively going to celebrate the smaller wins more often from now on, whilst pondering about how truly transformational and influential businesses don’t need to be valued at a $1 billion; maybe they don’t even need to be anywhere near £50 million. Maybe they just need to create amazing technology or ideas — big or small — and be happy with the results of their labours...whatever the monetary outcome. Maybe, we entrepreneurial types just need to get over ourselves a bit. Maybe…

This is a bit of a quick initial thought extrapolated. I have two ears, let me know what you think about focusing to create a culture of UK Startup Mittelstand!

Have fun! 🍻

Adam