The popular conception of entrepreneurship is that it comes in two sizes. Venture-scale startups aim for billion-dollar valuations within a decade by targeting large markets disruptively through innovative technologies or business models. Such aspiring “unicorns” capture the attention of many venture capitalists and angels and include success stories such as Google, Meta, and Airbnb. On the other end of the spectrum, small business entrepreneurship encompasses ventures that start small and often remain so, competing in mature markets using established templates, such as local restaurants, retailers, and service firms.
But in between these poles lies what we term “the mighty middle,” the often overlooked segment of startups with the potential to scale meaningfully and rapidly, though not necessarily to extreme valuations. These businesses, which we have studied extensively, offer great opportunities for entrepreneurs and their employees, and can be successful by employing different strategies for funding, hiring, and competing. The mighty middle deserves closer consideration as it may often offer a lower-risk, higher-return path for founder value capture, as well as more numerous opportunities than venture-scale startups.
The Mighty Middle of Entrepreneurship
In our research, we define the mighty middle as startups that have a feasible path to reaching valuations in the high single-digit millions to high tens of millions within 5-10 years. These companies often target midsize niches, akin to “blue lakes,” in contrast to venture-scale startups aiming for “blue oceans” and small businesses competing in “blue ponds.” An example of mighty-middle entrepreneurship is Supply, founded by Patrick and Jennifer Coddou in Fort Worth, Texas, in 2015. The company produces men’s grooming products, sold directly to consumers online. Leveraging community-building, Kickstarter campaigns, social media ads, and an appearance on Shark Tank, Supply grew to millions in annual sales with only a handful of employees before being acquired in September 2022. Though the details are private, acquisitions of such businesses are often at 4-6X EBITDA multiples, indicating an attractive payoff for the founders.
While mid-size companies have long existed, changes over the last twenty years mean mighty-middle businesses can now be built cheaper and faster across many sectors. The rise of the internet allows these businesses to target a national or global audience from the outset in a cost-efficient manner. Global, targeted advertising platforms like Meta, the ability of third-parties to sell on major ecommerce portals like Amazon and wholesale platforms like Faire can accelerate customer acquisition. Rich tech stacks, open source software, and online platforms like Shopify reduce the cost of software development. Global supply chains and computer-aided manufacturing make it easier for entrepreneurs to produce innovative designs in small batches and at affordable price points. All of this means that there are now more mighty-middle opportunities that can be profitably pursued with limited resources, which also opens up this form of entrepreneurship to a more diverse set of entrepreneurs.
The Mighty Middle Playbook
Recognizing the distinctiveness of mighty-middle startups has important implications for entrepreneurs, investors (including angels, VCs, and corporations), and policy makers.
For entrepreneurs, one key implication is that mighty-middle startups need to be built differently. Because so many VCs and angels focus exclusively on venture-scale startups, mighty-middle startups generally need to be bootstrapped, started as a side hustle, or funded with savings. An example is Little Stocking Company, a maker of girls apparel, founded by two friends and former nannies in Portland Oregon. To get started, they put $300 of materials on a credit card and then used revenue from initial Instagram orders to fund the business — and continued working other jobs while building up sales. Grants may also be feasible, though primarily for startups with deep technical innovations (e.g., SBIR grants in the U.S.) or social impact aims.
Different approaches are also likely to be needed for building capabilities, hiring and competing. Skilled employees may understandably be less willing to work for equity compensation for unfunded startups, necessitating a slower pace of hiring, more use of contractors, or founders undertaking more tasks themselves early on. For example, Sahra Nguyen was a journalist and filmmaker before founding the fast-growing Vietnamese-coffee brand Nguyen Coffee Supply. In launching the business, she faced critical tasks outside of her expertise including figuring out how to import raw beans and navigate customs, roast their unique robusta beans, and attract customers via online ads. While a VC-backed startup might have hired early employees to gain this knowledge, she initially took a DIY approach and learned new skills through searching the internet, her network, and taking online courses before progressing to hiring online contractors and then eventually full-time employees. They are now found in over 2,000 locations nationwide. Also illustrating this DIY approach is, Mike Perham, solo founder of Sidekiq who describes his current revenues as “being closer to $10 million than $1 million.” With occasional contracted support from a graphic designer and lawyer, he leveraged his software development background to create a Ruby task scheduler used by enterprise customers like KickStarter, Netflix, Comcast, and Conde Naste.
Yet counterbalancing these challenges are several advantages of the mighty middle for entrepreneurs. Most obviously, they offer greater potential upside compared to most small business opportunities. For many entrepreneurs, mighty-middle opportunities may also offer a more desirable risk-reward tradeoff compared to venture scale start-ups. Entrepreneurs who reach a certain level of scale in the mighty middle typically do so without outside professional investors, retaining more control and equity. This allows them to start paying themselves from firm profits, without having to wait for an acquisition or IPO. The absence of professional investors also reduces pressure to take high risks for aggressive growth. Additionally, with more opportunities in this range, entrepreneurs have a better chance of finding a life-changingly profitable mighty-middle opportunity than a venture-scale one.
For venture capitalists, angels, and other investors, we believe the mighty middle is valuable as language for distinguishing between a startup that may not fit their investment aims but which may still be a “good business” for the entrepreneurs. At the same time, the mighty middle provides a framework for working with entrepreneurs to “upscale” ideas by targeting broader markets. The mighty middle can also be a good fit for private equity-style investing once startups reach a degree of scale and profitability. Here we have seen funds that provide either minority investments (so-called “growth” investors) as well as holding companies like Tiny and Constellation Software, which acquire portfolios of mighty-middle software startups (though this aggregator playbook has been challenging for some in e-commerce).
For corporations, the mighty middle offer a promising source of innovation, making them attractive suppliers or acquisition targets (and which may chip away at their established offerings if ignored). In the food CPG space, established corporations and private equity firms look for mighty-middle businesses that are achieving some early traction (generally several million dollars in annual sales) as acquisition targets around whom they could “scale up” and leverage their economies of scale in distribution and manufacturing. National retailers are also increasingly working with consumer-oriented mighty-middle businesses that achieved their early traction online, bringing their innovative products and brands to a broader audience. For instance, the men’s soap brand Dr. Squatch is sold in major retailers including Target and Walmart (and now majority owned by Summit Partners after an investment in 2021), and food startup Recipe 33 sells their flavor-infused almonds nationally in retailers like Whole Foods, Sprouts, and HyVee.
Finally, many university, regional development and government programs aimed at enhancing entrepreneurship can also benefit from more explicit recognition of how the mighty middle are different. While stories of venture-scale outcomes can offer important lessons and be inspiring, aspiring entrepreneurs may be more likely to identify mighty-middle opportunities and these opportunities may offer a preferable risk-reward balance for many entrepreneurs. So more examples need to be shared of the “hero journeys” of successful mighty-middle businesses. Care should also be taken to highlight that most startups, even those that grow, are unlikely to receive much external equity investment. This also suggests an opportunity for accelerator-like programs emphasizing mentor feedback but not necessarily future investment. We also believe it can be helpful to point entrepreneurs in the mighty middle to sector-specific communities like E-Commerce Fuel (e-commerce), Indie Hackers and MicroConf (internet), and Zebra Startups (solving societal problems).
Overall, the mighty middle spotlights a segment of the entrepreneurial spectrum that bridges the binary of the behemoths and the boutiques. By understanding the distinctiveness of this segment, entrepreneurs and those who support them can be better prepared to build startups that embody significant growth potential even if they are unlikely to ever achieve the extraordinary scale highlighted in many entrepreneurial narratives.
This content was originally published here.