Kouris, Schiller: New Mittelstand

23 minutes, 5 links


Updated February 11, 2023
Better Venture

Evgeni Kouris (New Mittelstand)

Ines Schiller (Vyld)

Evgeni Kouris and Ines Schiller believe there is huge potential to build a new, sustainable economic backbone in European economies, in the form of medium-sized (or family) businesses: New Mittelstand. We sat with them to explore this approach and the New Mittelstand vision, which is focused on combining the best traditions of medium-sized companies with the agility and futuristic redesign principles of startups.

Interviewed June 2021

A Transformative Initiative for Medium-Sized and Family Businesses

Johannes Lenhard (JL): You had your own startup before New Mittelstand (NM) was founded. What motivated you to start this organization?

Evgeni Kouris (EK): It started in a personal crisis, which was related to the meaning of venture capital. I had idealized the startup ecosystem as I went and moved to Berlin in 2012. I quit both my careers as a musician and a consultant of BCG. At the time, the startup path and innovation with venture capital seemed like the ways to create a better future and innovate radically. To some degree, it was right, but the problem that I encountered there is that you may start with great purpose and vision, but venture capital is not necessarily helping you to get there. It rather requires a lot of experience to not divert from the original path. Money has a lot of influence. Venture capital structures are very clearly exit and monopoly oriented. So, in the unlikely event that your startup succeeds, the result is only advantageous for a few people involved: “win-lose principle.” I started looking at other models of entrepreneurship that do not require this kind of exponentiality and can scale and be successful long term for many people: “win-win principle.”

Erika Brodnock (EB): What is the ethos you are following and how is that connected to a new way of being and of doing business?

EK: The ultimate question for us is, do we have our own vision for the European way of doing entrepreneurship? The Silicon Valley startup methodology was not invented in Europe. It is very successful so far. You can see the Asian adoption of that mindset too. If you look in Europe, and especially Germany, what is going on here? We always talk about family and middle-sized businesses or “mittelstand,” which are the backbone of the economy. In the US, there are only two kinds: large or small—grow or go. It is different in Europe. You have three types of companies, and the ones that are providing most of the jobs are the middle-sized ones. They are also driving industrial innovation. The 2019–2020 numbers showed rapid decline over the last 15 years in radical product innovation, in this field where you would typically expect that innovation to happen. Startups were completely overhyped. So, there is a major issue with the traditional family businesses that needs to be addressed. Otherwise, we will lose that edge that normally was driving the German or European economies. That is one of the reasons why I initially founded the transformation initiative, New Mittelstand. It quickly became a community and movement of like-minded entrepreneurs who define themselves as New Mittelstand. It has been my complete focus since then.

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The startup has become a zebra on its own. We are a for-profit and for-purpose company, even though many people expect these initiatives to become non-profit. We want to set an example of doing things differently here. We want to find a new way of doing a family business ourselves. What is missing in Europe is this diversity oriented and bottom-up way of doing entrepreneurship. We call it New Mittelstand because it is a new way of old business, a new definition for the 21st century. We are open to learning from startups and learning from all kinds of methods to do radical innovation, but you cannot forget your roots. What values do we want to maintain? Diversity, freedom, democracy, and all the values that we really love. They are just unique and have a lot of history. We cannot forget these while moving into this radical technology innovation, evolution, or disruption. This is the challenge. As we used to say, it is about keeping your roots intact, while still having the wings to fly into this new future. This is really challenging for traditional companies, especially the ones who have been around for generations.

JL: Ines, from the perspective of a startup founder, what does NM do differently and how does that reflect your “ethos”? What is attractive in NM for you?

Ines Schiller (IS): When I started Vyld, I was not only thinking about the “what”—a radically sustainable product (our ocean-saving tampons made from seaweed)—but also about the “how”—the way we do business to bring this “good” product into the world, because for us the end does not always justify the means. We wanted Vyld to be able to grow and thrive in the same healthy way that we want our seaweed to, integrated in regenerative circular systems that are non-exploitative and designed to last. So I did a lot of research on alternative ways of doing business and, besides other inspiring sources like the steward-ownership model and the feminist business approach by Jennifer Armbrust, NM and the zebra startup movement are very promising and empowering vehicles for us to incorporate these values into our company’s DNA. We can use them like templates without having to (re)invent everything ourselves. I appreciate the work of Evgeni and the others very much, as they do a great job illustrating the fact that there are already alternative ways of doing business that actually work. I think it’s very helpful that they are doing this as living examples!

Bringing Diversity to the New Mittelstand Movement

JL: How are you addressing what kinds of diversity are in the New Mittelstand sector?

EK: In the German language, diversity is narrowly defined and we want to look more broadly. We consider New Mittelstand to be a positive vision for entrepreneurship in Europe. We need to find ways to do things where we have natural advantages in Europe and need to learn from what US and China ecosystems have done very well. What are our advantages traditionally? We have a lot of cultural diversity, which we need to leverage to our advantage. For example, in my VC-backed startup Gamewheel we started communicating in English from day one. Five years later, we have traffic from all over the globe, but not many people from traditional family businesses understand our site because it is in English. I thought, why do we always start in English? We have very different languages here in Europe and very different cultures. Startups are monocultural vehicles to great monopolies. Cultural diversity is more hindering, because it is more expensive, legally, culturally, to scale. You need different teams on the ground, and you need different models. Startup business models require a high degree of standardization. Family businesses, on the other hand, are regionally rooted. Yet they also experience a “family innovator’s dilemma.” They have an advantage of being regional, but they have the disadvantage of family-driven monoculture, because they traditionally try to find a successor from the family itself. Over the generations, this creates tunnel vision for the way of thinking and culture. This is not enough.

With New Mittelstand standards, we want to combine the best of both worlds. How can you be closed and open at the same time? How can you be focused on a particular type of culture or portion of the market, while still radically innovating? How can you find other things where your unique cultural DNA could be of value? How can you combine that with technology or startup innovation? This makes European innovation challenging and tough because you need so many discussions to decide. There are bottom-up structures, which are sometimes inefficient. We need to figure out how to leverage these structures and make it more effective for people. That will be our biggest advantage. After the internet economy that many European companies have missed, there will be a purpose economy. A new generation will require us to be more purpose oriented and have a triple bottom line, such as with UNSDGs Sustainable Development Goals. This new generational demand will be in favor of companies who embrace their culture, the DNA, the history, and also care about the next generation. What do I do to make the next generation look good for the next generation after? This is where Europe can shine, or the diversity culture can shine.

JL: Ines, what role does diversity (of different kinds) play for you?

IS: As a female and usually white-passing founder, I experience the consequences of a lack of diversity in the industry on a daily basis. Our economy suffers a lot from overemphasizing the importance of typical startup business models, but it loses so much by ignoring the vast majority of business models, ideas, founders, geographies, etc. This monoculture in business is as unhealthy as it is in nature. As a trained marine and field guide, I see the dramatic impacts that biodiversity loss has on our natural environment. I think we can really not overrate the importance of diversity for healthy systems—businesses or societies are not different from ecosystems, in fact as we are part of nature, our systems collapse in the same way that ecosystems do from biodiversity loss. We focus so much on “more of the same” logic, e.g., founder’s profiles coming out of the “good and right schools,” the “well-balanced, senior teams,” and “proofs of concept,” that we prevent ourselves from true innovation. But we are facing existential problems on this planet, and we will not solve them by following the same logic that brought us here. We need to think way more holistically and integrate other perspectives if we want to tackle this crisis complex. I call it a complex because for me the same mindset that enables gender inequality and the oppression of womxn enables the unpunished exploitation and destruction of nature. A very hands-on example in our own business is the way we talk about our products—usually they are called “feminine hygiene products” and marketed towards women, but not every womxn menstruates, not everyone who menstruates is a womxn, and periods are nothing that needs “hygienic” treatment, they are just natural. That’s why we use the more inclusive terms, menstruators and period products. Language matters indeed!

Mittelstand Alternatives to VC Funding

EB: How do you propose funding this new way in this new system? How does it differ from the traditional way of VC funding?

EK: For many family businesses and Mittelstand companies, independence is one of the biggest motivating factors, which they have successfully kept for generations. Some never leveraged a lot of external capital or they have kept their shares mostly in the family. They try not to raise external funding and dilute the shareholding in a way that it becomes uncontrollable or less controllable by the family. They are well funded and are very independent in the way they do things. We are looking into what we call “qualitative investing”—it requires a different capital structure, and investor and founder profiles. Jointly with our partner organization Zebras Unite, we are working towards acceleration of alternative capital structures for such a qualitative economy. Investing in zebra startups is, on the one hand side, purpose oriented and on the other hand side it is profit oriented. Zebra founders are focused on balancing the social, monetary, and environmental aspects, and hence zebra investors expect less exponential growth and more positive impact.

JL: Ines, what role does venture capital play for you? Are you already engaging in alternative ways of funding?

IS: We are just at the beginning and far from being a Mittelstand company, and as we have an innovative, R&D-heavy product, we need outside investment to come to a point where we can grow organically. That’s why we are looking exactly for this type of “qualitative investment” that Evgeni describes, one that is in line with our regenerative business approach. In general, I think it’s really urgent for investors, but also the economy as a whole, to understand that the VC hypergrowth model, with its reliance on fast, blitzscaled* growth, is just not a good idea on a finite planet. To be very clear, for us as a profit-for-purpose company, the VC model just doesn’t make sense. We don’t want Vyld to be a vehicle for investors making tons of money, but instead a tool for realizing our vision and creating positive impact. The decision-making power should not be coupled to the amount of money someone put into the company, it should always stay within the company. That’s why we’re using the steward-ownership model, which prohibits absentee owners from making decisions that are contrary to the actual company purpose (like extracting a lot of money that could be used for more impact). This is not an easy way and there are still many open questions like whether there is even enough of this mission-aligned capital out there for a R&D-heavy enterprise like ours, but we are willing to take that risk as following the conventional VC logic would just feel like a poor compromise.

Overcoming Negative Connotations and Conservative Values

EB: Purposeful can sound charitable. What are the impacts of making it seem as though it sits in the philanthropic social bucket? How can we shift away from the negative connotations that some from capitalist backgrounds associate with philanthropic investment?

EK: Qualitative investing is when purpose and profit orientation are balanced. Patagonia is a famous successful example, the company is profitable and purpose oriented. They accept less monetary growth to maximize the positive impact and to focus solely on company purpose. Many new generation founders want to combine profit and purpose orientation, and do not see that as a contradiction. New Mittelstand is a natural evolution of family business culture—the oldest way of doing business in a sustainable and balanced way. Balance is a core value to create a win-win economy rather than trying to get everything out of the company and maximize on profits.

We share the successes of these family businesses or so-called “hidden champions” in our online magazine, and this helps other entrepreneurs and investors see that there are other ways to be successful. About a half of global hidden champions came from Germany. They generate millions and sometimes billions and generate many jobs in Germany and globally, while not many people know much about them. We want to help them become more open and collaborative. We want them to talk about their successes and show that they are also funding new initiatives that will follow their footsteps. We want them to create internal startup-like initiatives and work with external startups. Many are going in this direction, and they are not investing on classical venture capital terms. New Mittelstand firms are often interested in qualitative zebra investments, where they expect a moderate positive return on investment over time. In the current economic context, this is quite attractive.

Traditional family businesses are leaner and often focus on profitability from day one. They still need to have capital and partnership to scale. Frosta, a New Mittelstand company focusing on frozen foods, is in a third generation of their business. They have been financing sustainable packaging development since the beginning of the century. No one wanted to pay a premium price for it ten years ago, so the company struggled financially for a long time. Normally, in venture capital, they would stop, but they kept going. Now, they are leading sustainable packaging with their plastic-free products. These are the typical New Mittelstand stories we share, which inspire. We are searching for good entrepreneurship that is purpose driven and it does not matter where you come from. You do not need to have gone to a good school, have an MBA, or a good network. It is about doing the right things in the right way and having something special there.

EB: Sitting on the other side of the fence, they do matter. As a Black female entrepreneur that does not have the “elite” (Oxford, Cambridge, Harvard, Stanford) degree, I am treated differently. In an ideal world, it would not matter. There is a mindset and education shift that needs to happen on the part of the people that are doing the overlooking. What are your thoughts? The world you have outlined is an ideal one in which I could thrive, not because of the color of my skin, but because of the quality of my business. How do we get from here to there?

EK: There are two verticals we are building based on the New Mittelstand vision: an online magazine and a transformative community. The online magazine helps us share the stories about diversity, radical innovation, and sustainability. One of the issues in traditional Mittelstand is lack of female leaders: according to a recent study, only about 11% of management and board members are female. If you consider origin and cultural background, you will end up with almost no representation at all. We want to grow and support the next generation that is taking charge on an even broader definition of diversity. It may take some time because it is about succession, and it takes years for existing families to rethink that and to make this decision. Jointly with Zebras Unite, we are working on alternative capital structures and to share inspiring stories of zebra entrepreneurs, relevant to transforming existing businesses.

Traditional family offices are often still very conservative. That money does not support the purpose-oriented narratives their brand identities indicate. We think this is inconsistent. So, the other vertical is focused on transformation with help of our community. The next generation wants more diversity and sustainability, new digital experiences, etc.—all this requires evolutionary and radical change at the same time. We developed a transformational framework to help next generation leaders to find orientation and necessary guidance, and share experiences in various circles and collaborate. We treat the culture of a traditional family firm as a product of entrepreneurship and apply new agile and iterative methods to develop it further. Often, we need to experiment in radical ways and there is an increasing interest to do that. But there is also an open debate. How far do we want to go? Some family businesses are going back to their roots in a negative sense, saying, “We do not want radical change, because we calculated it is not going to be good for us.” This debate is difficult, but we need to have the debate and move it into transformative action. This is the value our community creates and our positive impact.

JL: This is where politics comes into the conversation.

EK: If you ask Mittelstand companies and family businesses, what is the biggest hurdle for them to do innovation? They will say bureaucracy. The second-biggest issue is access to talent. In changing the way the capital is allocated, we need to figure out ways to do that without increasing bureaucracy. We need to direct the capital to the right people based on quality rather than traditional benchmarks and historical numbers. There is never going to be enough historical numbers, if we do not change radically and take some risks. I hope that these independent capital owners will be more likely to take risks, because at the end of the day, they want to say they did something good with it. Even if the business does not work, the purpose was still right. This is the balance of purpose with profit. The question is, what is the right ratio?

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