Germany’s Mittelstand is roundly considered to be the engine of the German economy.

Germany’s Mittelstand is roundly considered to be the engine of the German economy. Technically, the word is used to describe a small or medium sized company with less than 250 employees and €50m in annual sales. In reality, it refers to a state of mind of a certain type of business. Most Mittelstand companies are based in rural areas and have a history of family ownership where the business passes from one family member to another. They prize long term stability over short term growth, are export oriented and often focus on innovative and high value manufactured products that occupy worldwide niche market leadership positions in numerous B2B segments.

Crucially, they employ 70% of the German workforce. And because they are mainly family owned firms with little debt, these jobs tend to stick around for generations.

There are a lot of elements that make up a Mittelstand company but the part that is most applicable to tech companies (SaaS in particular), is worldwide leadership of a niche market. There are hundreds of thousands if not millions of niche business processes that already have or would benefit from SaaS or software solutions. Some of these niches are billion dollar opportunities; some of them are so narrow that they may just support one or two people fulltime. But many of them are opportunities to create long term businesses that each support 20-100 well paid, highly skilled jobs.

For the narrow cohort of billion dollar opportunities there is an established funding ecosystem in place in the form of Venture Capital which is constantly looking for the next billion dollar idea or unicorn. As investors in these opportunities have grown, the focus is increasingly on big money “exits” to deliver returns on investments. But for the smaller yet still meaningful opportunities, suitable funding is more difficult to attain despite there being less risk of failure.

Maybe the real opportunity for a country like Ireland isn’t to focus on creating the next unicorn — but instead to create hundreds or thousands of niche SaaS businesses. These are businesses that if they aren’t VC funded are less likely to be acquired and therefore more likely to stay in Ireland and keep the jobs with them. Niches are often less competitive than really big market sectors so you get time to hone your offering and establish a competitive advantage so they are ideal for building long term businesses.

The challenge for a government organisation such as Enterprise Ireland is how to help develop the right funding environment to spur the growth of these MittelSaaS or Niche Leaders. Because right now they have invested a lot of capital (€645m is currently under management in EI-supported Seed and Venture Capital funds) and mindshare in the VC path and that path is inherently about chasing the big dream and ultimately selling a company, often to foreign investors within a 5-7 year time frame.

This piece isn’t supposed to be anti-VC. There are many situations where venture capital makes sense. It also isn’t trying to say VC shouldn’t be supported by government policy. Rather it is to explore the idea of properly encouraging alternatives, such as venture debt, bank loans, or bootstrapping coaching that would better support the development of MittelSaaS.