Americans don't have to look enviously across the Atlantic at Germany's mighty Mittelstand.
The middle market is also a powerful force on U.S. soil. Like the Mittelstand, it is the backbone of economic growth and job creation. Unlike its German counterpart, however, the U.S. middle market labors and grows in relative obscurity, and in a financial system that in some cases acts in ways that are less than ideal for the development of long-lived, independent, mid-sized businesses.
In the U.S., the system of early-stage capital is geared toward start-ups. It focuses on setting them up, growing them fast, and selling them quickly. Our venture capital system is unique in the world and envied by many – Europe has nothing like it – and fuels our nation's entrepreneurial spirit.
But no blessing is unmixed. Venture capitalists start companies and then cash out by selling the company to a larger firm or the public and recycling the proceeds into the next round of startups. The system is not geared up to support companies that have long lives under a single owner, like the great Mittelstand companies.
Something similar can be said of our well-developed system of private equity. Private-equity funds generally invest in established companies with the expectation of selling their stake in three to five years—something that can be very valuable for part of a company's life but not the kind of generations-long support that characterizes the Mittelstand.
A U.S. company that wants to build and hold, grow and prosper must find ways of financing that are not as finely developed as our country's venture capital and PE systems. As these firms go from the start-up phase to the middle market, they make the successful transition from consumers of capital to producers of profits. Clearly many American middle-market companies have run this gauntlet: the median age of these outfits is 31. But the system doesn't make that process easy.
On the other hand, American entrepreneurship and ingenuity have created a number of innovations that have made it easier and less expensive for companies to build scale. Foremost among them: exponentially falling IT costs, the expansion of cloud computing, and the growth of software-as-a-service that combined have effectively eliminated the need for capital-intensive data centers. Companies can now buy IT on a pay-as-you-go basis.
Similarly, the transformation in logistics has made distributing goods much more accessible than it was only a generation ago, when mid-sized companies couldn't hope to compete with the giants' extensive trucking fleets and nationwide warehouse networks.
Mid-sized companies can also compete in marketing and consumer insights more equally than before. Changes in how Americans consume entertainment and news have shifted advertising dollars from expensive commercials on the vast landscape of broadcast TV to focused, digital advertising. And big data services allow companies of any size to target their messages and promotional efforts.
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These and other innovations have come together to reduce the competitive advantages that accrue to scale alone, making it easier for middle-market companies to compete with big guys in every industry and region across the country.
While expectations for short-term returns may pose challenges to preserving this vital sector's long-term independence, America's Mittelstand perseveres as a powerful force both at home and abroad. It is our greatest source of economic and job growth. In fact, if the U.S. middle market was a country, it would be the world's fifth largest economy – bigger than all of Germany's.
Thomas A. Stewart is Executive Director of the National Center for the Middle Market, which is a collaboration between The Ohio State University Fisher College of Business and GE Capital.