An interview with Dr. Cyrus Bark, Managing Director of Mittelstandswerk
Securing external funding as a small or medium-sized company is easier said than done, something Dr. Cyrus Bark knows from his own, somewhat painful experience in the past. With more than 70 employees and an annual turnover of €10 million, the metal processing company founded by his grandparents in the hills of the Swabian Alb urgently needed a bridging loan in order to plug a temporary gap in funding. It was 2019, the order books were full, and the business outlook was highly promising. Despite this, the company was forced to file for insolvency. Traditional banks felt further lending would be too risky and the only collateral that was offered was not enough. For alternative equity providers such as private equity funds, the company was too small and the expected returns were too low. The company simply did not fit the mold when it came to financing and consulting and was subsequently sold to a Turkish investor as part of an asset deal. Thanks to the support of customers, suppliers, and employees – plus a great deal of personal commitment and extensive private funding – in 2022 the people behind the business succeeded in buying it back and returning it to family ownership. The painful experience the enterprising business leader went through prompted him to shift into action. The company he founded, Mittelstandswerk GmbH, now advises SMEs caught up in atypical business situations. It is also working on the launch of a private equity fund targeted specifically at such small and medium-sized enterprises. In an interview with TRANSFER magazine and Steinbeis expert Ralf Lauterwasser, Bark talks about his experiences and plans.
Hello Dr. Bark. Entrepreneurship and the decision to become self-employed receive encouragement and support from all kinds of stakeholders – support that unfortunately ends abruptly when it boils down to the money. In your experience, why don’t the established banks, credit institutions, and funds do more to stand alongside SMEs?
Bark:
For different reasons, not just among the established lenders of SMEs, but for example also among funds as the providers of equity.
In the past, the traditional financial partners that acted as lenders to small and medium-sized enterprises were regional savings banks and cooperative banks. Fewer and fewer credit institutions are now in a position to fulfill this role. The main reasons for this are stricter lending criteria, significant obstacles when it comes to bureaucracy and regulatory requirements, in some cases insufficient expertise on the part of bank workers, but also a much higher tendency among financial institutions to shirk risk. Bankers are bankers, not entrepreneurs, so they don’t tick like entrepreneurs.
The more innovative equity investors focus mainly on larger SMEs, with annual sales exceeding 25 million euros, or they focus on “innovation trailblazers” – startups, sometimes with an extreme sense of imagination when it comes to development potential. You get startups that have only developed three lines of programming code, and have so far only made losses, receiving funding in the millions. Most of the classic, established SMEs – even those from the “old economy” – are left empty-handed. They’re not big enough and apparently not “sexy” enough.
Also, the people representing the private equity funds tend not to speak the same language of entrepreneurialism as the people representing the owner-managed SMEs interested in funding. Here’s an example: A private equity consultant from Dusseldorf or Frankfurt, wearing hand-sewn brogue shoes and a pinstripe suit, is hardly in a position to connect with the owner of machined parts company in the hills of the Swabian Alb, who’s still sitting at a lathe in the morning turning parts and then goes off after lunch to negotiate financing – and that’s not just because of the Swabian dialect.
The things you experienced personally served as a catalyst for you to plug that gap. How far have you come with your plan to set up Mittelstandswerk as an important port of call for SMEs? And are there any obstacles that have turned out to be bigger than you expected?
Bark:
We’ve broken down our plan for establishing Mittelstandswerk as a point of contact for SMEs into two separate areas, which are currently progressing differently.
The first is consulting, Mittelstandswerk GmbH. We already started operations in this area last October and we’re helping our SME clients prepare for the future. The interdisciplinary qualifications of our consultants and our interfaces with Steinbeis allow us to provide support on two fronts, not just in business management but also in technical areas. We optimize processes, leverage different ways to add value, and harness the energy of internal human capital. Our personal contacts and partners allow us to offer access to a variety of local networks in the fields of business, technology, and the market.
The second area is our M-Werk fund. This is based on a private equity model specifically tailored to SMEs, and it should be ready to ramp up in the second quarter of 2024. We want to use the M-Werk fund to provide equity capital for things like rapid market entry, expansions in different fields of business, or new market and customer development. We know from experience that currently there’s extremely strong demand for financing in the lower SME sector, and we foresee no shortage of potential target companies for our fund.
On the fund side, it will certainly be a challenge when it comes to fundraising and topping up with equity. What remains to be seen is whether in general or right now potential investors will be willing to invest in the Mittelstandswerk concept. Once the fund structure is in place and the general conditions are right for investors, as of quarter two, we’ll actively jump into the fundraising process. The initial signals we’re getting from the different family offices we’ve involved in the Mittelstandswerk concept are quite positive, and that makes us optimistic. Personally, I think it’s an excellent time right now to invest in the M-Werk fund.
What’s the main difference between the approach behind Mittelstandswerk and that taken by established consultants and banks?
Bark:
The thing that sets us apart from established banks and financial institutions is that we offer SMEs – the German Mittelstand – “smart money.”
The first thing that’s different about this smart money is that, unlike banks, we offer genuine equity capital – not loan capital – so unlike traditional consultants, we become directly involved in the company by making a financial commitment.
The second difference with the smart money approach is that unlike banks and traditional consultants, we act as a business partner, in a partnership of equals with the SME, we input with different skills, and we offer our interdisciplinary know-how and our network of contacts, with a strong focus on making things happen. The entrepreneurial genes of an SME are anchored in our DNA – that makes us different.
Turning to you, Mr. Lauterwasser: Steinbeis has a stake in Mittelstandswerk GmbH – it appears you also feel not enough is being done to service the demand for SME funding solutions. What was it about Mr. Bark’s business concept that convinced you to help set up Mittelstandswerk?
Lauterwasser:
We also see the financing gap highlighted by Cyrus Bark, in lots of projects, especially those involving SMEs with a tech focus. And it’s precisely those medium-sized companies that form the core of our customer base. The very different challenges they face – not just because of the technologies but also due to the markets – require tremendous effort from those companies. We believe that Mittelstandswerk’s approach of offering expert advice on the one hand, and providing funding in the form of equity on the other is the right and appropriate way to deal with this. We support this entrepreneurially driven initiative with conviction, not just as a shareholder but also through the expertise offered by our Steinbeis Enterprises.
Contact
Dr. Cyrus Bark (interviewee)
Mittelstandswerk GmbH (Stuttgart)
Ralf Lauterwasser (interviewee)
Steinbeis GmbH & Co. KG für Technologietransfer (Stuttgart)