Hidden Champions
Not VC
When investing in private markets <equity>, we only consider venture capital and private equity, which can’t serve most private businesses. To some extent, these two are not fit for small to medium-sized businesses, even with a moat to receive any form of capital from venture capital or private equity. The other issue and my beef with VC/PE is that they are structured in a way that doesn’t serve a long-term mindset, and when I say long-term, I mean thinking in terms of generations or permanent holders of equity, or evergreen structures. The other critical issue with VC/PE-backed companies is that they are meant to scale at all costs to reach a billion-dollar status, or else they are not interesting enough.
We solely rely on VC-backed companies to lead innovative solutions, and I fundamentally disagree with this viewpoint. So much innovation can be and is led by small to mid-size companies that are not unicorns and probably will never become unicorns. They solve critical niche problems with research and science-based innovations. We as a society worship capitalists who are building billion-dollar and trillion-dollar companies, and that creates a vacuum in the market to serve niche markets, and serving smaller markets is a moat because the Silicon Valley venture capitalists look at everything from a maximalist viewpoint; instead, I see things from a decentralized solutions and niche markets perspective. I prefer Constellation over Microsoft because, in that sense, they are a collective, in the true sense, a constellation of 1000s of vertical market SaaS companies serving niche solutions that giant software companies like Microsoft overlook.
Herman Simon nailed down several high-tech small—to mid-size companies in the book Hidden Champions. These companies are essentially deep-tech companies by any deep-tech VC standard, but they are underserved and overlooked by present-day, Silicon Valley-style venture capitalists. Herman calls these companies Hidden Champions; in Germany, they are called Mittelstand. These companies often achieve dominance through deep market focus, superior performance rather than price competition, intense customer intimacy, and a long-term, global vision. Let's look at some of these high-tech small to mid-size companies.
Brainlab, the world market leader in surgical positioning software, collaborates closely with surgeons and oncologists. Medical software and surgical navigation systems are highly specialized and technologically advanced. Brainlab, headquartered in Munich, Germany, reported revenues of €429.2 million for the fiscal year ending September 30, 2023.
Siltronic, the world leader in pure silicon wafers, interacts with customers from the outset when developing new products. The production of high-purity silicon wafers is a crucial and technologically demanding process in the semiconductor industry. In fiscal year 2024, the company reported revenues of € 1.412 billion. As of December 31, 2023, Siltronic employed approximately 4,455 individuals worldwide.
Herrenknecht is the world market leader in tunnel-drilling technology, and its venture into deep drilling for geothermal purposes. Tunnel drilling and geothermal drilling are complex engineering and technological endeavors. In 2023, the company reported revenues of € 1.2 billion and employed approximately 5,125 individuals worldwide.
Westfalia Separator is a leading manufacturer of separators and decanters used for mechanical separation in the food, chemicals, pharmaceuticals, and environmental technology industries. Founded in 1893, it is a subsidiary of the GEA Group.
Krones, headquartered in Neutraubling, Germany, is a global leader in bottling and packaging systems. It offers highly automated solutions incorporating advanced robotics, sensors, and control systems. In 2023, the company reported revenues of € 4.72 billion, a 12.2% increase from the previous year.
Scienta Omicron, established in 1984 and headquartered in Taunusstein, Germany, is a leading innovator in surface science and nanotechnology, specializing in scanning probe and scanning tunneling microscopes. In 2015, the company reported revenues of €65 million and employed around 120 individuals in Taunusstein as of January 2017. Scienta Omicron provides advanced instruments for electron spectroscopy, scanning probe microscopy, and thin film deposition, supporting researchers globally in areas such as more intelligent batteries, next-generation electronics, and quantum technologies.
ULVAC, established in 1952 and headquartered in Chigasaki, Kanagawa, Japan, is a global leader in vacuum technology, specializing in the development and manufacture of equipment for industries such as display, semiconductor, and electronics. The company reported net sales of ¥261.1 billion in fiscal year 2023 and, as of June 30, 2024, employed 6,234 individuals worldwide. ULVAC holds significant market shares in the coating equipment sector, accounting for 96% of the global market in LCD panel coating equipment and 70% in plasma display coating equipment, underscoring its dominance in these specialized fields.
R. STAHL, established in 1876 and headquartered in Waldenburg, Germany, is a leading provider of explosion protection equipment designed for hazardous environments across various industries, including oil and gas, chemicals, pharmaceuticals, and marine. In the fiscal year 2024, the company reported revenues of €344 million and employed approximately 1,700 individuals worldwide.
There are several thousand of them, which are even smaller than the ones I mentioned above. It is essential to create financial products that serve the real innovators, i.e., Hidden Champions, who think from a century-long perspective, rather than the fake, made-up innovators of Silicon Valley, because today they are, but tomorrow they might not even exist.
I don’t have an exact answer or a silver bullet, but I think a serial acquirer Holdco strategy is a great one. It acquires small-sized hidden champions, revenue share funds, or innovative equity funds, which can create a portfolio construction focused on hidden champions.
I think there is a huge opportunity to tap into.
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Note: These are my personal opinions.