Startup Stories

A Flawed Role Model

Golden Gate Bridge and evening fog
The fog of unemployments and failed startups is settling once again over San Francisco.
  • Why it matters

    Why it matters

    A degree of disruption of outdated industries and business models is valuable to the economy, but it’s important not to overstate the benefits of startup companies.

  • Facts

    Facts

    • Uber and Airbnb employ a mere thousand full-time employees each, Twitter fewer than 4,000.
    • The Silicon Valley region has hit a 10-year high in food stamp participation and a 20-percent increase in homelessness.
    • San Francisco has struggled through tech bubble collapses in the early 2000’s, again in 2008, and now another mini “adjustment” seems to be underway.
  • Audio

    Audio

  • Pdf

As I travel around Germany, from the giant messes of Hannover and Frankfurt to the digital incubators of Berlin, I hear a near-constant refrain from business and tech leaders: “Germany needs more startup companies, more innovation, more ‘disruption’ – where are the German Googles, Apples and Facebooks?”

This viewpoint goes hand-in-hand with a prevailing belief in the rightness of technology and innovation. That perspective is hardwired into Germany’s Enlightenment-based faith in modernity and ever-expanding prosperity.

Startups are viewed synonymously with technology and innovation, with new bold-name successes like Uber, Twitter and Airbnb becoming multibillion-dollar “unicorns” in only a few years. These and other companies inspire envy among German techies and entrepreneurs, young and old alike.

Three out of four startups will fail, and nine out of ten won’t make any money.

But as someone who has lived for many years in San Francisco in the heart of Silicon Valley, I can say that, while there is great merit in innovation and entrepreneurship, there are a number of downsides to the U.S.-style startup model.

For example, a flood of brand new startup companies often leads to an unstable bubble economy and a misallocation of investment capital. As the record from Silicon Valley shows, three out of four startups will fail, and nine out of ten won’t make any money.

First comes the boom – lots of venture capital money gets thrown around, chasing fantastical schemes. Armies of young programmers migrate to the new mecca, many well-paid but as temps and contractors they have no safety net or job protection. The tech invasion pushes up the price of local housing, and contributes to traffic congestion and inflation, which further distorts the long-term regional planning process.

Young U.S. Companies are Less in Demand-01

Eventually the bubble bursts, companies start failing and the layoffs come. Sky-high housing prices become unaffordable to the unemployed tech precariat. Restaurants and bars lack customers. Local sales revenue declines, government budgets become overstretched, leading to cuts in services and more layoffs.

I have watched San Francisco struggle through tech bubble collapses in the early 2000’s, again in 2008, and now another mini “adjustment” seems to be underway. With that kind of track record, this seems like a pretty inefficient way to invest capital – it’s more like a high-tech casino than a rational process of investment and planning.

One of the alleged advantages of the startup economy is job creation. Technology and innovation have acquired a reputation as boosting employment, but is that still true today?

Not necessarily. During the short-term bubble, startups increase regional employment, but over the long term technology companies increasingly are not job creators. In fact, they may well be job destroyers.

The tech startups are almost boastful about how they are able to inject software and algorithms into ever smarter machines which are replacing the humans. Many experts worry that we could end up in a situation where the great mass of humans do the low-skill, low-paid work that can’t be automated— pushing the button that starts the algorithms, and other humdrum tasks and on-demand jobs, hustling to scrape together enough to survive via the “share-the-crumbs” economy. Economist Nouriel Roubini says, “The factory of the future may be 1,000 robots and one worker manning them.”

The leading companies of Silicon Valley, which as startups invented many of the technologies of the emerging digital economy, are not creating huge numbers of jobs. Facebook (12,000 full-time employees), Google (60,000) and even Apple (90,000) are slacker job creators compared to traditional economy companies like Daimler, GM, Volkswagen, Siemens, IBM and GE, which each employ hundreds of thousands of people.

A region that boasts some of the world’s wealthiest companies has hit a 10-year high in food stamp participation and a 20-percent increase in homelessness.

The newest unicorn kids on the block, Uber and Airbnb, employ a mere thousand full-time employees each, Twitter fewer than 4,000. Uber employs a lot of contracted drivers (most of them part-time), but many taxi drivers have lost their jobs as a result, so the net employment gain is minimal. Within the pearly gates of “Startup Heaven,” inequality has become so rampant that a region that boasts some of the world’s wealthiest companies has hit a 10-year high in food stamp participation and a 20-percent increase in homelessness.

The more recent variety of brashly disruptive startups in the U.S. also comes with another troubling quality – a refusal to follow local laws or pay taxes. These companies are redesigning notions of corporate responsibility and accountability. In city after city, startups like Uber and Airbnb have broken local laws that regulate hotels and taxi service.

Airbnb, a company valued at €18 billion – three times that of the 50-year-old Hyatt Hotel chain – has claimed that since it is operating in about 34,000 cities around the world, it can’t possibly figure out all the local regulations and tax laws. So Airbnb has refused to pay occupancy taxes that all other hotels are required to pay, which are an important source of revenue for local governments.

Airbnb recently has begun paying taxes in about two dozen locations – at this rate it will take the company 50 years to reach over 30,000 cities – but imagine if BASF, which is the largest chemical producer in the world, set up chemical plants, or Daimler set up auto manufacturing facilities, without figuring out first the local laws and taxes.

Airbnb, as well as Uber and other startup companies, are asserting a new corporate right: first, set up operations, and second, maybe figure out the local laws and taxes later. But don’t hold your breath. These kinds of startup practices encourage a pirate mentality, mounting an attack against government regulations and taxation. If all businesses operated this way, it would result in economic chaos.

OK, OK, say startup enthusiasts, but if even two out of ten startups became huge global companies, Germany would be in the driver’s seat, in terms of being a bold pioneer of new technologies. And that would provide additional benefits – right?

Not necessarily. In this globalized world, it doesn’t matter so much anymore where something is invented, because those technologies quickly are disseminated everywhere. Germans have as much access to the products of Apple, Facebook and Google as Americans. And if these companies and their new technologies are not big job creators, the advantages of them originating in your home country are not so important.

In fact, one could make an argument that the most important innovation today is not the creation of a new technology, but its implementation. For example, many of the green high-tech inventions for renewable energy have launched in the United States. And yet Germany has been much more successful at implementing these new technologies than the U.S. Germany’s ambitious program to switch to renewable energy has made it a world leader in creating an infrastructure that increasingly is based on renewables, efficiency and sustainable development.

Moreover, this “greening” has created hundreds of thousands of new jobs. The implementation of tech advances may be a more important job creator than the inventions themselves.

Certainly a degree of disruption of outdated industries and business models is valuable to the economy, and Germany’s economic leaders should strive for greater innovation. But it’s important not to overstate the benefits of startup companies. There’s something to be said for patient capital investment that has its eye on the longer-term horizon.

At the end of the day, Germany’s “startup envy” might result in little more than a hugely inefficient allocation of investment capital.

 

To contact the author: gastautor@handelsblatt.com

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