Nurturing startups

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Startups: An increasingly rare site in Germany.
  • Why it matters

    Why it matters

    Without increased support for innovative new companies, entrepreneurial Germans will move overseas.

  • Facts

    Facts

    • Berlin has become a startup hub, with 40 percent of new German companies based there.
    • But the rest of Germany has become a startup desert.
    • Key reasons include a lack of venture capital, a dearth of business training and Germans’ preference for secure jobs.
  • Audio

    Audio

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If you look only at Berlin, you might think all is well on the German startup landscape. In the recent 2015 Global Startup Ecosystem Ranking, Germany’s capital took ninth place among the best locations for startups worldwide.

But Berlin is just an oasis in the startup desert landscape of Germany. Forty percent of new companies have their headquarters there, while in contrast even other cities popular with young people are far behind, including Hamburg with 7 percent and Munich with 8 percent. Once beyond city boundaries, the startup scene looks grim as fewer and fewer Germans want to start a company.

That has significant consequences. Germany is falling further behind in innovations, since new developments are no longer being made by large corporations, but rather by one- to five-person operations.

Google, Facebook, Amazon, all the companies that have radically changed people’s lives in recent years, had their origin not in a major corporation but in the minds of individuals with the courage to follow their vision. If Germany continues to allow its talent to go unused, it will continue to look at the U.S. with envy.

Why do so many more successful founders come from the U.S. and not Germany? The answer is complex. First, there is the matter of mentality, which is largely oriented toward security. Germans like secure jobs in an employee relationship.

If Germany doesn’t watch out, its startup community will be solely financed by America.

Second, the low level of willingness to take a risk is not only visible from the small number of companies launched. Family-owned companies have also had problems getting the younger generation excited about taking over. There’s no desire or interest to take a risk.

Education also plays a role. Ask a young person what they want to become and the probability they will say “founder” is low. Younger Germans bubble over with ideas and drive about how they can change the world, but in German schools this ambition is more likely to be smothered by worries and fears about the future than cultivated and encouraged. Overcrowded state universities also have a tough time motivating students to set up new companies.

A few years ago as a student of a state college, I had the opportunity to attend a seminar on startups in sustainability sector at a private German university. The spirit created in those five days was so inspiring you wanted to immediately start a company. We need more such incubators of ideas.

But even those who shrug off fear to create a startup are still a long way from achieving their goal because of a lack of money to follow through on their ideas. The problem in Germany isn’t initial financing; founders rave about the comprehensive government subsidy programs.

Rather, it becomes difficult when the company leaves its infancy and wants to grow really quickly, just as the Facebooks and Googles and Amazons of the world have done. Yet the complicated path to venture capital often makes it difficult for new companies to hit the next level of growth.

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The problem can briefly be summed up thus: Too little for too many. There are too few German venture capital firms with too little money. If you are lucky, you get your money from an American investor. They are considered better connected and give larger sums.

If Germany doesn’t watch out, the German startup community will be solely financed by America. In fact, many founders have been advised to immediately move their headquarters to the U.S. because financing is easier to find there.

What is needed are new rules that make the risk of investing in a startup more attractive. It must be made possible for venture capital firms to make real cash with a successful startup, so that they can afford to invest in new companies that might not be so successful.

This is likely to be a difficult task for politicians to undertake. It isn’t just since Franz Müntefering, former Minister of Labor and Social Affairs, labeled the entire investment sector as “locusts” that it fell into disrepute. It will be difficult to make the case to voters that investors should pay lower taxes and earn more, but it’s high time to take the risk.

 

To contact the author: d.heide@vhb.de

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