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A slow climb - A vigorous start-up scene has yet to produce its first big
breakthrough
ALL of the entrepreneurial spirits left here 200, 300 years ago, jokes Maxim
Nohroudi in his Berlin office. That is obviously not quite true. He met his
business partner at D sseldorf airport in 2010, their flight grounded by the
eruption of Iceland s Eyjafjallaj kull volcano. If only there were an app to
compare their options to get back to Berlin by schedule, price and time
required, they thought. Now there is: Waymate, which quickly compares both
inter-city and intra-city means of travel. To make money, Waymate plans to sell
adverts aimed at people based on their location. Eventually the app will allow
data to travel two ways, so that users can tell each other when a bus is stuck
in traffic.
Waymate is one of many start-ups in Berlin. Conferences about them are an
almost-daily event. One bank has said that a new start-up is founded every 20
hours, making Berlin a standout among the world s tech clusters .
But standing before Germany s newly minted entrepreneurs is a series of hurdles
that have so far kept them from getting bigger and changing the world. The last
German tech start-up to become a global star is SAP founded in 1972. German
firms, both the biggest ones and the much-lauded, family-owned Mittelstand, are
innovative themselves. But founders dream of German Googles, and the government
is keen to encourage them. The barriers are coming down. Unlike the Berlin
Wall, however, they will not tumble quickly.
One problem is that popular attitudes towards entrepreneurship are lukewarm
(see chart). Just under 50% of Germans polled by the Global Entrepreneurship
Monitor (GEM) agreed that starting a business was an attractive idea. Compare
that with attitudes in Germany s neighbours: 65% in France, 68% in Poland and
79% in the Netherlands had positive views. Germans are no more begrudging of
success than the others. The problem seems to be that few start-ups achieve it.
Lack of finance is a big reason. Small companies need angel investors and
venture capital to survive and grow. But these sources of capital are puny in
Germany. Deutsche Bank reckons that there are as many venture-capital
investments in Germany as in America (11-12 per million inhabitants). But the
average investment in Germany is just 780,000 ($1m), compared with 6m in
America. Lars Hinrichs, founder of Xing, a social network for entrepreneurs
(and a growing public company), says that a big reason is that successful
entrepreneurs do not become investors themselves, as they do in Silicon Valley.
German venture capitalists are cautious. Rather than bet on many companies in
the hope that one will grow explosively, they invest more selectively and
expect a high proportion to break even within 18 months. Germany s banks the
local savings banks and co-operatives that fund many traditional companies are
hesitant to lend to untested digital entrepreneurs.
Fear of failure is another dampener. It would deter 42% of Germans from
starting a company, GEM s polling finds. That is far behind Japan s 53%, but
well ahead of the 32% in the United States, where having flopped a few times is
a point of pride. Mr Nohroudi says there s no one [in Germany] asking what
did you learn? Instead, when his first company was shuttered, friends urged
him to go back to the comfortable university job he had held.
Optimists say nearly all of this is changing. University graduates now consider
start-ups a legitimate career option. More venture capital flowed into Berlin
than into London in the last quarter. American funds are especially keen. Xing
s Mr Hinrichs has been named to the supervisory board of Deutsche Telekom, the
first fledgling founder to take such a role in traditional corporate Germany.
One big initial public offering (IPO) could bring a charge of excitement to the
capital markets.
Patrick Bunk, founder of bermetrics, which helps big companies make sense of
the thousands of articles and social-media posts written about them, points to
several signs that Berlin s time has come. The city s five universities churn
out talent, though many graduates are shocked by the long hours they are
expected to work at a start-up. (Gr nderszene, a website, jokes that anyone
who wants to leave at 6pm will be asked if he s taking a lunch break. )
Fortunately for founders, workers are relatively cheap. Berlin s cool
reputation attracts young people from across Europe and beyond. The city s low
costs (relative to those of London, Europe s tech capital) allow early funding
to stretch much further in paying rents and salaries.
Germany s government tries to help. KfW, the federal development bank, lends to
new companies, as do its state-level equivalents. The biggest investor is
High-Tech Gr nderfonds (HTGF), a semi-official venture-capital firm. It draws
some of its 574m in investment capital from big German companies, but 80%
comes from the economy ministry. It has given advice and individual investments
of 500,000 (with the possibility of more) to hundreds of start-ups, in
exchange for 15% stakes. It thinks of itself as a professional venture-capital
fund. But start-up founders grumble that its government roots show clearly. It
is impossible to know whether it turns a profit: it publishes figures only for
successful sales of its stakes.
Outside official channels one of the biggest sources of funding is Rocket
Internet, a Berlin-based company-builder. Founded by the three brothers Samwer,
Rocket polarises opinion. It is known for a storm-the-barricades culture and
for launching lots of similar companies that can share resources. It is also
muttered that all Rocket does is copy successful ideas from abroad. It cloned
Alando from eBay and then sold it to eBay; it performed the same trick with
CityDeal and Groupon. But this is no shame: many start-up stars are copycats.
Rocket s most successful German property is now Zalando, a lookalike of Zappos,
an online shoe and clothing shop.
Rocket is exporting its formula. Two years ago the brothers decided to move
into new markets and to focus on businesses that exploit the shift in shopping
to online channels, the biggest trend worldwide, says Oliver Samwer. The
company has investments in 50 countries, from Brazil to Pakistan.
Beyond Berlin
While Berlin gets the hype, it is hardly the only German start-up scene. Xing
began in Hamburg, Mr Hinrichs s hometown. Non-Berliners are more likely to
focus on biotech or traditional industries like engineering than on digital
ventures, Berlin s speciality. Many of HTGF s triumphant press releases about
profitable exits tout non-digital successes. These include Freiburg s
Industrial Solar, which provides heat used in manufacturing processes and
air-conditioning to industrial facilities; Dresden s UroTiss, which makes
artificial tissues for urinary organs; and Kiel s Terrawater, which processes
sea- and wastewater. Such successes recall Germany s 19th-century start-ups in
chemistry and engineering, and are a reminder of just how little of Germany s
economy is based in its capital city.
In the absence of splashy IPOs, big German companies are among the main
investors in start-ups. A few, including Deutsche Telekom, Axel Springer Verlag
(a publisher) and Rewe (which owns supermarkets), have their own incubators.
Their bets are modest in size Telekom s Hubraum invests perhaps 3m-5m per
year. Peter Borchers, its co-head, says the real point is to act as an
early-warning system for new trends and to profit from the innovation that is
happening outside the company. The small profit Hubraum expects is a secondary
concern.
Germany s problem is not that it does not innovate. The country s oversized
trade surplus, its low unemployment rate and its thousands of makers of machine
tools, car parts and chemicals are proof that it is keeping up with trends in
industries in which it excels. There are two glaring deficits. One is the
dearth of Silicon Valley-style IPOs, which whet investors appetites and create
billionaires rather than mere millionaires. The other is the absence of
standard-setting giants like Google and Facebook, which serve as schools and
customers for newer ventures.
Digital Berlin is now nurturing the sorts of companies that could make
pulse-quickening stockmarket debuts, if Germany had a shareholder culture
vibrant enough to welcome them. As it is, many are likely to wind up in the
hands of incumbents like Telekom and Springer. A few will soar on their own.
Germany may not produce the next Google, but perhaps the land of Mercedes and
the Mittelstand does not need to.
From the print edition: Business