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Business creation in Germany

2013-10-08 10:53:44

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