Where is the German counterpart to Silicon Valley? Emulating the Californian model with its successful start-ups and often cited entrepreneurial spirit this desire of industry and politics should have been already begun. Although there are already German start-up scenes such as in Berlin and Munich, but still not comparable with the clenched concentration of creativity, capital and entrepreneurship as it is fancied outside of San Francisco.
However the focus on one only location is not necessarily mandatory. Rather, already many small initiatives with interesting young companies have been established in different locations in Germany. Such business incubators are not only funded by public initiatives, but also big companies are hoping through their own or sponsored business incubators to get access to creative minds and innovations outside their traditional business activities. They hope to create innovations by generating such open entrepreneurial islands.
While the university-driven models allow graduates to implement their own ideas and support a direct entry into entrepreneurship, a key motive of company based initiatives is probably the lack of own innovation capabilities in large and rigid organizations. Here the good example of Silicon Valley plays a role. Scouts and experts are sent there to discover how a million Dollar business can arise from a garage idea.
In fact some new high-revenue companies with successful products should have already been generated following this example. But you have to look very closely to find such a pearl. While there are some successful software and service-based start-ups there is also a long list of failed initiatives to be found. Typically the principle of “trial and error” is followed- similar to the procedures in venture capital companies: one of many will finally make it. Internal business incubators operate often operate like classic VCs – also because they entice their employees. As a result and due to lack of knowledge on product development these incubators focus rather on low-risk software investments and less on hardware initiatives.
Even in its article “Hangover in Silicon Valley” of November 17th 2015, the German Handelsblatt magazine calls companies such as Square, Twitter or Uber actually tech startups. Although the US Patent Office is becoming more and more restrictive in granting software-based method patents. At the German Patent Office this is almost impossible anyway. Overall there is a lack of scientific engineering knowledge and in particular to systematic strategic innovation among investors and within internal company driven incubator management, which is one of the main causes of the weak success of hardware initiatives.
What are now the key success factors for a real start-up environment following the Californian model? These are:
1. Vicinity to universities and research institutions. Silicon Valley has e.g. Berkley, Stanford, Yale and Lawrence Livermore in its surroundings. It is often forgotten that real technological developments for silicon chips were the basis of the first start-ups in Silicon Valley. Company founders had special technological expertise due to their university education, which formed the basis of their business ideas.
2. Connection to large-order clients with market access. For many early Silicon Valley companies this was e.g. the army or air force. Company driven business incubators should offer as well the company’s sales market – but on the other hand, this also limits the variety. Those types of clients may also be state institutions. Of course the presence of a first customer or a first sales market is the most successful funding instrument – and even better if they are sitting right around the corner.
3. Availability of seed capital beyond EUR 100,000 per start-up. This is especially important for real hardware and technology applications. The cost of simple injection molding tools can exceed this magnitude – despite all 3D printing capabilities this is still necessary for a real production. Also programs where a major part of the funding must flow back into research contracts or into infrastructure have to be reconsidered. This does not really serve the purpose of many start-ups. In addition seed investments by German venture capital providers are really rare. First public support options, such as those offered by the Innovation Vouchers in Bavaria, seem to be very helpful.
4. Vicinity to established, highly innovative companies. The exchange with various high-tech companies leads to cross-fertilization and innovations. To concentrate only on app and software solutions will lead to a dead end in innovation – as well as the focus on limited themes within internal company incubators. Through diversity in technologies and approaches start-ups usually develop well under good communications conditions. This leads often to new innovative initiatives.
5. Cultural Change. This means to support a real performance culture, i.e. rather offer small company shares for investors and significantly higher shares for active working shareholders. The mentality of “work hard – get rich” is a major motivation. As well a change towards a culture of error tolerance like “try and fail again” is required- i.e. no stigmatization of failed entrepreneurs. Interestingly, many later successful start-up entrepreneurs have once made the experience of failure. It made them ever better entrepreneurs. The fear of failure due to lack of second or third-chances should be counteracted.
6. Differentiation: Our domestic incubators with its start-ups are subjected to market laws. To remain competitive they need to differentiate. In particular the issue of hardware offers at the moment is a unique opportunity for Germany to differentiate from Silicon Valley. We have e.g. with Aachen, Darmstadt, Karlsruhe and Munich first class universities in the field of mechanical and electrical engineering – the German core competencies. The focus on apps, software or other “facebook-copies” is rather counterproductive.
Especially the political pre-conditions are crucial for the creation of a successful start-up scene. Thus, the online edition of the German magazine Wirtschaftswoche of November 18th 2015 comes to the conclusion that it is not very easy for young company founders in Germany – in particular because of active barriers of German politics. Following a study accompanied by the Technical University of Munich Germany ranks only no. 41 out of 44 countries in a survey evaluating start-up conditions. The reality of the “German Silicon Valley” seems further away than ever. From a policy perspective the following factors for a real start-up initiative in Germany should therefore be forced to follow the example of California:
7. Tax benefits for founders and shareholders – in particular for a subsequent exit. This also encourages successful founders to invest over again in new start-ups and thus could be an important element of a start-up wave.
8. Corporate tax advantage, e.g. on profits. Attractive German sites often have high business taxes. Here new regulations could consider special conditions for start-ups.
9. More flexible recruitment options and rules for student interns. Startups need motivated part-time employees, which they can offer later on a good job perspective. This is often more advantageous for young companies as permanent contracts with corresponding regulations and wage costs. Unfortunately policy only concentrates on social security contributions without any strategic sense of the situation of young entrepreneurs.
10. Adaptation of patent law. Compared to the USA in particular German inventors and small business owners have considerable disadvantages in the enforcement of their patent protection. It is virtually impossible for a financially weak patent owner to enforce intellectual property rights against a large company up to the final instance. In the US patent attorneys working on commission give reals advantage for small inventors and startups. In addition, German and European patents have a lower scope by rather narrower claims in comparison to US patents. Furthermore European applicants have disadvantages related to the direct patent costs: when filing a US patent twenty claims with three main claims are included in the fees- as opposed to just ten claims including two main claims in an EU filing. European patent owners have to pay yearly annuities opposed to only three maintenance fees for the US Patent Office.
If all above-mentioned factors would effectively be taken into account, a German Silicon Valley could be on its way – but this remains probably even longer a dream.