10 success factors for a German Silicon Valley

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.

US patents – more important than ever

In 2012 2.35 million patent applications were filed worldwide. This corresponds to a possible application rate of 268 per hour and an increase to the previous year by 9.2 %. Since the early 1980s, the annual applications have thus almost quadrupled. For the first time more than 1 million patents were granted in 2012. A total of 8.66 million patents worldwide are in force. This increases the risk for enterprises to be excluded from the other markets by innovation – especially by the noticeable trend of oligopolisation of high-tech markets (automotive, smartphones). In 2011 for the first time the Chinese ZTE Corporation was the top-applicant with 2,826 applications. An increase over the previous year of approximately 1,000 applications. Patents serve more and more as a source of revenue through licensing and litigation. The worldwide licensing revenue by intellectual property rights was in 2010 approximately 200 billion US$. The expenditure on patent litigation, patent licensing and purchasing since 2010 were e.g. in the smartphone industry 20 billion US$. In 2011 Apple and Google for the first time spent more money on patent litigation, licensing, and patent purchases, as for their R&D. The application trend to patent families expands, where the U.S. application plays more and more an important role. In 2011 504,600 applications were registered with the USPTO. Even by the recent revelations of the secret service activities, companies are more than ever confronted with the task to secure their intellectual property in an early stage. This makes the application of intellectual property rights in the USA a mandatory step. In our experience, the most sensible strategy for an affordable and powerful protection of intellectual property it the patent application with the U.S. Patent Office and, shortly before the expiration of the priority period, followed only by appropriate applications in specifically selected European countries. We recommend EPO and PCT applications only in special cases. In enforcing a property rights, a U.S. patent has the advantage that only one patent court has jurisdiction to potentially 314 million users. Furthermore, U.S. patents typically have a much larger potential scope due to the wider claims compared to Europe and Germany. After writing the U.S. application it is only necessary to translate the claims in the corresponding language if a further IP protection for Europe is needed. The advantage of such a qualified patent can thus also be used for the EU countries. In contrast, first applied patents e.g. in Germany usually have to be rewritten to achieve a valuable protection in the U.S. In addition, a possible U.S. application as continuation in part offers later opportunities to add more specific content to the invention. The fee for an U.S. patent application includes twenty claims with three main claims – as opposed to just ten claims, including two main claims in an EU application. After the grant of an the U.S. Patent maintenance fees have to be paid only three times, unlike the annuities at the European Patent Office. Good arguments for an effective and economical application strategy beginning in the United States.

Ways to Systematic Innovation – Right Thinking

Problem solving is one of the daily tasks of every human being. Enterprises solve the problems of their customers and their own in the areas of development, production or sales. Successful entrepreneurs are in general good problem solvers. The best use methodical problem solving proceedings, though often unconsciously controlled. “We have no problems, but challenges.” An interesting statement that some managers in different companies repeat over and over again – sometimes with a smile or with the deepest conviction, often returned recently from a management course. The expression problem sounds too negative. It is a unwanted condition in the here and now. Nobody wants it. The expression challenge sounds much better. It implies that with effort and work future tasks can be completed hopefully sucessful. The word problem is even sometimes officially forbidden in order not to endanger the good mood. But if you talk to managers a little bit longer, bit by bit the change the choice of words. Suddenly this evil word problem appears more often…

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When does the third wave arrive?

Why do many companies act not as systematic and methodical in the field of innovation as they do with their production or in quality management? Innovation is perceived as imponderable and followed according to the principles of chance or “trial and error”. The belief in trainable creativity and so-called creativity techniques becomes more often as a pitfall. Many known approaches are well marketed but only forms of cooperation and lead in result to more rhetorical than real innovation. They lack the thinking and methodological background. Real innovation, however, is predictable, measurable, repeatable, reliable and above all methodical – similar to the principles of the first two waves of successful management lean production and total quality management. The third wave is systematic innovation with real measurement parameters and applicable methods. As with the Six Sigma approach, innovation must involve every employee. The corresponding methods should be trained and applied with discipline. The theory of inventive problem solving TRIZ is an essential tool for this. Systematic innovation enables excellence initiatives for corporation, just as for production and quality. Companies that have implemented a phase model based innovation process often miss the hoped-for innovation boost due to the lack of methods. Through consistent implementation of the third wave companies can generate an innovation success story. The basis for this is formed by culture, process and methodology. Creativity is above all an attitude that is supported by an open corporate culture. With systematic innovation and its principles of Total Technology Development companies will focus on specific actions and can thus be a sustainable innovation machine – effective, efficient and pragmatic.

Differentiate – but how?

It not sufficient nowadays for a successful product in a highly competitive market to differentiate only by so-called new “features”. To distinguish their product from the multitude of given product alternatives companies need to develop products that fundamentally differentiate from the competition. This finding describes Harvard professor Youngme Moon in her latest book “Different: Escaping the competitive herd” (Crown Business, New York, 2010). Most companies only imitate their competitors by variations or slightly improved performance. Thus in many markets more and more similar products appear with little distinguishing characteristics. This leads to a strongly declining brand loyalty of consumers. Only companies that rely first on innovative technologies and at the same time consider differentiation not only as a “product feature”, but see this as an attitude and mindset for their entire company, will constantly gain market share in the future. Examples of this show Apple, Red Bull, IKEA or Harley Davidson. Accordingly, the development of perceptible distinctive products and services does not begin in the design or marketing department, but is rather the result of a change process of the entire company.

Are inventors as well entrepreneurs?

Newly established, small businesses, e.g. founded as spin-offs from universities or academic institutions are important engines of progress. Here committed inventors often enter with their ideas promising niches. It not unusual that large corporations take over later such successful start-ups and use them for their own innovation goals. According to the Federal Association of German Capital Corporations currently significantly fewer applications for start-ups are registered. Partly this is due to a cautious behavior in times of financial crisis and due to a strong fear of failure, especially after the experience of the dot-com bubble burst. Many potential new entrepreneurs find it difficult to obtain risk capital for their ideas. But this is not just because of the reticence of investors. The practice shows that Germany still is a country of inventors with good ideas, but these have often simply wrong ideas about a possible entrepreneurial implementation. Lack of business knowledge, coupled with an incorrect assessment of the value of their own invention, and often a reluctance to search for partnerships are characteristic features. So many good ideas disappear into drawers or pouty inventors.

Making the right decisions

Most people rely only on their intuition when making decisions. According to a study by Harvard University professor M.H. Bazerman this fact has not changed in the last 50 years despite increasing knowledge of management methods. This explains the very expensive and serious mistakes of many companies not least to be clearly seen in the current financial crisis. Although in our knowledge society we find today comprehensive possibilities to share information and facts for making secure logical and unbiased decisions. But managers act more intuitively neglecting facts, due to information overload, increasing complexity and time pressure. Successful decision making is based on logical, and not emotional thinking. It is rather slow, but deliberate, and relies on more detailed information. Furthermore it is helpful to follow consistently agreed decision criteria, to take the perspective of an outsider, to take the opposite role of a first desired decision, to be skeptical, to identify biases, collecting several expert opinions and ensuring completeness of all facts.

Mega-Trends

Mega-Trends are long-term cross-transformational processes influencing all areas of life. They determine the future markets worldwide and cause various distinct changes in all social systems. Already noticeable trends are demographic change, increasing urbanization, a growing health awareness, increasing mobility and flexibility in work and private life, increasing environmental awareness, growing security threats, the shifting of world economy towards Asia and increasing energy shortages. Companies must be prepared for the associated implications, and in particular the associated technological change. The future challenges are not only accompanied by the application of emerging new technologies, but also in their overlapping and melting together. The traditional technology boundaries will disappear and require interdisciplinary cooperation. So important technologies of the future will be nano-, bio-and information technology and the cognitive sciences. Their interaction will lead to intelligent materials. Novel design options at the nano-scale will not only result into product design, but also into designing of human beings. We have to prepare ourselves for a new era of human-machine interactions. Thus robotics will find its way in the private and leisure life.

Radical Product Design

Design-driven innovations are often associated with high risks, but allow in case of success a real competitive edge. Design and appearance of a product create emotions and are therefore harder to measure than technical or cost advantages. Radical designers do not follow existing trends, but create ones, such as Apple once with colored translucent computer cases. The acceptance of such new product designs by customers is difficult to be foreseen. “The market does not always know what he wants,” said Apple CEO Steve Jobs once. Real innovations are therefore proposed to customers rather than that they are reactions to existing requirements. According to a study by Harvard Business School and the School of Politécnica di Design in Milan companies follow typically three possible approaches to design innovation: “launch and observe”, “observe and launch” or “wait and react”. Successful innovators are found more in the category of “observe and launch“. Design innovators following this principle understand their customers and develop their ideas accordingly better than only reacting companies do. Pure reacting companies have a much larger number of variants in their product portfolio, as those who test products on the market first. Design innovators show a more balanced portfolio of products with associated logistical advantages