Week 158: About the Berlin Startup Scene

Instead of their pilgrimages to San Francisco, startup founders should travel to South Germany to learn from the Mittelstand how to build sustainable companies that benefit their communities as much as their founders.

I have became a technology industry skeptic.

That’s not a sentence I’m uttering lightly. After all, just a few years ago, I would have described myself as a technology determinist, a true believer in the power of technology’s ability to transform the world for the better.

Tech is the new finance industry. I’ve said so before and, unfortunately, I’ll have to stand by this statement. When Entrepreneurship centers are flourishing and universities like the MIT can’t cope with demand of new applicants, when professors teaching at those departments are announcing that young people don’t want to be investment bankers and instead are seeking their luck as tech-startup founders, I feel the urge of pointing to history and reminding us how the same happened before in finance. With its final transformation to a self-observed, self-deterministic sphere in the 80s, the finance industry became a huge magnet for young people who believed in the promise of becoming something bigger than themselves and not minding to earn more money than they could possibly need in their life-time. The demand was so huge, universities and colleges had to invent new departments just to cope with the demand of people wanting to acquire the right qualification to become an investment banker.

The same happens in the technology industry, especially in Silicon Valley. There is no doubt in my mind that it all started with good intentions, but when looking at things today, I doubt that we are on the right track.

Just take a close look at incubators in Silicon Valley. Despite talk of changing the world, they are fundamentally not significantly different from military boot camps. Despite the promise to cherish individuality and creativity, those institutions are rewarding conformity and punishing differentiation from the proposed model of the particular organization. Said models of executing upon predefined processes, usually created by rich, most likely white, males. Again, despite the talk, those processes aren’t there to help founders. Instead they are built around financial risk assessment models. Those rich, white men do want their money back. And then some. All of this is by no means an accident. It’s an elaborately designed system, which is in place to ensure and increase inequality. To put that into numbers: “between 1992 and 2007, the income of the 400 wealthiest people in the United States rose by 392 percent”.

All of this is surprisingly Ford’esque and I’m not one of the people who are saying that as a compliment.

I find this all especially appalling when I hear the talk about and by Berlin’s tech scene. In recent years, Berlin was pushed into becoming a potential place of investments. So far, with only mild success. A flourishing new industry is by itself not a bad idea for a city with above average unemployment rate. That is, when this industry has the potential to contribute something meaningful to solving the problems of the environment that it’s becoming part of.

While there are significant factors why Berlin is a great place for new things to emerge – still fairly cheap, high quality of living – it is by far not because so many potential employees for a technology startup are among Berlin’s unemployed. This is not exactly news. Most founders and CEOs are openly talking / complaining about how hard it is to hire good people, how they have to lure people to Berlin. Apparently Eastern European developers are in high demand.

Said startup hype lead to a furious emergence of new initiatives and new incubators. Seemingly any company with some change to spare and the desire to become part of the new gold rush. The saddest part here is that all those companies don’t even try to create a romantic, technology deterministic narrative like their Californian counter parts. Their language and footprint is corporate, they are here for the profits.

Which begs the question: what would be the virtue of welcoming this industry into the city with open arms? Klaus Wowereit, Berlin’s mayor in his third term, thinks that he has an answer. Recently, McKinsey published a pro-bono study for the city of Berlin. “Berlin gründet – Fünf Initiativen für die Start-up-Metropole Europas” (Berlin founding – Five initiatives for the european start-up metropole). Therein Wowereit postulates in a forword that the tech industry can have a significant contribution as a tax payer and employer. This comes from the man who sold out this cities real estate to the highest bidder without any regard for cultural and societal impact. With no significant contribution to fight unemployment, he leaves the city with a future promise for tax income. An unlikely scenario.

Unfortunately, there is no way out of this. Pressured by overwhelming attention from around the world, the city governments is cornered into shaping legislation or at least appearing authentically as if it can contribute something of significance to a development that mostly emerged because there was little to no regulation at all.

With pressure rising from investors waiting to be wooed, the government does what most governments would do and that is looking at so called best practices. Despite the fact that there is an overwhelming body of theory to the fact that is impossible to copy same models and various, failed attempts to copy Silicon Valley else where. Before anybody points toward Tel Aviv, let me say this: There is a strong correlation between a long-standing, overwhelming presence of huge facilities by US tech giants and the success of Tel Aviv’s tech scene. There is also a geo-political factor that can’t be replicated and it doesn’t hurt having a man of Yossi Vardi’s stature in your corner either.

Just last week I heard Joachim Bühler from BITKOM – an tech industry lobby group – say that he discusses many initiatives with city officials and all of them are trying to emulate Silicon Valley. One of the various observation documented by the McKinsey study states that there is lack in funding for technology companies seeking A & B investments rounds. There is plenty of seed money to go around and it hasn’t been easier to get some cash and hack away for six month, but when it comes to financing your dream to become bigger than Facebook things eventually get tough. The only reasonable hope that bureaucrats in this city can have to change something about this is fact is by luring financially strong and successful investors into the city. That, in turn, means luring in more US-based funds to the city.

There are three most likely outcomes for startups these days. Die unsuccessfully, get acquired by an US based technology company, or IPO. Most tech startups end up in the first category. This is by design and has been a long standing practice in the technology sector. Only the most successful of all companies end up in the last category and there is no reason to believe that the Berlin tech scene will produce a likely contender for a big tech IPO. That leaves the second category, acquisition by an US company. It’s that category that will ensure that neither qualified people, nor tax income will be left in the city as soon as something of significance will emerge here. This will not stop Berlin’s government walking down this path, because of the lack of courage to come up with a unique, feasible and realistic approach for a city in need and because those US investors will make everybody work according to those risk assessment processes that they teach in their incubators.

This is a dangerous path and one that is not only being applied in Berlin. All over a financially unstable Europe with high youth unemployment numbers, technology and startup culture is en vogue in city, state and federal governments. The same mistake of attempting to copy our spying American friends is happening everywhere.

We stand at the crossroads. We have a generation of founders that are unwilling and unmotivated to pursue anything else than world fame and the attempt to become the next Mark Zuckerberg. Those desires are fueled by investors who don’t care about fame, but about the returns on investment that is associated with finding the company that can become the next Facebook. And as addition to the team of people who will not help us get out of the financial crisis, we are seeing politicians completely incapable of coping with a rapidly changing world that are eager to build up those “ecosystems” that seem promising enough to help them campaign in the next election.

The technology utopia transformed itself from a hippy’esque LSD dream where technology will solve all of humanities problem to a well oiled machine in which the brightest people in the world are busy building new features that will make advertisers spend more money on the information that those apps gather about us and in which only a small fraction of the extremely hard working people can say for themselves that they are in fact Mark Zuckerberg.

I don’t want to leave you with the impression that I am a staunch opponent of anything tech, on the contrary. It is now that we have to debate how we want to see the technology industry evolve beyond its Californian Ideology model. I am all in favor of Berlin becoming the new startup capital. The question is: what kind of startups do we want? What kind of people do we want to start them? This is far more about goals and demeanor than about market opportunity and finance. We in Europe have the privilege to learn from companies that are building products and solving problems for generations now. Germany’s Mittelstand is still the backbone of its economy. European founders should stop traveling to San Francisco and instead focus on their national and European markets, the problems that those markets experience and how they can be part of the solutions to issues like massive youth unemployment. But foremost, they should concentrate on building a company that can stand on its own feet, that is not setup to race from one venture round to the other with the sole goal to exit as quickly as possible and be part of a machinery that never seems to be interested in being sustainable in itself.

Let me finish with a question: what do you think who employs more people? A company like Facebook with a world-renown brand that is worth about $100 Billion on the stock market or a hundred companies that most people have never heard of which are each worth a billion dollars each?

Week 109: Our client relationships

Some feedback that confirms our approach to client relationships, and what we like about working with the Mittelstand, or medium-sized businesses.

Good times here at Third Wave. Besides the client work, we’re also progressing on a lot of internal stuff. An overhaul of our Company page on our website is long overdue and will go live in the coming days.

Deeper client relationships

To give future clients a better idea about what it’s like to work with us, we’ve asked some of our clients for feedback on working with us. Here’s what two of them said:

Working with Third Wave has created value in a variety of ways. First of all, their analytical and clean approach to strategy combined with their natural and in-depth experience in the field of social media is rare. Second, they are two very competent and complementary characters that will always come up with surprising insights beyond the bread & butter results and third, they are just great, smart and sympathetic guys to spend time with. Thanks for the good job!

–Yousef Hammoudah, Viacom

Extremely competent, super straightforward, refreshingly pragmatic. Every project should be that much fun.

–Patricia Strehlke, 3A Composites

What I’m really proud of here is that our clients seem to enjoy working with us. A good client relationship has been a special priority for us in the last year. From our experience, the best results develop in a work atmosphere that is powered by mutual respect and collaborative partnership. This is why we put so much effort into getting to know our clients better. This is what makes the difference between a one-off-project vendor and a long-term partner. Deep relationships with our clients is a core value for Third Wave. And it’s good to see that our clients confirm this.

Working for the Mittelstand

I’m in the south of Germany this week for a workshop with a new client. Looks like we’re getting more and more business in this region, which is not really surprising because this is where a lot of the famous Mittelstand is, the pillar of the German economy. We’ve been really enjoying working with these medium-sized, mostly privately-/family-owned businesses. They won’t accept any hollow marketing bla but really appreciate a solid strategy, based on reasonable business goals. We’re looking forward to working with a lot more companies from this field.

I will be in Hamburg on Friday. If you fancy a coffee, ping me.