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?

Author: Igor

Igor likes to connect the dots. As a strategic consultant in an increasingly complex world, he favours broad knowledge over specialisation. In the last five years, he helped shape strategic decisions at large corporations like Deutsche Postbank AG and Deutsche Telekom AG as well as at startups like Amen and refund.me. In his work he is focusing always on finding the appropriate solutions as well as the people who will be executing upon his advice. Beside the consulting work, Igor speaks at international conferences on variety of topics (SXSW, PICNIC, re:publica, etc.).

9 thoughts on “Week 158: About the Berlin Startup Scene”

  1. This is a great post. I believe there is only one thing to truly kickstart the German market when it comes to Series A and B rounds. More investors need to be attracted to the markets in Germany (and EU) and unfortunately the only way to really do this quickly is tax incentives. I am fully aware that incentivising the rich to get richer will fall on deaf ears for many but if you get the money into the market, you can have founders building businesses for the long-term. No matter what your goal as a founder, without the necessary capital for growth, you are dead in the water against your competition. Governments simply don’t know how to do this type of funding and hence you have to attract the best-of-the-best VC’s. All very difficult but necessary.

  2. Hello Paul,

    I respectfully disagree that there should be (additional) tax incentives for VCs.

    Learning from Mittelstand also means that it’s about making great products (likewise services), and as such tax incentives should work in that way. Why not introduce tax incentives for the buying side, such buyers of startup products (likewise signer of long-term service agreements) enjoy tax incentives? That, I hope, would make sure it’s more about building sustainable businesses instead of what we see right now.

    Just my uninformed $0.02, m.

  3. Agree with Martin.

    Tax benefits for investors destroy otherwise stable systems and create rarely sustainable effects. They attract bargain hunters but not entrepreneurs.

    I see another root cause: while traditional industries know how much capital they need and banks know how to provide it, the German startup area looks like a zero-euro-space. Everything is expected to run cheap, and is allowed rather to eat up time, than money. More money looks like more risk. And we hate risk.

    I like the proposal to try support from the buying side: I’ve been in the situation to receive an innovation award by the federal government and get 2 weeks later a letter, rejecting a proposed project since we have been in the business for 2 years only and there are less suited but more experienced competitors.

  4. Very good Post Igor,

    Good thinking. Business is business anywhere and should serve a purpose. Individual and community. It makes no sense to ignore the local reality and not try to find solutions that meet long term expectations. Having said that, anyone investing in any businesses expects some sort of return. Social for sure. But also financial. So if there is something that the US school of management has taught us, that is to how to assess risk and return, quantify and pricing. This helps a lot how to define a fair share for investing and how to decide what to give away as equity in return of money and advice. And although is not the only successful model existing, it has been arguably one of the best in creating conditions to new venture creation.

    All the best and success in your venture :-)


  5. Retrospectively looking, the US model showed how to create extremely successful companies at the expense of community, the middle class and an equal society. Of course business need to make profit. That is their first and foremost purpose. I don’t have anything against that after all I’m running one for three years now. What I don’t believe is the hunger for never ending growth and complete ignorance as to how something like this can be accomplished. That too is something that the US school of management has thought the world quite well.

  6. Igor, can you name some concrete examples – from both sides of the Atlantic – showing the company failures you described?. … and what strategies and tactics are you suggesting specifically that go beyond just “travelling to the south of Germany and observing how they did it.” Despite, the production of physical goods and digital service is not comparable at all.

    If you haven’t already been there, I suggest travelling to the Silicon Valley and understand not only the cultural differences first hand, but also how many small and unknown Startups have gained a global impact already.

  7. Marc, you mean naming startups that have failed? As in you never heard of a company that started out and did not succeed? Or am I getting the question wrong?

    And to be perfectly fair, I think I indicated quite a few more things as to what do beyond what is written in the first paragraph of this post. “Traveling to south Germany” is a metaphor for an overall change in how to approach business, how to make it sustainable and less dependent on venture capital money. I prefer seeing more companies who are thinking both about the product as well as whether or not there is a way to market said product. To be more concrete: I find even something like Tumblr to be a failure as a company in itself. There is no doubt that it was immensely popular and people liked to use the product, but as a business it didn’t succeed to make the same product and make it profitable. That’s why they chose an exit. This exit, as profitable it is for the shareholders, is not a success story for me.

    I full heartily agree that the companies that are representing the Mittelstand are mostly in a very different stage, environment and that they are far way from building ephemeral products as most of the startups do in Berlin these days. There is no question about that. My suggestion was not: go there, copy what they do and build the same thing in Berlin, but I find it hard to believe that there is nothing to learn from companies who employe millions of people, who have been around for ages and who both make a very comfortable life for their founders as well as create a positive footprint in their communities.

    And yeah, I was to the Valley, thanks for that advice. ;)

  8. Igor, let’s take a look at the gaming industry. An industry I am quite familiar with and a key segment of that new market (tech) economy; extremely short user engagement cycles. Complicated, diverse monetization tactics ranging from FREE to Pay-As-U-Go. Huge, highly fragmented one/two/three sided markets, etc. Equals; crazy short development cycles, massive tech stacks with multiple “platform players” involved, requires expert knowledge in all executable directions, high product feature turn-arounds, 24/7 customer life services, and so on and so on…

    How do you see a company evolve – in a sustainable manner – on such wobbling ground? It is the famous infamous “Wegwerfgesellschaft” that creates those circumstances, not investors.

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