The German Road to Innovation

Germany has an entrepreneurship gap. A new culture is emerging to close it. In many ways, Germany couldn't be a better launching pad for new companies or technologies. It is a rich country, offering young people an excellent practical and academic education, and its central position in the increasingly integrated European market provides easy access to suppliers and customers, thanks mainly to a highly efficient infrastructure and a modern communications network. Yet Germany has one big weakness in building high-tech industries: a decades-old entrepreneurial gap. Compared with Silicon Valley, where 73 percent of all companies that have annual sales of more than $50 million were established after 1985, the share of such companies in Munich and Stuttgart is only 17 percent and 20 percent, respectively (Exhibit 1, on the next page). Except for the software powerhouse SAP, no company founded in Germany since the early 1970s has become a global leader in a new technology. This deficit is all the more unfortunate because technology companies are the most likely to grow at above-average rates and--in contrast to most established businesses--to raise employment levels. A climate for entrepreneurship There is light on the horizon, however. An entrepreneurial culture is growing, prompted by the developing market for venture capital. This market's most important stimulus has been the Neuer Markt. Launched in March 1997 on the model of New York's NASDAQ (Exhibit 2), this offshoot of the Frankfurt Stock Exchange is devoted to high-tech stocks. Flotation of stock on the Neuer Markt gives companies the prospect of continued financial support from the capital market. Entrepreneurs and venture capitalists get an attractive option for cashing in their investments. And with a fast-growing index, enormous valuations, and public attention, the Neuer Markt offers new businesses a chance to display themselves before the mass media. This exposure makes entrepreneurial careers more popular. "The climate has been changed dramatically by the successful flotations on the Neuer Markt," says Eberhard Farber, cofounder of the Munich-based software company IXOS. The soaring share prices of companies listed on the Neuer Markt have encouraged North American and British venture capitalists, who have long avoided the German market, to seek interesting investments in Germany. However encouraging it is to see a more dynamic market forming for venture capital, Germany still faces considerable challenges in closing the entrepreneurial gap. The source of the problem is not a shortage of capital available for new enterprises, as many people assume, but rather a shortage of knowledge. Germany has a number of skilled fund managers but still lacks a broad base of experienced venture capitalists and first-generation entrepreneurs who--mostly after selling their businesses--can pass on their know-how to the next generation of high-tech enterprises. To mitigate this shortage, the private and public sectors in Germany have launched imaginative initiatives that help people with good ideas enter business and help big, established companies develop and finance innovations. From ideas to start-ups "We are seeing a new wave of business start-ups in Germany," noted Roman Herzog in one of his last speeches as the country's president, at the May 1999 award ceremony in Hamburg for the national winners of the StartUp competition organized by the German savings banks, Stern magazine, and McKinsey. The outlook is indeed getting brighter as more such learning opportunities become available to entrepreneurs. In high schools, for example, 15- to 20-year-olds are forming "minicompanies" as part of a junior project sponsored by the Institut der Deutschen Wirtschaft. Students have a year to raise capital for these companies and to produce and sell the products and services they offer, and each of them is benchmarked against real markets. …