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). 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 Färber, 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. Meanwhile, Start, a two-year-old trade fair for entrepreneurs, is an annual event held in Essen for prospective business directors, venture capitalists, and consultants. At German universities, more than 20 chairs in entrepreneurship have already been founded, even though the first came into existence only as recently as 1998, at the European Business School in Oestrich-Winkel. More and more university graduates see companies of their own as an attractive alternative to traditional careers in business management or public administration.

Business plan competitions, initiated by McKinsey in 1996 in cooperation with the universities of Munich and Berlin, have become established as forums where entrepreneurs can exchange ideas and make contacts.¹ These contests have attracted many imitators. After special training and coaching, budding entrepreneurs submit comprehensive business plans, which are judged on their potential for arousing the interest of venture capitalists. These competitions have so far nurtured something like 1,000 new businesses, mainly in high-tech industries, and have created thousands of new jobs. Governments have also become more active; most regional ones have set up generously endowed development programs for young companies.

Will Germany experience a wave of innovation in the next few years, following the pattern of the United States? Or, as Roman Herzog feared, is the German economy still dusting itself off, having only just bounced off the bottom? The dusting-off process is the more likely scenario. Amgen, Intel, Microsoft, and most of the other companies stirring up the biotechnology, information technology, and telecommunications markets were founded some time ago. Germany’s leading high-tech companies, SAP and QIAGEN (a medical-technology company), were formed in 1972 and 1984, respectively. Many of the youthful businesses about to go public are not likely to live that long; they will be taken over or quit the market at an early age. Even with the support of good venture capitalists, only about one-third of the start-ups will succeed, and it will take at least a decade for any of them to become heavyweight international players.

Still, the rapid pace of technological change creates opportunities for late starters to leapfrog into new businesses based on superior technologies, and the Internet gives entrepreneurs a chance to innovate and to do business in locations remote from already-established centers of innovation such as Silicon Valley.

The spirit of change evident since the mid-1990s is encouraging. Nothing has done more to bolster rising interest in entrepreneurship than successful models, notably SAP. Forums like StartUp offer prospective entrepreneurs opportunities to meet successful pioneers such as Gerhard Schmid, the founder of MobilCom; Boris Anderer, the co-CEO of a rising software star, BROKAT; Stephan Schambach and his cofounders of the Internet trailblazer INTERSHOP; and CompuNet founder Jost Stollmann. Networking with these millionaires can’t hurt budding entrepreneurs, and the experience may even help them set their own ambitious goals for world markets.

Spurring innovation in big companies

Young people already know how greatly stock markets value innovation. But big German companies also need to see and act on the link between growth through innovation and higher share values. Market capitalization focuses much more strongly on growth expectations in the long term (upward of five years) than on short-term profit forecasts, especially in high-tech industries. In telecommunications, for exam-ple, long-term growth expectations explain more than 80 percent of the sector’s market capitalization, and for some Internet and biotechnology firms this proportion is close to 100 percent. The progress of Neuer Markt’s success stories (such as QIAGEN, EM.TV & Merchandising, and AIXTRON) strongly suggests that much of their attraction lies in future promise, not current cash flows.

At many established German companies, attempts to create a broadly innovative climate are still in their infancy. Such companies must try to inject the mechanisms of a start-up into the culture of an existing corporation—a process we describe as the creation of a "virtual start-up." This requires a great deal of sensitivity on management’s part. People who run established companies are finding that entrenched faith in their core businesses counts for little in fast-moving, innovative industries. Increasingly, success or failure depends on how quickly a company’s virtual start-up can transform ideas into attractive products and services and innovate to meet sophisticated customer requirements.

Corporate business plan contests are an extremely effective means of exposing latent ideas and mobilizing organizations to innovate

New ideas don’t fall from the sky; they must be generated systematically from within or obtained through alliances and acquisitions. To take either approach, a company has to develop suitable processes. A business plan competition organized within a company is a highly effective means of exposing latent ideas and mobilizing organizations to innovate. These competitions give staff members the opportunity not only to present proposals but also to get support and experienced guidance to realize them.

German companies have reaped superb results this way, and quickly. Siemens conducted a business plan competition in its semiconductor unit in 1997. The objective was primarily to open up new business segments through internal development projects and investments in external companies. Once an internal start-up reached the threshold of market launch, it would be either integrated into a product division or—if it didn’t fit into any of Siemens’s core areas—spun off. All employees who wanted to take part in the competition were allowed to do so, and more than 200 teams submitted proposals. Several dozen were developed into detailed business plans, with five businesses finally emerging as viable candidates for seed funding.

It is important for innovative companies not only to generate internal ventures but also to get firsthand experience of the way venture capital can successfully spur innovations, for such investment plays a crucial role in weaving start-ups into established corporations. Germany’s industry has awakened to the strategic importance of venture capital: BASF, DaimlerChrysler, Deutsche Telekom, SAP, Siemens, and other companies have set up corporate venture capital funds. But many of them must still develop clearer value propositions, both for themselves and for their start-ups, and gain the confidence of the top managers of young firms, who often fear getting sucked into big corporations or developing a big-company mentality. Germany still has a long way to go before it matches the United States, where more than 25 percent of venture capital invested in new companies comes from existing companies in established industries.

Regional development

Many stakeholders have realized the interdependency of regional development, specific industries, and start-ups. For example, Munich, the capital of Bavaria, has become the fourth-largest information technology center in the world, after Silicon Valley, Boston, and London. Early, targeted financing from the Bavarian state government clearly helped the city attract and nurture companies in this fast-moving business. Munich is also a hub of the aerospace industry, with DASA, Dornier Luftfahrt GmbH, MTU, and many other companies based there. This creates a vast demand for know-how from neighboring fields of technology, such as energy, environmental technology, lasers, materials, robotics, sensors, and space technologies.

The German Aerospace Center in Oberpfaffenhofen (near Munich) recently set up a department to transfer the institute’s know-how to potential start-ups, thus also revitalizing established local industries that use them as suppliers of technology. In addition, Munich boasts one of Germany’s leading concentrations of biotechnology institutions (Exhibit 3): the Gene Center at Ludwig-Maximilians University, the Max Planck Institute for Biochemistry, and the Martinsried/Grosshadern Clinic cluster together on the edge of the city.

Plans call for this cluster to be expanded into a research campus with more than 4,000 scientists. An Innovation and Founders Biotechnology Center was set up in the cluster in 1995 to give new firms swift access to the facilities of local institutes. Investors have already been attracted: the Aventis Group set up its Center for Applied Genome Research in the cluster in 1997, and Amgen, the US pioneer in the commercialization of biotechnology, also has facilities there. Indeed, of the 12,000 jobs generated in 1998 by the biotech industry in Germany, 3,000 were located in the Munich area.

Innovation can be managed, and in Germany the potential for it is already being unlocked. With the right balance of deregulation and commitment from managers, the country can become a leader in the industries of the new economy during the next decade.