The VC Void in Germany
As I returned from my one-month trip supported by the American Council on Germany to study innovation in the German Mittelstand (SMEs), I was greeted with a LinkedIn post from one of my favorite Stanford Business Professors, Ilya Strebulaev, lamenting “Germany’s VC void.” Due to its lack of available venture capital, Germany is terrible at producing unicorns, in contrast to the US, where seven out of the current top ten companies in market capitalization were venture backed. But is a profusion of small and medium-sized companies a terrible sign for Germany’s economy… or maybe just an illustration of different business philosophies?
After more than three dozen meetings with Mittelstand leaders across Germany, I came away more optimistic than I thought I would be about their ability to adapt to digital transformation. Granted, my study was subject to selection bias – not everyone I reached out to was interested in meeting me. But all the company leaders I did meet with seemed well prepared for the future. The “founder energy” is still alive in these family-owned companies, even with second, third, or even fourth-generation family members taking over. Each previous generation successfully guided the family business through the disruptions at hand, so today’s generation feels similar pressure to innovate with new product categories and business model experiments, staying directly involved in the process.
I discovered a significant advantage the SMEs have over the big corporate behemoths: their top-down decision-making process. The biggest innovation challenge for big US corporates is turning a good idea into a great product that eventually creates a meaningful impact on the bottom line. Even with CEO sponsorship, the good ideas tend to get smothered by a middle management layer that is focused on protecting the margins of its existing product lines – after all, the next CEO (the one that cares more about the numbers) may be just around the corner…
By contrast, the family leadership of a typical Mittelstand company won’t be changing any time soon – so if they decide that a new idea should become a product, the organization executes.
I also uncovered a surprising challenge during my study. Here in the US, innovation and seeking ideas from external sources are synonymous. But it’s not a natural activity for the German Mittelstand, where the philosophy of “Selber Machen” (we do it on our own) prevails. Leaders need to get outside their four walls. More engagement with innovation hubs including Silicon Valley could create the spark for new ideas – and partnerships.
Germany definitely has some economic challenges ahead, but as it navigates the digital transformation, the Cambrian-like diversity found in its Mittelstand sector may well provide the resilience needed to survive the coming wave of disruptions. If you want to read my full final report, you can download it here.
And speaking of “Get Outside the Four Walls”, this is Principle #2 of 9 in Prof. Strebulaev’s just released, already best-selling book, “The Venture Mindset”, describing what Silicon Valley’s Venture Capitalists do to turn good ideas into extraordinary value. The world may not need more VCs, but we could all learn more from their mindset – this book is my mandatory addition to your reading list!
more on the blog archive
