Why Germany is Losing the Innovation Battle

Why is Germany – the land of ideas – losing the innovation battle against Silicon Valley?

Author Christoph Keese went on a journey to the Silicon Valley to find out for himself and published his findings in the amazing book “Silicon Valley: Was aus dem maechtigsten Tal der Welt auf uns zukommt“. Unfortunately there is no English translation available so far, but if you do understand German, I highly recommend reading this book.

I have tried to summarize his findings, and added my own interpretation to it as well. Below, you can see a power point slide I have created. You probably won’t be able to make sense of it on your own, so my explanation will follow.

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There are three main reasons why Silicon Valley’s start-ups are immensely innovative.

1. Venture capital

Christoph Keese states in his book that in Silicon Valley alone, there were 32 billion dollar venture capital available from 2011-2013, while in Germany there were only 2 billion available over the same period of time. Despite the fact that there are highly innovative German companies, they often remain small to medium size businesses, because they do not have the financial means to grow beyond that as there is no venture capital available. He gives the example of MyTaxi, a company which has been created half a year earlier than Uber, but operates under the same principle. It simply wasn’t able to scale up its business on a global basis, because it couldn’t raise enough money through venture capital, despite the fact that its technology worked well and customers liked the product. Uber became the market leader in the shared economy taxi driving business.

2. Minimal Viable Products

In Silicon Valley,the process from idea to first product often takes only about six weeks. For most German start-ups, this is unthinkable. Germans often want their product to be perfect upon release. They are afraid that if a product of low quality is being released, customers and critics will react harshly and the reputation of the company will be permanently damaged. The reality is, that it in most circumstances almost nobody will hear about the product in the beginning.

3.Customer feedback

Highly innovative companies create processes which allow them to focus purely on the core function of the product, to reiterate their ideas and pivot depending on the feedback they receive from customers. German companies, with their focus on perfection, will often spend a much longer time in product development, and create a product with many different functions, only to realize that customers ignore these functions. This need for perfection often comes from the fact that many German business owners are afraid that their ideas will be stolen. Start-ups in the Silicon Valley, on the other hand, are more afraid that they get excluded from the information flow of ideas, because their belief is that ideas improve every time they are shared.

So why are there these massive differences in how innovation is approached in Germany, and how it is approached in Silicon Valley?

With the picture below I want to give you a feeling of what the culture in the Silicon Valley looks like. There is a strong emphasis on the free exchange of ideas and a disregard for hierarchy. A student with a good idea could relatively easily get access to people with capital and know-how. People love to meet new people in cafes or parties, and to share their ideas with each other. In Germany, both of these things aren’t very likely to happen. A student isn’t very likely to get access to the boss of Siemens, for instance. Nor would people like to share their ideas with each other. After all, there is the chance that the idea gets stolen.

siliconvalleyculture

From a cultural perspective, one thing becomes a massive problem for Germany: it’s risk aversion.  According to Hofstede, Germany is a culture with a high uncertainty avoidance. What this means is that in the German culture, everything should be structured and planned through carefully. Risk is to be avoided. Of course this has its advantages, too. The housing bubble in the USA was to a large extent due to their speculative behaviour, which is far less common in Germany. However, this focus on avoiding risk means that Germans are less likely to provide venture capital, and that is where its focus on trade secrets comes from.

Christoph Keene argues that there is a strong need in Germany to develop a risk culture, and that there need to be massive structural reforms in Germany in regards to venture capital. He wonders why, despite the fact that the German government is aware of these problems, no concrete steps are being taken in that regard. Because he sees no clear development, he also asks a provocative question: do German politicians really want to do whats necessary to compete in the innovation battle?

As a cultural expert, the fact that German politics do not move into the right direction, comes to no real surprise. Implementing structural reforms to increase the availability of venture capital would mean to encourage a more risk-taking behaviour. And that simply goes against the values of the people. Even though they might cognitively understand that these changes are necessary, it is unlikely that they will implement them, simply because it feels wrong to them.

What are the consequences of all this?

Naturally what happens is that those German entrepreneurs who come into a situation where they lack the capital to scale up their businesses and have no means to acquire that capital, end up migrating to a country that has more favorable conditions for entrepreneurs. This greatly reduces Germany’s ability to innovate, and  makes it  less competitive on the global market.

Culture should never be underestimated as a factor of how an economy operates. Every country has its own competitive advantages, and culture is one factor that determines what these competitive advantages are. Japan and Germany – both countries with high levels of uncertainty avoidance – strived in the industrial economy. The ability to continuously improve the production process and thus to work towards product perfection was the key to this. Now, in an age defined by the ability to build disruptive innovations, this ability of continuous improvement is not enough. Germany and Japan alike need to find ways to work around their nature of avoiding risk.

Of course, one’s nature is difficult to change. Migrants can bring a more flexible mindset with them. But they can’t do this if they are expected to completely adapt to the local way of doing things. The digital age requires us to be flexible and open minded for influences from outside.

Its time to open up.

 

Tim

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