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Deeptech innovation may be the path for future German success

Mark Chillingworth Profile picture for user Mark Chillingworth October 27, 2023
Summary:
Germany has an opportunity to be bold and invest in deeptech start-ups to build a new economy that will benefit its mega-firms and citizens

An image of a building with a German flag on it against a sunset backdrop
(Image by PayPal.me/FelixMittermeier from Pixabay)

The polls tell a story of dissatisfaction, but an early-stage start-up competition speaks of confidence. So how does Germany feel about its future, and in particular, the role technology will play in restoring or retaining its position as an economic leader in Europe and the world?  

If you measure the success of a nation by Gross Domestic Product (GDP), then Germany is possibly in decline - GDP is predicted to decrease this year, and inflation remains high. Once famous for its reliable trains, Deutsche Bahn trains have a punctuality problem that has upset the time-conscious Swiss next door. The author can attest to this being the fact (2 missed connections were involved in the writing of this article!). 

As with the United Kingdom, Poland, Hungary and Italy, this perception of decline has led to a rise in populist right-wing politics that claims the answers are simple. Alternative für Deutschland (AfD) won 15% of votes in the state of Bavaria and 18% in Hesse. Like Italy and the UK, AfD is using anti-immigration rhetoric to explain the complexity of economic change, macro-economic issues and the climate emergency. 

Robert Habeck, Vice Chancellor of Germany and Federal Minister for Economic Affairs and Climate Action in the national government, didn't avoid the issues in an address to Stage Two, an early stage start-up competition. He said: 

Overlapping crises have hit us in addition to the challenges of digitization. There is no time to rest. 

Yet Germany has record employment levels and, unlike some countries in Europe, low levels of public debt. It remains a leader in automotive, engineering, chemicals, and of course, enterprise technology - and is home to 3.5 million small and medium-sized enterprises. 

Go deep

The titans of the German economy face some big challenges. Manufacturing cars, cranes, agricultural machinery and chemicals is energy-intensive, and Germany has been a major user of natural gas from Russia. Whilst challenges to the Chinese and European economy post-COVID have all added pressure to its industrial base. 

However, having a leadership position in heavy industry is seen as a benefit to Germany as it plans a new economy. Dubbed Deeptech, this area is where start-ups use science, engineering and technology to tackle the major challenges facing Germany and the world. Stage Two had a healthy number of deeptech early-stage start-ups present. These entrepreneurs had ideas to create new energy sources, digitize and improve healthcare, make plastic from seaweed, and use apps to solve nutrition issues. 

According to entrepreneurship partner at McKinsey, Tobias Henz, Europe and the USA are on par when it comes to creating and funding deeptech start-ups. He adds: 

Start-ups need to focus on big actual problems, and that is a good shift for Europe. It can be done in a European way that fits our culture and is not a copy of the USA, Israel or China.

He says that a year ago, there was a lot of talk about a crisis in start-up funding levels, but funds for deeptech have held fast. Deeptech, he believes, is where Germany and Europe can lead. 

Anna Christmann, also a member of the Federal Ministry for Economic Affairs and Climate Action, agrees: 

We must not focus on the battles of the past; greentech, business-to-business automation and quantum computing are areas where we lead. Let's focus on them.

If Germany is to focus on deeptech, then it needs to get better at working with start-ups. 

Malte Brettel and Dr Stephan Stubner, founders of Stage Two, entrepreneurs and academics say early-stage start-ups are in a good position in Germany. They benefit, as their event demonstrates, from good support from German universities. But scaling up technology companies in Germany is hard. Stuber says: 

The first step in a university is rather easy; it becomes tricky when you need a significant amount of funds, but building markets is harder than building technology. That may be why we don't have so many unicorns in Germany.

Brettel adds: 

The international funds are far larger than in Europe, valuations in the USA are a factor of three higher - so it is easier to rise up as a business.

Big business in Germany agrees. Sebastian Dreben R&D Strategy Manager at Siemens, says: 

The transfer of knowledge into business from start-ups is behind the USA.

His colleague at Siemens, Julian Boha, adds: 

It is essential to work with start-ups that have an adjacent portfolio. We are a big firm but need a speedboat at times, and start-ups are one of the ways to get that speedboat. For start-ups, working with a corporate means you can start small and then you grow with them and then attract VC investment.

Henz says collaborations between start-ups and major corporations are on the rise in Germany. While investors believe the current state of the national and world economy is not helping. Birthe Ross of TGFS, a tech fund for the Saxony region of Germany, says:

The current environment means firms are very hesitant, so it is hard for start-ups to get the traction.

Axel Menneking, who heads up start-up incubation and venturing for Deutsche Telekom, is harder-hitting: 

Corporations are not doing a good enough job of nurturing these transformative innovators. We have the financial power and the patience that a VC does not have. So there is a lot of room for improvement in the mindset and to measure success by means other than financial. If you look at the start-up monitor for Germany, the collaboration levels have decreased.

The hesitancy to invest leaches into the relationship start-ups have when they do partner with corporates, Menneking says: 

We call it Proof of Concept (POC) purgatory, and it is one of the dangers of working with corporates.

Boha at Siemens agrees, with both business technology leaders stating that time is precious to start-ups. 

Be bold

Whether academic, investor or business leader, one word kept cropping up - bold. Germany needs to be bolder. The COO of Marvel Fusion, Brettel, politicians and VCs all called for more bravery. Elisabeth Spitz Shanchez of Xdeck, an accelerator and VC fund from Cologne, says: 

Culturally, people in Germany are more risk averse, but we need people that are bold and try things.

Christmann of the government added: 

Germany has a tradition of incrementalism, but we need to keep up with the disruptors, so we are looking for both.

Tech titans

Germany is, of course, home to Europe's largest software company, SAP, as well as TeamViewer and Suse. As we have reported, SAP has been highly acquisitive, especially in its home market. So, is this a barrier to German start-ups? Entrepreneurship academic Brettel says: 

SAP is good for the ecosystem as it shows a pathway to selling your company. So it is good and bad, as we could do with more SAPs.

Henz of McKinsey agrees: 

Founders need to know there has to be a path to scaling and selling.

Both believe that the challenge of taking technology, engineering or medical innovations onto a global stage is often too costly and difficult. Existing large businesses have the channels in place and need innovation. 

My take 

Germany is probably its own hardest critic. Its greatest risk is that its giants become over-protectionist of their existing business models. Stage Two demonstrated that there is a wealth of innovation in Germany and across Europe. Entrepreneurs have a desire to collaborate with big businesses in Germany, which could boost the economy and rekindle hope in voters and citizens.

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