What happened?
Germany has a problem as a location: the International Monetary Fund (IMF) the Economic growth forecast in Germany again for the coming year: from 1.3 to just 0.8 percent. The IMF even expects stagnation for the current year. The German economy will probably not grow in 2024 for the second year in a row – this was last the case in 2002 and 2003.
The problem has of course long been recognized, and industry and politics are on the alert. Tough renovation measures are being initiated in many places. Volkswagen In view of the dwindling order situation, for example, it is even pursuing tough austerity measures Factory closures in Germany are no longer excluded. And the federal government is trying to help.
As a motor for the stumbling economy, it is hoping, among other things, for start-ups and their innovative strength – at the Startup Germany Summit in September, an alliance of business, politics and associations signed a declaration of intent to invest a total of 12 billion euros in venture capital by 2030. Federal Economics Minister Robert Habeck (55; Greens) also started the debate again this week about a “Germany Fund” initiated. In this way, billions could be made available to the economy for investments, for example in digitalization.
What is it really about?
Alone: Additional funding for venture capitalists is unlikely to be the solution to this problem. The best venture funds and start-ups will always be able to raise capital this way. And while I think it’s good that the broader population can share in the returns of this asset class, additional billions won’t turn things around. What would actually strengthen the start-up ecosystem, on the other hand, is ensuring a financially strong customer base who buys their products.
The conditions for this are actually good. There are established specialists in all sorts of industries in Germany who need to modernize and increase their efficiency using new technologies. This need has already given rise to some industrial start-ups. But companies are not yet buying on a large scale from up-and-coming tech companies.
Europe has a risk-averse attitude towards technology in general. While US companies see tech as an investment opportunity and a competitive advantage, European companies are much more likely to hold back
. You can currently see this using the example of artificial intelligence (AI): While 92 percent of the “Fortune 500” companies supposedly already use ChatGPT, according to Destatis, only 35 percent of large companies in Germany use AI.
Although openness has improved somewhat in recent years, there is still a lot to do. Because senior executives often lack technical knowledge or experience, European companies often trap startups in a “pilot purgatory.” Or worse: They don’t even consider buying from the newcomers until they have established themselves with US companies. True to the motto: “Nobody gets fired if they choose IBM or SAP”. This is nothing less than an economic own goal, as start-ups founded in Europe migrate to the USA in search of growth and expansion opportunities.
And now?
To drive economic growth, Germany must increase its productivity – and the use of tech in Germany’s largest industrial companies and corporations is a great opportunity to do exactly that. That would be beneficial for both sides:
Struggling companies could benefit from greater efficiency and new working methods while improving their profit margins. Technologies such as AI systems can help automate processes and save enormous costs. This could also help address the skills shortage in the country.
European start-ups would be able to demonstrate their product-market fit to large companies and grow much faster. This would allow them to compete with US startups that are getting much more opportunity to prove themselves on the other side of the Atlantic.
Focusing on the acceptance of new technologies and product purchases from domestic start-ups could be a far more effective way to boost start-up activity in Germany than making more venture capital available. Maybe it’s time for a new, government-backed program that makes it easier for established German companies and medium-sized companies to buy from European tech start-ups and rewards the “risk taking” of large German companies. The state itself could commit to new and leaner procurement practices in order to enable more spending on start-ups and use more technology itself.
For inspiration, local companies and the German government can look to the USA. J.P. Morgan, for example, one of the oldest banks on the market, says it has been using AI for over a decade. The AI assistant LLM Suite was recently introduced there for 140,000 employees. Or Bank of America: It is investing $3.8 billion in new technologies this year.
Here are some things I advise German companies:
Create a culture that rewards innovation. A more positive view of risk could lead to more innovative thinking. This is about a collective change in attitude, not an individual one. The responsibility lies with all employees of a company.
Don’t just look at spending on innovation as a cost, but look closely at the cost-benefit. In a tense economic environment, many companies focus too much on individual cost items and ignore the often disproportionate efficiency gains and future potential of software solutions.
Make extensive use of open source. The most important technological breakthroughs often come thanks to open source, which is why companies should not shy away from such approaches.
Understand the limited resources of a start-up. Companies should be careful not to waste a startup’s time and only participate in a pilot if they are seriously considering introducing a new technology. This in turn would signal to start-ups that they are a trustworthy partner who is open to innovation.