Traditional companies have to transform their business models in the era of digitalization in order to maintain their market position (as you could read in Part 1 of my blog series). At the same time, founders try to identify market gaps or outdated businesses models and revolutionize them by means of digitalization. In order to be successful as a start-up, a supportive ecosystem is crucial.
You can't manage what you can't measure
Traditionally, the German start-up community has been strongly oriented towards measurability and key performance indicators. Thus, the investment pitch is still often determined by numbers and financial plans. In the first place, financiers want to make a clever investment, the ratio of risk to realism must be right. In contrast, this correlation is not the most important decisive factor in Silicon Valley.
Watching out for innovative business models, investors particularly support ideas which make a real difference and stand for progress in new areas – and which are highly risk-sensitive. However, it is exactly these ideas which often lead to disruption and innovation. Andy Bechtolsheim, a German immigrant in the US and one of the first Google investors, credits his willingness for risk-taking to the American boldness:
“I didn’t even know what I was investing in, I thought it was a search engine. But it really is an advertising company”
Systematically, the Valley gained the lead through the high density of business angels, venture capitalists (VCs) and investors. In addition to providing financial resources, ventures (especially in the early stage) can also benefit from the significant expertise of investors.
In Germany, it can be observed that larger companies develop accelerator programs, which aim at bringing together the experienced business with young entrepreneurs in a digital environment. Thus, accelerators such as Axel Springer Plug & Play, Deutsche Bahn DB Mindbox, Oetker Digital, Telekom Hub: Raum or the SpaceLab of Media Markt and Saturn preserve the proximity to the market while supporting young entrepreneurs. However, so far, they seldom manage to integrate the ideas of start-ups in a way that makes their own company significantly more innovate.
Infrastructure is the most important thing
It should be kept in mind that many medium-to-large companies that can be found in Silicon Valley have left the start-up stage, such as Slack who have had $340 million funding from Google Ventures. The latest generations of software, hardware and artificial intelligence have been evolving for years. The driving force behind this evolution is amongst others the proximity to universities with top graduates.
The species of “electronic natives” follows the generation of the digital natives and is focusing on the research of artificial intelligence - particularly with regard to the mechanical learning of emotions, which revokes the imagination power of most people. In addition to the high number of top graduates, the Valley also has a high density of co-working spaces and financiers.
Peter Thiel, co-founder of PayPal and the Facebook’s first professional investor attributes the biggest advantage of the Valley to the “culture of failure” amongst founders, as stipulated in his bible for founders “From Zero to One”. The willingness to invest large sums is higher in the Valley in order to profit from exponential scale effects.
Thus, in 2016 VCs have invested around $27.5 billion in start-ups in Silicon Valley, while €778 million has been invested in start-ups in Germany. Investors in Germany often try to reduce risk with smaller investments and a more highly diversified portfolio, while US investors are often willing to put high sums in highly risky businesses.
However, a disadvantage of Silicon Valley is the high-priced infrastructure, particularly in the northern Bay area around San Francisco. Residents of San Francisco pay in average $3,590 for a one-room apartment per month, while in Berlin it’s only a fraction at €430 per month, on average.
Founders such as Mark Zuckerberg and Evans Spiegel often start off outside of San Francisco, in cities which are not yet popular for their start-up scene such as Austin, Texas. Also, many universities in a radius of roughly 70 km around Silicon Valley bring along start-ups. In their early stages, financially-needy start-ups often only travel to San Francisco with the aim to raise their cash reserves.
Advancement through technology
Evolutionarily, the species of the “Homo founder” in the US has evolved in a different direction to the European “Homo founder”.
In Berlin, the focus of founders often lies on developing new business models in the areas of consumer goods and e-health. In San Francisco, there are significantly more tech-founders, experimenting with new technologies. Out of 1000 start-ups worldwide dealing with artificial intelligence (AI), 500 are located in the US and only about 60 in Germany.
In the Valley, residents are used to seeing state-licensed prototypes of self-driving cars from Google, Apple and Tesla on the streets. Amazon just announced that they have received a patent for a method to guide drone-delivered packages to a safe landing. Moreover, Elon Musk's SpaceX and Hyperloop are driving the next revolution in passenger transport. Technological progress is always the ideal breeding ground for the development of new business models and thus a great ground for start-ups.
Image source: The Independent
The technological progress in Silicon Valley is further supported by the legislature which promotes fast development by loosening guidelines and laws, regarding the testing of technological innovations for example.
While test flights for drones are allowed in the US, companies like Deutsche Post or Amazon still await approval in Germany for piloting such test flights. In my opinion, European laws and regulations are often very strict and outdated in a sense that they were enacted in the pre-digital era, and the European government lays the foundation for technological advancements (such as autonomous driving) in a passive and rather slow manner, which can be an obstacle for rapid innovations.
The business model of passenger transport in private vehicles was, for example, stopped by a court in Germany, whereas the 'sharing economy' in the US is already an important component of society.
Can Berlin ever be the new Valley?
Despite increasing (virtual) networks and globalisation, it’s still a fact that start-ups with digital business models in Silicon Valley enjoy a structural advantage. Due to the bundled knowledge and expertise of founders and investors, the technological sophistication and the supportive legislature, start-ups regularly succeed to develop disruptive business models.
Corporate offices equipped with fitness studios, restaurants, bars and chill-out areas (that actually can be used during working hours) like the LinkedIn office in San Francisco promote flexibility, open-mindedness and an innovation culture, which cannot yet be encountered in similar companies in Germany.
While founders in the Valley focus on actually realizing their ideas quickly, their German counterparts are often busy with key facts and figures. Traditionally, research and science are important pillars of the German economy, but entrepreneurial activity is more strongly promoted and institutionalized in the US.
However, an advantage of Berlin as a start-up hub lies is its cost structure: the city provides affordable apartments, inexpensive offices with low maintenance costs, connectivity and a good infrastructure which lures international talents and reminds me of the Valley ten years ago.
Until today, the Valley has managed to attract tech pioneers and start-up founders. Berlin can definitely make grounds for it.