As German industry has passed through the financial crisis comparatively unscathed, my March trip to the Munich Network’s corporate venturing conference shed light on how one of the most important industrial areas of the country is approaching investing in small companies. The Bavarian region is closely associated with the country’s famous Mittelstand.
Ahead of the conference, at an enjoyable supper sampling the region’s hearty food with Vodafone Ventures’ Wolfgang Schuster and corporate finance group Clean Capital’s Stephan Decher, Decher recounted the words of a Mittelstand business owner, who had just told him: “Laziness is worse than theft.”
The three of us joked about and discussed what this comment said about the seriously focused attitude driving these businesses forward, as some of the world’s most successful exporters – to our mind stealing was a pretty serious offence, whereas laziness is a sin we had all been guilty of.
Yet the reality is, this highly focused work discipline, which has long powered the Bavarian economy, is changing in some respects. In part this is resulting in the owners of the region’s Mittelstand companies giving up equity, which many have long guarded closely.
One corporate venturing executive even said the region provided a unique opportunity for corporates, as he had hatched a deal with a profitable local Bavarian company which would probably never have sold a stake to a solely institutional investor. The unit was able to do the deal because the Mittelstand company’s family owners wanted the strategic benefits a deal with the corporate could bring.
Similarly private equity firms have also scoured the German Mittelstand in pursuit of companies where the inheriting family of a founder may not have the ambition to continue running the business. This change has gone beyond the heirs of a small business.
Decher talked about how some young German people do not desire the technical job for life to which their parents’ generation may have aspired.
A trend to watch for is a possible corporate venturing upsurge in early-stage activity in Munich.
Tanja Kufner, the head of telecoms company Telefónica’s Wayra Munich, took me across town from the Munich Network conference in a taxi to see the company’s colourful open-plan office and early members of the scheme. Among those who I chatted to were the founders of 3D printing company Fabbeo, Fleur Augustinus and Karim Hamdi, who said they had bootstrapped the company last year, and that winning the financing from Wayra had provided them with the funds to keep in business, as their personal funds were running low at the time.
Another business, Cleverlize, an education app company, had received flowers that day from a teacher, who had designed his first app using its technology.
Kufner said she hoped she could create “a Munich start-up scene”, as much of the buzz in Germany is currently surrounding Berlin. If this happens it is likely Wayra Munich and another corporate-backed incubator, that of Deutsche-Telekom-owned Scout24, will play an important role in catalysing entrepreneurial activity from the city’s young business people, which has more of a contemporary Silicon Valley flavour than the typically engineering-focused Mittelstand.
Stefan Lemper, who heads Scout24’s incubator in Munich, said: “There is an initiative from Munich start-ups, incubators and VCs [venture capital firms] to better unite the scene. There are various projects and we are seeing great interest.”
He added: “We started with You Is Now as an incubator in Munich at the end of December. We are pretty early in the whole process. Scout24 operates in various classified portals such as real estate, cars and dating. It originally set up an incubator in Berlin, ImmobilienScout24, with a focus on real estate business.
The Munich operation has a broader mandate involving existing as well as promising new markets as the Munich business is part of the Scout24 holding company rather than attached to one particular business line. We can invest up to €500,000 ($650,000) and we also provide a kickstart package, which specifies the help we give for online marketing, search engine traffic optimisation, consulting, a media package and lots of other things.”
Min-Kin Mak, who heads Deutsche Telekom’s Berlin-based incubator Hub:raum, was also in attendance at the Munich Network conference. Mak, who previously worked with Kufner, doing early-stage venture deals at Munich-based industrial conglomerate Siemens, said: “I have a strong local background from living here. Now I spend most of my time in Berlin.”
Of course Bavarian industry is at the forefront of international business, so corporate venturing in the region is doing far more than just attempting to kickstart a new style of entrepreneurship in the economy.
To this end, Siemens Venture Capital, the corporate venturing unit of the Munich-based company, said it was setting up a renminbi (RMB) China fund, having previously invested from a US dollar offshore set-up in its deals in the region since 2006.
Ralf Schnell, head of Siemens Venture Capital, said: “The market in China currently goes to RMB-based investing and this will position us better in the market. We also increased our team from three to five investment professionals in the last year and see ourselves well positioned to fully exploit the opportunities in China.”
Bavarian companies have long been some of the best in the world in engineering and the creation of new products, with Microsoft founder Bill Gates once going as far as to label the region “Europe’s high-tech mecca”. Two of the region’s best-known companies, Siemens and BMW, have set up venturing units, while US-based industrial company 3M also bases its venturing unit in the region.
I had the pleasure of interviewing BMW iVentures’ Ulrich Quay in a fireside chat at the IBF Corporate Venturing and Innovation Partnering conference in Newport Beach, California.
Intriguingly Quay said BMW’s Bavarian engineering heritage had actually been a hindrance in the company’s pursuit of corporate venturing. He explained the mentality of “not invented here” was difficult to overcome given the company’s confidence in the quality of its technology and design. This is despite a realisation that the pace of change in the start-up world means the company has to engage more actively by becoming an investor in small companies.
It will be interesting to see how this highly disciplined and structured economy evolves as it embraces an exit-driven style of capitalism. In some respects, if this trend goes too far, something may be lost of what makes the region special. Yet I would bet many in the region continue a traditional approach, even as financiers take equity in some companies, and the region’s youth develop the next “new, new thing”.