What can Germany teach us about sustainable start-ups?

I have become a technology industry sceptic. It’s not a sentence I utter lightly, because a few years ago I was a true believer in the power of technology’s ability to transform the world for the better.

Europe, beset by financial problems and high rates of unemployment, is desperately searching for ways to spur growth. Many are looking to the technology industry for solutions, hoping to replicate the success of Silicon Valley. However, while there is no doubt about the size and importance of technology as an industry, copying the US model will not solve Europe’s problem. Here is why:

Entrepreneurial ventures are popping up like mushrooms these days. More and more young Europeans are hoping to make money by founding tech start-ups. Increasingly, they are relying on so-called incubators to guide them to success.

Despite talk of changing the world, incubators are not fundamentally different from military boot camps. Despite their promise to cherish individuality and creativity, they’re really only interested in conformity; they punish start-ups that stray from proposed business models and predefined processes (processes that, despite incubators’ claims, are built around financial risk assessment models and are not there to help founders. Investors want their money back.)

No one is arguing that the technology industry is not important for the economy. Recently, McKinsey published a pro-bono study for the city of Berlin, with a foreword written by the city’s mayor, Klaus Wowereit, In it, he postulates that the tech industry has significant value as a tax payer and employer.

Is he right? Let’s stay with Berlin as an example. Its unemployment rate is significantly higher than the rest of Germany, yet of that group of job-seekers only a few have the potential to work in a technology start-up. (The biggest challenge for most new companies is not so much the lack of funding as the lack of new talent.)

Are we right to assume technology companies are good tax payers? Several of the largest companies have been in the news recently for just the opposite. Apple, Google and Microsoft are known for the unprecedented size of their cash reserves, which they protect via the use of tax loopholes. Apple was recently the subject of an investigation by the US Congress, Amazon was criticized in the UK for paying only £2.4m, despite generating over £4bn in sales, and Google has been front and centre of coverage of the so-called “Double Irish” model of tax evasion.

We stand at the crossroads. We have a generation of tech founders who are determined to find fame and become the next Mark Zuckerberg. They are supported by investors who care less about fame than about the returns on investment associated with finding the next Facebook. Completing the team of people who are failing to steer us out of the financial crisis are the politicians, many of whom seem incapable of coping with a rapidly changing world, and who are only prepared to build “ecosystems” that will help them win the next election.

What Europe needs is a truly European approach to the technology industry. Instead of pilgrimages to San Francisco, start-up founders should travel to southern Germany. This is the home of the Mittelstand, the small and medium-size enterprises that are the reason for Germany’s success as an export-driven nation. Here, entrepreneurs can learn how to build sustainable companies that benefit their communities as much as their founders. Almost all German companies fall into this category; combined, they generate 52% of all economic output, while employing roughly 15.5 million people. They also provide training, something that potentially reduces rates of youth unemployment in Europe.

Author: Igor Schwarzmann is co-founder of Third Wave, a Berlin-based business consultancy and think tank.

Image: German Chancellor Angela Merkel delivers a lecture to a 12th grade class in Berlin, 13 August 2013. REUTERS/Odd Andersen/Pool

This blog is part of a series of articles lending context to the World Economic Forum’s work in the field of European entrepreneurship. Click here to read Nicholas Davis’s introduction to the series. 

For more articles on entrepreneurship in Europe, click here.