ZEW Study: Dawn of Hope for the IT Industry - Slight Increase in High-Tech Start-Ups

Software Start-ups Support Positive Development, Research-intensive Industries still Losing / Founders Name Biggest Problems

The number of high-tech start-ups in Germany increased by 3.1 percent compared to the previous year. This is the finding of a recent study conducted by the Centre for European Economic Reserach (ZEW) in cooperation with Microsoft Germany. In the software sector, the number of new start-ups even increased by 15 percent. However, the number of high-tech start-ups in cutting-edge technologies such as medical engineering which have especially good chances of growth the long run decreased. In total, the number of high-tech start-ups standing at 14,000 is still on one of the lowest levels since the mid 1990s.

In the previous year, the number of start-ups in the high-tech sector slightly increased and numerous employees started their own firm. The reform of the German law governing Private Limited Companies ("Unternehmergesellschaft" in German) now makes it easier to start a new firm. "The development of high-tech start-ups is sound. However, it is first of all driven by microenterprises. The start-ups only contribute a small percentage to the innovation activity in Germany. Further developments will show if lasting business models result from these microenterprises," says Dr. Georg Licht, head of ZEW research department Industrial Economics and International Management. "To increase the start-up scene in Germany, more start-ups with technological product innovations giving impulse to the German economy are necessary. Germany as site of innovation has to keep up with other countries," Licht adds.

Biggest Problems for Start-ups in Germany

The current study, which also refers to research findings by other institutes, indicates the problems start-up founders have to face in Germany. 36 percent of participants stated that they had problems, in particular, with customer acquisition and the acquisition of new orders (according to the start-up panel of the IfM, Bonn). The start-up founders hold the opinion that, in Germany, especially established firms had doubts to work with new start-ups. In general, many entrepreneurs have to face funding shortfalls in the firm’s foundation phase. The start-up founders participating in the ZEW study also criticizes the limited access to financing possibilities with traditional credit financing as well as a low number of venture capitalists. In the last ten years, the latter had increasingly focused on the growth phase and had completely withdrawn from financing the founding period. Moreover, there are problems when employing new qualified staff. 25 percent of company founders participating at the start-up survey KfW-Gründungsmonitor 2010 also consider the burden to the family a problem. Furthermore, the founders’ personal fears are development problems for start-ups.

"Germany as a country of technological innovations lacks far behind its possibilities. This has to change quickly. Despite a positive development, the ZEW study indicates that Germany as country for high-tech start-ups is struggling to keep up with other countries," says Ralph Haupter, General Manager of Microsoft Germany, with regard to the study’s findings. With the initiatives "unternimm was" and BizSpark, both promoting high-tech start-ups, Microsoft provides know-how on technology, sales and marketing as well as access to client and partner networks.

Haupter calls for fiscal incentives for investors in Germany. "This is common in other European countries and the German government has already decided to give such incentives. As usual, we not only have to talk but act! Germany has to become one of the most attractive regions for business angels and venture capitalists."

High-Tech Firms are Giving Impetus to the German Economy

Innovative high-tech start-ups are of great significance to Germany. In particular, they have positive effects on the labour market. According to ZEW, high-tech start-ups on average employ twice as much staff than start-ups in other sectors. After five years in business, this factor even increases to 2.5 times as much. "The high-tech industry is one of the sectors giving impetus to the German economy and sets the trend with regard to innovative strength," says Hans-Joachim Otto, Parliamentary State Secretary in the Federal Ministry of Economics and Technology.

Small firms and start-ups make up the major part of innovations and employment in the IT industry. Start-ups considerably outmatch established firms with regard to dynamics, flexibility and innovativeness. However, start-ups frequently have to face prejudices. "Customers often worry if start-ups will be able to provide their services in the long run. Problems like order acquisition, which are confirmed by the ZEW study, are the logical consequence," reports Stefan Lemper, Managing Director of Cooee Gmbh and longtime partner of a Venture Capital firm. He continues: "A promoter like Microsoft makes contacting potential cooperation partners and clients easier. For example, we were able to present our technology to a big audience at Microsoft’s booth at CeBIT. Moreover, with the support of "unternimm was", we adapted products to the Windows Live Messenger and have thus gained a great client base."

Germans’ "Full Insurance Mentality" Prevents Entrepreneurial Spirit

Uncertain earnings and financing risks are the reasons why potential start-up founders do not make the step towards self-employment. "Germans often want to found a firm and not take any risks," says Ralph Haupter about this development. "We have to call upon the established firms to work with start-ups, and we need a change in the mentality among young people to show greater interest in entrepreneurial thinking," he adds. "If this happens, the country of Bosch, Daimler and Co. will again bring forth outstanding founders in this century."

For further information please contact

Dr. Georg Licht, Phone: +49 (0)621/1235-177, E-mail: licht@zew.de