1997–2018: Back to the future of digitalization
It was a great honor and pleasure for me to speak at the annual economic conference, Ludwig-Erhard-Symposium, in Berlin about the state of digitalization in Germany from an entrepreneurial perspective.
In 1997, 21 years ago, I founded one of the first internet companies in Germany, whose task was the delivery and measurement of online advertising.
At that time, there was this unanimous opinion that the internet would be switched off shortly and no one could imagine how one could ever make money with online advertising. Ten years later, my company merged with its US competitor, DoubleClick, and was bought by Google in 2007.
At the age of 26 — too young for retirement — I started founding other companies, for example Smartclip, which was acquired by RTL Group. Smartclip is now part of the group and broadcasts TV advertising on connected TVs as well as across the internet.
In 2010, I switched from the founder/operator side of the ecosystem to the investor/venture capital side and started investing in start-ups in the US and Europe. The Tradedesk, one of the most successful companies in our portfolio, was listed on Nasdaq (TTD) last year with a market cap of $4 billion.
So that is a quick summary of my background: I am an entrepreneur who has been involved with the internet and digitalization for the past 21 years.
To the present, the latest interview with the head of the Chancellor’s Office Helge Braun in the German business weekly Wirtschaftswoche has conveyed what the German government understands about digitalization: “The government needs to do something simultaneously: fast, high-performance internet must be expanded everywhere in Germany. We also have to make sure, that our economy becomes fit for the digital age. So then we have to guarantee security on the internet.”
Of course, I am happy about fast, secure internet and a strong economy, but beyond that, we must see digitalization as a very strategic investment in our future. Let me outline several key thesis’ that I think provide a critical lense for why Germany is behind:
Germany needs companies that can compete at eye level with Google, Facebook, Amazon, and Apple. And which have the resources to invest billions in new technologies. For comparison: The entire Dax, the top 30 companies in Germany, are rated as highly as Apple alone. When someone in Germany is asked what major internet companies they know, 90 percent would mention United Internet. Although the company has internet in its name, it only installs DSL connections.
Over the last 20 years, Germany missed out on developing real technology companies which have a chance to compete globally against the Valley’s tech monopolists. With interventions and isolation on the part of the state, China has successfully established itself and immediately built a “Great Firewall” around it.
Let us assume, hypothetically speaking, that there would be a president in the United States, who rules his country via Twitter and one evening he would think of banning the services of Google, Facebook, Amazon, and Apple in Europe overnight, for example, due to the fact that Europe does not want to pay the punitive tariffs?
90 percent of smartphones would no longer work (70% Android & 20% iOS), 95 percent of search queries would not be answered, and 95 percent of online advertising would not be delivered. 46 percent of e-commerce would drop out if Amazon didn’t deliver in Germany. These are sobering statistics when it becomes apparent how US companies control entire markets in Germany.
In 2001, after the DotCom bubble burst, no more start-ups in the field of internet or technology were financed in Germany. I speak from my own experience: I was at the bank at that time — and asked for a loan.
That went on until 2006, and there were a few more financings. However, just two years later, in 2008 when the financial crisis hit, that phase was over.
In 2010, when the Samwer brothers started Rocket Internet and began cloning US start-ups, an ecosystem began to develop in Berlin. In other words, those who had worked at Rocket or its many holdings started to set up their own businesses.
With money from successful exits, an active business angel scene developed here in Berlin. There are now over 5,000 business angels in Germany that usually finance the seed phase with 50–200,000 Euros so the company can be founded.
Building off of that, there are only 100 venture capital firms in Germany that finance an A round of 1–3 million Euros. For comparison, there are 1,000 VCs in the US. In the B round with investment amounts of 10–30 million Euros, the circle of investors is reduced to a handful.
The consequence is that many companies are sold to US competitors instead of becoming the next Google themselves.
The second essential point is the German education system. It’s practically the same as it was 50 years ago. Religious and physical education are compulsory subjects, but not computer science. This continues at the university level. Apart from the Business School WHU and ETH university, there is hardly a university with entrepreneurship as a course of study.
The small number of highly skilled entrepreneurs and a lack of financing opportunities for start-ups is a disastrous combination which will lead to the next Google coming from the US or China and not Germany.
To understand how difficult it is to obtain financing — I want to describe our investment process as VC:
Each year, we take a look at around 2,000 start-ups from different technology sectors in Europe and the US. Of these, approximately 200 companies are invited to an interview, only 20 companies make it through to second and third round meetings. Out of these 20 companies, we ultimately invest in 10. That makes 0.5 percent.
However, these rock stars are once again separating the wheat from the chaff: only 33 percent of our portfolio receive investment for the follow-up round.
As a venture fund, we expect about 70 out of 100 investments to go bankrupt, 20 return the invested capital, and 9 bring 3x-10x the return on investment. Only one “unicorn” manages to achieve 100 times the funding volume and allows us to support the next generation of founders.
A tax auditor from Düsseldorf could not believe that someone would voluntarily invest his money in companies that were written off by 70 percent and was convinced that we were doing money laundering. I am always happy when the state helps through such qualified employees.
Let me briefly point out which future fields Germany must support and in which areas we must invest in:
1. Artificial Intelligence (AI) will interfuse every business within the next ten years.
For example, recruitment: AIs are already using various criteria to select how well someone fits the job opening.
Example voice recognition of emotions: software that captures how you feel. Through artificial intelligence, the state of mind of humans can be detected in the span of only a few minutes.
2. Drones: drones will become an essential part of our transporting system, ranging from parcel delivery and the transport of people to strategic military maneuvers.
3. Three-dimensional-printing will supersede lower-cost producers worldwide within the next ten years. All you have to do is buy a print plan, and everyone can print their object of desire.
4. Natural Language Processing (NLP): Speech recognition and voice control of all devices and applications. Language recognition will penetrate all functions of your home, car, or workplace.
5. Augmented Reality and Virtual Reality (AR/VR): The film, “Ready Player One” by Steven Spielberg gives a good taste of what is possible with a Human Brain Interface. Simulations can be experienced as reality.
6. Blockchain technology: It is not just about cryptocurrencies.
Cryptocurrencies such as Bitcoin or ETH will take a long time to become firmly established as a currency. However, the underlying blockchain technology is fascinating and will extend to many areas — whether to replace the notary or the land registry or merely to track where the last rotten tomato came from.
If we make the right investment decisions now, while staying aware of how crucial it is not to become dependent on US suppliers, then Germany can claim some of the new core technologies for itself.
“The best way to predict your future is to create it.” Abraham Lincoln