Photo credit: Wirtschaftstag 2018
Monday, November 12, 2018

Wirtschaftstag 2018

I share my employer’s perspective from a global point of view for an innovative startup ecosystem in Germany.

The Wirtschaftstag der Innovationen 2018 (literally “Business day for innovation”) was a one day conference organized by the Wirtschaftsrat der CDU on November 12th, 2018. My role at the conference was to provide a viewpoint on startups from a global perspective based on both personal experience and my experience working at Microsoft.

Good morning ladies and gentlemen.

I apologize for speaking today in English, but mein Deutsch ist nicht gut für dieses Publikum. I hope you understand.

My name is Duncan Davidson, and I’m the CTO in Residence at Microsoft for Startups here in Berlin. My journey in technology started almost forty years ago when I experimented as a child with the very first personal computers. Twenty years ago, I moved to the San Francisco Bay Area, the epicenter of Internet startups and got involved in Open Source software. Four years ago, I moved to Berlin to join Wunderlist, part of the Berlin ecosystem which was then acquired by Microsoft in 2015.

My family and I are happy to be here.

Microsoft sees startups as an important part of the global innovation engine.

Startups inspire us by pushing the envelope of what’s possible and building products that improve our personal and professional lives. They are, quite literally, helping to shape the future. And, this isn’t just high-minded idealism. Startups are building the most exciting applications that will run on the globally distributed computing platforms, of which Azure is one.

The better startups do, the better we do.

After a few years of experimentation, we’ve identified a unique way in how we can help startups. As you know, Microsoft has a very mature sales organization that has contacts with a massive number of businesses on the planet. In addition to selling our products, we serve as a channel for independent software vendors to connect to our customers and to help sell other companies products is a core part of our efforts.

Our Microsoft ScaleUp program provides business-to-business startups access to this channel. We’re helping qualified startups that have a product-market fit develop the skills they need to become partners for our channels and we lower the barriers for them to participate.

It’s a win-win situation for everyone and a benefit that no other cloud vendor currently can provide.

We host our ScaleUp program in eight global offices: Seattle, London, Berlin, Tel Aviv, Bangalore, Beijing, Shanghai, and Sydney. In our Berlin office, we work with startups from across Europe, including Portugal, France, Switzerland, the Netherlands, Finland, Austria, and of course, here in Germany.

We also host community spaces — we call them Reactors — in Seattle, San Francisco, New York, London, and Sydney. In these spaces, we host meetups, hackathons, and more. Between our experiences with these community spaces and our ScaleUp program around the world, we’ve be able to build up a global perspective on the startup ecosystem around the world.

When we established our program by opening spaces around the globe, we did so with the thesis that the differences in each region required an individualized approach. Moreover, that these differences would be so significant that there needed to be a very customized strategy for each area.

I no longer believe that this thesis is correct.

The fundamentals of how startups grow and develop are more common than not. Yes, there are essential differences in culture, financing, and go-to-market challenges. These do matter.

For example, Silicon Valley has a great deal of acceptance for trying to go big on an idea and failing, and China has recently taken this acceptance to a new level. On the other hand, as you know, Europe typically favors a much more conservative approach that isn’t nearly as accepting of financial risk or the possibility of failure.

Each area also makes different demands with how apps are built, including localization. US-based startups can operate with an English-first or even English-only mindset and the startups there certainly benefit from the simplicity this brings to product development and finding product-market fit. They can defer many of the complexities of localization till later, if ever.

On the other hand, European startups typically have to navigate the complexities of localization earlier in their development. Otherwise they risk limiting themselves to a smaller market and may make assumptions that compromise their product and strategy for a bigger market.

These differences, however, don’t materially affect the primary process of the startup development lifecycle from ideation to experimentation to product-market fit to growth.

The steps are the same.

What culture, financing, regulation, and go-to-market challenges really affect is velocity, both of individual startups and the regional ecosystem as a whole.

Why does velocity matter?

The faster the startup lifecycle moves, the faster ideas and business models are proven valid for the current market, or put on the shelf, possibly for another time. The benefits don’t just accrue to the companies and their investors, however. Founders and developers learn their lessons from each startup more quickly and take those lessons with them into the next cycle.

It’s these rapid learning cycles that teach each generation of founders and developers their craft. A big reason Silicon Valley is what it is today is because the people there have had more cycles to develop the craft than anywhere else. Yes, there are the universities and the area’s technology roots dating back to the 1950s. But the number of iterations is unmatched.

How much do culture and regulation play a role?

I used to think that culture and regulation were the most important parts of the startup equation. However, watching China’s startup scene evolve in a much different culture and regulatory environment indicates otherwise. The current activity around startups in China is off-the-charts regarding both the size of their funding rounds and how fast the entrepreneurs there are learning.

The event that finished breaking through my Western bias and mindset — one which discounted China’s software startup ecosystem as a land of copycats — is the recent and almost complete transformation of their consumer payment system by cashless tools like Alipay and WeChat. Not only have these tools become the dominant payment system in cities like Shanghai, but they’ve even taken over in places like fruit stands by the side of the road in the middle of the countryside where you pay by scanning a QR code. With a phone.

You can even pay street musicians with these apps. Forget the guitar case with a sprinkling of change in it. Instead, friends of the musician hold up QR codes after every few songs.

Think about it a minute. I know that’s hard to visualize in here Berlin where a cash-first mindset rules. Imagine it at Mauerpark! It’s even hard to imagine in a place like New York where credit cards are the dominant payment mechanism. But it is astounding. If you try to go to China now as a tourist and try to pay with cash or credit card, you’re in for a rude awakening.

The wheels of innovation are turning fast in China. They’re probably spinning faster there than in Silicon Valley now. That’s both sobering and incredibly exciting.

So, while it certainly has an effect, let’s take culture off the table.

Let’s look at financing.

London has a vibrant startup ecosystem. It may still be the most exciting startup scene in Europe. We can be worried about what effect Brexit was going to have on it. The jury is still out on what exactly Brexit means and it’s anybody’s guess as to what happens next. But even as scary as it might be, and even if it has a huge impact on the overall economy and established businesses. I don’t think it will having as chilling an effect on the startup scene as you might otherwise expect.

Our office in London continues to host its part of a thriving startup ecosystem. Our community meeting space is full every day of events that benefit that ecosystem. And, this seems to be true of the many other accelerators and corporate sponsored startup spaces there.

So what’s happening?

Fast moving ecosystems adapt to change better than slow moving ones.

It’s worth remembering that some of the best performing current Internet companies in the US were formed during the dot-com bubble and in the aftermath of its crash. Google started in 1998 and rose to prominence after the bubble popped. Facebook was founded in the aftermath of the pop 2004. Netflix was founded in 1997 and found its flat fee unlimited rental business model in 2000.

Innovation and disruption go hand in hand.

Of course, Brexit is going to hurt. But the velocity of the startup ecosystem there means that it will still produce a lot of innovation even during that pain.

One of the things my colleagues in London think has helped fuel the velocity and vibrancy of the startup scene there is what the United Kingdom has done with tax incentives. Their Enterprise Investment Scheme, the Seed Enterprise Investment Scheme, the Social Investment Scheme, and the Venture Capital Trust provide significant tools that encourage investment, not only by large investors but by small ones.

Furthermore, in crafting these incentives in a way that promotes smaller investors to participate, they spread the benefit of success among a broader group of people. And the more people that benefit from the ecosystem, the more will be there to power future cycles.

Let’s look elsewhere in Europe.

The Paris startup scene is interesting. So is the one in the Netherlands. However, there’s one more country I’d like to call out specifically as a hotspot and that’s Portugal.

Yes, one of the PIGS.

You all know the financial issues that Southern Europe has had, but despite those Portugal’s startup scene is growing like no other in the South. Portugal seems to understand that velocity is an important part of growing a startup ecosystem and it’s encouraging building velocity with both visa access and tax schemes that encourage investment.

Furthermore, they’ve invested in making sure that they are a visible destination for startups, including ensuring that the WebSummit conference with its 70,000 attendees remains in Lisbon for the next ten years.

Keep your eye on them. I think they’ve got promising times ahead.

So about Germany.

Having been here only four years, and having benefited already from policies that made my moving and working here much more accessible than my own home country makes it for Europeans going the other way, I know that I’m a position where I can only be dangerous with my opinions about what the startup ecosystem here needs to continue to thrive. My views aren’t nuanced enough to dare to suggest anything resembling detailed policy. However, I’ll share three points with you for your consideration.

First off, as somebody who has started companies in the United States, I have to say that the process of both forming and selling companies in Germany is a lot more daunting than it could be.

I wouldn’t dare to suggest a particular approach, and of course, any change to how companies are structured here have to fit into German law and culture, but modernizing these regulations and processes would serve the German startup ecosystem well.

Second, the investment culture here is not nearly as dynamic as it is other places. Most major financing rounds only take place with substantial participation from foreign investors. That tends to encourage taking the startups that do start here overseas for later rounds of investments with a shift in focus. That’s not an outcome that Germany should want.

You can look at all the activity happening in Berlin’s cafes as a good sign, but the delta between that and Unicorn success is a big one and you don’t want to encourage companies to leave in that gap. You want to encourage them to stay.

Third, while Germany should continue to encourage its citizens to be entrepreneurs and to create a more fluid financing environment, Berlin is and will remain an attractive city for outsiders like me to come, make their home, and to build the local startup technology scene. I believe Germany can further increase its efforts to attract and retain foreign talent to join and develop the rich skilled developer community that’s here.

Germany has incredible foundations in science and manufacturing. You know that of course, but I want to stress that I talk to business-to-business startups every week that want access to the companies here. It’s fertile ground for all kinds of innovation. Like everything, a growth mindset can really help.

Modernize, encourage, and promote.

Thank you.