Handelsblatt: Germany’s false envy of Silicon Valley “startups”

By Steven Hill, Handelsblatt, April 21, 2016

(German language PDF version,Deutschlands falscher Neid aufs Silicon Valley,” online version here)  

As I travel around Germany, from the giant messe of Hannover and Frankfurt to the digital incubators of Berlin, I hear a near-constant refrain: “Germany needs more startup companies, more innovation, more ‘disruption’ — where are the German Googles, Apple and Facebook?”

Startups are viewed as beacons of technology and innovation, which taps into Germany’s Enlightenment-based faith in modernity and ever-expanding prosperity. But as someone who has lived for many years in San Francisco in the heart of Silicon Valley, I can say that, while there is great merit in innovation and entrepreneurship, there are a number of downsides to the U.S. startup model.

A flood of brand new startup companies often leads to an unstable, bubble economy. As the record from Silicon Valley shows, three out of four startups will fail, and nine out of 10 won’t make any money. First comes the boom – lots of venture capital money chasing fantastical schemes. Armies of young programmers and computer whizzes migrate to the new mecca, pushing up housing costs, traffic congestion and inflation. Long-term regional planning gets distorted.

Then eventually the bubble bursts, companies start failing and the layoffs come. I have watched San Francisco struggle through tech bubble collapses in the early 2000’s, again in 2008, and another mini “adjustment” most recently. It seems more like a high-tech casino than an efficient process of investment and planning.

One of the alleged advantages of the startup economy is job creation, but is that really true?

Not necessarily. During the short term bubble, startups increase regional employment, but over the long term technology companies increasingly are not job creators. The tech CEOs are boastful about how they are able to inject software and algorithms into ever smarter machines which are replacing the humans. Economist Nouriel Roubini says, “The factory of the future may be 1,000 robots and one worker manning them.”

Indeed, Silicon Valley’s leading companies are not creating huge numbers of jobs. Facebook (12,000 full-time employees), Google (60,000) and even Apple (90,000) are slacker job creators compared to traditional economy companies like Daimler, GM, Volkswagen, IBM and Siemens, which each employ hundreds of thousands.

The newest startup disruptors, Uber and Airbnb, employ a mere thousand full time employees each. And they come with another troubling quality – a refusal to follow local laws or pay taxes.

Airbnb, a hotel-like company valued at 18 billion euros – three times that of the Hyatt Hotel chain — claims that since it is operating in about 34,000 cities, it can’t possibly figure out all the local regulations and tax laws. Imagine if BASF, which is the largest chemical producer in the world, set up chemical plants, or Daimler set up auto manufacturing facilities, without figuring out the local laws and taxes.

Imagine if all businesses operated this way, asserting a new corporate right to first, set up operations, and second, maybe eventually follow local laws and pay taxes. It would result in economic chaos.

OK, OK, say startup enthusiasts, but if even two out of 10 startups became huge global companies, Germany would be a bold tech pioneer which would provide additional benefits.

But in this globalized world, it doesn’t matter as much anymore where something is invented, since those technologies quickly spread everywhere. Germans have as much access to the products of Apple, Facebook and Google as do Americans. And if these companies and their new technologies are not big job creators, the “home country” advantage is not so important.

Indeed, Germany’s ambitious Energiewende program, which is creating hundreds of thousands of new jobs, shows that the implementation of tech advances like renewable energy may be a more important job creator than the inventions themselves.

Certainly a degree of disruption of outdated businesses is valuable, and Germany should strive for greater innovation. But it’s important not to overstate the benefits of startup companies. There’s something to be said for patient capital investment that has its eye on the longer-term horizon.

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