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Founding a company: USA vs. FRG – are Silicon Valley start-ups a role model?

Does the USA really offer better conditions for founding a company? Looking at that Influence of the founding environment, it can be stated that incremental and innovative start-ups are primarily promoted in Germany. Critics say this type of product development is too slow, they demand that new products be adapted more quickly to current market conditions. But is the radically innovative founding philosophy like that of Silicon Valley really to be recommended? We do the fact check in this post!

Founding a company in Germany – safety first

According to the current Global Entrepreneurship Monitor (GEM), the start-up rate of companies in Germany in 2019 at 7.6 percent, the highest level since the surveys began. In this context, one should do the whole positive climate in Germany for starting a business. According to surveys, the fear of failure would not prevent 63 percent of Germans from founding a start-up. In the ranking of the highest-income economies, led by South Korea and Norway, Germany thus occupies 7th place. Thanks to the dual training system that has been tried and tested in Germany, workers can already acquire education business knowledge and entrepreneurial skills that will benefit them later when they become self-employed. A social partnership employee protection also promotes a long period of employment and the associated intensive knowledge of in-house processes and their history. This motivates German employees to work on technological innovations, to continuously improve products and thereby secure the company’s competitiveness in the long term. Especially German entrepreneurs who rely on local product quality are able to assert themselves excellently in international competition.

Germany vs. USA – Why founding a company in the USA works differently

If you search for successful company founders on Google, you will hardly come across German founder stories. The search result lists, on the other hand, are full of reports about former “garage entrepreneurs” from Silicon Valley and their current million-dollar sales. There is no doubt that it will be international radical-innovative type of entrepreneur as a role model highlighted because he implements lightning fast. Science is also showing interest in radically innovative start-ups, because studies show that these companies grow faster than average and create a disproportionately large number of jobs. The radical entrepreneur is also of interest to US shareholders, as their innovations – no matter how poorly tested – usually appear as assets on the balance sheet and thus increase the value of the company.

The matter is somewhat simplified if for such “trial and error” – Development projects first create suitable structures that already exist in Silicon Valley. Due to their high level of mobility and the short average duration of the employment relationship, employees there are repeatedly confronted with new approaches and models of thinking, which increases their ability to think and imagine abstractly and increases their potential for innovation. Also leads the rigid funded procedure by the US authorities is causing investors to flee to venture capital funds that finance the strong growth of radical innovators in the US. Next to this would be the balance sheet policy of companies to align with the US pattern so that radical innovations are reflected as assets on the balance sheet.

However, if one proceeds from the assumption that innovations need some time anyway until they fully correspond to the desired product benefit, the question arises as to how quality assured the manufacture of such “radical products” takes place and what the operational safety of such devices is like. At the same time, the deregulated environment in the US is constraining the spread of incremental innovators essential to thriving growth regulated environment according to the German model. The USA does not offer entrepreneurs the better start-up conditions, but only promotes and systematizes the emergence of radical innovators.

Company formation in comparison – a conclusion

The above remarks may give the impression that founders in Germany are forced to be incrementally innovative, as it were, since the existing environment does not sufficiently promote radical innovation. And with good reason, because empirical, incremental product development fits in damage-preventing and consumer-friendly environment much better than product development with Harry Potter’s wand. Merely copying other structures has rarely led to success.

Further information: PDF download (external link to IfM Bonn), source: Förderkreis Gründer-Forschung eV (FGF) and IfM Bonn.