Why Germany Dominates the U.S. in Innovation …. or does it?

“Germany dominates the US in Innovation” blared the headline from the HBR blog posted by Dan Breznitz who put across several points to illustrate where and how Germany was better than the US in these respects. As a person who has lived and experienced both sides of the pond I beg to differ. The article does incorporate several facts such as the strong manufacturing base and a good work ethos but in mixing innovation with inequality and other issues I think the author has missed the point, and I would like to elaborate why.

On government sponsored research – the author does extol the large benefits of government based applied research at institutes such as Fraunhofer. True, they are indeed great and have provided many an invention – perhaps the most widely known is the MP3 license. However, there are multiple efforts by the US government in the same direction; key difference being that they prefer to fund private firms to carry out the research on their behalf. Let us take the example of the Small Business Innovation Research and compare (all figures taken from their respective websites)

• Number of institutes/ firms funded
  • Fraunhofer: 66 institutes and research facilities around Germany
  • SBIR grants: Supporting 15000 small firms all around USA
• Number of people (engineers/ scientists) employed
  • Fraunhofer: 22,000 staff
  • SBIR grants: 400,000 scientists and researchers
• Funding
  • Fraunhofer: annual budget around 1.9 Billion Euro
  • SBIR: annual $2.5 Billion

As can be seen, one major program in the US is able to employ 20 times more people and support a whole lot more of private enterprise than focusing on a few big institutes. It is this private capital driven mentality that allowed NASA to downsize and opened the doors to many upstarts who are developing new technologies at a fraction of the cost of what it cost the government under NASA (see SpaceX). From my own experience, small and agile firms are able to innovate at an astonishing rate. Although government funded research is nice, they are typically trapped by layers of bureaucracy and inefficiency which limits their productivity.

The second argument around German leadership in manufacturing; if the American’s learnt one thing early was to franchise, scale and mass produce – all at the lowest cost. This was the key determining factor which led to a flight of capital to developing markets such as China and India which became the manufacturing hubs. In recent times as technology innovations such as automation and 3D printing are becoming more wide spread – we can see manufacturing come back (again to provide a cost advantage). What Germany is definitely good at is in manufacturing, but if you talk to the vaunted mittelstands’ there is a distinct fear that as China and India catch up, this technology edge is fast evaporating as the technology is copied (or sadly robbed due to poor control), localized and enhanced to suit the local market. The US took the other route to economic prosperity – focusing on services rather than manufacturing – which has directly led to the huge explosion in this industry, and the innovation around it (I am considering IT more as a service rather than a traditional manufacturing industry).

Yes – this does bring about inequality, because you end up with a high tier service class (who make the cool software etc), and a lower tier class who “serves” (the fast food server etc) and the absence of a strong “manufacturing” middle class as in Germany. But this is not tied to who is the better innovator, but the impact of the choice to focus on a particular aspect of the food chain i.e. services rather than manufacturing. Putting both in the same pot simply befuddles the discussion.

It is also true that Audi, BMW etc do sell well – but within high-tech you can also see that their connected car platforms are in partnership with the likes of Google and Apple (all US companies).  And if you want to talk about cars – the US is one of the few places where you can see the emergence of players such as Tesla to challenge the erstwhile giants.

What Germany trumps the US in is in its social benefits – working hard to ensure higher and more egalitarian employment and a fairer distribution of wealth.  This is part of a cultural ethos and mindset rather than an outcome of innovation – and definitely a model to be copied. However, pairing this as an outcome of innovation is far fetched.

In the end, I believe both countries have their own strengths and weaknesses and could do well to learn from each other; In innovation – if anything, Germany could take a piece out of the US system.

The nascent VC – Fools rush in!

The good folks at SeedCamp invited me to be a mentor for SeedCamp week in Berlin, and never to miss an opportunity to discover new trends and companies I signed up for the same. The event was very smoothly run, with quite a nice mix of startups ranging from education to financial management, fashion and sustainable farming. Most of them good ideas, but as serial entrepreneurs caution, an idea is one thing… execution is everything.

However, this post is not about the startups – but more about the investor community who were milling around. Before I arrived, I thought I had a good idea of the players within this ecosystem; after yesterday I realized on how much I had undersized this segment. There were players I had never even heard of, and suddenly it seems that there are a lot more VC’s than companies! Some of these firms are niche so if you are not in that industry you may never have heard of them. But among some of the others, I admit if I would be one of their LP’s then I should be justifiably worried. Some definitely seemed qualified, many born out of established VC’s; however there were many running around speaking in platitudes interspersed with jargon. Maybe this impressed some, but left me wondering about their actual capabilities.

The challenge I realize is that there just aren’t a sizeable number of high quality investment opportunities. If you are a good startup, with a good product – you literally have all the VC’s knocking on your door. In this case, major firms such as Earlybird have an advantage since they are well known and can provide you with good, solid advice to help you along the way. Conversely it means that a no-name VC would have to simply outbid an established player (i.e. cough up more cash for lesser equity) just to get a chance to get a foot in the door. They may still lose in this game since most good startups realize the value of strategic advice over money and may still decline such an offer; as Peter Witt (my professor at WHU) liked to say – if you want dumb money, ask your dentist; he will give you the money, and offer no advice!.

What are your options then – well, you then have to target the “not so good firms” to invest. Well that increases your risk…. an odd saying in what is already a highly risky business. Who stands to lose – well, the LP of course! Not only this, even startups should be cautious in working with these – to carefully evaluate what (apart from money) other resources are offered. If you can get money from one, then perhaps you can get money from another – see what else is on the table in terms of support.

But all in all, Berlin is now becoming an increasingly attractive place for folks to come and set up a business. The key is to set up – and hopefully with a well connected Angel investor – who has the right connections and contacts to the right VC’s. So when you grow (with the right advice and investment) you are automatically in the inner circle to help you get to the next stage. And if you are one of those who isn’t sure that his idea is there yet – Berlin is an even more attractive with money floating around…. it wasn’t like this, and not sure how long this will last…. but now it is there… so grab it!

Partnering at large corporations – secrets to succeed!

In the era of consolidation following the economic crises, many firms turned towards a ‘protect the core’ approach. One often adopted approach was the slashing of R&D budgets and consequently a diminishing pipeline of new products. These now lean companies are facing a new problem – what do you do when your core itself is shrinking! This is being fueled by rapid technology changes which allows substitutes to enter the market, many with a compelling service offering, and many times free of cost!

Given an option to either make (i.e. reinstate the development that you just fired), buy (who knows if this is a hype or will work?) – many large firms are turning to the third, the partner option. At the highest level this would seem simple – there are no integration headaches, no large in-house development costs; but many are realizing this is not as easy as it seems. This is best illustrated by a simple analogy, ‘have you ever seen an elephant dance with a mouse?‘. Nonetheless, rather than give up on what is and should be a clear cornerstone of new products offerings to keep customers happy, large companies can make some concrete steps in this direction.

• Make sure that the partnering and venturing team has the full backing of the management. This simply boils down to the fact that partner products should always be evaluated on par with similar internally developed offerings – no step-motherly treatment here.
• Ensure that the team understands the partner mindset. At best this would also mean that a few members if not all have past experience in such an environment. It is quite difficult to understand the challenges, needs and wants of small firms if you haven’t quite done it yourself.
• Do not subject your partner to the internal functions, realpolitik and bureaucracy in your organization. Instead work hard to make your own internal processes lean, efficient and less cumbersome. Best way to look at it – treat the partner as you would a customer; keep him happy! It is amazing how beneficial this could be to other divisions in your organization as well.
• Invest in being able to effectively manage multiple partnerships. Managing the first 3 – 10 are easy, managing 50 is another story altogether. This does not imply additional layers of complexity – but recognize the need to be abreast of and manage partner needs. The Microsoft way – i.e. categorize partners based upon a few select KPI’s (e.g. revenue, strategic interest etc) and then accordingly assign resources to them is quite effective in this respect. Have to give them credit here – they do know how to manage (without strangling) their partners to a good extent.
• And with all partners – do not be afraid of failure; monitor the progress, recognize if and when it is failing – and move on. Do not throw good money after bad.
• Finally – be patient. The above points may sound simple but do need some time to fall in place and for you see tangible results. Give yourself the time, and make management aware of the same. Last thing you need is the fruits of your labor falling apart halfway through because unrealistic short-term expectations have been set!

To Pitch as a Pope – Lessons for an entrepreneur via Pope Francis

You are not the front runner; in fact people don’t even know who you are. They expect one of the favorites – you do not fit the mold of the most eligible candidate by most (if not all) polls. But yet – here you stand, in full glare and knowing that the entire world is watching you, evaluating and interpreting your every move. You have just a few minutes to make a first impression – and you know that this has to count. This was the m-o-m-e-n-t yesterday, as aptly described by the CNN article when a relatively unknown Archbishop from Argentina was named Pope.

Of course, this is a totally different level altogether from an entrepreneur pitching in front of an audience of investors – in many ways it is simply not comparable (with one big factor being that the entrepreneur may have spent endless nights perfecting his pitch while the Pope – well, he may still be coming to terms with the fact that he life has dramatically changed forever before he addresses his audience). However, as I watched the whole episode live on television yesterday, I realized that in those brief moments there were some valuable nuggets which each entrepreneur (and for that extent anyone) could use. This is what I would like to analyze and share today. If you haven’t already watched it, then I would urge you to do so (NBC has a full slideshow, and so does the NYT among many other news services) – the points below would make a lot more sense

1. If you hesitate at the beginning don’t fret – it is only human to do so in what may be an uncertain (and perhaps unfriendly) environment. But do genuinely try to reach out to your audience. When Pope Francis emerged, he definitely would have known that the people were still scratching their heads to figure out who he was. His first gesture was that of a slight hesitation, but followed through with a friendly wave. This was a far cry from the clasped hands of past Popes; it was more a down to earth, “hello there” gesture which connected with the teeming masses gathered below. If anything – it served to break the ice.
2. Understand your audience and address them appropriately – this is genuinely difficult to do if you are trying to address the entire world. But his use of Italian (instead of the more archaic Latin) and simple, well paused sentences allowed him to directly reach out to the people. Entrepreneurs could well learn to keep language simple, be direct and to the point rather than ramble on. If thoughts are complex – make them simple. People understand SIMPLE far more than anything else – although many would love to believe otherwise
3. Be watchful of the unspoken word – inasmuch as people pay attention to what you say, they also pay attention to your non-verbal communication. This is not only important for your audience but many a time equally important for your employees. The Pope’s display was simply masterful here – upon entering he insisted on being on the same level as the other cardinals, rather than on an elevated platform. This and his choice of clothing, preferring a simple white garment compared to the deep red vestments sent a clear message to his own. In a company, this type of message can be critical – maintaining and boosting employee morale when they see their CEO among them, rather than choosing a helicopter status.
4. Get your audience engaged and excited about what you have to offer, be genuine and passionate about it. People can and will recognize a smoke-screen. As it has been said, you can fool a person only so many times. Here the Pope did work the crowd in his own inimitable way. He made a small joke, but more importantly asked the people to pray for him before he blessed them. Remember, here is the guy who for Catholics is God’s CEO on earth – he should be the guy blessing them, but is humble enough to ask people for their prayers. This simply captivated the audience. As an entrepreneur, do recognize that you may not be the best at everything, you are talking to investors or other people in the audience because you need something. Being sincere and humble about it is important. The right people can understand and appreciate that.
5. Always thank your audience – if there was a parting master-stroke this was it, when the Pope requested the microphone after the announcement and thanked the audience for coming and wished them a good night. Remember, he didn’t need to do so – they were there of their own volition. But in reaching out once again, even if they forgot what he had said earlier they were left with a warm and positive impression in their heart. An entrepreneur could well keep this in mind, even though your audience may have come to invest in you and seek returns, still they are taking time out from other things – even if it just for 5 minutes to hear you. And even though they may be interested in investing to seek returns, there are few who will invest if they don’t like the person. You have 5 minutes to make yourself likable – make it count.

This is pretty much what I could gather in a nutshell, perhaps there are more. Although none of what I have written is new or rocket science, just seeing it in action was nice – as for me I was left with a nice and happy feeling in my heart.

If I were an investor – I would have invested in him!

The (un)manager – lessons from Zygna and Twitter

The past few months have seen some of the new found darlings of the Web 2.0 generation literally getting their dirty laundry displayed in the open. When all was going well, these very people couldn’t do anything wrong adorning the front pages of all magazine with adulation including ‘whiz-kid’ to most ‘smartly dressed executive’. One would ever wonder if they had some super-human element in them. However, as their companies faded the reality was starkly revealed. I do not condemn these folk, from an outsider’s perspective it is quite difficult to understand why they did what they did – but perhaps, it does serve as a learning for some of us in the future.

Let us start with Marc Pincus. When Zygna’s star was rising he was the the man with the vision, the man who couldn’t take a mis-step. But then some details popped up that left me puzzled. For starters, the manner in which he dealt with a few key executives by clawing back shares pre-IPO. When you join a start-up a big hope is to hit the jackpot when you go IPO, not sure how it would have felt if suddenly you realize you are back on the street where you started. More so, how would the other employees have felt – would they ever trust the guy who hired them in the first place for not doing so. And then, post IPO, immediately cashing out on a significant portion of the stock. Does speak volumes for the long term success of the company. In reading through blogs, and more interestingly the readers comments you come to get a flavor of the problems at Zygna. No clear strategy, a company where Marc pushes people to perform, tries to compartmentalize innovation and force design of the next big Farmville, disillusionment from its designers, more firings….. seems to be like a vicious cycle.

The next would be Jack Dorsey of Twitter and Square fame. I will admit that I do admire his products, especially Square but behind that blue eyed boy is apparently a person you do not want to see the bad side off. So much so, when he came back to spend more time at Twitter (after divving up time between Square and Twitter) the developer team was up in arms due to his abrasive style. No wonder, in a short span of time, he was ‘coaxed’ to renege his role towards a more passive capacity.

This does bring me to the crux of the issue. Sometimes managers do need to force the issue, but many a time they need to master the art to convince. Just because you are smart, there is little (or perhaps even negative) benefit in thinking that it has to be your way or the highway. This is especially true in the new age industries where good talent is scare and firms are ready to pay top dollar to lure away good people. These people work because they like the subject, the money is good – but indeed they have other avenues to earn the same. Treating them as crap, or behaving in an arbitrary, high handed manner doesn’t get you any brownie points. If anything, you need to be thankful that you do have the super-star developer in your team – else he may just have been sitting with your competitor. And finally, whatever you do – do think two steps ahead. I am not sure if Marc even thought of what the ripple effect would be if he took back shares of  early employees pre-IPO. Would a few millions here and there have dented his wealth? Would some goodwill have helped retained some of his key people, and perhaps attracted others?

In the end, we will not know – but as is painfully seen, down the line, the efforts of your past will either bear you rich dividends, or perhaps lead you to the path of despair.