German firms embrace start-ups to catch up with digital world

By Caroline Copley

DUESSELDORF, Germany (Reuters) – Latecomers to the digital age, big German companies have started teaming up with start-ups to shake up their conservative business culture and keep pace with a world increasingly dominated by nimble tech giants.

More than half of the firms on Germany’s blue-chip DAX index (.GDAXI) trace their roots back to the 19th century or earlier. The youngest corporate, SAP, was founded 43 years ago.

In contrast, around half of the top 30 companies on the Nasdaq (.NDX) were set up in the 1980s or later and the fourth-biggest firm, Facebook (FB.O), was established about a decade ago.

German companies are the engine of Europe’s biggest economy, which is the financial bedrock of the euro zone. But government officials and company executives fear they could fall far behind if they cannot swiftly identify and adopt innovations in web and smartphone technology that have driven the success of Google (GOOGL.O), Apple (AAPL.O) and Amazon (AMZN.O).

Mindful of the danger, companies such Metro (MEOG.DE), Bayer (BAYGn.DE), Evonik (EVKn.DE), Merck KGaA (MRCG.DE) and Deutsche Telekom (DTEGn.DE) are now investing in start-ups – seeking to gain digital expertise, as well as to embrace newcomers whose innovations could represent threats to their own businesses.

This trend could help address a shortage of venture capital that has stunted innovation. Although investment in German start-ups more than doubled to $ 1.74 billion last year, this was less than the amount raised by U.S. car-sharing company Uber alone. In contrast, U.S.-based start-ups drew $ 49.39 billion, according to Thomson Reuters data.

“What’s missing is that companies like ourselves open up their resources to help others to grow,” Metro Chief Executive Olaf Koch told Reuters at an Innovation in Retail Meetup event on the retailer’s campus in Duesseldorf.

“We can make small companies big.”

VENTURE FUNDS

The cash-and-carry chain will choose 10 start-ups for an “accelerator” programme in which it will supply its business experience, as well as use of its sales force.

Among those hoping to catch Koch’s eye at the informal Duesseldorf Meetup were POSpulse, which uses crowdsourcing and smartphones to conduct market research, Dinnery, an online high-end meal delivery service, Bauerntuete, an online farmers’ market, and KptnCook, an app that combines daily recipes with shopping lists for local supermarkets.

Healthcare firms Bayer, Merck and Boehringer Ingelheim, Deutsche Telekom and chemicals group Evonik, meanwhile, have all set up multi-million euro in-house venture funds. Deutsche Telekom has pledged to invest 500 million euros ($ 542 million) in Germany’s start-up scene over the next five years.

Companies that have seen digital innovations savage the business models of industries such as telecoms and media are desperate not to snooze through the next revolution, said Christian Miele, of Germany’s Start-up ?Association.

“Every big corporate has the problem of being too slow to adapt and move at the same speed as a startup,” he said.

“If a WhatsApp comes around the corner, disrupts your business and kills a billion dollars in revenue for every telco in the world, you start to think, what did we not see here?”

Fewer than half of Germany’s top 500 companies have a comprehensive digital strategy, according to a study by Accenture.

Moreover, just 11 percent use social media and only 6 percent cloud computing, the European Commission’s Digital Economy Index published at the end of February showed.

RISK-TAKING

Mail order company Otto’s catalogue model, for example, meant it was ideally placed to capitalise on the online shopping boom, but the 66-year-old firm has been steadily losing market share to digital upstart Zalando (ZALG.DE) and Amazon.

The company announced plans in February to invest a high double-digit million euro sum in a venture capital fund over the next business year.

The German government – seeking to encourage the kind of game-changing innovation that saw Daimler (DAIGn.DE) disrupt the horse-carriage industry at the end of the 19th Century – has announced plans to try to promote startups. They include a pre-market web platform to connect young companies with investors.

But critics say the measures do not go far enough.

“We must make venture capital investment in Germany easier and, above all, more attractive in terms of taxation. This would strengthen the country’s innovative capability and would also be an important step towards more growth and new jobs,” Bayer boss Marijn Dekkers said last month.

Chancellor Angela Merkel believes a bigger obstacle may be an entrenched fear of failure.

“This culture of investing in start-ups … of taking risks and of being able to live with the fact that only one in 10 projects will end successfully … is something that is perhaps more pronounced in the United States and maybe even in South Korea,” she said in her weekly podcast this month.

Still, Christoph Keese, executive vice president at media group Axel Springer (SPRGn.DE), dismisses the notion that Germans lack the national character for risk-taking and insists the country can make up digital ground.

“We’ve lost the first round but that doesn’t mean we can’t win the second or third round.”

($ 1 = 0.9232 euros)

(Additional reporting by Ludwig Burger in Frankfurt; Editing by Pravin Char)