Douwe Osinga's Blog: Silicon Valley Startups vs German Startups

Thursday, September 27, 2012

A lot of entrepreneurs who are starting out in Europe I talk to seem to have trouble with the ambition. Where as your 22 year old Silicon Valley startup will happily declare that their iPhone app will soon completely change the financial industry and chance banking as we know it, your average Berlin starter-upper seems to be satisfied to build a company that will let them and a 9 friends do something they like while making enough money to live a modest lifestyle.

It's easy to jump to the conclusion that the key to success is thinking big. But there is such a thing as thinking too big. At Google even before he became CEO Larry had the reputation that no matter what was pitched as a new project, his answer was always, no, no, your solving the wrong problem. You need to solve the underlying, bigger issue. Always solve the biggest problem available.

I was once pitched this idea of a structured data wiki at Google. There's lots of people that for whatever reason are very much interested in certain subjects and giving them the tools to organise themselves in "data communities" seemed to me like a good way to get some hard data into what is now the knowledge graph of Google. Larry didn't agree. Why build a tool for communities? Why only do structured data? Why do wikis? We should make it so that any part of the World Wide Web should be editable by anybody with the ability to annotate anything with any semantic value. 

Obviously that went nowhere. The best ideas that turn out big don't start that way; they often start with a small wonderment about something and grow from there. They say go big or go home, but go big prematurely and you go home too.

It is not only about the right amount of bigness the think about, but it occurs to me there's also a choice to be made to think about depths versus breadth. The Silicon Valley and German model make an interesting if idealised comparison. They start the same; somebody comes up with an interesting idea, builds a prototype, get some more people involved and they decide to go for it: to start a new company. A quick look at the wider market tells them of course that there are a lot of players already.

The Silicon Valley startup will look at this market and then try to raise enough money to throw enough resources to match the opportunity. To disrupt the market by changing the rules for everybody. This could fail at various levels of course; they might not raise the money, there's probably other startups with similar ideas and intentions and the market might simply not be disruptable. But if it works the pay off is obviously very large. Worst case you end up with a zombie company, best case with something like AirBnb.

The German startup meanwhile looks at the market and then decides to narrow down their focus on the biggest niche that is defendable and then focusses on becoming the very best in precisely this niche. It seems at first that this is the formula for a life style company but then by relentlessly focussing on their small and defendable niche and choosing product quality over short term profitability some of these companies become the best of the world in their respective area and join the ranks of the much admired Mittelstand. Worst case you end up with a struggling lifestyle company, best case with an unknown world-beater like Putzmeister who make the concrete pumping machines and export to all over the world.

The difference has partly to do with culture but also a lot with money. In Silicon Valley you can raise millions with a new company but only in return for the promise to build a 100 million dollar company. In return for 3 million dollars your VC will want 30% of the company and a path to making their money back 10 times - they'll value your company at 10 million now if you can show how you could sell it for 100 million later. This gives the startup not only the resources to go for a disrupt strategy but it also requires it.

For the German company it is usually much harder to raise significant amounts of money. A seed round against a very modest valuation is usually all that's to be had. Without the resources for immediate expansion, they focus on finding the right niche and building the right product for that niche. They might be successful but will typically remain small or make it to what they call middle-sized.

If you want you can see in this a reflection of the German approach to making things work the best they can and the American approach of going for bulk as fast as possible.