Number of High-Tech Start-Ups in Germany Decreasing

Firm Foundations

Over the past year, the number of newly founded firms in the German high-tech sector has decreased. Compared to the previous year, it fell 16 per cent and thus reached a new low point. These are the major findings of a current study conducted by the Centre for European Economic Research (ZEW) in Mannheim on behalf of the business magazine impulse and Microsoft Deutschland GmbH.

The study titled "High-Tech Start-Ups in Germany" examines the development of start-up activity in technology and knowledge-intensive economic branches between 1995 and 2005. A supplementary survey among 1,000 high-tech companies suggested that particularly research institutes and universities give important impulses. Young companies in close contact with science, and start-ups actively involved in research and development (R&D) display higher sales and employment growth than companies without R&D investments.

Some of the most important factors of success are still the orientation of a product and service range towards the use value of customers, the qualification of the founding team and its members as well as flexibility to respond rapidly to changes in the market. The study is based on the biannual ZEW Start-up Panel drawing on data provided by Creditreform. The study also took into account the results of the survey among more than 1,000 young high-tech start-ups to identify specific success parameters, barriers and risks for the development of these new high-tech companies.

Universities and Research Institutes Give Impulses

In 69 per cent of all high-tech start-ups, at least one founding member has completed a higher education programme. Moreover, in almost 20 per cent of the firms, one of the founding members had been previously employed at a university or public research institution. About 10 per cent of the companies state that the business concept was directly inspired by science.

This illustrates the great impact of academic education and research on the development of the German high-tech sector. Another major task of universities is the education of qualified staff. High-tech firms primarily require high-skilled workers with a sciences and engineering background, which are not available in sufficient numbers on the labour market. Three quarters of the questioned founders consider “high-skilled workers” to be a key success factor for their companies. At the same time, every fifth company sees the lack of qualified staff as a major obstacle to development.

Jürgen Gallmann, chair executive officer of Microsoft Deutschland GmbH, commented on the results of the study: "The low number of high-tech start-ups is alarming since the future of Germany as an internationally competitive business location depends on innovations in the field of advanced technology. Politicians, scientists and economists should therefore increasingly promote the exchange between research institutes and enterprises as many high-tech start-ups are established in an academic context. The established firms' sales and marketing know-how can make a major contribution to the success of younger companies in order to access new markets and create sustainable jobs. Microsoft Deutschland's initiative for high-tech start-ups "unternimm was." ("take action.") provides necessary support and stimulates a new start-up atmosphere."

Innovative Founders Prevail

About 78 per cent of the questioned founders consider "customer retention" the most important success factor for their corporate development. Other factors are the adaptability to changing market situations (64 per cent), the use of the latest information and communication technology and modern software (56 or 52 per cent) as well as innovation (49 per cent). These results show that consistent market orientation and a quick reaction to changes on the market ensure success. Companies that are continuously involved in R&D exhibit significantly higher employment growth than firms without their own R&D activities.

The highest obstacle for starting a business remains the lack of financing, which is seen as a barrier to corporate development by a third of the companies. The majority states that financing constraints constitute a major risk for the future (23 per cent consider them to be of high significance, 43 per cent of medium significance). Especially fast-growing companies attach great importance to this factor. Financial constraints are often caused by shortcomings in the financial management of the enterprises. Shortcomings in strategic management can also become apparent in other areas. Almost one out of ten companies considers the lack of commercial knowledge to be a major obstacle to development whereas about 33 per cent attach slightly less importance to it. For successful high-tech start-ups, it is thus an essential task to convey commercial knowledge. "Without sufficient economic competence, even very innovative high-tech start-ups struggle in the face of tough price competition," stresses Dr. Klaus Schweinsberg, chief editor of impulse.

2005 Decrease in Start-Up Numbers Reaccelerated

The study suggests that the start-up numbers in the technology-intensive sectors of the manufacturing industry have been decreasing for years. The downward trend of 2005 accelerated in all technology and knowledge- intensive branches. In the high-tech sector, the number of newly founded firms dropped by a total of 16 per cent compared to the previous year. Last year’s start-up activity was thus 30 per cent below the 1995 level. But even though the development of software start-ups is regressive as well, the overall picture is positive. The number of software start-ups fell in 2001, 2002 and 2005, but remained stable in 2003 and 2004. Due to the strong increase until 2000, the number of new software firms in 2005 still exceeds the level of 1995 by 13 per cent.

On the whole, the share of start-ups in technology and knowledge-intensive sectors of the overall start-up activity has decreased over the past ten years. The proportion made up 9 per cent in 2000 and dropped to about 6.5 per cent until 2005.

Dr. Georg Licht, head of the ZEW Research Department "Industrial Economics and International Management" adds that " the decreasing start-up numbers in the high-tech sector are a major alarm signal. Germany’s economic growth, which has been on a low level for more than a decade, does not provide any perspectives for young enterprises. The first step towards one's own business seems increasingly unattractive. However, a leading international location for high-tech products requires a constant flow of new business ideas that persistently challenge established companies. Therefore, innovation policy and economic policy should prioritise the promotion of business formation and the improvement of framework conditions for small and young firms."

High-Tech Companies Face the Future with Optimism

Even though start-up numbers are decreasing, the majority of high-tech companies past their first years are facing the future with optimism. That particularly applies to software companies. 85 per cent of them expect their economic prospects to improve; only one per cent raises concern about a deterioration.

Technologies employed for business purposes also influence corporate development. The majority of high-tech companies attach great importance to business development software (49 per cent). Telecommunications /media (36 per cent) and microelectronics (19 per cent) rank second and third. Information technology (IT) thus offers the best growth prospects for the majority of young high-tech companies.

Contact

Dr. Georg Licht, Phone: +49(0)621/1235-177, E-mail: licht@zew.de