Sprechen Sie Startup?

Germany could use more entrepreneurs

Amid the devastation and despair that followed World War II, there was one curiously positive development in Germany. Demoralized citizens sought refuge in work, pouring their energies into the creation of thousands of manufacturing companies: the famous Mittelstand. Those new auto-parts companies and machinery makers created so much wealth and employment that by the end of the 1950s, Germany was richer than it had ever been--and needed to import workers to keep its factories running.

Today, the German entrepreneurial gene seems to be dormant. The offspring of that founding generation have grown comfortable and risk-averse. They often prefer secure jobs with big companies--or better yet, the government. That's a problem for the economy, since it is startups, not large, old corporations, that create the most jobs. The need for startups is taking on new urgency as giants such as Deutsche Bank (DB ) and Siemens (SI ) slash payrolls. That has put unemployment, now at 9.5%, back on an upward trend.

The statistics aren't encouraging. Deutsche Ausgleichsbank, the German government's main vehicle for promoting start-ups, gave out 19% fewer loans to entrepreneurs in 2000 because of fewer applications. The decline has continued this year. But buried in the data is one bit of good news: Loans to technology startups, such as biotech and information-technology companies, rose 31%, to $455 million, in 2000. And tech companies create the most jobs. Overall, companies backed by the Ausgleichsbank accounted for 320,000 jobs in Germany last year, a significant number in a country with 3.9 million unemployed.

Anecdotal evidence points to a new entrepreneurial spirit among younger Germans--even after the dot-com meltdown. In the Munich suburb of Unterföhring, a group of ex-investment bankers and management consultants have redeployed their expertise to sell pet supplies online. Never mind that Zooplus CEO Roland Honekamp, formerly with Boston Consulting Group, doesn't own so much as a parakeet. He and some friends hatched the company in 1999. "We thought, `Other people can do it, why not us?"' says the 30-year-old.

Online pet suppliers bombed in the U.S., but Honekamp thinks the $3 billion German-speaking market is different. There's no nationwide pet chain, so he figures Zooplus can beat mom-and-pop pet shops on price and selection. Honekamp also realized it was a mistake to rely solely on the Internet, so he has introduced a mail-order catalogue as well. Zooplus, which employs 25 people, hopes to be cash-flow positive next year. Its sales reached $2.4 million in the third quarter, nearly triple their year-earlier level.

RED TAPE. There's no question that Germany could be kinder to its entrepreneurs. Startups must contend with a tangle of government regulations that can place them at a disadvantage with international rivals. A new German company requires an average of seven government approvals to begin operations, compared with four in the U.S. and two in Canada, according to Opportunity for All, a Cologne group that lobbies for economic reform. Fledgling companies are also hobbled by rigid labor rules, a problem throughout Europe. It is possible to lay off workers, for example, but the process is lengthy and often costly because of severance payments. On the plus side, the dot-com frenzy fostered a venture-capital industry, which barely existed before. Federal and state banks chip in, too--Zooplus raised $18 million in venture capital and government funds.

If only the public at large were as supportive. "When I started [my company], my grandfather and grandmother were upset because I resigned [from] a really nice job," says Marc-Achim Elmhorst, founder of Hanover-based SBE Software Beratung Elmhorst, a consulting firm with seven employees. "In Germany, it's more important to stay within a social framework." In a recent poll by the Allensbach Institute, an opinion-research firm, only 29% of respondents said entrepreneurs contribute to society.

Still, Zooplus' Honekamp has no trouble finding workers willing to accept the long hours and insecurity of a startup. "They're totally open to working for a new company," he says. If that spirit can spread nationwide, Germany could witness another economic miracle.

By Jack Ewing in Frankfurt

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