Europe's Startups Are Showing Signs Of Life

Germany is leading the way in trying to spur new business creation -- and it's paying off

The Munich office of venture-capital firm Apax Partners went through all of 2002 and most of 2003 without backing a single startup company. Then, in December, the firm joined a consortium that invested $11 million in Geneva-based ACOL Technologies, a maker of light diodes. In January, Apax signed a deal to back an undisclosed German maker of miniature motors. And Apax expects to sign yet another deal in a few weeks with a German maker of solar energy cells.

A startup boom? Well, of sorts. The new investments at Apax are among several indicators that Europe's moribund entrepreneurial scene is showing signs of life. Early-stage investment by venture-capital companies -- the kind that goes to startups -- rose 28% to $440 million in the third quarter of 2003 from the previous quarter, according to the European Private Equity & Venture Capital Assn. In Germany, a new program to encourage self-employment has helped drive an increase in the net number of startups in 2003, according to rating agency Creditreform.

The picture is mixed in France. Business startups during the first 11 months of last year surged nearly 11% from the same period in 2002, but most were one-person businesses that haven't generated new jobs. Still, some business advocates say that the center-right government's efforts to boost business creation, including the repeal last year of minimum startup-capital requirements, are encouraging more people to become entrepreneurs. "There has been a real change in peoples' thinking," says Sandrine Wehrli of the Chamber of Commerce & Industry for the Val d'Oise and Yvelines regions outside Paris.

MOVING BEYOND IDEAS. If business creation can gather momentum, that is good news indeed for the European economy. The Continent, led by Germany, has long lagged Britain and the U.S. in entrepreneurial drive. The rap has been that Europeans are pretty good at inventing things but bad at spinning their discoveries into gold. "New product concepts have often come from Europe, but they have often been commercialized in Silicon Valley," says Apax partner Christian Reitberger, noting that a German research institute invented the technology behind MP3 music players, while foreign companies such as Sony Corp. (SNE ) made all the money. The result: Europe hasn't created enough new companies to replace the jobs eliminated by traditional manufacturers.

A stronger economy helps prompt creation of new business. But some credit should also go to governments, universities, and business groups, which for years have been trying to encourage entrepreneurs by offering cheap financing, reducing bureaucracy, and teaching scientists how to commercialize their discoveries.

Now it looks as if, in Germany at least, the efforts are beginning to pay off. "It's getting easier and easier to set up your own business," says Friedrich von Nathusius, 48, former director of business development for Citigroup Asset Management (C ) in Germany and Austria. Von Nathusius, who left Citigroup last year after his department was eliminated, is creating his own company, Convexity, to help foreign asset managers market funds in Germany. He is taking advantage of a new law that will allow entrepreneurs to set up a limited liability corporation for just one euro.

The pro-entrepreneurial measures have also borne fruit for Eleonore Haltner, co-founder and managing director of Across Barriers, a biotech startup in Saarbrücken, Germany. Drawing on her doctoral research in the mid-1990s, Haltner developed methods to determine how a given drug is most efficiently absorbed by the human body. In 1998 she and a professor started Across Barriers to help pharmaceutical companies decide, for example, whether a new medication should be injected or swallowed.

A few years ago, Haltner's business idea might not have gotten very far. But she was able to take advantage of the so-called Starter Center at the University of Saarland, where entrepreneurs get cheap office space, access to lab equipment, and crash courses in business fundamentals. The support "allowed us to survive the first two years until we got financing," says Haltner, 43. Today, Across Barriers has more than $2 million in sales and 30 employees. Haltner expects the company to be profitable in 2004.

State aid also has given some French entrepreneurs a leg up. In 2002, Marc Danto quit his sales job at French dairy giant Group Danone (DA ) and got a loan from the government-backed Development Bank for Small & Midsized Companies. He set up a business in the Paris suburbs that acts as a sales representative for food companies. "Once you have [the government loan], you can convince other banks to lend to you," says Danto, whose company, Exocet, now employs 12 people.

Government largesse also is largely responsible for a surge in one-person startups in Germany. Burkhard Treiber, a 46-year-old resident of Hanover, drove a taxi after budget cuts eliminated his job teaching handicapped children. Last year, after the taxi company went broke, he signed up for Germany's Ich AG (Me Inc.) program, which provides small subsidies in lieu of unemployment benefits to jobless people. Backed by $750 a month from the government, a sum that declines gradually before running out in three years, the certified chess teacher has enough work coaching would-be grand masters that he is thinking of hiring an assistant. The Ich AG program "has been a lucky break for me," Treiber says.

Even under the best-case scenarios, self-employment programs will barely nick unemployment, which in Germany amounts to 4.3 million people, vs. about 90,000 Ich AGs. The biggest problem for would-be entrepreneurs may be the lack of ways for financial backers of startups to cash out once a new company has become successful. One of the most lucrative options is to sell the company on the stock market via an initial public offering. But the collapse of Frankfurt's tech-heavy Neuer Markt in 2003 burned thousands of retail investors, who are needed to fuel a lively market for small-cap stocks. "An awful lot of trust was squandered," says Stefanie Franzke, an economist at the Center for Financial Studies in Frankfurt.

But at least the IPO market is stirring. Several new tech IPOs are expected on the Frankfurt Stock Exchange in coming months, including Munich-based Wacker Siltronic, a $1.3 billion maker of silicon wafers for the semiconductor industry, and X-Fab Semiconductor Foundries, an Erfurt-based producer of custom chips. Although both are large, established companies, successful offerings could shake loose the IPO market and encourage startup investment. With any luck, a little entrepreneurial spirit will prove contagious.

By Jack Ewing, with Andrea Zammert, in Frankfurt, and Carol Matlack and Rachel Tiplady in Paris

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