The upcoming “coopetition” of family business and startups

Hamburg in the North, founding member of the Hanseatic League and the second-busiest port in Europe; Lake Constance in the South, birthplace of the Zeppelin airship and Germany’s “Blech Valley” because of its manufacturing industry; Berlin, the start-up capital of Europe. All these places — though very different — have two things in common. Besides the fact that they mark the geography of my own background (and upbringing), their economic and social ecosystem are characterized by the “German Mittelstand” as the home of mostly family-owned businesses.

Family-owned businesses are the most important part of Germany’s economy, positively reinforcing local ties as well as responsibility to employees and respective families. About 91 percent of all German companies are family-owned “Mittelstand”, but responsible for 48 percent of Germany’s economic power. Also, family-owned businesses often perform above average in their field of operation (4.6 percent revenue growth of the 500 largest family-owned businesses from 2007–2012, as compared to 1.9 of DAX companies), according to the Foundation for Family Businesses in Germany and Europe, overcoming challenges better than their non-family counterparts. Family-owned businesses mostly do business in a sustainable way, thus providing a blueprint for successful business models which also have an impact on the public value. This success is recognized globally and especially in the US, as according to The Atlantic, “Germany seems to offer a blueprint for Obama’s middle-out economic agenda”. But there is more that must be taken into account. In Forbes’ article, “The Family Secret That Makes German Companies So Successful”, the argument speaks to the fact that “many (of these businesses) are owned, at least in part, by foundations”, and through “a model that has been common in Germany for more than a century, foundations do not have return on capital as their principal goal.” “This attitude is continuing in the new generation inheriting a business,” as Axel Steffen, a Hamburg-based director and specialist for SME and family-run businesses at PwC, summarizes a number of studies done globaly by the network, especially their soon to be released “Next Generation Survey 2016”.

However, on the other hand, “Europe’s biggest economy is rightly worried that digitization is a threat to its industrial leadership” The German automobile industry — which includes family-owned businesses like Bosch, Volkswagen, BMW, and Schaeffler/Continental — serves as an example, as “Some fear that its carmakers, which directly or indirectly employ one in seven workers nationwide, could be demoted to low-margin metal-bashers, while American tech giants make most of the money by providing the software and the in-car entertainment” — and perhaps, in time, designing the cars themselves.

Here one can see the Silicon Valley approach of “software eating the world,” as Marc Andreessen said. This obviously is THE most successful approach to entrepreneurship so far, enabling a huge amount of innovation in the US and globally. But there are growing criticisms from very different angles that the “Silicon Valley unicorns” can’t ensure real growth in value — long-term, sustainable and fair also from a stakeholder-perspective. On the other hand, we fear that the “German Mittelstand” is not innovative enough, still too hierarchical and often much too slow.

But wait — can’t both sides learn very much from each other and collaborate in many ways? I have discussed this often in the past several weeks, notably with Prof. Dr. Habil. Günther Strunk of Leuphana University Lüneburg, a leading researcher on these issues and director of the Hamburg Institute of Family Owned Business, who comments that “Germany’s family-owned businesses are successful in the most different industries, while building up this success on fundamental great entrepreneurial courage and a spirit of innovation of the founder family.” Professor Strunk concludes that, “Germany’s family-owned business for the most part have the willingness, but lack the readiness in their organizational culture to collaborate with or invest in start-ups. There are many opportunities for synergies and lasting growth, though, and this is understood especially by the young generation in the owner families.”

These synergies can take a variety of forms, which can be seen well here in the North: Hamburg is Germany’s capital of family-owned businesses (34 top-companies have their headquarters here, including the Otto Group, Jungheinrich, Fielmann, Wempe, and Peek & Cloppenburg) but is also the home of Germany’s latest unicorn, XING, which now belongs to Hubert Burda Media, a family owned publishing company. XING-founder Lars Hinrichs was raised in an entrepreneurial family, but decided not to enter the family business, instead becoming a serial entrepreneur (disrupting the structurally conservative residential economy with his “Apartimentum” right now) and top-advisor to the European Commission on their “Startup Europe” campaign instead, honoured by the World Economic Forum and invited as the first Member of the Supervisory Board Deutsche Telekom with an “entrepreneurial” background.

Having had the pleasure of co-authoring a book chapter on (social) entrepreneurship and innovation with Mr. Hinrichs that was chosen by Germany’s former Minister for Economic and Labor Affairs, Wolfgang Clement, to be published in his book on the future of social market economy last year, I was able to discuss many aspects with many startup-founders, family-owned businesses and researchers like Professor Strunk. As a result of this, Lars Hinrichs and I argue that there might be some “positive gene defect,” which — in the right “epigenetic”, socio-economic context, so to say — empowers you to either succeed your parents as a company inheritor (and to transform it into the digital age), or to start your own company. 75 percent of the young generation wants to become a successor to their parents and lead “their” company into the 21th century, and, furthermore, 47 percent of the general population in Germany wants to start their own business, according to the German Federal Association of Young Entrepreneurs.

It seems to be an untapped potential for creating innovations and sustainable growth, to “infect” the “German Mittelstand” and its “gene pool” with this “positive gene defect” — and vice versa the “stable” fundamental philosophy of family-owned businesses are suitable to help entrepreneurs who want to shape the future of social market economies in Europe and around the world. We need knowledgeable parties, reliable and respected by both communities, to make such an exchange of ideas and values happen and to ensure the potential that comes with this is released. The coopetition that will follow, this special type of collaboration building upon the simultaneous cooperation and competition that have been described in game theory, will empower our economies to come up with the best kind of growth, whilst simultaneously allowing all kind of disruptions and / or opting out of potential innovations in whatever regions and industries in whatever state and extent that makes sense. Policymakers, universities and associations should contribute to such a preferable outcome.

After all, even international midmarket companies were start-ups at some point.