The economic success of large corporations from German core sectors such as automotive, mechanical engineering, and chemicals, and a large number of well-established medium-sized businesses—known as the Mittelstand—have fueled Germany’s steady GDP growth over the last several decades. More recently, however, technology advancements, particularly in the areas of digitalization and connectivity, are compelling Germany to reimagine the fundamentals of its economy. The widespread conclusion is that a robust start-up ecosystem—enabled by these technology trends and comprised of founders, their businesses, corporates and SMEs, educational institutions, investors, and government agencies—needs to become a pillar of the economy if Germany is to remain prosperous at home and competitive abroad.
What entrepreneurship could deliver by 2030
To be clear, entrepreneurship has been and continues to be a part of the modern German economy. Today, approximately 2,900 start-ups are launched in Germany annually. For the start-up ecosystem to deliver next-level change, however, the already high dynamic of the start-up ecosystem will almost certainly have to be accelerated.
On its current trajectory, start-ups could create just over €1 trillion in value until 2030. With a 50 percent increase in founding activity, start-ups could create another €500 billion (Exhibit 1), but just adding more start-ups is only part of the strategy. Start-ups could become more successful. According to a major new McKinsey research effort, supporting the launch of more start-ups and investing in the success of start-ups could generate a total of €2.3 trillion in value and create 1.44 million jobs by 2030—almost twice as many as would exist at the current pace of creation and success.
More start-ups, please
For many potential founders, the entrepreneurial journey stops before it even begins. Currently, half of those surveyed see entrepreneurship as a viable professional path for themselves, and 11 percent have definite plans to start a company. However, too few people decide to found companies in the end; currently, only half of the people with definite plans, or 5 percent.1 There are two reasons for this: the lack of a clear entrepreneurial mindset and obstacles in the founding process, like the fear of financial insecurity or the lack of entrepreneurial knowledge. Launching a business is still too difficult and time-consuming in Germany. Local and national governments could explore ways to halve the number of tasks related to founding a company.2 A simplified, digitalized bureaucracy and taxation process for companies up to a certain size could also significantly reduce the time, effort, and costs associated with registration, including contracting a notary or tax adviser. Streamlining this process could enable founders to focus on what really matters.
Digging deeper, there are five specific sources for additional start-ups that could collectively double the number of start-ups being founded in the year 2030, to a total of 5,800 (Exhibit 2). Taking ramp-up effects into account, this translates to a 50 percent increase in the total number of start-ups founded in the timeframe between now and 2030, or 41,000 start-ups in that timeframe.
More spin-offs coming out of universities and research institutions. Universities are already home to the research and innovation that leads to innovative new businesses. Only a few universities, however, graduate students who go on to become founders. With curricula that expose students to and prepare students for entrepreneurship along with the resources that support innovation, start-up labs and universities could contribute to the launch of an additional 1,350 start-ups annually in 2030.
Double the share of female founders. Women in Germany today are about as willing as men to build a company (48 percent).3 But when it comes to actually starting a company, there is a significant gender gap, with women only accounting for 16 percent of today’s founders. Only 5.2 percent of women-led start-up teams have received €1 million in funding compared with 27.8 percent of those led by men.4 Initiatives to bring greater gender parity to entrepreneurship, including increased access to both mentoring and financing for women, could add another 630 start-ups to Germany’s start-up ecosystem founded annually.
Double the share of founders without a university education. While there is potential for universities to be bigger launching pads for founders, investing in the potential of entrepreneurial-minded people without a university education is also a wise endeavor. Almost half of Germans with only a high school diploma express an interest in founding a company,5 but of actual founders, less than 20 percent do not hold university degrees. Campaigns to highlight the successes of founders without university degrees and support those who might follow in their footsteps could lead to an 520 additional annual start-ups being founded in 2030 .
More founders in their thirties. Looking at famous tech pioneers could easily give the impression that founders need to be barely out of university to become successful. But research has shown that the average age of a successful start-up founder is 45 years.6 A collaboration between private employers and the public sector could enable employees to “try out” their own business via a paid leave of absence. Prospective founders could reduce the risk associated with quitting their jobs, and the start-up ecosystem could gain the benefit of innovators who bring real-world experience and higher chances of success. Programs such as this could help launch 220 additional start-ups founded annually in 2030.
Support migrant community talent pool. Today the migrant community or their descendants report higher interest in starting a company than their non-migrant peers (59 percent and 49 percent, respectively) but they make up only 20 percent of current founders.7 Systematic support of a growing talent pool could lead to 180 additional start-ups in Germany founded annually in 2030.
Fueling start-ups’ success
Of course, increasing the number of start-ups over the coming decade would be only half the solution; making start-ups even more successful could be the other half. The metrics of success vary and are strongly dependent on founders’ aspirations for their companies. But with the right set of structures and mechanisms put in place, two general start-up categories—hypergrowth companies and the New German Mittelstand—could help drive such increased success.
Hypergrowth companies commit to raising money round after round, preparing for exits valued in the billions. Hypergrowth companies could represent 85 percent of the value of Germany’s start-up ecosystem by 2030. To get there, however, these companies need to secure late-stage funding, which has been challenging for German start-ups. From Series A to Series D, German start-ups become increasingly less likely than their US counterparts to raise money (Exhibit 3); overall, a US start-up is 1.5 times more likely to become a unicorn than its German peers. By increasing access to later-stage funding, nearly 75 additional German start-ups could become unicorns or successfully undertake an IPO between today and 2030. Additionally, governments could explore steps to make it easier for start-ups to attract and retain top talent access to international markets that facilitate growth.
The New German Mittelstand would be the set of start-ups that focus on a sustainable path toward profitability or an early exit that leads to significant job creation. This group could represent only 15 percent of the overall value, but it could account for 30 percent of the jobs created in start-ups founded between today and 2030—jobs that tend to be a) more stable than those created by their hypergrowth peers and b) geographically dispersed and less concentrated in urban areas. To support the development of these smaller yet critically important companies, both established enterprises and governments could consider partnering with them and even becoming early customers. Substantial entrepreneurial knowledge is mission-critical: Since start-ups comprising the new German Mittelstand frequently have less funding than their hypergrowth peers, they have to focus much earlier on profitability. Being prepared to take on that responsibility means that the next generation of entrepreneurs could benefit from having their first experience with the challenges of building a business as early as possible, even in school.
A distinctly German approach
Other countries have gained notoriety for their start-up landscapes—reputations driven in large part by the decacorns, $10+ billion start-ups, that have taken flight there. While Germany seeks a thriving start-up ecosystem, its success may depend on building on its own unique strengths instead of trying to imitate other countries’ approaches. The “German Way” of entrepreneurship could be evidenced by a clear set of principles and practices:
Credible delivery. In 2030, German start-ups could be built on the industries and values that Germany has been well known for. German start-ups will likely innovate in the areas of industrial automation, sustainability, and environmental impact. Their founding teams could demonstrate more commitment to job security, employee protections, fair wages, and other values central to the German social market economy (soziale Marktwirtschaft). In addition, founders as well as investors could aim to reinvest within Germany and Europe to further boost the momentum of entrepreneurship and help economic growth further continue to flourish.
Responsible entrepreneurship. This idea of reinvestment applies to human capital too. Serial founders are one indicator of a healthy start-up ecosystem and are nearly twice as likely to succeed with their second venture as first-time entrepreneurs.8 Encouraging experienced founders to launch subsequent start-ups and employees of start-ups to become founders would build on success and could further solidify the start-up ecosystem as part of the backbone of the Germany economy.
Cluster organization. One virtue of the German economy could be its organization in regional or thematic clusters—with a strong Mittelstand and research organizations at its center. Start-ups could enrich these agile clusters that each have their own unique combination of resources, technology specialties, and industry focus. One step further, these clusters—which are significantly different and complementary throughout the country—could interact with each other. This would be mutually beneficial and could lay the groundwork for a unique “ecosystem of ecosystems.”
It could take the wide range of start-up stakeholders—from educators and legislators to those in government agencies and corporate C-suites—to establish a thriving start-up landscape and firmly embed entrepreneurship in both the institutions and culture of Germany. Together, these stakeholders and others could have the power to help society at large see entrepreneurship as a viable and even commendable career path, while replacing barriers to start-up success with incentives and tools that facilitate success. As a result, they could help ensure that starting a business is a possibility for many and not just the exclusive realm of a few. This is when the power of entrepreneurship could be fully unleashed and when the start-up ecosystem could be a fundamental driver of Germany’s economic success.