Authors: Dr. Kai Morgenstern, Armin Baharian & Dr. Matthias Wallisch, https://www.rkw-kompetenzzentrum.de/
In comparison to other countries, SMEs have a special place in the German economy. The German Mittelstand is admired worldwide as a successful role-model. In total, more than 3.6 million SMEs are active in Germany. Yet, the Mittelstand is much more than just an important economic factor, demonstrated by three key characteristics.
First, Mittelstand companies are often deeply embedded in their home region and it is not uncommon for them to be the most important employers in rural areas. Having said that, local roots and economic importance are only one side of the coin: Frequently, the regionally rooted companies are at the same time world market leaders in their industries.
Second, Mittelstand companies are characterized by the so-called “unity of ownership and management”. Apart from small businesses in the service sector, self-employed professionals, and trades- people, the Mittelstand is comprised of many companies that have been owned and managed by the same family for several generations.
Third, the German Mittelstand is widely recognized as an important job creation machine which acts as a stabilizer in difficult times, such as the recent financial crisis. In Germany, more than half of all employees with social insurance, which is considered an indicator of “good jobs”, work for SMEs.
Since many German SMEs occupy leading positions in their industries, startups can benefit from their broad customer base, their brand recognition, and the trust of their customers and partners, helping them to scale and grow. At the same time, the company owners are often well-connected and can help budding entrepreneurs to make useful contacts in their industry in Germany. Nevertheless, differences in company cultures between startups and the Mittelstand may create difficulties. Especially the larger Mittelstand companies often have complex hierarchical management structures thus, entrepreneurs should consider that decision making may take longer than expected. Moreover, many SMEs are quite risk averse. Startups should, therefore, be able to show that their business model has reached a certain degree of maturity. This, in turn, limits, to some extent, the freedom of action and the range of possible experiments in a cooperation.
Many of Germany’s large and well-known companies are actively fostering cooperation with startups. They systematically use the whole range of possible cooperation approaches – from hackathons and other types of startup events, to co-working spaces and accelerator programs, all the way to all-out investment and acquisition.
Yet, the Mittelstand is largely absent from this growing market. These activities and programs typically go way beyond what a Mittelstand company is willing or able to commit to in terms of financial and other resources. Apart from that, German Mittelstand entrepreneurs value and prioritize personal acquaintance in comparison to other factors such as industry background and capitalization.
As far as goals of cooperation with startups are concerned, Mittelstand entrepreneurs typically do not look for investment opportunities but want to create projects to tap new technologies, develop product innovations and gain access to new markets. About a third of German SMEs have some experience with startup cooperation.
The RKW Kompetenzzentrum’s research shows that smaller SMEs are more likely to have cooperated with startups. One can distinguish four basic types of cooperation:
- Development partnerships: The main goal is to generate new ideas, especially with regard to digital products and platforms, as well as product, service and process innovations.
- Supplier relationships: The startup supplies the SME with product components or services.
- Sales partnerships: The SME sells one or more products of the startup as part of its own portfolio.
- Conventional customer relationship: The SME is a customer of the startup and buys its product or service. Especially in software development, SMEs and startups frequently seal large contracts.
For Indian startups it may difficult to access German SMEs directly. However, accelerator programs, incubators and co-working spaces usually also have a good outreach to SMEs and can facilitate the access. In addition, Germany has many associations representing the SME sector, either generally or sectoral. A way to reach out to SMEs is also through these associations.
More information about “Mittelstand meets Startup“ have been published by the RKW Kompetenzzentrum. The results are based on computer-assisted telephone interviews with 250 SMEs conducted in March 2018.