In installment four of my start-up series, I will, after having introduced the “pragmatic foundations”, now describe the second category: “Mass-Produced Enterprises”. Because wherever someone talks “the founding of an enterprise”, he usually means the “mass-produced” foundation process.
For your information: at some time in the 1990, some banks and enterprise counsellors found out that you can easily make a lot of money if you specialize on the establishment of enterprise by young founders. It was no problem at all to quickly get the full support of politics (new jobs) and economy (new business). Patterns from the USA that looked successful were enthusiastically embraced. The country needs new and young firms. Without the slightest scruples, managers and bankers who were no longer wanted, along with would-be counsellors, declared themselves business angels. Politics gave money and many big concerns contributed with other donations, often with the camouflaged goal of winning the ”war of talents“.
Business plan contests were created and monetary prizes were offered. At the universities, activities for promoting and speeding up foundations, such as “UnternehmerTUM” at Munich Technical University (TUM) were established. The university curricula were extended to include founders’ courses, once in a while they even went so far as to offer counselling and coaching seminars. The Free State of Bavaria, especially under Herrn Stoiber, gave more financial subsidies than ever and initiated more activities and infra structures, such as BICCnet.
All of a sudden, entrepreneurship had become chic. On big partiers, the “young entrepreneurs”, wearing their new business suits, met, consuming small sandwiches and beer and listening to great presentations. Nice video recordings propagated a new young generation of founders. And they all wanted to establish a new enterprise, only waiting for the great business idea to present itself …
Regardless of all the effort, the success of all these great events is minimal. Suddenly, the “pragmatic establishment of an enterprise” I introduced in instalment one no longer plays a role in public – regardless of the fact that it still works quite well. At least in our sector, I know quite a few small enterprises that were started successfully and very pragmatically during the last 20 years without the founders ever having attended a business plan contest or a founders’ lecture. Statistics tell their own story – but apparently nobody in the “founding scene” is interested.
Well, so far my criticism. Basically, the “mass-produced enterprise” is all about considerably speeding up the development of an enterprise. For instance because you wish to quickly fill the gap of a technological niche you identified or because you want to take quick advantage of a chance on the market. Usually, you need a lot of money for this kind of thing, because, after all, you want to develop the enterprise very quickly and very professionally. As a general rule, the founder does not have this kind of money.
Consequently, he needs someone to give him the money, for instance as “venture capital”.
Before you know what hit you, such enterprises will start making the interests of the money lenders, rather than those of the entrepreneurs – as would be normal for a “pragmatic founding” -, their top priority. As a general rule, your “pragmatic founder” will plan for his entire life. Handing the firm on to the next generation is actually quite common, too. Usually, the “exit” is not planned.
With the “mass-produced enterprise”, the shareholders plan the timely sale or the entry into the stock market (IPO), of course including a very high profit. With every round of financing, the share of the founders backed by their own capital decreases. Simultaneously, the influence of the money lenders will increase. The remaining motivation for the founders and often also for the employees is the remaining shares of the enterprise, or formerly also often the share option.
I know several persons who actually became quite rich in this way. Companies like IXOS or Norcom are only two examples. At one time, they were right at the top, the founders had made good money – and then the spiral went downwards. These are precisely the few lucky cases the Venture Capital enterprises thrive on.
During this process, most of the investments will be lost. Others will reach their goal without serious damage being inflicted. I know several such cases: here in Unterhaching, we had sub-let some office space to the Xignal AG. Their strength was the capacity to develop extremely fast. Regardless, the financing negotiations seemed to get harder and harder. One day, however, they managed to sell – to the National Semiconductors. After this company was also sold, Xignal was liquidated.
I also know some smaller success stories of synthetically created enterprises: a friend of mine actually managed to find two attractive technological gaps while establishing one company. He certainly made a lot of profit with his options.
Yet the “mass-produced enterprise” reminds me in a disastrous way of a functional and Taylorist way of thinking – which today is outdated. They want to determine success up front, define precise goals and then construct the means towards those goals with instruments of the classic business world. The missing capital is supposed to be supplied by Venture Capital enterprises or federal funding programs.
And basically, this is exactly what the product developers of the big enterprises, too, do. Except that the enthusiasm, creativity and lack of experience of the young founders is supposed to manage what even the enterprises cannot do, regardless of all their many advantages such as money, employees, knowledge of the market, brand, sales and marketing. …
Incidentally, the entire business model of Venture Capital enterprises is one I would seriously question. Doesn’t it sound a little like the lottery, with the motto: let us buy lots of lottery tickets, break the jackpot and then buy many more lottery tickets? Except what to do if you never break the jackpot? …
There might be another reason why “mass-production” does not work in Europe. As often, everybody was full of admiration for what they did in the USA. The reason was that everybody said how hard it is to get capital for foundations in Europe (an assumption that might well be questionable).
And thus, the US of A became our big model in this sector, as well. You just (blindly) imitate what they show you. Nobody ever tries to find out if the US system would fit Europe. The success of young American enterprises, such as Amazon, Apple, Dell, Ebay, Facebook, Google, Microsoft, Oracle, Tesla and many more is too glamorous. Compared to the European “Old Bulls”, such as (still) Siemens, these enterprises are extremely young.
And if you take a close look at all those enterprises I just mentioned, you will discover that all these firms actually were not “mass produced” during their first years of existence. Instead, the history of their founding was always rather exciting and strongly influenced by pragmatism and coincidences.
However, the situation in Europe differs hugely from that in the USA. The many languages and the strong regionalization in Europe necessitate a founding culture that is totally different from what the alleged success pattern dictates. As I see it, the “regionalization” is actually an aspect that might also be a huge entrepreneurial chance. As an example, I would like to cite Sina Trinkwalder and her @manomama, and recommend her great book “You Have to Create your Own Miracles” as a nice appeal for regionalization.
And, of course, even after more than two decades of intense trying and Business Plan Contests, there is not a single German Start-Up which could hold a torch to Google & Co. Zalando, too, is just the copy of an American pattern created by modern alchemists who claim to have found the formula for making gold out of iron. However, such formulas will always attract people who give you money, thus permitting you to start new projects.
But why don’t you take a more critical look at the results (turnover, results, value of the enterprise) and look at how much money has already gone down the drain? And then let us remember all the bankruptcies after the turn of the millennium: it gives you an increasing suspicion that the system will not work.
Let me finish with an example that clarifies why founding an enterprise along the lines of mass production is difficult. It is the story of Dr. Frankenstein. He wants to create a human being and manages to create a monster.
After all, an enterprise is, above all, a social system. As such, it has more similarities with a biological being than with a machine you can control and determine. A machine that gets input and delivers output, thus making the shareholders rich.
RMD
(Translated by EG)
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