The Hy Summit in Berlin was a great attempt to bring together the corporate world and the startup scene, with senior people from Bosch, Siemens, Axel Springer and other firms rubbing shoulders with some fantastic startups and European VCs. The atmosphere and organisation was wonderful, and it was great to see the Federal Minister of Transport and Digital Infrastructure, Alexander Dobrindt, open the event with an announcement of €100m of funding for supporting startup infrastructure needs.
One interesting debate that encapsulated the challenges both sides face was between the amazing Ijad Madisch, founder of ResearchGate, which has seen investment from Peter Thiel and Bill Gates, and Dr. Dieter Wegener from Siemens. Ijad made the point that companies cannot do both hardware and software, and they need to choose one if they are to have the requisite level of focus to succeed – and unsurprisingly he chose software because “the internet will be everywhere”. But will it be everything? Dr. Wegener argued that the manufacture of large gas turbines, for example, requires deep knowledge of both hardware and software, and how they can work together in a coherent design, whereas Ijad argued that we should just focus on high-value software innovation and hope that someone else builds our physical infrastructure.
This symbolised, for me, one of the limitations with the “software is eating the world” philosophy – namely that we live in a physical world of energy, food, manufacturing and transport that demands innovation in both hardware and software – and also the exciting potential of combining the best of both worlds to help create innovations like the electric car, the self-driving car or perhaps even the self-regulating power station. A later speaker referring to the potential of big data combined with sensor networks talked about the potential for transforming food production, which faces increasing demand and decreasing available land on which to grow food, highlighting the potential to apply new software and algorithmic thinking to hard, physical world problems.
If the goals of technologically innovation are purely short-term financial, then who cares about solving these problems when you can flip a messaging platform for billions of dollars? But a future in which food production is unstable, or where Europe gives up industrial innovation or suffers increasingly unsustainable energy supplies is one where a better way to share photos online might be the least of our worries. In fact, some of the most exciting developments right now are about both hardware and software. Tesla has shaken up the automotive sector and is forcing incumbents to radically re-think their market role and value proposition. Google’s strategic moves into transportation were well-described in a talk by Klaus Hommels, who illustrated how the search giant moved from its dominant position with Google maps into route-finding and then towards self-driving cars, which when combined with its investment in Uber could transform urban automotive transportation. And of course, the rise of Internet of Things and the Industrial Internet is as much about great hardware experiences as it is about software.
Europe’s 200-year history of industrial innovation and manufacturing is what helped create the world we live in today, and the potential to combine this experience, knowledge and logistics with the best software and new Internet business model innovations is truly exciting. Siemens and Bosch, both at the conference, provide hundreds of thousands of jobs directly and many more indirectly through the ecosystems that have grown up around them in Stuttgart and Munich especially. They are part of the landscape of Germany and as such they create value in ways that go far beyond their combined €120bn+ revenues. In fact, part of the reason Bosch is able to take a long-term view and invest so heavily in R&D is precisely because it is protected from the vagaries of capital markets, being owned by a trust. It would be a mistake, in my view, to dismiss this ‘thick’ value and instead focus only on virtual businesses that create some spectacular deals, but little employment or retained value. We need both.
Arguably, it is not just corporates that need to innovate to meet this challenge, but perhaps VCs too. Robert Bonanzinga gave a brilliant and engaging talk about innovation in venture capital, arguing rather provocatively that the only innovation among VCs since Yahoo started in the mid-1990’s has been the adoption of height-adjustable desks, suggesting that in terms of software, an investment process today would rely mostly on Microsoft Office, just as it would have done back then. He made a strong case for VCs using big data software platforms to identify investable opportunities (which reminded me of Klarna and its pre-approval of e-commerce purchases), rather than just follow current investment trends or seek to copy others.
So how do we combine the strengths of old and new, corporate and startups? In sessions on building versus buying companies and corporate-backed accelerators there was general agreement that corporate venture funding of startups was not a good idea and rarely produced successes, for a variety of reasons. Equally, no amount of innovation tourism, where corporate executives spend a few days in hipster cafes and small startups in Berlin or East London will change the game. So how do we bring the agility and innovation of startups into slow-moving corporates, and how could we use the knowledge and scale of existing corporates to help startups grow faster and create global supply chains, for example?
It is interesting that very little was said about how to take the real operational lessons of startups into existing corporates, so perhaps there is an underlying assumption that they cannot be changed. But in our view, it is not just about bringing in (or investing in) young startups, it is also about learning real lessons from how they operate and applying these to the way older companies are structured and how they operate to make them more agile and better equipped to operate at internet scale and speed. This is a huge need that is keenly felt by corporate executives, but one that is not well met at the moment.
As if to underline the threats faced by slow-moving corporates in Europe today, Ralf Lindner of Medisana illustrated what is possible when companies truly focus on ambitious goals with his stories from Shenzhen, China, and some of the amazing companies that have grown up so quickly there in recent years. He spoke about a mobile phone startup producing its own hardware and software that has gone from nothing to a predicted 40m units sold in just a few years, and perhaps most remarkably how WeChat capitalised on a South China tradition of gifting red envelopes of money to friends and relatives in order to sign up 100m users, including their full bank account deals, in just three days. This kind of scale and speed poses a huge challenge to European firms, one which goes way beyond previous waves of cheap manufacturing and low-wage competition. How they learn from and respond to this is an important question.
How to combine the very different strengths of traditional European companies, especially industrial companies, and fast-moving innovative startups is a fascinating issue that could unlock huge value in the age of the industrial internet. The Hy Summit was a great start, but there is lots of work and thinking to do if we are truly to make the best of both worlds. Corporates need to internalise the lessons and operational agility of startups, whilst at the same time using their traditional strengths to help the best startups sell into their markets and take advantage of their ecosystems. Startups, similarly, have lots to teach and lots to learn. How we make that happen is a big question, and one which is central to the mission of our new company.
Many thanks to Hans, Aydo and the team for organising such a thought-provoking and enjoyable event.