When it comes to startup hubs, not every region can be Silicon Valley or Tel Aviv.

In my recent book, Startup Cities, (read a review of the book here) I found that many cities are trying to get there. But unless the region has a unique asset that is vitally important to the best entrepreneurs, the effort to become a startup hub will be for naught.

Does Munich, Germany have what it takes? After applying my Startup Common model, I think there is a chance it could. After all, Munich boasts that "About 440 startups in Munich have received funding in the last decade and support from German corporations, government."

But none of these have gone public, there is a small, but growing pool of venture capital and Berlin seems to have by far the biggest concentration of German startups.

To get more information, on May 30 I interviewed a startup CEO, the leader of a Munich startup accelerator/venture capital firm, and Munich economic development executives. These included Alexander Rinke, co-founder and CEO of process mining service Celonis; Helmut Schoenenberger, CEO and co-founder of UnternehmerTUM Center for Innovation and Business Creation; and James Mister, Investment & Expansion Manager of Bavarian U.S. Offices for Economic Development.

The Startup Common consists of six elements - pillar companies, universities, human capital, investment capital, mentor networks, and values -- that get strengthened in each generation of startup success and failure. Unfunded startups tap the Startup Common for capital, people, and advice--few of which are funded. Successful funded startups reinvest their capital and know-how into the Startup Common. The people and technology from failed startups are composted and returned to the Startup Common

Here's how Munich stacks up on each element.

1. Pillar companies: Good

Pillar companies are local publicly traded companies that supply talent and capital for startups, serve as early users of their product, and sometimes acquire them after they grow.

Munich does not have pillar companies like Google -- but some of its world famous manufacturing companies help out startups in various ways. As Schoenenberger said, "BMW has a 500 million Euro venture fund and operates a startup garage which gives startups direct access to BMW experts. And Siemens has a 1 billion Euro fund."

Munich-based companies also purchase products of at least one local startup. For example, Celonis's Process Mining service -- which analyzes and visualizes corporate processes, counts BMW, Siemens, Fresenius, Medical Care, MunichRe, Airbus. A partnership with SAP has helped Celonis to sell to Fortune 500 companies.

Moreover, Munich hosts offices for 100 Fortune 500 companies including IBM, Amazon, Google, Microsoft and Intel.

2. Universities: Good

Local universities supply intellectual property and talent that can spur local startups. The Technical University of Munich (TUM) describes itself as "one of Europe's top universities committed to interdisciplinary education and the active promotion of promising young scientists."

Unlike places like MIT which encourage professors to start companies, the position of a professor in Munich is so prestigious that they do not perceive a need to start their own companies. 

3. Human Capital: Good 

Coming from the pillar companies, universities, and talent from around the world, Silicon Valley has an ample, if expensive, pool of start-up CEOs and other C-level executives, functional vice president types, and engineers, sales people, and marketers.

TUM and the Ludwig-Maximilian-University "provide a consistent talent pool of engineers and data scientists." The engineering talent from TUM is concentrated in fields such as sensors, Lidar, mobility, Internet of Things, and 3D-printing.

Does Munich have a deep pool of CEOs and other C-level executives? To be sure, Munich hosts a handful of startups -- including Fitness App Freeletics; Smart Sensor Solutions supplier Konux; E-scooters maker UNU Motors, intelligent headphone maker Bragi; and sports data analyst Kinexon

An analysis of their management teams suggests that such executive skills are developing in Munich. Freeletics's CEO went from being a consultant to its CEO -- if the company has a successful exit, it would be his first. Konux is in Palo Alto and its CEO has an IT degree from TUM -- this is his first startup. Unu's CEO is a first-time entrepreneur with a degree in economics. Bragi's CEO is from Denmark and was a design consultant before starting Bragi and Kinexon's managing director has a doctorate from TUM and is a first-time founder.

4. Investment Capital: Fair and Improving

Startups need different kinds of capital at different stages -- bootstrapping, founder financing, or friends and family money to get a business model, Angel capital to win customers in a specific market segment, and venture capital to expand globally and broaden the product line.

Munich lags Silicon Valley and Berlin when it comes to capital. According to EY, the top 100 startups in Germany received $8.5 billion in 2017 funding -- and 7.9% of that was invested in Munich (nearly 70% went to Berlin). Munich's estimated $670 million in 2017 startup investments dramatically lags the combination of Silicon Valley and San Francisco's 2017 total of more than $30 billion, according to the PWC MoneyTree Report.

Schoenenberger said, "My fund has 110 million Euros and is one of 60 active local venture capitalists. The amount of money available is still small, but it's rising."

But Munich has some promising-sounding case studies. For example, according to Rinke,  UnternehmerTUM and the Bavarian government supported Celonis's growth. And Celonis was able to raise a $27.6 million round of funding -- but the investors were not from Munich (Accel is based in Silicon Valley and 83North is in London)..

5. Mentor Networks: Fair/Good

Experienced investors and executives in a region can form mentor networks that help companies and talented professionals tackle pressing challenges. At the corporate level, such mentoring includes help with strategic vision, acquisitions, raising capital, performance monitoring, organization design, culture, hiring and firing, product development, and getting customers and partners.

As Schoenenberger pointed out, UnternehmerTUM provides a compelling blend of mentoring and capital to Celonis as well as Flixbus and NavVis.

Specifically, UnternehmerTUM offers "founders and startups a complete service, from the initial idea all the way to IPO. A team of experienced entrepreneurs, scientists and managers supports founders with the development of their products, services and business models. The experts accompany them actively with building up their companies, market entry and financing - also via Venture Capital."

The question is whether enough Munich founders have experienced successful exits to create a deep pool of startup mentors.

6. Values: Fair

Silicon Valley has a unique set of values that guide the way people behave -- it puts a premium on ideas that will disrupt the way the world works and on giving back without expectation of short-term gain.

Such values are critical --  one entrepreneur who relocated to Palo Alto told me that in London -- where he came from -- it is very difficult to meet with people who have capital or valuable advice and those masters of the universe only help if they see an immediate short-term benefit for themselves. This helped prompt him to leave London.

Munich has a great quality of life --  Mercer ranked it fourth on its Quality of Living Index noting that its "generous paid vacation time and close proximity to the countryside and alps contribute to its high standard of living."

But given the high pay and benefits that would go to someone working for BMW or Siemens, it is hard to see why a local graduate would take the risk of starting a company in a place with such great, stable local employers.

Moreover, Munich has a certain risk aversion for pure entrepreneurship though the involvement of companies like BMW -- seeking to make open innovation work -- is a promising middle ground.

Perhaps if one of its startups, such as Celonis, achieves a successful exit, Munich families will begin urging their children to become entrepreneurs. And that change in values could help Munich boost its attractiveness to top entrepreneurs.

Published on: Jun 8, 2018