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Is the start-up scene the miracle solution for developing digital transformation?

Right on time for the 9th German Engineering Summit, to be held in Berlin on October 17 and 18 of this year, the trade association VDMA has announced the "Start-up Machine" initiative. This network is designed to support joint projects between start-ups and established companies from the industry, and help German mechanical engineers make faster progress with their digitalization. The VDMA says that the ideas from start-ups will continue to become ever more important. But will these ideas alone be enough to make a success of the digital transformation in mechanical and plant engineering?

Over the last decade or so, a start-up ecosystem has established itself in Germany, with its focal point in Berlin. The German start-up world is now an important factor for the economy. "You'll only be relevant in the future if you're in Berlin" would seem to be the motto of well-known industrial corporations and their flagship projects. But I question whether the more than 3,200 German companies in the investment goods industry can really profit from the start-ups.

Almost all the successful start-ups come from the e-commerce industry

Let's take a quick look at the numbers: According to Ernst & Young's Start-up Barometer, significantly more young companies received risk capital in Germany in 2016 than in the year before. The number of start-ups rose from 383 to 455, and the number of financing rounds from 417 to 486. At the same time, however, the total volume of investments fell by almost a third, down to 2.2 billion euros. In 2015, you could still rightly call Berlin the start-up capital of Europe, thanks to a number of major investments, but by 2016, London (2.2 billion euros), Paris (1.3 billion euros) and Stockholm (1.2 billion euros) had overtaken the German metropolis. Around 939 million euros – the lion's share – of the risk capital invested in the first half of 2017 went into e-commerce. It was followed by FinTech, health and software, and analytics. 

Source:  Start-up Barometer, Ernst & Young.

So the question arises once again of whether the plant and mechanical engineering industry can benefit from these start-ups. And as yet, there is no clear answer to that question. But if a CEO asks whether she will find the solutions to the future of her company in Berlin, Andreas Winiarski, Managing Partner of Earlybird Venture Capital and insider in the start-up scene, will answer with a clear and unequivocal "NO". 

Speed alone does not make a success

In his LinkedIn blog, he warns against too much euphoria. The start-up scene, he says, is still too young, too fragmented, too self-referential and too focused on quickly setting up a company and selling it. The start-ups, Winiarski maintains, finally have to learn that successful entrepreneurialism isn't only a matter of speed and creativity, but also of discipline and sustainability. We need more company founders who want to solve real problems with real technology. Berlin has already seen too many start-ups in the e-commerce segment and too many founding partnerships made up solely of business grads. What is needed, he goes on to say, is more company founders from IT and engineering strongholds like Aachen, Dresden, Darmstadt or Munich. "We need more "real tech" coupled with more responsibility and long-term mindsets." 

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Big investments, big losses

The call for more "real tech" is entirely justified. But nonetheless, many established players think they have discovered the value of the start-ups for the digital furtherance of their business models: for instance, with its start-up in Berlin, Klöckner Stahl aims on the one hand to raise its innovativeness, and on the other to get a lead on the competition by digitalizing its services. But even smaller companies are starting to invest in start-ups as well. For example the online marketplace Contorion, founded in 2014, was bought by the Munich tool specialist Hoffmann SE, with the goal of digitalizing itself. 

These are merely isolated examples where no sustained success has yet been proven. Klöckner has already invested an estimated 20 million euros in digitalizing its processes, and the Contorion acquisition by Hoffmann SE cost around 100 million euros – and that although Contorion generates a loss of about a million a month! 

Start-up hysteria

And even though the current exuberance about buying start-ups can be seen as veritable hysteria, not every engineering company will profit from these investments. The brave new world isn't always a good long-term fit for an industry that still dances to an entirely different drum. 

Over many decades, mechanical engineers have grown used to designing quality machines in certain cycles, putting them on the market and then guaranteeing service and continued further development over the decades to come. But the advancing digitalization will force a change in that paradigm. Companies have to quickly become more agile in order to exploit the full potential of digital models, open up their networks and develop joint business models that in the event of their success will lead to added value and additional benefits for all those involved. Start-ups can take on a key role as idea generators in this process, but joining forces with or buying one of them is by no means a silver bullet. As with any investment, mechanical engineering enterprises shouldn't overshoot the mark here out of pure overzealousness or even panic, but rather carefully weigh-up the long-term implications of integrating the start-up business model for their profitabilit

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