Deep dive: Mittelstand companies pioneering digital innovation

The country’s SMEs are collectively known as the Mittelstand, and the term has historically carried connotations of a conservative, risk-averse approach to business. That view was never accurate and has now been completely superseded, argues Tommy Oehl, managing partner at Vito Ventures in Munich.

Oehl’s great-grandmother founded and built a company in Germany after the Second World War, before handing it over to his grandfather. The essence of entrepreneurship in that era, Oehl says, was not to make the largest possible amount of money, but firstly to build something to feed a family, and then explore the opportunities that this entailed. Digital transformation, he argues, means that Europe has the potential to build companies that will last not just for a few years, but will endure to create substantial and fundamental value.

Germany is at the heart of that process. Vito invests mostly in German companies, with a focus on technologies used in property and energy. The country’s structure of government incentives and the availability of partnerships with large, established businesses means that the Mittelstand is uniquely well placed to apply start-up creativity to the challenges of digital transformation.

Daria Saharova, a partner at Vito, is a pioneer in the sense that only about 7 per cent of venture capital partners globally are women. She states that in the past, there had been less of a push to try-and-fail within the engineering sector, which allowed Silicon Valley to progress at a faster rate – but, that this is now changing fast. Munich, she says, has become one of the “greatest and craziest” places to start a company. The ecosystem includes giants like Siemens and BMW, four universities, a concentration of media, deep pools of specialised talent and customers with a willingness to pay.

Vito Ventures was established with the backing of the Viessmann Group, a German family-owned heating engineer based in Allendorf with a history dating back more than a century. CEO Max Viessmann has transformed the company into an innovative leader in both industrial and investing terms. The Viessmann partnership means that Vito’s portfolio companies get direct access to pitch to companies like Viessmann, and if successful, potentially the whole SME market. Openings are generated for pilots, sales partnerships, and, ultimately, exit partners. Vito shares its investment hypotheses, gives feedback on new technology trends and functions as a sparring partner within business development.

Mittelstand companies across the country are breaking down barriers in this way. Investing and exiting are fluid and interactive processes with great scope for cross-fertilisation. The fruits are starting to emerge at the national level. The combined value of German inbound and outbound M&A in 2017 jumped 37 per cent to 110 billion euros, with digitalisation a leading theme, according to Noerr Consulting. To a large extent, German potential simply reflects that of the Mittelstand, which employ about 21.6 million people, according to the Federation of German Industries (BDI). That means that the Mittelstand companies provide over three-quarters of all jobs in the country.

Saharova says that working with Max Viessmann as an investor is exceptional in that the company understands the venture capital business model. She remembers that Max would set aside a day each week to go around every department of his company to talk about digitalisation. It meant a lot to the staff, she said, that an executive would take time to come and drink coffee with them and make them feel comfortable about the future.

Oehl says that Viessmann’s family-owned structure means that its decision path is much faster than in most corporates. The company takes on social responsibility for its employees and stakeholders and ensures that they lead, rather than respond, to technological change. That, in a nutshell, is true German entrepreneurship.