CEO Talks #4: Startup Culture

How does the founding, funding, and scaling of a startup work?

Christian Harwanegg: Many startups work the same way and pursue the same goal: they want to become a unicorn as quickly as possible – preferably within 5 years. After that, the company is sold, and investors can exit as quickly as possible with as much money as possible. Many startups from the FinTech, telehealth and gig economy sectors try to scale as quickly as possible without regard to profitability. In doing so, an exaggerated company value is often already presented in the startup phase. With each round of financing by investors, the valuation of the startup increases massively. Whether such companies are actually successful and whether money will be earned can only be evaluated later. Some founders, such as Elizabeth Holmes of Theranos, had a billionaire’s status on paper – but in her case, nothing remained in the end. In many industries, scaling is the only way to achieve medium-term success for the startup. That is also the problem: A flag is raised in one, two, three markets; then the next investor comes along and tries to roll out the service or product globally. Investors and funding rounds get bigger and bigger, but there is no focus on whether the startup is profitable at that point. The hope is always that whoever buys the startup at the end for an absurdly high sum can integrate it so that it can be run profitably. FinTech startups provide ample examples, while often operating more like a non-governmental controlled casino for consumers than anything else.

Why do we so often hear about startups from the same industries with no USP, such as FinTech, IT, or telehealth?

Christian Harwanegg: Many companies like Netflix, for example, have been unprofitable for decades, but deliver long-term customer value. Many startups without a real USP or product do the same: They are strongly oriented towards customer lifetime values, for example through subscription models, where they try to get customers to pay a small amount every month for a service without owning a substantial product at the end. Investors like to invest in things that have a very high scalability on paper. In our industry, it's not so easy because we make a physical product with a massive USP, but we don't have the capacity to scale up so quickly without losing quality or dumping prices. In IT or FinTech – startups that offer services – it's very different. With the right investment, you can scale up almost infinitely fast. For founders, it's a question of cultural mindset: Do I want to build something from scratch and accept that it will grow more slowly, or do I follow the Anglo-American startup culture, which is usually all about achieving goals quickly, spending investors' money, and achieving higher valuations?

Why do we rarely hear about great startups with a clear USP that offer solutions to concrete problems?

Christian Harwanegg: There are many startups, both nationally and internationally, that have sustainably developed a product and are not purely service-oriented. You hear less about these startups because they are not so busy with media work as they are with developing their product. As with MADx, further development is financed with the company's own cash flow. So you're not constantly looking for investors and therefore don't have to constantly advertise yourself as much; you make sure that the business grows sustainably, possibly with the plan to sell the company to a strategic investor, as is often the case in the medical technology sector with the final exit. If the goal is to sell the company, then the numbers have to be right so that money can really be made with it in the end. The question here is whether many of these "successful" startups that are well-known in the media really have a business model that is unique and can demonstrate a real USP. One example is the IT industry: Many apps that provide services are very easy to copy, and as soon as a company with more budget for marketing comes along, such startups quickly lose a large share of the market or are completely driven out of it.

What should young entrepreneurs consider before founding a startup, and what requirements must the product or service meet?

Christian Harwanegg: You can't give a blanket answer to that, but in my opinion, you should always have enthusiasm for the subject and know the market. Becoming super-rich should not be the only motivation as it might require shortcuts, not seldom with fraudulent practices. There is this idealised Hollywood image of the university drop-out startup founder who is already brilliant at the age of 20 and has the perfect idea. There are certainly such founders, but they tend to be active in IT-related areas. In the financial sector, I think it is much more difficult to be successful with little experience, because you must know the market well and understand its dynamics.

As a founder, you must be clear about what you want to achieve in the medium or long term, what the company's niche is, how big the market really is, and what the opportunities are. There is also the question of whether the product or service can be rolled out internationally, or whether you focus on a small segment with a special service, for example.?

Of course, everyone wishes to become the next Mark Zuckerberg, but founders who really manage to do that have to do a lot of things right: they must find the right investor at the right time in the right place, recognise the trend of the time or maybe even establish it. I think great and successful startups created their market in the first place: they offered something that, in the best case, people didn't even know they needed.

That was also the case with MADx: Nine out of ten people initially thought that no one needed this product – and we still became very successful. You must have this kind of resilience as a founder. You have to get through this phase, find the right team and implement your operations accordingly. Of course, you also have to be lucky enough for your plans to work out in the end.

Startups are often associated with the exploitation of employees. Where does this idea come from, and what might the future look like???

Christian Harwanegg: Perhaps it stems from the fact that employees in a startup often take on more functions than is usual in larger companies. They are deployed more broadly and always have a higher workload due to rapid scaling. Scaling always costs money, so naturally they try to achieve their goals with as few resources as possible. In principle, every company does it this way, but the smaller the structure, the harder it is to manage.

However, startups also have many advantages in terms of culture: faster communication, more connection to the company, a more direct link to success. This is lost in a large company with a hundred thousand employees, because it is much more difficult to create an identification with the company.

The youngest generation on the labour market is bringing about a change anyway: home office, work-life balance and many other topics are much more dominant today and have already brought about a massive cultural shift.

Due to the pandemic, new framework conditions have inevitably arisen for many companies. The labour market is undergoing a difficult transformation, and startups are finding it even more difficult to deal with.

There are extreme examples such as IT companies where employees work from home all the time except for two days of office presence per month. But such employees are very difficult to integrate into the team because communication that is purely digital simply loses quality.

At MADx, too, it was unthinkable for the team to work from home in the first two years, because many things had to be coordinated quickly on site and lab work and production cannot be done from home. That has since changed as well, now that the company has grown, and competences and tasks have been divided among various departments and employees.

That's just the lifecycle of a company: the earlier you are in that cycle as a startup, the harder it is for employees to only work decentralised. In the future, a reasonable middle ground will have to be found for many of these issues.