12.03.2015 | News & Interviews

A fourth year of collaboration between EY and CODE_n

Innovation in the realm of the Internet of Things takes center stage at CeBIT 2015 where, for the fourth year running, EY sponsors the international start-up contest CODE_n. Mark Smith, EY’s Managing Partner for Market and Business Development in Germany, Austria and Switzerland, discusses what start-ups need to succeed

The CODE_n contest is now in its fourth year, and EY has sponsored it from the beginning. So we are especially pleased to have you on board again this year. How has the collaboration paid off for EY so far? What do you expect from CODE_n15?

It is crucial to support innovative young companies if we want to see future growth in Germany, Europe and around the world. For us, CODE_n is a vital platform for start-ups to connect with established firms and potential investors. In return, established companies and SMEs get access to disruptive ideas that can help them update their business models and keep pace with their competitors – something that is vital at a time when almost all industry sectors are being transformed. It is a classic win-win situation. Entrepreneurs get access to venture capital and a larger client base, while established companies get an injection of radical ideas.

In 2015, the overarching theme of CODE_n is the Internet of Things (IoT) – an incredibly fast-growing market of intelligent and connected devices for all areas of our everyday lives as well as for industry, mobility, urbanization and the economy. With estimated annual growth of 17.5% up for grabs, it is essential that German SMEs – the ‘Mittelstand’ – are ready to exploit and shape emerging IoT innovation.

EY is a globally acting advisory organization with a worldwide network of business contacts as well as profound experience across markets and industries. How do you view global start-up culture? Are we still in the early stages? Or is the party already over?

As a longstanding provider of support to young companies with business models and ideas in disruptive technologies, we have been able to gain first-hand insights into start-up culture, both in Germany and around the world. We help entrepreneurs to jumpstart their business in many ways, from advising them on fiscal, business and legal matters to giving them access to superb business networks through contests such as CODE_n and the well-known EY Entrepreneur of the Year competition.

According to the 2014 German Start-up Monitor, Germany has achieved a record high in venture capital. And the story is echoed further afield: the examples of the United States and Israel show that start-up culture is not only rocketing but even gaining momentum. Today, Israel has the most start-ups in the world after Silicon Valley. And the fact that so many founders move from Tel Aviv to Berlin demonstrates how much Germany can profit from innovation. There is a vast amount of knowledge and entrepreneurial spirit flowing into the country. It presents a great opportunity, and not only for the capital city.

Start-ups are often active in business fields that are approached reluctantly by established companies. Why is that? Do established companies lack courage or do start-ups tend to overestimate their market chances?

It is important to differentiate between major corporations and SMEs when using the term ‘established companies’. Large companies often find it a challenge to establish a culture of innovation across the whole organization. Staff have to be encouraged to develop self-confidence and a willingness to experiment. In SMEs, innovation often still happens by accident. Here, target-oriented innovation management and the implementation of a culture of innovation could unlock much unused potential.

At EY, we strongly believe that connecting start-ups with established companies can create valuable synergies. The entrepreneurial know-how, networks and financial power of established companies can significantly increase the market chances of start-ups. The more promising and disruptive a business model is, the less risky the start-up adventure becomes. In return, established companies can overcome their inhibitions and rid themselves of internal hurdles that may be deeply rooted in company traditions. As is so often the case, “a prophet is not recognized in his own land”. External impulses play a critical role when it comes to instilling a culture of innovation.

Many start-ups fail. Why is this? Do they miscalculate their market chances? Or do they commit technical mistakes that could be avoided if they had proper advice?

It’s true that nine out of 10 start-ups fail, but this is not a phenomenon limited to start-ups. Failure has been and always will be a risk for entrepreneurs. Young companies can significantly increase their chances of success by avoiding technical mistakes. EY provides multi-faceted support for start-ups. On the one hand, we offer concrete, practical approaches which are developed by our multi-disciplinary, international networks and teams. How well this works can be seen through our involvement with spectacular IPOs such as Zalando and Rocket Internet. On the other hand, we provide start-ups with access to venture capital and to important networks. It’s vital that entrepreneurs overcome their sometimes ‘geeky’ outlook and get used to communicating confidently with the public and marketing themselves and their ideas. Here, we can provide help and advice to turn ideas into flourishing business models.

It is said that German start-up culture still lags behind that of many other countries. Is this right? And if so, is it due to the risk aversion of founders and investors? Or are structural problems such as high legislatory hurdles to blame?

As you say, Germany is often seen as needing to catch up in this area. The situation begins with venture capital. Even VC investors seem a bit more risk-averse than their international colleagues, maybe because you act more conservatively when you have less money available for investment. It is a very optimistic sign that Germany overtook the UK in gaining venture capital in 2014, but there are still structural shortfalls left to address. For example, in the seed-phase of start-ups the public sector remains the key investor. Here there is still a lot of work to be done. And that extends to other areas such as regulation and legislation, not least the introduction of statutory minimum wages on 1 January 2015 – something that can easily become a big challenge for start-ups.

What could be done to improve the situation?

Things are already changing and significant improvements are underway. For example,  politicians and the public seem to have grasped the significance of digital innovation. Just take the governmental investment aid initiative INVEST – Zuschuss für Wagniskapital (Seed grant/venture capital fund), introduced in 2013. But private growth financing is in dire need of development too, despite an increase in crowd funding and an expanding business angel scene. This is where our know-how in advisory and networking come into play, providing help in all phases of a company’s lifecycle.

The Internet of Things is commonly considered a highly promising area. What would you advise start-ups that want to establish themselves in this market?

Firstly, I would advise young entrepreneurs to deeply challenge their role and business model. Can their idea be legally protected? Are they attractive to investors? Can they deal with uncertainty? Are they motivated enough to get through critical situations? Does their idea work at a global scale? If the answer to these questions is yes, they should seek advice from an experienced sparring partner who can help them win over mezzanine investors and possible business partners. Furthermore, it is crucial to use network platforms and contests such as CODE_n and the EY Entrepreneur of the Year professionally – as well as to avoid legal, fiscal and business mistakes from the very beginning. We help start-ups with every aspect of founding and funding – if they can convince us of their talent and the potential of their idea. So, my final advice is: win us over, and we’ll support you every step of the way.

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