An evaluation of the German blockchain startup environment

Introduction

According to the World Economic Forum, blockchain-related services could account for ten percent of global gross domestic product (GDP) by 2027 (1). Some experts even draw a parallel to the development of the World Wide Web and the accompanying revolution of media usage. These comparisons demonstrate the technology’s tremendous potential. Therefore, the question is raised how much the German economy will contribute to this digital revolution. So far, Germany and also Europe only play a minor role in the digital age and mainly missed previous revolutions like the platform economy. This revolution is predominantly shaped by US-based “” companies, comprising of Google, Amazon, Facebook, Apple, and the Chinese companies “BAT”, Baidu, Alibaba, and Tencent. Nevertheless, the digital age has just begun, and Germany — one of the world’s most innovative economies (2) — still has the chance to take a leading role in the field of blockchain.

Blockchain — the new Internet and its application fields

In recent years, the Internet has primarily served to exchange information.
Blockchain technology now also makes it possible to transfer value securely
and privately in a digital way, without the involvement of an intermediary (7). As a result of this disintermediation and improved record-keeping,
blockchain’s main benefit will initially lie in cost reductions by increasing
operational efficiencies. This improvement, in turn, creates new
opportunities for many industries. According to McKinsey, industries such as
the public sector, technology, media, and telecom, as well as the financial sector, will be heavily impacted by the technology. In addition, the feasibility
of implementing blockchain in these industries is considered high (8).

Challenges and future potential of blockchain

However, critics also point out the limitations of blockchain technology (15). In fact, McKinsey (2018) estimates that it will take another three to five years for blockchain to scale (16). This can also be seen at the Gartner Hype Cycle:
Blockchain passed the peak of the hype between 2016 (17) and 2017 (18). In 2018, blockchain was close to the phase ‘trough of disillusionment’ (19). In this phase, the technology faces declining expectations and interest as the desired success has so far failed to materialize. However, as blockchain technology has many facets, it is essential to note that some use cases, such as
cryptocurrencies, are further developed than other use cases (20).

German blockchain startup ecosystem

To gain a better understanding of the status quo of the German blockchain
startup ecosystem, this chapter provides a brief overview of the German
blockchain landscape. By the end of 2020, the German blockchain ecosystem
consists of approximately 177 German blockchain startups. The majority of
German blockchain startups are involved in Investing, followed by Public
Chain Infrastructure and Enterprise Infrastructure (see Figure 1) (30) (31).

Figure 1: Industries of blockchain startups (Blockchain startups in Europe, 2021, Source: chainEurope, (n.d.))
Figure 2: Distribution of blockchain startups in Germany (Blockchain startups in Europe, 2021, Source: chainEurope, (n.d.))

Factors for the success of German blockchain startups

Based on the results of the interviews conducted with representatives from
startups, news agencies, consultancies, universities, lawyers, VCs, politicians,
a representative of an established company and a bank, the most important
factors that can contribute to the satisfaction of German blockchain startups
are explained. The order of the factors listed does not reflect priority.

  1. Fast and efficient exchange with regulators to increase regulatory security. This is the most important factor and is a composition of the two sub-factors ‘clear and blockchain-friendly regulatory framework’ and ‘experimental environment for technologies’ (33). The first sub-factor is essential to create regulatory certainty not only for startups but also for investors and corporates. The second sub-factor aims to create a so-called regulatory sandbox where startups can initially develop their blockchain solutions and innovative business models in a guided process, facilitated by regulatory requirements and in close cooperation with the relevant supervisory authorities. In this sense, it is of utmost importance that startups can easily exchange information with regulators. This subfactor was mentioned by three out of seven startups. However, this was the most crucial factor, according to the non-startup interview partners. These two sub-factors have a high relevance as otherwise, startups have to pay vast amounts of legal cost to be compliant, slowing down their development drastically. Legal uncertainty was the reason for two interviewed blockchain startups to found their startup in Switzerland and the UK instead of Germany. It is therefore urgently necessary on the part of the government and jurisdiction to develop suitable concepts in a timely manner and, above all, to integrate them into practice as quickly as possible in order to prevent further founders with their ideas favoring other countries to start up their businesses. A lot can be achieved with a more innovation-friendly and pragmatic approach in order to attract and retain as much technology and innovation as possible in Germany. A strategically important factor.
  2. Strongly cohesive and interconnected community with political influence. This factor combines the sub-factors ‘strong and connected community’, ‘independent and influential associations’, and ‘sufficient contact points to industry’. A strong community is essential for startups to mutually support each other and to gain visibility and relevance. An association should represent the interests of the entire community to the relevant stakeholders, especially politicians. Startups also request sufficient networking events to get in contact with the established industry to speed up decision-making processes.
  3. Blockchain enlightened companies with the willingness to implement blockchain solutions. This factor contains the two subfactors ‘blockchain educated corporates’, and ‘sufficient corporate budgets for blockchain solutions’. As many blockchain startups target the B2B market with their solutions, startups have to explain various dimensions of the technology and its benefits. Due to the lack of knowledge, corporates often do not provide sufficient budgets or are very hesitant. Even though corporates are willing to experiment quickly, it is very time-consuming to go beyond prototyping. This is a tedious and expensive process for blockchain startups.
  4. Competitive political blockchain strategy and comprehensive support measures. This aspect aims to enable the implementation and use of blockchain technology to support the public sector and politics. Politics strongly influences the public sector, and, therefore, both subfactors are summarized. Startups, for example, demand a decentralized identity infrastructure provided by the public sector. In this regard, it is highly demanded that the government provides a vision regarding their perspective about blockchain and their approach to improving the current environment. Especially the political passivity was criticized by blockchain startups.
  5. Blockchain enlightened and risk-seeking investors providing sufficient venture capital. This is a demand that results from blockchain startups struggling to find investors who are willing to invest in their projects. Blockchain projects are typically long-term projects, making short-term returns difficult. As the technology is still immature, startups have to invest significant amounts in research and development (R&D) without generating short-term revenue. This is aggravated by the tendency of German investors to avoid risk and the partial lack of blockchain knowledge. All startup-interviewees were unsatisfied with the current funding situation. There is a need for investors who are willing to forego short-term profits and support a startup in the blockchain space for the longer term with the prospect of profiting from the emergence and further development of this rising technology. With a better understanding of the technology, it is likely that more investors will recognize the great growth opportunities and accordingly the funding situation could change rapidly. It should also be noted that there are also prospects for short to medium-term profits in the fast-growing blockchain sector.
  6. Educating society about technology (blockchain). This factor can
    be divided into the three parts: ‘positive public perception of blockchain’, ‘educated institutions’, and ‘educated society’. The first sub-factor, in particular, is a challenge for startups due to scams in the past, which led to a partly negative connotation. Due to missing blockchain knowledge, politicians, institutions, and the broader public are skeptical about blockchain projects, and they cannot decide between fake and promising projects. This is at the expense of the development speed of the ecosystem and, thus, also of the success of blockchain startups.

Potential of the German blockchain startup environment

Based on these factors, further results of the interviews, and desk research,
this paper identified the following areas as most necessary for the German
blockchain ecosystem.

  1. Fast and efficient exchange with regulators to create regulatory
    security
  2. Strongly cohesive and interconnected community with political
    influence
  3. Competitive political blockchain strategy and comprehensive
    support measures

Strongly cohesive and interconnected community with political influence

The following four measures address the first factor of the demand side.
Especially the measure regarding associations shows great potential.

Fast and efficient exchange with regulators to create regulatory security

The following measures should be driven forward by the supply side. In
general, there is currently a lack of blockchain know-how in decision-making
positions.

Competitive political blockchain strategy and comprehensive support measures

The next aspect on the supply side mainly concerns the role of politics. A total
of seven measures were identified whereby the measure ‘blockchain strategy’
is considered separately in the following chapter.

Evaluating the German blockchain strategy

A further reason for the high level of dissatisfaction of the interview partners
was the missing political direction until September 2019. The demand for a
blockchain strategy was also supported by studies three and four. In the first
step, the publication of the blockchain strategy does not allow for any
conclusions of the quality of the work. Therefore, the content of the strategy
is compared and evaluated with those of this paper.

Conclusion

Germany is a laggard in the field of digitization, especially compared to the
US and China, where the platform economy emerged and prospered. Blockchain technology, however, offers Germany the opportunity to become
a forerunner. As startups play a crucial role in developing and deploying new
technologies, Germany needs to provide a competitive startup environment
in which blockchain startups can evolve.

  1. Fast and efficient exchange with regulators to create regulatory certainty
  2. Strongly cohesive and connected community with political influence
  3. Competitive political blockchain strategy and comprehensive support measures

Remarks

Download the article as a PDF file. More information about the Frankfurt School Blockchain Center on the Internet, on Twitter or on Facebook.

About the Author

Hendrik Petersen completed his part-time master’s degree (MSc) at the HSBA
Hamburg School of Business Administration in Global Management and
Governance. He works as an Executive Assistant to the Management Board at GHD GesundHeits GmbH Deutschland. You can contact him via mail (
hendrik.petersen@tonline.de) or via LinkedIn (https://www.linkedin.com/in/hendrik-petersen-02976394/)

Endnotes

(1) World Economic Forum. (2018, March 9). https://www.weforum.org/agenda/2018/03/blockchain-bitcoin-explainer-shillerroubini/.

--

--

Love podcasts or audiobooks? Learn on the go with our new app.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store