In Germany, where I’m spending more time these days, large technology companies — think Siemens, SAP — long have had a reputation for quality and success. On the flipside, smaller German tech startups have burst onto the international scene, including many “unicorns.”
But what about German companies in the middle — known collectively as the Mittelstand?
These small- and mid-sized German firms, usually family-owned and based in smaller cities, constitute the backbone of the German economy. Whether they’re making machine parts or chemicals or cutting-edge software, Mittelstand companies are generally strong, dependable and community-minded. In fact, in many German towns, the majority of the population is employed by a Mittelstand company: In 2020, these firms accounted for 57.6% of Germany’s employment and 34.4% of national revenues. In 2018, they comprised 99.5% of Germany’s companies.
Many of these firms have all the ingredients for breakout success: amazing products and strong brands, loyal customers and dedicated employees. But many have been held back by a conservative, risk-averse mindset that has shunned outside investment, and with it the ability to recruit more-seasoned executives, embrace new technologies and move into new markets.
In my view, otherwise-promising Mittelstand companies that don’t focus on this type of growth risk being left behind in a more global, technology-driven economy. As a general partner on Battery Ventures’ private equity team, I’ve invested in numerous Mittelstand software companies. We want to help these companies realize their full potential – and build resilient and sustainable businesses.
The Mittelstand has begun to realize that broadening its horizons and partnering with outside investors can help them achieve greater success. Indeed, foreign investment in Germany, including in the Mittelstand, has soared since 2018. In 2020, more than 1,000 German companies received a total of €12.5 billion, or nearly US$14.5 billion, from institutional investors, despite the pandemic.
So how should Mittelstand executives think about breaking out of the box to grow? Based on my experience working with these companies, I would focus on three main strategies:
Start succession planning.
Mittelstand companies should focus on succession planning and executive recruitment in general — specifically, a greater focus on recruiting world-class executives who can help take successful, family-run businesses to the next level.
Right now, many Mittelstand companies struggle with succession issues as the children, or even grandchildren, of founders are no longer interested in working in the family business. By 2022, according to some estimates, about one in five of these companies could change ownership or go out of business.
Forward-looking Mittelstand companies will recruit new leaders with specific functional expertise (in go-to-market, engineering, product management, HR or finance), which becomes more important as companies scale, diversify and go global. Often, it’s difficult to find specialized, high-quality executives in the small towns where these companies are headquartered. In this era of work-from-anywhere, Mittelstand families need to be open minded about executives who may not live locally, and also about working with international investors who can tap their networks to help with recruiting.
Double down on product innovation to stay ahead.
Growing and scaling an organization also requires great products that customers want to buy. For this reason, I would encourage mid-sized German businesses to double down on innovation and R&D and not be afraid to leap forward by leveraging new technologies such as cloud computing, agile software development and AI.
Technology-focused Mittelstand companies are doing much of this already, releasing high-quality, fully baked products after extensive research, development and testing — not pushing minimum-viable software products (MVPs) out the door quickly, as many U.S. tech companies do. But sometimes they can be hesitant to make big bets like moving their core products — which often have taken decades to develop — into the cloud, with all the associated risks and costs. However, this type of investment, in time and money, needs to happen eventually. Taking these steps can ultimately give Mittelstand companies a global competitive advantage and keep them from being leapfrogged by a new generation of competitors, foreign and domestic.
The globalization of commerce and China’s emergence as a technologically sophisticated producer have created new challenges for the Mittelstand. Indeed, many of these companies are regional champions within Germany but haven’t sought to expand, even to other European countries. I’ve seen many of these companies begin to create growth plans that include organic as well as inorganic growth through targeted, tuck-in acquisitions. This type of M&A can accelerate international expansion, supplement and complement a company’s core offering, and still allow the company to maintain its longstanding connection to its hometown and employee base.
Acquisitions are only one way to grow, of course. Mittelstand companies can accelerate organic growth by thinking bigger about market opportunities, geographic reach, product landscape, even the scalability of their own infrastructure. Mittelstand companies should ask themselves: do we have the products and the capital to expand internationally? Which new markets should we enter next? Are we efficiently investing in sales and marketing to reach all potential new customers? Are we capitalizing on opportunities within our existing customer base? Does our product deliver a more compelling value when bundled with a complementary product?
What comes next?
My hope is that more Mittelstand CEOs will see the benefits partnerships can bring, and that more of these companies can become cross-border champions. Many Mittelstand companies have lots of runway for growth ahead of them – more than they may realize. Whether founders wish to continue with the company along that journey, or diversify their wealth while preparing the company for the next phase, Mittelstand companies need not stay “stuck in the middle”.
Battery Ventures provides investment advisory services solely to privately offered funds and neither solicits nor makes its services available to the public or other advisory clients. Nothing herein should be construed as investment advice. Content obtained from third-party sources, although believed reliable, has not been independently verified for accuracy or completeness and cannot be guaranteed. * For a full list of all Battery investments and exits, click here.