What To Learn From Finance, Funding and Wages in Germany’s Start-Up Ecosystem
From Overtime To Wealth – The Fight To Get Paid
If you have just migrated to Germany as a budding entrepreneur, then you might probably worry about a variety of things and one of them may have to do with your finances. Getting your finances sorted before starting up a business is essential after all, because hard work sadly does not pay bills. In some cases, getting paid as an entrepreneur still seems to constitute a privilege – at least in the initial stages of this experience and profession. This article will tell a brief history about finance, funding and wages zooming into the reality of making a living as an employee or a freelancer in Germany’s start-up ecosystem. Whereas one may assume that there could be a significant difference with regard to wages inside and outside of Germany’s ‘start-up world’ – at least based on the image of ‘entrepreneurship’ as a field of financial hardship, where workers still go from rags to riches or from overtime to wealth, this article will both show that the latter cannot be generalized and that there is a need for further research in this regard.
Next to the above, this short article will also demonstrate that making a differentiation between Germany’s ‘start-up labour market’ and Germany’s ‘traditional labour market’ could allow for analyses with impact. With databases such as the ones published by the German Federal Statistical Office (Destatis) failing to sufficiently capture the lives of entrepreneurs in financial terms and in a differentiated manner – that is, to provide insights into the differences in earnings between freelancers and employees at start-ups, whereby it would have to be further differentiated whether these start-ups cooperate with public actors and SMEs or are standing on their own, a lot of efforts are urgently needed to promote Germany’s start-up ecosystem as a ‘world’ with an own operating mode – its own rules, regulations and incentives.
Working towards wage and wealth equality in Germany’s start-up ecosystem and tackling discrimination on the way could arguably offer the chance to understand which changes are needed on Germany’s labour markets overall. Different from the ‘traditional labour market’, the ‘start-up labour market’ has probably been exposed to less state and institutional regulation, which is why its lacunas might most directly reflect what workers really want and need from the state and its institutions. Whereas the latter is not to say that these labour markets can fully be imagined as independent, nor to deny the intersections that they have, contrasting these two systems may lead to establish lessons learned while these labour markets continue to merge as the result of increased cooperation between start-ups and SMEs, and probably increasingly the public sector in the future.
From Finance To ‘Everyday Security’
How Entrepreneurs Finance Their Business In Germany
According to the Deutscher Startup Monitor 2021, most entrepreneurs in Germany rely on private savings when it comes to financing their business. In 2021, 74,9% of entrepreneurs who participated in the survey approved the latter fact – with a further 43,2% relying on public financing, 30,1% relying on business angels, 22% on family and friends, 21,4% on operative cash flow (OCF), 19,8% on venture capital (VC) and 16,1% on bank loans. Unlike the latter survey, the Migrant Startup Monitor 2022 shows that most migrant founders relied on public financing (43,2%) followed by business angels (41,4%) and VC (42,2%). In both cases, entrepreneurs were found to prefer public funding as their primary option followed by VC, business angels, operative cash flow etc.
While the Migrant Startup Monitor 2022 did not specify further between three categories, namely public funding, VC and business angels, the Deutscher Startup Monitor 2021 also gave entrepreneurs the opportunity to let its readers know whether they would welcome strategic investors (i.e. companies, family offices) as a source of funding – and they eagerly agreed (42,5%). The latter might indicate that entrepreneurs crave both financial security and guidance. However, unlike employees most entrepreneurs do not seek ‘security’ from the state, public institutions or their employer. Nonetheless, the opportunity of receiving targeted support as an entrepreneur through a particular company might be one way to also enhance one’s entrepreneurship network.
Finance Alone Is Not Enough…
As the findings of the Deutscher Startup Monitor 2021 prove, founders particularly valued investors who also offered them access to a network with useful connections (75,6%), industry expertise (70,3%) and a fitting ‘personality’ (64,4%). Of course, entrepreneurs also seek capital strength (42,3%) when they decide upon a particular investor, but interestingly capital strength is not first, which illustrates that what entrepreneurs actually need might be ‘guidance’. Entrepreneurship still comes along with so many insecurities that a ‘systemic’ answer to ‘security’ might work better for most entrepreneurs. Based on the fact that a well-functioning and broad network opens the door to future investment opportunities and revenue, the latter makes a lot of sense. As Crawford and Hutchinson state in their 2016 article ‘Mapping the Contours of ‘Everyday Security’: Time, Space and Emotion’,
“Feeling secure demands not only the absence of direct harms in the moment but also assurances that the conditions underpinning our security will persist into the future […] By ‘everyday security’ [it is] refer[red] to two broad and interrelated issues. First, the lived experiences of individuals and groups who interact with security measures and practices […Second] the more mundane and quotidian practices and habits that are understood or characterized by people and groups as being ‘about security’, and which are crafted and carried out on a regular (everyday) basis, namely the production of ‘security from below’”Crawford and Hutchinson (2016). Mapping the Contours of ‘Everyday Security’: Time, Space and Emotion, The British Journal of Criminology 56(6): 1184–1202
In other words, in order to feel confident to start up a business, entrepreneurs in Germany need both support from the state and the private sector – namely to make entrepreneurship a ‘feasible option’, which is aligned with Germany’s welfare state model as it stays somewhat independent from the state. As Otto, Balaku, Hünefeld and Kottwitz’ findings suggest, solo entrepreneurship is, for instance, entangled with some ‘contradictory experiences’: Whereas solo entrepreneurs carry all sorts of responsibility alone with the latter certainly reinforcing presenteeism, presenteeism marks a practise to ‘protect’ financial needs in the short term and self-fulfilment and self-realization in the mid- and long-term. Different from Germany’s ‘traditional labour market’, Germany’s ‘start-up labour market’ might thus allow a certain degree of freedom from the hierarchical structures within companies – though further research would need to confirm this.
Whereas solo entrepreneurs were found to value autonomy, which the researchers describe as a basic psychological need and a premise to reach organizational goals, responsibility was found to be experienced as a burden under certain conditions (i.e. lacking capacity to prioritize health, family etc.). In this scenario, presenteeism could then be interpreted as a ‘security habit/practise’, which reemphasizes that Crawford and Hutchinson’s argument might bear some truth. Security is without question also about making sure that – what we want from our societies, life and our career, stays achievable in the future. At the most basic level, security could also be argued to allow us to live a life according to our values, which we enact through our everyday practices and habits. The latter might lead us to ask:
- Does the welfare state model no longer work – that is because we need to ‘choose’ the high-burden responsibility entrepreneurship path as an alternative to traditional employment?
- And/or are the corporate world (i.e. wherever it has not yet opened pathways to cooperate with start-ups) and the private sector responsible for the demise of autonomy in the world of work?
- Should SMEs and large companies be obliged to adopt an ‘innovation model’ that includes the cooperation with start-ups?
- Should we opt for making ‘freelancing’ the rule and what would this require from our so-called welfare state?
‘Funding Gaps’ & ‘Wage Gaps’ Are More Than Just A Number
As the Migrant Startup Monitor 2022 showed, almost half (42,6%) of migrant founders of the first generation struggled with raising capital and the search for investors. And whereas this says nothing about a potential wage gap in the start-up industry, the latter illustrates that wage (in)equality needs to be measured after taking into account how opportunity costs diverge when starting up a business. Different from other founders, migrant founders might simply have no savings to rely on. As the Federal Agency for Civic Education (bpb) states, in comparison to persons with no migrational background, persons with a migrational background between 25 and 34 years of age had a 13,6% higher chance to be at risk for poverty in 2019. Younger people between 18 and 24 were at an even higher risk with the individual risk overall decreasing with age and increasing with old age (i.e. restarting at the age of 65).
At the same time as migrants were coping with an increased poverty risk, they also earned only 77% of the national average. However, the opportunity cost, which is involved in starting up a business, is more likely to increase when founders are in the possession of savings and decide to merge ‘private’ and business decisions to a huge degree. The latter might teach us two lessons about wage and wealth (in)equality as well as about access to finance, security and protection from discrimination: 1) founders who have invested their private savings to grow a company, which contributes to public benefit or common good in one or the other way, should be compensated adequately – including in retrospect, once investors join the scene; 2) migrant founders who are at an increased risk of poverty should receive an adequately higher compensation so they can build up a pool of private savings. In other words, taking larger risks needs to be incentivized on spot and in retrospect. The latter might lead to shrinking the need for everyday security practices as described above. Central to any policy decisions should thereby be an understanding of the fact that starting up a business leads to merging what is commonly accepted as ‘private’ and ‘public’. As Pantin reiterates…
“[E]ntrepreneurs use their own wealth to finance their startup venture […and] draw upon that wealth to capitalize a business, thereby accumulating more wealth”Lynnise E. Pantin (2018). The Wealth Gap and the Racial Disparities in the Startup Ecosystem, Saint Louis University Law Journal 62(2): 419-460
The latter quote shows that even the act of starting up a business could be interpreted as a ‘security practice’, which involves potential risks as an opportunity cost. Examining wage (in)equality is not enough to understand whether there is a gap between what employees in Germany’s start-up ecosystem and outside of it should earn. An alternative way to approach fair compensation might be connected with measuring impact. Wherever start-ups render local and regional communities a service, they should arguably be eligible to receive either tax incentives, targeted and free business support (i.e. including through other B2B companies) or access to additional funding through local, respectively regional, public start-up funds.
The benefit of establishing such public funds would be connected with the fact that building up an extra budget could shrink the risk that business failure impacts ‘private life’. In addition, such funds would allow for entrepreneurs to make self-informed decisions on how to invest the received compensation. Finally, such funds could reserve a certain budget to compensate all employees at start-ups – from marketing lead to CEO – through a fixed amount based on the companies’ overall impact and involvement in local societies. The latter could particularly serve to combat discrimination, where it does exist. As a research project from 2016, which marked a joint effort between Jobspotting, Berlin Startup Jobs and Aalen University, shows, female employees in Berlin’s start-up ecosystem earned significantly less than their male counterparts. The question whether there is a wage or wealth gap between Germany’s ‘traditional labour market’ and its ‘start-up labour market’ can hence not be answered that easily, but a gender pay gap persists in both.
Ecosystems Are Too Dynamic To Talk About Wage Gaps, Except For Females
As mentioned before, whereas more up-to-date research about start-up salaries in Germany is not available, except for some data published by angel.co, the 2016 research project actually found that a significant wage gap between the start-up world and other domains does not exist. Based on a survey, which included 80% of founders with a different nationality mostly from seed stage start-ups, the average median salary for females balanced at €2,500 and the average median salary for males amounted to €3,464 in 2016 with gross salaries in locations other than Berlin being slightly lower. Whereas the latter reemphasizes that a wage gap within Germany’s start-up ecosystem exists – that is between the genders – data from Statista reveals that there is no significant difference between the gross average median salary of workers outside Germany’s start-up ecosystem. In 2016, the latter earned on average €41,132. However, this number does not say enough, mainly because it does not answer whether there might be a gap when it comes to compensating females outside or inside Germany’s ‘start-up labour market’ and it neither allows for a comparison between particular roles.
The persistence of this gender pay gap may explain why female employees were more likely to feel underpaid than their male counterparts. It is indeed true that there is still a lot to be done to make sure that women earn the same as men. As Michael Kind highlights, this problem is even more persistent where the company board of start-ups consists only of men and where women are underrepresented in management positions. Tackling this problem at the root could not only work through the afore-mentioned funds, but also by requiring that start-ups work towards diversity and inclusion, also beyond the domain of gender equality and parity, with funding being made available only in the case that start-ups show respect for the rules. What do you think, what can still be done to improve how employees and entrepreneurs navigate across Germany’s ‘start-up labour market’? Let us know on LinkedIn!
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