The Mittelstand v Silicon Valley: Which model of entrepreneurship is most relevant for post-Brexit Britain?
Growth in the UK is slowing down as business investment declines amid Brexit uncertainty. Jobs growth too seems to be slowing particularly in scaling firms. As always, however, the UK’s entrepreneurial small-and-medium firms (SMEs) will play a key role in restoring future growth. But how should we ‘do’ entrepreneurship in the future?
A recent research paper by André Pahnke and Friederike Welter contrasts two ‘models’ (or perhaps myths) of entrepreneurship: the Mittelstand model epitomised by German SMEs and the Silicon Valley model of venture capital backed start-up. These are not strictly alternatives, of course, but the comparison is thought-provoking in terms of the role and meaning of entrepreneurship.
Let’s start with the Mittelstand model. Widely admired across the globe, German Mittelstand firms stand for innovation, operational excellence and global market leadership in their chosen market niche. This is achieved through consistent investment and innovation alongside organic growth, with Mittelstand firms having a strong aversion to external finance. Precise definitions of what actually constitutes a Mittelstand firm, however, differ. Typically, though we think of these firms as being defined by their small size and often a strong element of family ownership and control.
The Mittelstand model (or myth) suggests a firm characterised by ‘familiness’ and strong employee engagement, and which is strongly embedded in its local community. Critics point to the limitations to growth imposed by Mittelstand firms’ preference for internal finance and firms’ limited flexibility in the face of challenges such as digitisation and Industry 4.0.
The Silicon Valley model (or myth?) of entrepreneurship could hardly be more different. Opportunity driven, venture capital funded and focussed on rapid short-term growth, the entrepreneur’s objective here is often profitable exit rather than building a business which benefits employees and/or communities.
In part, the contrast between the Mittelstand and Silicon Valley models of entrepreneurship is driven by the mindset and ambition of business leaders. What are their objectives? Are they building a business for the long-term? Or, is their priority profitable exit? We have some evidence on this from research which we undertook at the ERC with over 6,000 UK micro-businesses in 2018. This suggested that around 40 per cent of UK micro-business owners saw ‘building a business to hand on to my family’ as very important compared to 30 per cent whose priority was a ‘profitable exit’. So, in the UK, the balance may point more strongly to the Mittelstand model of entrepreneurship rather than the Silicon Valley model.
Consistent with the Silicon Valley model, these proportions prove rather different in the US, with 51 per cent of micro-business owners aiming for a profitable exit and 45 per cent of hoping to hand on the business to their family.
Entrepreneurial mindsets and ambition are not the whole story, however. Both the Mittelstand and Silicon Valley models of entrepreneurship depend critically on the resources which are available within the local business eco-system. Crucial for the Silicon Valley model is the availability of risk capital, not something which is necessary for Mittelstand-type entrepreneurship. The Mittelstand model on the other hand relies strongly on the quality of technical training available in Germany.
So which model is most relevant for the future? Well, Pahnke and Welter’s conclusion is straightforward: ‘the Mittelstand is an excellent example of every day entrepreneurship, demonstrating how entrepreneurship that builds on a sense of responsibility and solidarity can shape an economy and society and contribute to its world standing’. It is hard to disagree, particularly if we are focussed on more inclusive growth post-Brexit. However, this is not the whole story. Levels of entrepreneurial activity in the UK remain well below those in the US so perhaps the answer cannot be one-sided. Instead, future growth may depend on enabling both entrepreneurship models.
 Pahnke, A. and F. Welter (2019). “The German Mittelstand: antithesis to Silicon Valley entrepreneurship?” Small Business Economics 52(2): 345-358.
 Data derived from the Micro-Business Britain project. See the ‘State of Small Business Britain’ report for details. Available at: https://www.enterpriseresearch.ac.uk/publications/state-small-business-britain-report-2018/.
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the Enterprise Research Centre, its Funders or Advisory Group.