Founders prefer metropolitan areas

Attention founders: Metropolitan areas are at the forefront of the startup scene. According to the KfW Start-up Monitor 2019, they find the best conditions there.

This article is part of the special feature GründerNavi – for founders and young companies

Startup activity is higher in metropolitan areas than elsewhere in Germany. Berlin has topped the list for years, followed by Hamburg. In the current KfW Startup Monitor 2019 ranking, the state of Brandenburg has now moved up from eighth to third place for the first time. The monitor's authors suspect that Berlin's attractiveness is now spilling over into the surrounding region. In Berlin, between 2016 and 2018, an average of 193 people per 10.000 working-age individuals started their own businesses. During the same period, the figures were 146 in Hamburg and 134 in Brandenburg. Bavaria and North Rhine-Westphalia remain among the top five, ranking fourth and fifth respectively. The eastern German states regularly occupy the bottom of the list.

Two-thirds of solo self-employed

Metropolitan areas are characterized by short distances and a high density of people and businesses. Service providers in particular benefit from this. The startup strength of Berlin and Hamburg is due in particular to the media and IT sectors, with their high proportion of freelance founders. Metropolitan areas also benefit from the influx of workers. However, the majority of startups are so-called solo self-employed individuals, meaning they have no employees. On average, this group accounts for almost two-thirds of all startups.

Yet there are certainly start-ups that are relevant to the labor market. For example, new founders created around 219.000 full-time equivalent jobs last year. This underscores their relevance for employment in Germany. At the same time, this represents one of the biggest obstacles for young entrepreneurs: "Young companies generally have a harder time recruiting employees," states the KfW Start-up Monitor 2019. Potential applicants fear the failure of their new venture and, as a result, the loss of their jobs.

Difficult search for employees and investors

The fear of losing one's job is not entirely unfounded: "Within three years of business, around 30 percent of founders discontinue their business." This once again confirms the persistent 3-30 rule of thumb. The reasons for giving up vary considerably. "Personal reasons" dominate at 32 percent. The study includes family commitments, stress, illness, and dissatisfaction with the income earned. A better job alternative may also have emerged. Importantly, only a small fraction fail due to financial difficulties, i.e., file for bankruptcy.

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This isn't to say that financing difficulties aren't a problem. On the contrary, they pose the greatest barrier, according to the KfW Start-up Monitor. Over the past ten years, the average capital investment of founders has increased significantly, from around €10.000 to just under €16.000. And the proportion of those experiencing financing difficulties rose to 17 percent in 2018 (previous year: 14 percent) – either because the founders were unable to raise sufficient equity or debt capital. 

More women are daring to become self-employed

Although the number of so-called emergency start-ups has increased, most are opportunity founders. KfW Banking Group uses these two terms to distinguish between founders who have not found alternative employment and therefore (have to) become self-employed and those who sense a business opportunity. The latter continue to represent the largest group at 70 percent. Emergency start-ups have more than halved since the years before 2012. However, from 2017 to 2018, there was a further increase, rising from 13.000 to 148.000 new business founders compared to 382.000 opportunity founders (-8.000). According to KfW, this does not yet mark a reversal of the trend.

Independence is important to many founders, especially women. Almost half of women cite independence as their primary motivation. The proportion of female founders increased in 2018 for the first time in two years, climbing to 40 percent from 37 percent the previous year. Specifically, their share rose by four percent to 216.000 female founders. By comparison, the number of male founders continued to decline, by five percent to 331.000. The KfW Start-up Monitor counted a total of 547.000 start-ups in 2019. Thus, thanks to female founders, the number of start-ups, which had been declining for years, stabilized somewhat in 2018: the overall decline in 2018 was only minus two percent.