Building an Enterprise Startup in Germany

An Interview with Dr. Michael Keppler, Business Angel and Co-Founder of ICON Supply Chain Management

While attending the mentoring circle at CyberForum Karlsruhe, I had the pleasure to meet Dr. Michael Keppler. He is a mentor, business angel, co-founder and former CEO of ICON Supply Chain Management, Karlsruhe.

Dr. Michael Keppler

Dr. Michael Keppler

Together with a friend from the University of Karlsruhe, Dr. Keppler started ICON in 1992 and developed the company to become technology leader in the supply chain planning and collaboration domain.

Dr. Keppler and his co-founder managed the company through the key transitions that characterize a high-tech enterprise business: from the startup stage with a lot of custom project work, to a scalable products business, and finally, to the exit, selling ICON to E2open in July 2013.

His experience is invaluable to startup founders. So thanks to Michael for sitting down with me and sharing some of his lessons learned, as well as his take on Southern Germany as a location for tech startups.

Barbara: Michael, how did you come up with the idea to start an enterprise software company in 1992? You were still working on your PhD in engineering, and back then, it wasn’t that common for engineers to start their own software company.

Michael: That’s right, there weren’t too many software startups in these days. But we did see several others starting their own business, some of them directly after finishing university. My co-founder and I completed our PhD in engineering at the Institute for Material Handling and Logistics (IFL). During that time we did a lot of projects with industrial partners, giving us first-hand experience with supply chain problems faced by large, global companies. And just as important, we established valuable contacts in the industry at the same time.

On top of that, like all entrepreneurs, we wanted to build something new and exciting, do our own thing and not get stuck in the political complexities of Top 50 corporations.

Barbara: What’s your view of the startup environment today, compared to the early nineties? What has changed?

Michael: Back then, there was less organized, structured support for entrepreneurs. Today we have valuable mentoring and business angel networks – like the CyberForum in Karlsruhe– which didn’t even exist back then.

Because of this, starting a company today has become easier and less risky. Founders nowadays can avoid a lot of mistakes by getting advice from mentors – i.e. people who have learned from their own mistakes.

On the financing side as well, the situation has much improved. Especially startups right out of university now can be financed through EXIST startup grants from the BmWi (Federal Ministry of Economic Affairs and Energy) – a program that was established in 2007. Another financing option is the Business Angel network – which didn’t exist back then either.

But in the end, what really counts is winning the first customer. Particularly in the enterprise market, it is almost more important to have a first customer than a fully functioning product. A sample path to success is providing a custom solution to a client who is in a painful emergency situation. Over time you evolve the custom solution into a generic product. Building a generally applicable product first and trying to sell it based on its potential value to customers may work as well, but is more difficult in my opinion.

Barbara: The transition from custom solutions to a more scalable product business, that’s a tricky one. How did you navigate this transition – and does it still work the same way today?

Michael: In that area as well, things have become easier for startups – due to the broader availability of startup financing. The transition from custom projects to products is expensive, since you need to standardize the product itself, professional services, sales, and marketing. In short you have to setup the whole organization for scalability. And during that transition process, you will not be as responsive as before regarding custom work and short-term change requests from customers. This means you lose your agility, which is one of the major competitive advantages of small companies. As a result you are going to lose revenue as well – while you are paying a lot of money for building the company. You can imagine how intense and dangerous this is.

Therefore, this has been and still is a very critical period in the later stage of a startup and one needs to decide very carefully when to tackle this problem and how. If a startup wants to go beyond custom projects and build a scalable product that appeals to a broader market, it needs to make significant investments that typically will require external funding. I recommend founders seek qualified external advice at this stage to make sure they do not over-extend their organization.

Barbara: Another key development step for a startup is going international. How did that work for you and what’s your advice for founders today?

Michael: Here, I recommend building up reference customers abroad before opening up an office and starting expensive sales and marketing initiatives. In our market segment, due to the global nature of supply chains and since our solution focused on collaboration between multiple tiers in a supply chain, it was quite obvious for us to go international by working with the suppliers or customers of our own customers. That’s how we won our first international business – and that works in other enterprise markets also. Once the first customers are on board in a foreign market, the resulting success stories can be leveraged to launch targeted sales and marketing initiatives.

Another important aspect is culture and organizational structure: as the startup grows, the original agile “guerilla spirit” needs to evolve into more structured processes and responsibilities. This is often difficult to accept for the initial crew. Another source of cultural problems is accelerated hiring that will necessarily bring in people with different attitudes and values, which can create a rift between the “old guard” and the new hires. Particularly when new cultures from foreign countries are added. And even within the old guard, over time, values will diverge and problems arise.

Therefore, it is important to get external advice at this stage also, for example through an active advisory board or even psychological screening of candidates during the hiring process. The latter is a good idea when executives from the outside are hired to bring in the needed experience for scaling the organization.

Barbara: For companies serving a specialized market segment, a good strategy for ensuring long-term success can be the sale of the company to an acquirer with a broader solution portfolio. That’s what you did with ICON. What’s your advice for this stage?

Michael: You should always focus on increasing your company value – and not get distracted by the potential payout and the wonderful things you could do with that money. You need to focus on what will be attractive for the acquirer to buy, not primarily on what you would like to sell. There is a subtle difference, which is good to remember in sales in general!

In order to spur interest in your company, you need to make sure the following conditions are met: Demonstrate a scalable product business and an organizational structure that supports it. The company needs to clearly articulate its USPs (unique selling propositions) and to demonstrate a satisfied and growing user base, as well as successful business partnerships.

Systematically cultivating relationships with key decision makers both among customers and among partners will go a long way to ensure visibility with potential strategic buyers.

For conducting the sale, it is critically important to use external M&A advisors who will analyze your company without emotional attachment, document its current state, and develop a pitch for potential buyers. They will support you in preparing and delivering the pitch, guide you through the complexities of the due diligence process, lead negotiations with potential buyers, and bring in specialized lawyers.

Barbara: Now that you are active as a business angel and mentor to startups – what’s your view of trends and opportunities for technology startups in Southern Germany? Where do you see special opportunities, advantages, but also disadvantages of the location?

Michael: Looking at the plethora of big and small software vendors that target corporate customers, one might be tempted to think there are no market opportunities left to exploit. On the other hand, globalization and global competition has created many problems for corporations that need to be solved. Especially in the areas of supply chain, logistics, and co-engineering, there are many gaps left by existing solutions – presenting opportunities for creative and courageous entrepreneurs.

Conditions for startups in Germany have improved a lot in the last couple of years. However, they are still not comparable to e.g. the Silicon Valley – which I could witness over the years while spending time at our San Jose office.

On the other hand, here in Southern Germany, we have a strong concentration of technology businesses, especially around the automotive industry with its international supplier networks. These businesses alone represent an interesting market potential to IT startups: the automotive industry is changing and one of the key challenges is the need for agility and faster response times. Therefore, in the areas of supply chain, logistics, and IT, automotive companies and their suppliers will change to use processes similar to the high-tech/electronics industry.

Barbara: Any final thoughts or key advice you’d like to give young entrepreneurs?

Michael: Even today, people still buy from people, and that’s why cultivating trusted relationships is very important for the success of entrepreneurs. That’s especially true for enterprise startups initially addressing a niche market and selling solutions that are mission-critical for their customers. These are not huge, anonymous markets and the list of potential customers is limited, so getting in touch and staying in touch with customers and other key industry players has always been a priority for me.

This also helps overcome the natural skepticism that a large enterprise customer will feel towards a small startup. Often, the startup is even competing against large established players with a large solution portfolio who at least on paper offer similar functionalities – or have announced them for the future. To win in that situation, the customer must trust you as a person and trust the technical and execution capabilities of your company.

As an example, we found our very first customer through a university friend who rose through the ranks at HP. When he faced a serious supply chain challenge, he asked for our expert opinion and that turned into a customer relationship. And from the supply chain network of that first customer, many other customer relationships developed, including our first international customers.

So that’s my key advice: take the time to build and actively nurture strong, trusted relationships.

Michael helps companies to accomplish their growth objectives – whether in startup or later stages. With his 20+ years experience in cutting edge supply chain projects and solutions development he also provides consulting services to customers who wish to build differentiating capabilities.

He can be reached at michael.keppler@outlook.com or via LinkedIn

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