The Silicon Valley Built on Sand

The problem was not the idea. The problem was — not exclusively, but decisively — the people who were supposed to finance it. And their rules, which they refused to change.

I. The Idea

In the mid-1980s, something remarkable happened in Lower Saxony. The Norddeutsche Landesbank — the Nord/LB, that solid public-law credit institution based in Hanover, which since its founding in 1970 had been mainly occupied with coordinating savings banks and granting municipal loans — founded a venture capital company. It was called Nord/GI.

The idea was not bad. It was even right. Germany needed risk capital for inventors and founders. The American venture capital model had produced companies like Apple, Intel and Hewlett-Packard in Silicon Valley — firms that came from garages and changed the world. Lower Saxony wanted the same. A Silicon Valley on the Leine river. Or rather: a Silikon-Valley, because what emerged there was not made of silicon but of silicone — soft, shapeable, and without inner structure.

The problem was not the idea. The problem was the people who were supposed to implement it.

II. The Bankers

Nord/GI was run by bankers. Not by entrepreneurs. Not by engineers. Not by people who had ever developed a product, built a prototype or spent a sleepless night in a workshop. But by people who had learned to grant loans, assess collateral and calculate interest. Those were their skills. Those were their reflexes. And that was the problem.

Venture capital is the opposite of banking. A banker asks: what collateral do you have? A venture capitalist asks: what have you invented? A banker wants interest from day one. A venture capitalist knows that the first years will be loss-making years — and that the profit later can be all the greater. A banker diversifies his risk across a hundred small loans. A venture capitalist focuses on a few projects and accompanies them intensively. A banker administers. A venture capitalist shapes.

Nord/GI did none of this. It disguised itself as a venture capital company, but underneath it wore the uniform of a commercial bank.

III. The Contract

I know this because I was one of their founders. Not one of the founders of Nord/GI — one of the founders who was supposed to be financed by Nord/GI. In 1985 I came to Lower Saxony with a patented invention: a novel process for producing polygon profiles on machine tools. Prof. Tönshoff at the University of Hanover — technology advisor to Economics Minister Birgit Breuel — had assessed the invention positively. The city of Hameln had invited me into its new technology and business incubation centre. The economics ministry had issued a grant notice for 700,000 DM. Everything looked promising.

Then came the Nord/GI contract. A silent participation of 500,000 DM. The word “participation” suggested partnership. The reality was different. Just three months after the money was transferred, I had rising interest payments to make. Not after three years. Not after the first revenue. Not after break-even. After three months. To a founder who was in the process of developing a machine tool — a process that takes years.

My solicitor in Cologne — Dr. Dörffer, a man with dry humour — looked at the contract and said only: “What do you want to do — without interest the bankers give no money.” He then informed me that one was permitted to call a banker a “robber”. However, if one said “criminal” or “gangster”, that was actionable.

What followed was a cycle that in its absurdity recalled a Loriot sketch — had it not had such bitter consequences. I had to borrow money from my house bank, the Stadtsparkasse Hameln, in order to pay the interest to Nord/GI. So money flowed from one bank to the other. A perpetual motion machine of debt, while I was trying to develop a machine tool that had never existed in the world before.

IV. The Rules

My contact at Nord/GI was called Gerd Kastrup. He was one of three managing directors and initially made a very positive impression on me. I regarded him as my partner for a long time. I told him clearly that I saw myself as an inventor-entrepreneur and that the project was meant to be a vehicle for making and realising further inventions. He replied only: “But for now you must focus completely on the project we are investing in.”

That “for now” lasted eleven years.

I told Kastrup often: “Your rules are wrong!” His answer was always the same: “But we cannot change them for you.”

That single sentence contains the entire failure of the German innovation system. The rules are wrong — everyone knows it. But no one changes them. Not for the inventor who needs it. Not for the innovation that dies because of it. The rules exist for their own sake.

What was wrong with the rules? Inventors seek paths that no one before them has walked. They need quiet to immerse themselves in their problem. For weeks, months, sometimes years. What they do not need is a banker who demands interest after three months. What they do not need is a participation agreement constructed like a loan contract. What they do not need is a partner who speaks the language of venture capital but uses the grammar of banking.

V. The Experiment

I do not know how many projects Nord/GI financed. I do not know how many of them failed. I suspect: all of them.

That is the bitter point: the projects probably did not fail because they were bad. They failed because the financing structure condemned them to failure. You cannot make a plant grow by pulling it out of the ground every three months to check whether it has developed roots.

In the real Silicon Valley, venture capital works differently. A venture capitalist gives money and waits. He gives the founder time. He gives him contacts. He gives him — and this is decisive — peace. He earns his money not through interest but through the appreciation in value of his stake. If the company fails, he loses his money. If it succeeds, he multiplies it. That is risk. Hence the name: risk capital.

Nord/GI wanted risk capital without risk. That is like wanting to swim without getting wet.

VI. The Metamorphosis

What became of Nord/GI is more instructive than any business school case study. The company did not disappear — it transformed. Nord/GI became NORD Holding Unternehmensbeteiligungsgesellschaft mbH. Today it manages over 3.5 billion euros. It is one of Germany's leading private equity companies.

And it invests exclusively in already established, medium-sized companies. Management buyouts. Business successions. Corporate spin-offs. Companies with 20 to 200 million euros in revenue. No founders. No inventors. No machine tools that have never existed in the world before. No risk.

The quiet metamorphosis from venture capital company to investment company for established businesses is the most honest admission Nord/LB ever made — without ever saying it aloud. It says: we tried. We could not do it. So now we do what we can do: banking, just under a different name.

That is no disgrace. Not everyone can do venture capital. But it is a disgrace that on the way to this realisation, livelihoods were destroyed. Mine almost too.

VII. Built on Sand

The title of this essay is no accident. Silicon Valley in California sits on tectonically active ground — the most innovative region in the world stands on a foundation that can shake at any moment. But the people there have learned to live with risk. They did not eliminate the risk — they managed it.

In Lower Saxony it was the reverse. They built on sand and acted as though it were concrete. They founded a venture capital company and ran it like a bank. They spoke of innovation and meant interest. They spoke of partnership and meant loan contract.

The parable of the house on sand, which Jesus tells in the Sermon on the Mount, is not about poor building materials. It is about false foundations. Whoever builds on sand builds on something that gives way under load. It looks like a foundation, but it does not hold.

VIII. The Lesson

Prof. Erich Häußer, the former President of the German Patent Office, put the systemic failure behind stories like this in a nutshell. He called it the “cartel of ignorance” and warned as early as the mid-1990s: “If this cartel of ignorance cannot be broken, we will in quite foreseeable time ourselves become a low-wage country again.”

Häußer was right. The cartel won. And the sand remained.

Germany to this day has no functioning venture capital system for inventors and founders in the early phase. What it has are banks that disguise themselves as innovation promoters. Funding agencies that ask for market analyses before the market exists. And a political class that inserts the word “innovation” into every Sunday speech, but on Monday does not change the rules.

The real Silicon Valley is built on an idea: that people with good ideas should be given money and then left in peace. That failure is not a stigma but a learning process. That profit comes not from interest but from value creation. That the banker should serve the inventor — not the other way around.

In Lower Saxony it was the reverse. In Germany it still is.

The house that Nord/LB built on sand is gone. In its place now stands a solid concrete building — NORD Holding, 3.5 billion euros in weight, invested in profitable medium-sized companies. A success, certainly. But a success that does not answer the question that stood at the beginning:

Who finances the inventors?

The answer, then as now: nobody.

“Your rules are wrong!” — “But we cannot change them for you.”