The Silikon-Valley Built on Sand

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 headquartered in Hanover, which since its founding in 1970 had been essentially occupied with coordinating savings banks and issuing 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 model of venture capital had produced companies like Apple, Intel and Hewlett-Packard in Silicon Valley — firms that came out of garages and changed the world. Lower Saxony wanted that too. A Silicon Valley on the river Leine. Or rather: a Silikon-Valley — because what emerged there was not made of silicon but of silicone: soft, malleable, and lacking any internal structure.

The problem was not the idea. The problem was the people charged with implementing it.

II. The Bankers

The 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, evaluate collateral, and calculate interest. These were their skills. These 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 can be all the greater later. A banker diversifies his risk across a hundred small loans. A venture capitalist concentrates on a few projects and accompanies them intensively. A banker administers. A venture capitalist creates.

The Nord/GI did none of this. It dressed up as a venture capital firm, 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 the Nord/GI — one of the founders who were supposed to be financed by the 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 adviser to the Minister of Economic Affairs, Birgit Breuel — had evaluated the invention positively. The city of Hamelin had invited me to its new technology and start-up centre. The Ministry of Economic Affairs had issued a funding decision for 700,000 DM. Everything looked promising.

Then came the Nord/GI contract. A silent partnership of 500,000 DM. The word "partnership" suggested collaboration. The reality was different. Just three months after the money was transferred, I was required to make rising interest payments. 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 lawyer in Cologne — Dr Dörffer, a man of dry humour — looked at the contract and said only: "What do you expect? Without interest, bankers don't give money." Then he informed me that one was permitted to call a banker a "robber". However, if one said "criminal" or "gangster", that would be actionable.

What followed was a cycle that in its absurdity recalls a Loriot sketch — had it not carried such bitter consequences. I had to borrow money from my house bank, the Stadtsparkasse Hamelin, in order to pay the interest to the Nord/GI. So money flowed from one bank to another. A perpetual motion machine of debt, while I was trying to develop a machine tool that did not yet exist anywhere in the world.

IV. The Rules

My contact at the Nord/GI was named Gerd Kastrup. He was one of three managing directors and initially made a very positive impression on me. For a long time I regarded him as my partner. I told him clearly that I saw myself as an inventor-entrepreneur and that the project should be a vehicle for making and realising further inventions. He merely replied: "Right now you need to focus entirely on the project we're investing in."

That "right now" became eleven years.

I often told Kastrup: "Your rules are wrong!" His answer was always the same: "But we can't 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 them changed. Not for the innovation that dies because of them. The rules exist for their own sake. They are not a means to an end; they are the end.

What was wrong with the rules? Well, inventors seek paths that no one has walked before them. They need peace to immerse themselves in their problem. For weeks, for months, sometimes for years. What they do not need is a banker demanding interest after three months. What they do not need is a partnership agreement structured 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 the Nord/GI financed. I do not know how many of them failed. I suspect: all of them. I know of only one other project that consumed approximately 12 million DM — a sum bearing no proportion to mine — and where in the end an inadvertent connection to Heckler & Koch that I established played a role, but which also failed.

That is the bitter punchline: 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 roots yet.

In the real Silicon Valley, venture capital works differently. A venture capitalist provides 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 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.

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

VI. The Metamorphosis

What became of the Nord/GI is more instructive than any business school case study. The company did not disappear — it transformed. The Nord/GI became the NORD Holding Unternehmensbeteiligungsgesellschaft mbH. Today it manages over 3.5 billion euros. It is one of Germany's leading private equity firms. It has offices in Hanover, Berlin, Munich and Frankfurt.

And it invests exclusively in already established, medium-sized companies.

Management buyouts. Company successions. Corporate spin-offs. Expansion financing. Companies with revenues of 20 to 200 million euros and an EBITDA of 2.5 to 20 million. No founders. No inventors. No machine tools that do not yet exist anywhere in the world. No sleepless nights in start-up centres. No risk.

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

That is no disgrace. Not everyone can do venture capital. But it is a disgrace that on the road to this realisation, livelihoods were destroyed. Mine nearly among them.

VII. Built on Sand

The title of this essay is no coincidence. Lower Saxony lies on the North German Plain — geologically speaking, on sand. Silicon Valley in California sits on tectonically active ground, which has a certain irony: the most innovative region in the world stands on a foundation that can shift at any moment. But the people there have learned to live with risk. They have developed earthquake-proof buildings. They have installed early warning systems. They have not eliminated the risk — they have managed it.

In Lower Saxony it was the other way round. They built on sand and pretended it was concrete. They founded a venture capital firm and ran it like a bank. They spoke of innovation and meant interest. They spoke of partnership and meant loan agreements. They called it Silikon-Valley and meant the circulation of money between the local savings bank and the state bank.

The parable of the house built 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 pressure. It looks like a foundation, but it does not bear the load.

The Nord/GI was built on sand. Not because the projects were bad. Not because the inventors were incapable. But because the foundation — the assumption that innovation could be financed with banking rules — gave way under the first load.

VIII. The Lesson

Prof. Erich Häußer, the former president of the German Patent Office, articulated the systemic failure behind stories like this with precision. He called it the "Cartel of Ignorance" and warned as early as the mid-1990s: "If we do not succeed in breaking through this causal Cartel of Ignorance, we will within a foreseeable time become a low-wage country again."

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

To this day, Germany has no functioning venture capital system for inventors and founders in the early stages. What it has are banks disguised as innovation promoters. Funding agencies that demand market analyses before the market exists. And a political class that works the word "innovation" into every Sunday speech, but on Monday does not change the rules.

Palantir CEO Alex Karp, who wrote his doctoral thesis under Habermas in Frankfurt, puts it plainly: "The German tech scene is one of the worst in the world. Nobody talks about Germany any more."

The real Silicon Valley is not built on sand. It is built on an idea: that you should give money to people with good ideas and then leave them alone. That failure is not a disgrace 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 round.

In Lower Saxony it was the other way round. In Germany it still is.

The house that the Nord/LB built on sand no longer stands. In its place now stands a solid building of concrete — the NORD Holding, 3.5 billion euros strong, invested in profitable mid-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: No one.

"Your rules are wrong!" — "But we can't change them for you."