The importance of innovation sovereignty

Innovations are vital for companies when it comes to adapting to changed market conditions and staying competitive. They pave the way for developing new products and services, for better meeting customer needs, and for boosting efficiency. Without innovations, many areas of the economy and society, including the insurance industry, would stagnate. Though Silicon Valley is widely considered the wellspring of tech innovations, they’re too important to be left up to others, says ERGO CDO Mark Klein in his column.

It all could have turned out very differently. If different personal, political and economic decisions had been made in the US in the mid-20th century, the evolution of technology as we know it might have been completely different. Many of the world’s leading tech companies and products most likely wouldn’t exist. The tech landscape would be less dynamic. Pioneering advancements in areas like computer technology, software, and the Internet would have been achieved only gradually – if at all. Because it was the choices made by people like Frederick Terman, Arthur Rock and many others that laid the groundwork for what would become the world’s leading innovation centre: Silicon Valley.

For example, it was Frederick Terman, former Vice-President of Leland Stanford Junior University, who founded the “Stanford Industrial Park” in the early 1950s. By actively recruiting companies to set up shop on the university campus, the technology park promoted close collaboration between the business world and academia. In addition, Terman encouraged his students to start their own companies and used his own network to secure them initial business.

In turn, Arthur Rock is considered to be one of the Valley’s first “venture capitalists” (VCs). As far back as the late 1950s, he was instrumental in founding the company Fairchild Semiconductor, and later, tech companies like Teledyne, Intel and Apple. Beyond lucrative contracts with government offices and the military, it was above all VCs who, through their expertise, resources, connections and capital, helped small tech companies in the Valley make it big.

But according to LinkedIn co-founder Reid Hoffman, Silicon Valley isn’t a place; it’s a mindset. It’s seen as the digital El Dorado, a massive melting pot of ideas that gives birth to technological quantum leaps. Without a doubt, New York, Tel Aviv, Shenzhen, Singapore and Bangalore are among the leading tech trendsetters of our day and home to some of the most exciting start-ups and venture capital ecosystems. Yet the real source is in Silicon Valley, located in the San Francisco Bay Area.

What’s made the Valley so unique from the outset is the confluence of various, mutually amplifying factors. Where there were once apple orchards and peach plantations, since the 1950s it’s been the place where (venture) capitalists meet the visionaries building the companies of tomorrow. Stanford University produces a steady flow of new tech talent and founders. Moreover, a solid technological infrastructure promotes companies’ growth and development.

Over several decades, the Valley has successfully established a unique ecosystem of start-ups, investors and tech companies. The innovations that have been created there, and that continue to be created there, will shape all our lives. They’re also critically important for the insurance industry: computer chips, artificial intelligence (AI), automation technologies, cloud computing, mobile apps, and much more. These innovations and solutions based on them are also essential for insurers in terms of rapidly adapting to changed market conditions, better meeting customer needs, penetrating new markets, and staying competitive. Failing to innovate, or even stagnating, can have serious negative effects on the long-term stability and profitability of insurance companies and those in other sectors.

Even if there have been a few more sobering headlines about the Valley in recent months – on cancelled projects, layoffs, and declining investments from VCs – it continues to pulse with energy. This April, some of my AI-related ERGO colleagues and I had the chance to see for ourselves. In our various conversations with major and minor players in the area of AI and generative AI (GenAI), one thing became very clear: the Valley is currently in a state of euphoria – because AI and GenAI promise to rapidly deliver added value and higher efficiency. The speed at which new solutions are developed has been completely transformed.

But if we’re being truthful, that wasn’t always the case: when I visited the Valley in 2022, it was virtually a ghost town. Shortly before that, the COVID-19 pandemic had been at its worst. Streets and office buildings were empty, many employees had been fired and moved on; until the rise of GenAI, the spirit of Silicon Valley was nearly extinguished.

On the one hand, this showed that, contrary to Reid Hoffmann’s aforementioned thesis, the Valley really did need a fixed location for active exchanges and meeting in the flesh. True innovations can only arise at a place where, through the networking of companies, investors and research institutes, a living ecosystem can thrive.

On the other, it showed where we in Europe still have room for improvement: generally speaking, we face the challenge of accelerating innovation and finding new motors for growth. After all, Europe largely missed out on the digital revolution and attendant boosts in productivity. According to Mario Draghi’s report on the EU’s competitiveness, only four of the world’s top 50 tech companies are based in Europe. And it’s not because Europe is lacking in talent, ideas or ambition. On the contrary.

Germany, for example, is home to high-quality academic research on AI. Our strong suits include robotics, quantum technologies, and autonomous driving. Moreover, as companies like DeepL, Celonis, Aleph Alpha and SAP have amply proven, we can “do tech”. But all too often, tech innovations made in Germany and Europe aren’t successfully marketed, due to a lack of investment, infrastructure, or standardised regulations and approval processes. As a result, innovative companies that are looking to expand often prefer to work with investors from non-EU countries, or simply go to those places that offer everything they need – like the Valley.

Yet we as the EU could be among the frontrunners. If various EU countries pulled together, we could close the innovation gap with the US and China, especially when it comes to leading technologies. And that’s precisely what we should do. Because innovations are too important to be left up to others. What if there’s a new crisis and this time the Valley doesn’t bounce back, so that the “spring” dries up? What if geopolitical tensions make it harder or even impossible to access innovations? Or what if, at some point, innovations can no longer be reconciled with our European values, norms and regulatory policies? The multiple crises and shocks of the past months and years have shown us time and again how (economically) vulnerable and dependent we are.

What we need are digital sovereignty and innovation centres of our own. High-tech and research hubs, like those already in place or planned in Bavaria, Baden-Württemberg, Hessen, North Rhine-Westphalia and Rhineland-Palatinate, are a step in the right direction – another is finally acknowledging the fact that, at the federal level, “too little has been done for too long” when it comes to technology.

At last year’s digital summit, the former Federal Chancellor Olaf Scholz touched on the topic in his speech, while also setting the goal for Germany to “be one of the frontrunners” in future technologies and innovations, e.g. AI, quantum computing, or virtual reality. To help make that happen, plans are in place to e.g. offer additional tax incentives for private investment and to drive implementation of the EU’s Capital Markets Union, so as to bring more private capital to Europe, pool resources in connection with key technologies, and achieve a leading position in network technologies.

But turning Germany and the EU into an innovation hub isn’t all up to the politicians; the business world also has to do its part. We at ERGO are helping establish such a fruitful ecosystem by investing in promising German and European start-ups, e.g. through the ERGO CVC Fund, the Earlybird Venture Capital Fund, and the Heal Capital Fund.

Moreover, by founding the accelerator ERGO ScaleHub this June, we have intensified our support for scale-ups, that is, more mature start-ups. Together with the City of Düsseldorf and the community SpaceTechHub.K67, the goal is to support selected scale-ups from the health, finance and insurance sector from the headquarters in Düsseldorf. In this regard, a variety of services are available for scale-ups, ranging from access to national and international expert, business and investor networks; to support with visas; to help with finding office space.

In addition, ERGO has cooperated with numerous German and international start-ups and scale-ups for years. Through partnerships with major insurance companies, they profit from their technical expertise and resources, not to mention access to a broad customer base and successfully established sales networks. This allows the young companies to scale their business models more quickly and expand them with their products or services. The cooperations also afford them long-term stability and security and put them in touch with other potential partners and investors.

I can only recommend that we in the insurance sector and beyond actively promote innovations in Germany and Europe. After all, we have the talent, technologies and drive. We can and should push true innovations and their practical applications to position Germany and Europe as strong, sovereign and self-assured partners and equals for other global players. Each and every step takes us closer to our common goal. After all, when the two Stanford graduates William Hewlett and David Packard founded the future international giant “HP” back in 1939, they started out small: with 500 dollars in seed money – from Frederick Terman.

Please note: This article was first published by Versicherungsmonitor.