Earlier this year, German Chancellor Angela Merkel asked the founder of Bloomy Days, a floral delivery startup, whether her business had already reached profitability. Not yet, Franziska von Hardenberg said, but in 2016 she tripled her turnover, and in 2017 she wanted to double it.
Those plans were cut short when Bloomy Days filed for bankruptcy in July after it failed to secure capital from investors. It is well-known that most startups are going to fail, for any number of reasons, but in Germany it is all too common for the business to dry up because the flow of money from investors stops before it can reach profitability.
Digital startups like Bloomy Days are rarely profitable until they operate on a large scale, but until that point growth requires money for marketing and sales, for technology, for internal organization. And while a fledgling company’s success is far from guaranteed, they need venture capital — a word that Germans like to hear as much as nails on a chalkboard.
In the first half of 2017, German startups pulled in €2.1 billion ($2.5 billion) of capital, according to the German Startup Association. Investments are higher than in previous years, but they’re still peanuts compared to US capital. In the first nine months of 2017, US startups received $54.8 billion in funding, according to market researcher CB Insights. And in a ranking of the world’s top 100 largest venture capital funds, compiled by the research firm Prequin, only one German investor is mentioned — Rocket Internet, which placed 93rd.
It comes as little surprise that would-be founders in Germany take their ideas abroad. Florian Leibert, who was born in the Bavarian city Schweinfurt, packed his bags and built his software company, Mesosphere, in California. Mr. Leibert does not think his startup, which sells software to help companies consolidate and manage data, would have made it in Germany.
“It is hard to get venture capital in Germany for infrastructure software,” he says. Plus, the enterprise software ecosystem is not very big: Too few companies are willing to acquire or partner with startups like Mesosphere. Mr. Leibert’s company is a perfect example of how access to capital directly impacts success. Risk-taking is a crucial element in establishing a good startup environment, but this realization has been slow to put down roots in Germany, limiting growth.
The country has spawned a few “unicorns,” startups with a valuation of more than $1 billion: Take Ottobock, Auto1, and Curevac. Zalando, an online fashion retailer, is worth close to €10 billion, making it nearly as valuable as some DAX companies.
These companies not only serve as the sector’s role models but help finance it. The CEO of Rocket Internet, Oliver Samwer, is the first German investor to make €1 billion of capital available. His former protégés, Zalando founders Robert Gentz and David Schneider, also invest money into smaller startups, creating an ecosystem that is slowly becoming more self-sustaining.
Compared to international startup hubs, the German scene is modest. Worldwide there are more than 200 unicorns, many of them from Silicon Valley. Car service Uber and Airbnb are two famous examples of young companies with valuations of over $20 billion. These mega-platforms with impressive market power are redefining the rules — and they’re almost all found in the US.
Ijad Madisch’s Berlin startup ResearchGate is an academic social network to let researchers share and discuss their findings. Mr. Madisch has received more than $100 million in funding from Bill Gates and other foreign investors. But it is hard to find a German among the mix.
This is because most major financing rounds in Germany only take place with heavy participation from foreign investors. The Munich-based startup Lilium, for example, recently collected $90 million — the majority coming from the Chinese internet group Tencent. Internet of Things platform Relayr was also initially funded by US investors, like Kleiner Perkins and Cisco, before reinsurance giant Munich Re joined in.
While international interest brings much-needed capital and valuable contacts, there is a worry that German ideas leave and come to fruition abroad. Investor Klaus Hommels has described capital as a “geopolitical weapon,” with foreign investors who want their holdings close by requiring companies to relocate.
The reliance is huge, says Florian Nöll of the German Startup Association. His organization proposes that Germany follow the US model, where insurance and pension funds are among the most important investors in venture capital funds. In Europe, regulations make it difficult for insurers to invest in startups.
One of the only other sources of capital in Germany is from entrepreneurial families that already run established companies, like Siemens, Miele or Swarovski. All three are involved in the venture capital fund La Famiglia. Mr. Nöll believes that more donors would sprout if Germany provided tax incentives for investing in young digital companies.
Bloomy Days found a new hope in established flower supplier Fleurop, a unit of Interflora, which has over 58,000 flower shops worldwide. Thanks to an acquisition the startup is alive, but no longer basking in the sunlight.
Christof Kerkmann is an editor for Handelsblatt Online and writes about the technology sector. Miriam Schröder covers startups in Berlin. Christine Coester adapted this article forHandelsblatt Global. To contact the authors: firstname.lastname@example.org, email@example.com.