Money mismatch

German investors funding domestic startups less than foreign ones

german startup funding, venture capital
Have idea, will travel. Source: Getty Images

When Matt Talbot was seeking funding for his Colorado-based startup, the US entrepreneur took the unusual step of pitching an investor 8,000 kilometers away in Germany. A few discussions later, they had a deal.

Wooing international investors isn’t that unusual anymore. Mr. Talbot’s company, GoSpotCheck, which helps field teams collect data, is one example of a small but growing trend of foreign startups obtaining financing from German investors.

Data provided to Handelsblatt by PitchBook shows that German investors put more than $360 million into non-German businesses in the first 10.5 months of this year — up dramatically from the 12-month total of $174 million two years ago and $125 million a decade ago.

It’s positive for German investors because it reflects their growing influence in the global startup scene. But it’s frustrating for the German government, which has been trying for years to persuade investors to put more capital in homegrown startups. The German venture capital market remains chronically underfunded in comparison with the US.

Until 2018, German investors were still putting more money in local firms than in foreign ones. But so far this year, it’s the other way round: German startups received about $207 million from German investors, significantly less than the amount that has gone to foreign startups.

“If German investors invest their money abroad, and German startups lack money, then there is a mismatch,” said German lawmaker Danyal Bayaz, the Green Party’s startup expert. “The question is, how can we get startups and investors together?”

german startup funding, venture capital

Germany’s economics ministry has complained that new businesses aren’t getting enough money in the crucial early growth phase when they need support to get their innovations to market. It’s looking for ways to persuade institutional investors to make more venture capital available.

Mr. Bayaz said German startups aren’t visible enough to investors and urged the government to step up efforts to create ecosystems for company founders, and to make it easier for people to invest some of their retirement savings in new business ventures.

Pawel Chudzinski, a partner in Berlin-based Point Nine Capital, which invested in GoSpotCheck, said Germany needs more than just capital to become a global tech hub. Faster broadband connections, better tech education and bolder entrepreneurial thinking are also required, along with a bureaucratic environment that’s more friendly to English-speaking founders, he said.

There are various reasons why foreign startups turn to German investors. Some, like Talbot, do so because they’re seeking advice from investors who specialize in a particular field. Others, like Gašper Kolenc, co-founder of Tingles, a relaxation video platform in California, want help in expanding to Europe.

german startup funding, venture capital

“German venture capital firms are still investing far too little in individual startups in Germany because the funds are simply too small,” said Florian Nöll, head of the German Startups Association.

That poses a risk to Germany’s standing, said Economics Minister Peter Altmaier. “The big funds are all based in the US. The few successful platforms we have are relocating to the US,” he warned.

One Silicon Valley financier tried to persuade the founders of Babbel, a Berlin-based language teaching site, to relocate to California in 2010 as part of the terms for their funding. Babbel refused because it would have been too difficult to find employees in the US.

“We had to find people who spoke Portuguese as well as Swedish. Good luck finding them in Silicon Valley,” Thomas Holl, co-founder and CTO of Babbel, told Handelsblatt. In Berlin, Babbel grew profitable and raised money a few years later from European investors. The company now employs more than 600 people in Berlin and New York.

Georgia Wells is a Arthur F. Burns fellow who writes for the Wall Street Journal. Dana Heide covers economic policy for Handelsblatt in Berlin. To contact the author: heide@handelsblatt.com

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