No Dough

Germany's safe-bet startups get capital — but they're the only ones

Businessman and couple pulling at rope around large Euro sign money bag
Working hard for their money. Source: Getty

Germany, a country for startups? Far from it. But it’s an understandable first impression. The country, and especially Berlin, has never been privy to so much venture capital, with the top 100 startups having collected $8.5 billion since their founding. The number of investment rounds also increased by 28 to a total of 480, according to a new study by management consulting firm EY.

But only a few of Germany’s startups go home with fresh capital; the rest leave empty-handed.

The lucky ones make headlines: Delivery Hero, Auto1 or Home24. The EY study found that startups that made headlines received strong financial boosts, thanks to IPOs and interest from international investors. It makes sense: Investing in them is a safe bet; they’ve proven their business models work.

This in turn impacts other startups, said EY’s Thomas Prüver. “A lot of money is still being invested in e-commerce. But startups that deal with blockchain or artificial intelligence, for example, have a harder time acquiring funding of similar dimensions in Germany.”

Hendrik Brandis, co-founder of Earlybird, one of Europe’s largest venture capital firms, is well aware of this investment gap. “Investing in such companies requires more patience than with well-known business models, because the further development of these technologies costs a lot of money and the time to market maturity often takes longer,” Mr. Brandis said.

But patience is a virtue and capital for these more risky German startups is scarce.

Baader Bank, an investment bank north of Munich, recognizes the advantages of being patient. It invested in Earlybird’s latest Digital West Fund, Handelsblatt has learned. The fund, like previous ones, is focused on western European technology companies, including the AI startup Fraugster and the cryptoexchange platform, Shapeshift.

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“Earlybird gives us the opportunity to look into the future with binoculars, in two ways,” said Christian Bacherl, a member of Baader Bank’s management board. Namely, the fund lets Baader Bank get financially involved with successful business models, while identifying new trends at an early stage.

Mr. Brandis thinks that established companies and startups would also mutually benefit from an arrangement in which a large company provides the necessary dough for the fledgling company. The startup streamlines creativity, helping spawn innovation.

Alex Diehl, venture advisor at Hasso Plattner Ventures, a VC firm established by SAP’s founder, is committed to startups that develop software for process automation. “These startups need money in the long term and investors who don’t just want quick results.”

But many companies fail to recognize that these types of investments are worthwhile, even if they do not pay off immediately. “The innovations that come from this type of ecosystem will be very fruitful — even if they have little to do with their own business model at first glance,” Mr. Diehl continued.

According to Mr. Diehl, industry players are Europe’s answer to what Google, Alibaba, Softbank, Tencent and Apple are doing in the US and Asia. “Some are active, but compared to international efforts, it is too little – and lacks serious focus. To put it succinctly: A hip incubator in Berlin with colorful chairs and a social media team is no innovation strategy for companies worth billions.”

And the lack of money is a massive competitive disadvantage: “Since SAP, we have not been able to develop a global technology leader, although there is enough economic power and know-how,” Mr. Diehl said. “There are plenty of people in Germany with technological expertise and smart ideas. They just need the right impulses and incentives to establish a company.” Companies seem to be starting to understand this. Mr. Brandis of Earlybird, for instance, confirms that the share of companies investing in Earlybird has risen from 20 percent to around 35 percent in the latest fund alone.

There is little denying that the deep-tech market promises a large future growth market, EY’s Mr. Prüver said. “If Europe sets the right course, the local scene could catch up significantly with Silicon Valley,” he said. All it takes is a little patience.

Johannes Steger is an editor with Handelsblatt’s companies and markets desk in Düsseldorf. To contact the author: 

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