Why International Venture Capital has Finally Discovered Germany

December 2021

It’s no secret that the start-up sector in the European Union, including Germany, has traditionally lagged dramatically behind that of Anglo-American world. But in the past two years, and especially in 2021, the first signs emerged that the balance could be redressed in the future. And Germany is at the center of this development.

According to recent figures from Internet platform Dealcom, Germany comfortably leads the EU in absolute numbers of unicorns USD one billion exits with 53. France is second with 30, followed by Sweden and the Netherlands on 24 apiece. Across the board, deals are getting bigger and bigger, and new unicorns are born on a regular basis.

Much of this money is coming from outside the EU. So why have foreign investors discovered European and German start-ups?

“There are three significant reasons why the number of unicorns in Germany is growing,” explains Nico Gramenz, the CEO of Factory Berlin, Europea’s biggest tech hub. “Firstly, capital is looking for places to flow. There are no high interest rates, and entrepreneurs can almost pick and choose who they take money from. Secondly, the tipping point seems to have been the fast delivery segment. Thanks to Gorillas and others, Germany has been playing in the Champions League, at least regarding a couple of verticals.

“Thirdly, we have serial entrepreneurs, who keep investing, founding companies and passing on their knowledge. Increased experience and broader business angel networks motivate entrepreneurs to found more companies, which correlates with more unicorns. And finally, thanks to tools like Companisto, ordinary people can invest in start-ups as of EUR 500. There’s more risk entailed, but it’s definitely better than burning through money in times of 0.2 percent savings interest versus 4.5 percent inflation.”

Start-up get-together in the Factory Berlin © Factory Berlin

The different perception of German startups by  international VCs

Maximilian Schreiber, head of partnerships at signals, the Berlin-based innovation ecosystem of SIGNAL IDUNA Group, adds: “There are two main reasons why we see such rapid increase of unicorns in Germany. Firstly, the quality of startups are constantly improving since starting a business has been established as a desirable career. Furthermore, the regulatory framework and support for entrepreneurs have also improved over the last legislative period. In addition, both the German multinationals and the “German Mittelstand” have recognized the need and benefits of working with startups to foster innovation. This allows German b2b startups to gain early access to globally active customers and, thus, scale fast. 

Secondly, more and more venture capital (VC) money is invested globally. As a consequence, more VC money is deployed in Germany not only by German VCs but more interestingly also by top international VCs. They have realized that globally competitive startups can emerge from Germany, especially in the b2b sector, thanks to shining examples such as Celonis and Personio. This is also evident in the last investments of our VC vehicle, signals VC, where top VCs like Sequoia and Accel from the US as well as Atomico and Index Ventures from Europe co-invested alongside us.”

A better environment for innovative businesses

At the same time, the infrastructure and environment for start-ups in Germany is objectively improving. At 16 locations across the country, the Digital Hub Initiative supports start-ups and the unicorns of tomorrow by connecting them with corporates, SMEs, researchers and investors.

The state is also doing its part. Early this year the former German government approved the EUR 10 billion Future Fund to stimulate venture capital investments. In conjunction with the European Investment Fund (EIF), EUR 193 million had already been doled out to VC funds by the end of October.

“It’s challenging for young innovative companies to acquire sufficient capital to grow their innovation and business models,” explains Germany Trade & Invest Senior Manager Michael Schnabel from the Investor Services Team. “With the expansion of the Future Fund, Germany intends to strengthen the financing opportunities of start-ups in the capital-intensive scaling phase.”

“I’m optimistic that together with the German Future Fund we can give a boost to venture capital financing in Germany,” said EIF CEO Alain Godard on the fund’s website.

Meanwhile, the new center-left/environmentalist/business-friendly government under Chancellor Olaf Scholz has pledged to make it easier for start-ups to “get registered and enter the market.” Start-ups are repeatedly mentioned in the government’s binding coalition agreement.

“We will support digital start-ups in their late-phase financing and strengthen Germany as a venture capital location,” reads one passage. “We want to increase the number of female entrepreneurs in the digital sector and have created a stipend and reserved part of the Future Fund to that effect. We will simplify public tenders and contract processes for companies like Gov- and EdTech start-ups. We will bolster Germany as a gaming location and institutionalize state support for it. We will offer SMEs uncomplicated assistance for digitalization and expand our support for IT security, data protection and the use of digital technologies.”

Start-up trade fair „Startupnight“ in Berlin © Startupnight

A long-term trend

According to business consultants Ernst &Young, Germany reached its 2020 level of venture capital in the first half of 2021 alone. Government and private initiatives to kick the start-up scene into overdrive could amount to up to EUR 50 billion.

That’s changing the very nature of the German economy. Consultant McKinsey sees the potential for 41,000 new start-ups by 2030 and a market capitalization of EUR 2.3 trillion. That would be more than the total worth of Germany’s current blue chip DAX 40 stock index.

“Technology advancements, particularly in the areas of digitalization and connectivity, are compelling Germany to reimagine the fundamentals of its economy,” wrote McKinsey in a paper entitled Entrepreneurship Zeitgeist 2030. “The widespread conclusion is that a robust start-up ecosystem – enabled by these technology trends and comprised of founders, their businesses, corporates and SMEs, educational institutions, investors, and government agencies – needs to become a pillar of the economy if Germany is to remain prosperous at home and competitive abroad.”

Germany has a long way to go to challenge the dominance of the UK and particularly the US in terms of start-ups and venture capital. But there are signs that changes are underway – and global investors are taking notice.