Germany’s venture capital blues

Picture courtesy German Private Equity and Venture Capital Association

Rolf Dienst, is General Partner and founder of Wellington Partners Venture Capital GmbH in Munich, and currently chairman of the German Private Equity and Venture Capital Association (BVK). He spoke to Science|Business about the state of the German VC market.

Mr. Dienst, please tell us a bit about yourself and your firm before we begin.

I started in VC in 1978. My first job was with Matuschka Group and then TVM. In 1991, I founded Wellington Partners. We are now one of a group of large European venture firms, managing €800 million for investors around the world.

Wellington invests out of two parallel funds. The larger one invests in information and communications technology, the smaller in life sciences. Together, these funds have €350 million and invest across Europe, with some 40 per cent of investments going to Germany. We invest in all stages, from seed, in some cases, to late stage pre-IPOs. The firm employs 30 people, with offices in Munich, Zurich, London and a small office in Palo Alto.

Broadly speaking, what trends are affecting VC investment in Germany?

Relative to the size of our economy, we have a totally underdeveloped VC industry. It’s about 20 per cent of the UK market and 30 per cent of the French market. We are in line with Greece and Bulgaria. It’s a disaster. That’s point number one.

Number two: we do not have proper funding within Germany because there are very few institutional investors that go for ventures. All the money that is invested is mostly from non-German investors – that obviously is not a good sign. German institutional investors are not at all interested in VC.

Germany is strong in medical technology, or Med Tech, and Clean Tech, which focuses on energy efficient technologies. However, very few foreign VCs go for early stage deals in Germany. Most go for later-stage deals because of problems with language and familiarity.

So why do you think German institutional investors are not interested in VC?

I don’t know. Bad experience? Not enough know-how? A lot of things. We could talk about it at great length.

Germany has about 20 to 30 venture capital firms. But very few have active funds. Only about 15 to 20 firms are really active players. Relative to other big countries, this is peanuts.

One of the big hurdles is that Germany does not have a clear regulatory environment - both on the tax and the legal side, but mostly on the tax side. This is a major issue. The government has not been clear. We are so far behind compared to what the UK is doing.

Why is Germany so far behind the UK?

Well, for a start, the government wants us to charge VAT on our management fees. This doesn’t happen anywhere else in Europe. The next thing is that the government doesn’t make it clear if we are commercial or non-commercial. It’s a question of transparency. This gives us a serious handicap on the tax and legal side. We have no regional funding in Germany. And therefore, the industry is not doing what it should do, given the market and Germany’s booming high-tech sector.

But while there is difficulty, there is opportunity and hope. We are all fighting. The fact that there are some players like TVM Capital GmbH, Wellington, Target Partners GmbH etc still raising funds means we are still in the business. So, I’m not complaining too much.

What investment sectors are in vogue at present?

There is a very distinct trend toward cleantech. The Internet continues to be a trend that is very active still. We also do a lot in medical technology.

In which sectors are you finding the most interesting ideas?

We are presented with lots of interesting ideas and see over 1,000 deals every year. I can’t tell you which ones are more or less interesting. We deal in telecommunications and semiconductors.

Which countries are strongest in science-related projects?

Germany and the UK, and Switzerland for the life sciences.

Why are these countries outperforming others?

There are thousands of reasons that have to do with education and university funding and the entrepreneurial spirit.

What advice do you have for companies on how to get their inventions to market?

They should determine very early on whether there is a demand for a product, what it takes to get to this market and whether there is a reasonable chance of doing this with the means they have.

Most people don’t see the final target because they don’t want to see it. Then they get disillusioned. They start along the path, but they don’t have enough experience or gas in their engines.

Is the credit crunch affecting your business?

It’s not affecting the venture side at all. It may eventually: if the big guys have a problem, we may also have a problem. But at this point we don’t see it. We are working on smaller deals. At this point, I don’t expect any impact on business this year.

In which countries do you see the most promise for investors?

It’s not a question of countries. It’s a question of companies. We have a couple of interesting companies in the Nordic region. I can’t tell you by numbers. Continental Europe has a lot of technology companies. The question is: Where is there enough management to really make something out of it?

Do you really believe that German government policies are holding back innovation and entrepreneurialism?

Well, look at what the Israelis do – how they sponsor start-ups – and then you’ll see the shortcomings.

Germany needs better funding structures for early stage investments, such as more money from the state. Germany needs a better legal and tax structure for VCs.  The Israelis have a budget of $350 million that they spend every year just on early stage, and they have only about 7 per cent of the population of German. That says it all.