German VC - back on track

Friedrich Bornikoel

Friedrich Bornikoel has been the managing partner for TVM Capital’s Information & Communications Technology group since 1997. The funds that he oversees are focused on investments in software, industrial applications, design and planning tools, telecommunications, and semiconductors.

Thomas Lau, the news editor at Science|Business, spoke to Bronikoel in Paris about  Germany’s VCs market in 2005 and 2006. Bornikoel was in Paris attending a roundtable discussion organised by Science/Business. This is an edited version of the interview.

How would you describe the VC industry in Germany in 2005?

In 2005, I think that the VC business saw a recovery, on the back of a more general recovery. If you look at the buying behaviour of the large companies, it was a much better.  We saw better and clearer decision processes on capital investments. There are still exceptions to the rule in some verticals, with telecoms, for example, still difficult.

Since the election, the business environment in Germany has improved a lot. We are seeing more good investment opportunities, more follow-on financings, and more merger and acquisition activity.  We see more success stories and some good IPOs. All in all we are cautiously optimistic. Finally, it is important to note that 2005 was a much better year regarding fundraising.

How have the German government’s polices affected the industry?

In the past government policy had a negative impact on fundraising due to fund taxation issues. There was a sharp decline in investment in VC funds in the few years leading up to 2005, but tax reforms passed last year have clarified things. As a result we saw a clear recovery in fundraising in 2005 and we expect even more activity this year. Fundraising is still not easy, but it’s easier than three years ago.

I think that in 2006 there won’t be a boom, or dramatic changes in the number of deals, regarding venture capital raised, or regarding the valuations paid, but we expect a steady growth and a healthy growth, back to what we consider to be normal.

What kind of technology will be popular among investors in 2006?

In IT there are plenty of opportunities for companies with special chips or new battery concepts, clean tech, and new services.  I think we will see a lot of very good companies.

Despite its larger economy the German VC sector still lags behind the UK. Do you think Germany will be able to catch up soon?

The VC industry in UK was established well before the German VC industry and is therefore more mature. But there is no good reason why the German VC industry shouldn’t be able to close the gap over time.

We have excellent R&D infrastructure, excellent research institutes and universities, and hence also excellent highly skilled engineers. One clear demonstration of this is that a large number of R&D centres of US Fortune 500 companies are based in Germany. Add to that the fact that in 2005, Germany was the world’s leading exporter. Those companies that make a large part of their revenue from exports, and leverage the strong R&D infrastructure here.

Furthermore we have very demanding industries – like the automotive industry – that push companies to develop world-class products and solutions. Hence Germany per se is certainly an attractive home market to start a company.

In the recent years the main factor hampering the German VC industry was the overall poor economy caused by very weak consumer demand and a focus on cost cutting. After the election one can see a change for the better, and an acceleration of recovery. The new government has it on the agenda to support high tech start-ups.  People are thinking much more positively in Germany now.

It will take some time for the VC business in Germany to catch up with the UK, but one has to set goals.  The new government has said it will improve the business and tax environment to the level of international best practices, and to remove deficits in the international context in the next four years. If you look at VC activity internationally, the differences on how VCs run their business in different countries are levelling out. You can see that not only in Central Europe, but on a worldwide basis.

In 2005, there were news reports saying that TVM Capital is moving away from early stage companies. Is that true?

This was a misunderstanding. In a press release about our US software investments we said we would consider investing in companies with a transatlantic ambitions that are more mature and revenue generating. Since it takes time and management attention to set up European operations the company should be in product roll-out mode, and stable in the US. As a result we will not compete in Series A rounds in the U.S. But we haven’t changed our focus on early stage investments otherwise.