In the race to create world-beating technology companies from scratch, Germany spent most of the past thirty years on the sidelines. But the country’s start-up ecosystem is now flourishing - and foreign investors are taking a second look
Germany may not create the next Google or Twitter, but a new generation of German entrepreneurs is aiming high in business software, robotics, advanced manufacturing and medical technology.
“We are on the way to building a number of €1 billion-plus companies,” says Alex von Frankenberg, co-managing director at Germany’s High-Tech Gründerfonds (HTGF), an early-stage venture fund launched in 2005 to nurture globally competitive tech start-ups. “Some of them will deliver big exits for investors, he says, predicting that in ten years, Germany will be “No. 1 in business-to-business tech space.”
That’s a big leap forward: a decade ago Germany lacked most of the basic ingredients for a dynamic start-up ecosystem: It had no seed funds, few business angels and little venture capital—the venture capital industry funded only 20 German start-ups a year. Entrepreneurship was not taught at German universities. “In 2004, the German government sat down with industry and said, ‘let’s change that,’” recalls Frankenberg. HTGF Co-director Michael Brandkamp, was member of an expert commission advising the government.
In 2005, on the advice of the commission, the German government and industry launched HTGF with a €272 million to invest in early-stage companies. Investors included the state-owned bank Kreditanstalt für Wiederaufbau and German industry giants such as Siemens, Daimler, Robert Bosch, BASF, Carl Zeiss and Deutsche Telekom.
Since then, HTGF has poured € 250 million into promising start-ups and triggered another €830 million of investment from by mostly private investors, helping forge a more dynamic Germany ecosystem. A key milestone: HTGF’s portfolio this year has begun delivering a steady stream of returns. Frankenberg and his team racked up 11 profitable sales in 2014, including three sensor companies, and he anticipates a few more before December 31.
HTGF’s government and industry backers initially expected the fund would lose money, given the tough starting conditions and lack of ecosystem. “With a little luck, the first fund will be profitable,” Frankenberg says. A second fund, HTGF II is outperforming the first fund and already has chalked up a few exits.
At the same time, HTGF’s start-ups are gaining girth. The most profitable company in the portfolio will have a net profit of nearly €10 million in 2014, Frankenberg says, and nine more companies are close to that performance. The largest portfolio company now has more than €100 million in revenues. And in 2011, HTGF closed a second fund of €304 million.
Attracting international investors
One of the fund’s biggest achievements is its success in convincing industry, business angels and international investors to back German start-ups. In 2013, HTGF invested only €15 million but it attracted co-investments of €171 million, including €52 million from international venture capitalists, €40 million from business angels and €26 million from corporations.
Of course, Germany, like the rest of Europe, had been struggling to replicate a Silicon Valley ecosystem since the late 1980s—but the country’s risk-averse banks and culture were a major impediment. The collapse of Germany’s IPO market "Neuer Markt" in 2002 and the bursting of the internet bubble further chilled the appetite for risk.
Over the past decade, however, the German government redoubled its efforts, establishing federal grants to support student entrepreneurs, a competition for universities with excellent programmes for start-ups, and German accelerators in Silicon Valley and New York. And unlike previous government-backed attempts to fund early-stage investing, HTGF was set up as an independent organisation. “We have significant freedom,” says Frankenberg. “For example, we were able to recruit from scratch. That really helped to find the right people.”
The good news is that Germany’s ecosystem is now working. “We now have great company builders,” says Frankenberg. Another sign of growing entrepreneurial culture is that talented managers are for the first time flocking to work for German start-ups. Frankenberg has a pool of 300-400 German professionals looking for a role in HTGF companies.
Short leash
And HTGF recently convinced a tech start-up from Budapest to relocate to Germany. “In ten years Germany will be on a level with London and Israel for start-ups. Germany may well become the No. 1 place in Europe to start a company,” he predicts.
Part of HTGF’s success is linked to a “short leash,” he says. Initially, the group was only allowed to invest €1 million per company, making it vital to attract other early-stage investors for follow-on investments. Knowing few investors believed German start-ups were worth a glance, HTGF managers invested only in start-ups that were likely to interest other investors. Frankenberg also hit the pavement early, showcasing the one-year-old HTGF portfolio starting in 2006 to corporate investors, business angels and VCs in Europe and in 2007 to Silicon Valley investors.
“Some established VCs made jokes about us in the beginning,” recalls Frankenberg, who earned an MBA at the University of Texas in Austin and is a fan of the US phrase, “just do it.” It took a lot of persistence, but the roadshows finally paid off. After three years, foreign investors started coming and asking to look at the HTGF portfolio.
What is still missing in the German start-up scene is “a big shiny success story,” says Frankenberg. Zalando, a six-year-old German start-up has mushroomed into Europe’s biggest online retailer with $2.3 billion in sales. It went public on the Frankfurt stock exchange in October amid great fanfare, but its shares slumped initially, recovering later.
Germany’s next global tech champion is more likely to be in business-to-business technologies, Frankenberg insists, as opposed to the consumer market. Start-ups in B-to-B technologies build on Germany’s industrial and manufacturing strength and those are the most promising sectors, says Frankenberg.
Germany’s weak spot remains its venture capital industry. What the country needs is, “significant exits that generate returns,” he says. Corporate VC in 2013 in Germany totalled only €70 million, compared with €244 million spent by German industry sponsoring national football teams, Frankenberg notes.
But he is quick to insist that Germany’s glass is not only half full—it’s three-quarters full. “We often complain about how much better it is in the US. I don’t agree. There’s a fantastic environment in Germany. We have excellent infrastructure and universities. There are no electricity black outs. And we have a high-speed rail system.
However, many have flagged the need for a secondary market or segment for tech start-ups, a move HTGF favours. “The main point is the quality of companies that list,” Frankenberg says.
“We are on the way to building a number of €1 billion-plus companies,” says Alex von Frankenberg, co-managing director at Germany’s High-Tech Gründerfonds (HTGF), an early-stage venture fund launched in 2005 to nurture globally competitive tech start-ups. “Some of them will deliver big exits for investors, he says, predicting that in ten years, Germany will be “No. 1 in business-to-business tech space.”
That’s a big leap forward: a decade ago Germany lacked most of the basic ingredients for a dynamic start-up ecosystem: It had no seed funds, few business angels and little venture capital—the venture capital industry funded only 20 German start-ups a year. Entrepreneurship was not taught at German universities. “In 2004, the German government sat down with industry and said, ‘let’s change that,’” recalls Frankenberg. HTGF Co-director Michael Brandkamp, was member of an expert commission advising the government.
In 2005, on the advice of the commission, the German government and industry launched HTGF with a €272 million to invest in early-stage companies. Investors included the state-owned bank Kreditanstalt für Wiederaufbau and German industry giants such as Siemens, Daimler, Robert Bosch, BASF, Carl Zeiss and Deutsche Telekom.
Since then, HTGF has poured € 250 million into promising start-ups and triggered another €830 million of investment from by mostly private investors, helping forge a more dynamic Germany ecosystem. A key milestone: HTGF’s portfolio this year has begun delivering a steady stream of returns. Frankenberg and his team racked up 11 profitable sales in 2014, including three sensor companies, and he anticipates a few more before December 31.
HTGF’s government and industry backers initially expected the fund would lose money, given the tough starting conditions and lack of ecosystem. “With a little luck, the first fund will be profitable,” Frankenberg says. A second fund, HTGF II is outperforming the first fund and already has chalked up a few exits.
At the same time, HTGF’s start-ups are gaining girth. The most profitable company in the portfolio will have a net profit of nearly €10 million in 2014, Frankenberg says, and nine more companies are close to that performance. The largest portfolio company now has more than €100 million in revenues. And in 2011, HTGF closed a second fund of €304 million.
Attracting international investors
One of the fund’s biggest achievements is its success in convincing industry, business angels and international investors to back German start-ups. In 2013, HTGF invested only €15 million but it attracted co-investments of €171 million, including €52 million from international venture capitalists, €40 million from business angels and €26 million from corporations.
Of course, Germany, like the rest of Europe, had been struggling to replicate a Silicon Valley ecosystem since the late 1980s—but the country’s risk-averse banks and culture were a major impediment. The collapse of Germany’s IPO market "Neuer Markt" in 2002 and the bursting of the internet bubble further chilled the appetite for risk.
Over the past decade, however, the German government redoubled its efforts, establishing federal grants to support student entrepreneurs, a competition for universities with excellent programmes for start-ups, and German accelerators in Silicon Valley and New York. And unlike previous government-backed attempts to fund early-stage investing, HTGF was set up as an independent organisation. “We have significant freedom,” says Frankenberg. “For example, we were able to recruit from scratch. That really helped to find the right people.”
The good news is that Germany’s ecosystem is now working. “We now have great company builders,” says Frankenberg. Another sign of growing entrepreneurial culture is that talented managers are for the first time flocking to work for German start-ups. Frankenberg has a pool of 300-400 German professionals looking for a role in HTGF companies.
Short leash
And HTGF recently convinced a tech start-up from Budapest to relocate to Germany. “In ten years Germany will be on a level with London and Israel for start-ups. Germany may well become the No. 1 place in Europe to start a company,” he predicts.
Part of HTGF’s success is linked to a “short leash,” he says. Initially, the group was only allowed to invest €1 million per company, making it vital to attract other early-stage investors for follow-on investments. Knowing few investors believed German start-ups were worth a glance, HTGF managers invested only in start-ups that were likely to interest other investors. Frankenberg also hit the pavement early, showcasing the one-year-old HTGF portfolio starting in 2006 to corporate investors, business angels and VCs in Europe and in 2007 to Silicon Valley investors.
“Some established VCs made jokes about us in the beginning,” recalls Frankenberg, who earned an MBA at the University of Texas in Austin and is a fan of the US phrase, “just do it.” It took a lot of persistence, but the roadshows finally paid off. After three years, foreign investors started coming and asking to look at the HTGF portfolio.
What is still missing in the German start-up scene is “a big shiny success story,” says Frankenberg. Zalando, a six-year-old German start-up has mushroomed into Europe’s biggest online retailer with $2.3 billion in sales. It went public on the Frankfurt stock exchange in October amid great fanfare, but its shares slumped initially, recovering later.
Germany’s next global tech champion is more likely to be in business-to-business technologies, Frankenberg insists, as opposed to the consumer market. Start-ups in B-to-B technologies build on Germany’s industrial and manufacturing strength and those are the most promising sectors, says Frankenberg.
Germany’s weak spot remains its venture capital industry. What the country needs is, “significant exits that generate returns,” he says. Corporate VC in 2013 in Germany totalled only €70 million, compared with €244 million spent by German industry sponsoring national football teams, Frankenberg notes.
But he is quick to insist that Germany’s glass is not only half full—it’s three-quarters full. “We often complain about how much better it is in the US. I don’t agree. There’s a fantastic environment in Germany. We have excellent infrastructure and universities. There are no electricity black outs. And we have a high-speed rail system.
However, many have flagged the need for a secondary market or segment for tech start-ups, a move HTGF favours. “The main point is the quality of companies that list,” Frankenberg says.
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