The technology startup industry reached record levels of funding in Germany last year, with plenty of successful initial public offerings and mergers and acquisitions, according to a 2018 report from professional services firm Ernst & Young.
But while the top 100 startups have so far attracted $8.5 billion, Germany is only just starting to establish a worldwide reputation as a startup hub for technology companies as it competes against traditional startup centers such as London and Silicon Valley. Its key challenges: a lack of major domestic investment and skepticism toward putting money into emerging technologies.
Germany has historically been a top global innovator, bringing products such as top class automobiles, the printing press, the chip card, and even the Christmas tree. Europe’s largest economy is one of the world leaders in sustainable energy, biotechnology, and experimental software engineering, constantly being praised for its efficiency and attention to details. Yet while the technology is there, Germans need to improve their sense of enterprise, of taking financial risks, say people in the country’s startup scene.
“The technology base is pretty good in Germany,” says Christian Nagel, co-founder and partner of Earlybird, a 20-year-old venture capital investment company based in Berlin and focused on European technology companies. “What has been missing so far is the combination of the tech and the entrepreneurial spirit.”
The German entrepreneurial spirit has often been challenged in history, where Germans with brilliant ideas were confronted with political crises, wars, the reshaping of borders and changes in regime. As a confederation, the German territory has been fractured throughout history, lacking a unitary business environment and clear regulations for people looking to start businesses of their own. During the reconstruction years after World War II and later following the fall of the Soviet Union, the Germans have proved their proficiency in several industries, perfecting and improving especially in the scientific and technology field. Yet while the German spirit has always been quite technical, when it comes to risk taking Europe’s leader seems more conservative, adopting a fast-follower attitude.
“The strength of Germany’s position lies overwhelmingly in advanced technologies, not so much in cutting-edge technologies,” writes Ulrich Wengenroth in a chapter on German entrepreneurship in the book, ” The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times.”
This is also reflected in investors’ preferences for putting their money into safe, already proven industries, while avoiding newer emerging technologies such as blockchain or artificial intelligence. According to the January 2018 startup barometer published by Ernst & Young, investors in German startups still bet on traditional industries such as e-commerce, fintech, and health.
“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,” says Ernst & Young partner Thomas Prüver in an article by the German business newspaper the Handelsblatt.
Foreign Money and Foreign Workers for Domestic Success
As the European Union has slowly surrendered innovative competitiveness to countries like the U.S., China and South Korea, European leaders such as French President Emmanuel Macron and German Chancellor Angela Merkel are calling for a European disruptive innovation body similar to the American Defense Advanced Research Projects Agency that gave the world the internet and interactive maps. A European version would consider for investment technologies that the private sector is unwilling to risk money on as they take too much research resources and time. In addition, Macron says France will invest $1.8 billion in AI to compete against the U.S. and China.
But before joining the EU’s plans of becoming a global technology leader, Germany must first deal with its own problems back home, mainly due to a relaxed approach to entrepreneurship.
“Generally risk-averse German investors have been loathe to jump on the venture capital train with the enthusiasm of American investors,” Grace Dobosh writes in Handelsblatt. “Most major financing rounds in Germany only happen with heavy participation from foreign investors.”
Foreign investors also seem to like German startups because they are allowed to finance them only after they have proven their value and have already expanded with German funds.
“The early stage is pretty well covered by German investors and to a lesser extent from the government,” says Nagel. “The issue is more in the second and third rounds. Whenever our companies go fundraise for B and C rounds, which is more than $10 million to $20 million, they have to go to London or New York.”
The mentality is slowly changing as major cities in Germany such as Berlin are growing and attracting more diverse people with their own ties to the outside world and views on entrepreneurship and technology.
“If you look at the total number of foreigners starting startups and working in startups, by the most recent numbers I looked at, Berlin was pretty much at the same level as Silicon Valley,” says Benjamin Rohé, founding managing director of the Berlin-based German Tech Entrepreneurship Center, a center connecting an international network of companies to universities and startups. About half of startups in Berlin are founded by non-Germans, Rohé says.
The cost of operation in the German capital is lower than in the Silicon Valley, and Berlin is also better placed geographically, making it much more accessible and more appealing to tech talent coming from Eastern Europe, experts say. Brexit is also helping Berlin, with London’s status as a global business center damaged by the U.K.’s planned departure from the EU, a move that will make moving to the country increasingly more difficult for EU citizens. Immigration is easier in Germany compared to other places, and the country is among those to offer a startup visa for people looking to found a company.
“The visa process in Germany makes that very, very simple especially compared to other regions, not just with the U.S., where it’s very difficult, but also with the U.K.,” says Rohé. In addition, new companies in Germany tend to think about global expansion strategies much earlier in the development process, in part because of team diversity and also because of smaller markets that German startups first target, Nagel says. “This is also a big advantage over the U.S. because in the U.S. you normally think about tackling the U.S. market first which is large enough.”
But while startups in Berlin have proven to attract the same amount of funding much faster compared to other technology hubs in Europe such as London or Stockholm, there is still a long way to go to finance true innovation, experts say. The good news is Berlin is in a much better place than it was a decade ago.
“In Germany, the startup scene let’s say 10 years ago was more like you wouldn’t get any funding if you weren’t proven to have been successful in the United States,” Rohé says.
In Berlin, the growth in startups has happened outside the government realm. Experts say startups could benefit if government officials would contribute in supporting the fledgling startup ecosystem.
“It’s good that all this has happened without government support, despite politics, because this way it’s stable and it’s here to stay, but obviously it could be much better if supported by making Berlin an attractive place to be and build a company,” Nagel says.
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The German Approach to Tech Investment originally appeared on usnews.com
