Germany (Deutschland), Austria and Switzerland (Confœderatio Helvetica) make up the DACH economic region, which has a unique innovation landscape ranging from the entrepreneurial hub of the German capital of Berlin to the Swiss city of Zug, nicknamed Crypto Valley.
The DACH venture capital ecosystem recorded €7.5bn ($8.4bn) of deal value distributed across more than 700 transactions last year, according to data provider PitchBook’s Venture Ecosystem FactBook. Corporate venturers contributed to more than 200 deals whose volume stood at €4.6bn ($5.2bn).
Bernhard Mohr, managing director of Evonik Venture Capital (EVC), the corporate venture capital (CVC) division of the Germany-listed speciality chemicals provider, told Global Corporate Venturing: “We see in Germany the strongest ecosystem of CVC units in most industry sectors such as automotive, chemistry, pharma, software, energy and finance.
“This distinguishes Germany from Austria and Switzerland, because of its strong industrial history. Nearly every big company has a CVC subsidiary – Germany has 81 CVC units, Switzerland 15 and Austria two. These units are working closely together, across industry and the value chain, so that startups can benefit from the ecosystem. These networks are actively managed by the government, for example, through the HTGF [public-private VC investment firm High-Tech Gründerfonds].
“With their global reach, the German CVC units also connect startups globally and open the global market for their portfolio companies. With subsidiaries in the Silicon Valley, German CVC units connect their business with the strong VC network. Silicon Valley-based CVC units are mainly in software and commercial services.”
Dominique Mégret, head of Swisscom Ventures, the majority Swiss state-owned telecoms firm’s corporate venturing arm, explained that although its home is a small country, it is highly diverse and packs substantial world-class capabilities.
Mégret added: “The few universities we have are among the best in the world and many multinational corporations (MNCs) operate global research and development (R&D) centres here to benefit from that. That density of know-how is what sets Switzerland apart not only from Germany and Austria but in some ways also from Silicon Valley. However, the latter has a domestic market with plenty of room for companies to reach global scale, unlike Switzerland.”
Markus Moor, a partner at Emerald Technology Ventures, a Switzerland-based clean technology-focused venture firm with over 20 corporate limited partners (LPs), said: “Despite its small size, Switzerland has two universities in the global top 20 university ranking and both are regarded as some of the strongest technical universities. They have been an excellent source of innovation and showed a steadily increasing number of spinouts over the last two decades.”
Jelena Markovic, a senior associate at BayWa RE Energy Ventures, the corporate VC vehicle for BayWa Renewable Energy, Germany-based trading conglomerate BayWa Group’s clean energy subsidiary, commented compared with Silicon Valley, DACH region’s ticket, round and fund sizes are significantly smaller.
She added: “Furthermore, company valuations are a lot lower as well as the number of unicorns in the region. Another distinguishing factor is the heavy focus on facts and figures and due diligence of German VCs, and the exit scenario is less oriented towards an initial public offering.
“Concerning the pitching process, the startups in Germany usually have less variety of term sheets to choose from and are the ones who apply. Nevertheless, high potential startups will always have a number of investors to choose from.
“Germany is the biggest magnet for tech talent in the DACH region, making it a more effective startup environment than Austria and Switzerland. The German VC ecosystem is the biggest in the DACH region, which adds to its attractiveness for startups as well.
“Most of the funding is invested in Berlin and Munich, with a focus on series A and B. Also, as Germany has broad traditional industries with a high potential for disruption, it is offering additional structural opportunities to startups.”
The German Startup Association, headed by Christian Miele, a Berlin-based partner at US-headquartered VC firm E.Ventures, has developed multiple measures that will optimise the country’s startup ecosystem. For example, the association helped push through a €2bn ($2.2bn) startup subsidy scheme backed by the federal government to help entrepreneurs survive the pandemic.
Pillar 1, sponsored by state-owned development bank KfW, would help finance larger startups with VC support while smaller startups without private capital backing could take advantage of Pillar 2, earmarked through local development entities helped by the federal government.
Crispin Leick, managing director of EnBW New Ventures, the CVC outfit for the Germany-headquartered energy utilities company, noted: “In the DACH region, only the size of the German market leads to valuation differences.” He added that many DACH-based fund managers have been implementing ideas learned from Silicon Valley.
Matthias Engel, managing director for Innogy Ventures, a strategic investment vehicle for the Germany-listed utility Eon’s renewable energy subsidiary, said: “Germany is certainly by far the biggest economy [in DACH]. Most large corporates are active in CVC and understand this as an essential part of innovation. Though some larger corporates in other DACH regions are also active in CVC, it is less common.
“Germany is interesting for investors and founders for a number of reasons. Top-class engineering and business universities provide a constant flow of talent. This being paired with access to globally leading industrial corporations, some of them being blue-chip companies and some of them being hidden champions from the so-called Mittelstand (medium-sized businesses).
“Another reason is access to seed and earlier-stage capital. There is quite an amount of public capital available to support entrepreneurs but also institutional funds for earlier-stage companies. Growth money is however scarce, which will make it attractive for investors from abroad to come to Germany. There is just not as much competition among investors like in Silicon Valley and hence investors will benefit from lower valuations of companies.”
Sean Wright, Germany-based managing director of Stanley Ventures, US-headquartered hardware product maker Stanley Black & Decker’s corporate venturing group, added: “There is significantly more startup activity in Germany [than in Switzerland and Austria]. We have however invested in one company in Switzerland [while] Austria tends to have a bit less startup activity in our impression.
“The German ecosystem is also unique compared with the US. Germany is a lot smaller than the US, but you tend to find a lot of good hardware startups here due to the strong engineering culture.”
Tobias Gutmann, assistant professor of product innovation at Germany-based EBS Business School who leads the Siemens Product Innovation Lab, explained that Germany profits from an unmatched quantity and variety of hidden champions – world leaders in industry and manufacturing that dominate their respective sectors. “The deep and dispersed technological know-how and capacity for innovation within the Mittelstand is often underestimated,” he added.
“The mix of renowned technical universities including Technical University of Munich, Karlsruhe Institute of Technology and RWTH Aachen University, business schools such as EBS, HHL and WHU, research institutions like Fraunhofer and Helmholtz, as well as MNCs play a key role in fostering innovation and collaborative approaches through strategic partnerships, VC, incubators or accelerators. Hence, Germany has an excellent point of departure for successful co-development and moonshots – for intrapreneurs and entrepreneurs alike.”
Paolo Bavaj, head of corporate venturing of adhesive technologies at Henkel Ventures, the Germany-based adhesives, cosmetics and laundry product manufacturer’s CVC arm, concurred that Germany has several remarkable technical universities and strong manufacturing industries. “This means that startups have the market always close by if they develop a new material or technology,” he argued.
“Germany also has a unique structure with the Mittelstand companies, who act sometimes as technology providers and sometimes as smaller customers, who are quickly willing to try new stuff. This is very interesting for startups in order to get initial feedback before they can scale with the larger companies.
“The other side of the coin is that the excellent technical universities in Germany do not really encourage students to become a founder. Too often entrepreneurship is not part of the academic curriculum. Another unfortunate circumstance is that there is by far not enough money and risk-taking behaviour in Germany to sufficiently support early-stage startups.
“All in all, there are very unique aspects in Germany where one can build on, but there is certainly also significant room for improvement.”
Bavaj’s observation echoed the sentiment expressed by Philipp Thurn und Taxis, chief executive and founder of Constantia New Business, the Austria-based industrial conglomerate’s corporate venturing fund, who told GCV last year: “The teams that we come across are usually very good on the technical side, with highly-qualified engineers, but often miss the commercial skillset that should come with it. This has to do with the European and German DNA [as opposed to the US one].
“It is a cultural thing – we like to build things, but we do not like to sell things, as that bears a somewhat negative connotation for young engineers. We need to change that image culturally, as a good business founder is also a good salesman.”
That said, Berlin is regarded as the symbol of German innovation and its startup scene, according to EBS’s Gutmann. “Indeed, it is a good case study for illustrating the ecosystem’s development. While the innovation ecosystem has been widely dominated by a few players like [e-commerce holding group] Rocket Internet, it has become way more dispersed, in terms of industries and geography,” he pointed out.
“The times of e-commerce and copycats are long gone and Germany has very strong local ecosystems in different regions including Munich, Ruhr and Leipzig, which are becoming more and more connected through different government programs such as De:Hub, topic-specific initiatives like AppliedAI and conferences such as Bits & Pretzels.”
Increased CVC activities in the region
Michael Brigl, Munich-based managing director and senior partner at consulting firm Boston Consulting Group (BCG), said: “In recent years, we observed a steep increase of innovation vehicles – such as CVCs – in DACH. Most of the companies (65%, according to BCG’s DACH-focused study conducted in 2019) actively partnered startups and, thus, leveraged their tech as a vital source of innovation.
“Despite this development, many startups (55%) and corporates (45%) were not satisfied with their cooperation and impact generated. This put pressure on corporate venturing units, mostly from the C-level executives – a trend that has been accelerated during the Covid-19 pandemic as corporates try to navigate through the health crisis.
“Post-Covid-19, however, corporate venturing units will play an even more important role as before – they will become an essential contributor to the new CEO agenda and will help re-imagine growth.
“Key questions will then be how to allocate capital to different innovation activities encompassing incremental and disruptive spectrums; how to leverage M&A more aggressively; how to set the innovation agenda to support the growth ambition; and how to leverage innovation vehicles, including CVCs, to realise the agenda.”
EVC’s Mohr also observed an upsurge of CVCs in the DACH region in recent years, which has led to good networking opportunities among CVCs and startups. “Open innovation is an important component of companies’ innovation strategies in most industries,” he continued.
“This has no impact on our investment approach but, overall, the willingness in the business units to work with startups has increased. A large number of CVC units makes it possible to support investments across value chains through co-investments with CVC units from other industries.”
EnBW New Ventures’ Leick agreed that the ecosystem in the region has developed considerably, in terms of the number of corporate players, funding amounts and types of investors. “Today, it is possible to build consortiums that truly make a startup stronger by taking on different parts of the needs, for example, [by combining international expansion] and industrial sector insights,” he pointed out.
“We, therefore, spend more time in setting up the right mix and balance in a consortium than 10 years ago. Especially because the CVC community has grown, today we only work with CVC setups that follow the same basic beliefs as ours.”
In the past few years, Innogy Ventures’ Engel noticed an inflow of talent from abroad, especially Eastern European, and more mature service providers. “A few years ago, it was not so easy to find a law firm that could deal with the specifics of investment agreements or virtual stock option plans for startups in Berlin. It is a commodity today.”
As for investment trends, the number-one topic in Germany is digitisation, said Engel. “Even for some larger companies, Covid-19 has been a wake-up call in that respect. So in my view, a lot of attention to CVCs will go in that direction. Needless to say that the public sector lags behind lightyears and that we can expect strong demand for digitisation in that sector as well, offering opportunities for investors and entrepreneurs.”
“In terms of specific technologies, blockchain has cooled down pretty much over the last years and the excitement has not yet come back. Artificial intelligence and machine learning are still very hot topics in Germany across all sectors and get a lot of attention as they are regarded as foundational for an economy in the future to be successful.”
While Engel does not perceive a specific sector sticking out from a German perspective, he appreciates Berlin is known for its e-commerce and financial technology scene and Munich remains a hotspot for enterprise software and tech.
“Especially for us as an energy company, but also for other industries, climate change has become an ever more important topic over the last years. It is fair to assume that this will affect investment strategies for CVCs,” Engel added.
“Decarbonisation and digitisation are two trends that in my way go hand-in-hand. Paired with sustainability, these three will form the basis for a number of investment strategies to be formulated right now and in the future. Covid-19 has tremendously accelerated this thinking in Germany.”
Henkel Ventures’ Bavaj, however, said he has not seen the same level of development with material science in Germany, acknowledging that most disruptive advancements in the region are related to digital innovation and business models.
Case in point is Austria-based financial services firm Raiffeisen Bank International (RBI)’s strategic investment subsidiary, Elevator Ventures. The unit appointed Maximilian Schausberger, formerly head of partnerships at RBI’s technology collaboration program, Elevator Lab, in recent weeks as managing director in a bid to ramp up its fintech focus.
Schausberger told Der Brutkasten: “The journey between RBI and fintech startups over the past three years has shown a huge potential for collaboration, [which] we have done over the past three years through Elevator Lab. We have conducted about 25 pilot projects in 10 countries that resulted in partnerships where real value was created.
“I think this is where the future is heading to – RBI can offer its network, experience and know-how, and build a point of contact for external partners.
“The whole bank is developing in this direction, and the infrastructure is being developed. Our business models of the future – technology like blockchain, open APIs [application programming interfaces, or open banking]. Fintech topics are not seen as something separate now but are more involved and included in a broader strategy of partnerships.”
Regarding Switzerland, Swisscom Ventures’ Mégret said historically – and even today to some extent – the country has been underfunded with VC money. “There was about $2.3bn VC funding invested in Switzerland in 2019, which only represents about 5% of domestic R&D spending,” he continued.
“Other, more mature ecosystems such as the US and Israel, see VC investment volumes at 15% to 25% of their corresponding domestic R&D, at similar relative R&D spending levels.
“Switzerland has already evolved a lot and we are starting to see much more high-quality later-stage investment opportunities nowadays, so as an investor, we are trying to maintain our leading position for those stages.”
In the energy sector, Innogy Ventures’ Engel said he has not come across many CVCs from Austria or Switzerland making investments. “I am aware however of some energy companies in Austria that are planning to set up CVCs,” he added.
“Across all industries, my impression is that most large corporates and blue-chip companies in Switzerland have a CVC and that it is much less common for large corporates in Austria. Depending on the economic development post-Covid-19, we might see a certain demand in Austria to catch up.”
Concerning Germany’s startup scene, BayWa RE Energy Ventures’ Markovic noted that some of the driving factors of its growth have been university programs supporting students’ entrepreneurial projects, as well as a stronger VC ecosystem and traditional industries’ increased appetite for innovation.
She explained: “Out of this growing ecosystem and the resulting opportunities for corporates, BayWa RE Energy Ventures was established as the CVC of BayWa RE in 2018. From our perspective, corporate venturing does not always have to be strategic, but can also be financially driven and act as a source for market knowledge and trend scouting.
“Due to its structural advantages, Germany produces highly innovative hardware and software startups. Nevertheless, the industries mostly represented in the startup ecosystem are IT, food and consumer goods. Therefore, as a cleantech investor, our investment scope expands beyond Germany to Europe and Israel.”
Stanley Ventures’ Wright holds the same view that the German innovation ecosystem is growing fast and becoming more important, saying: “There is a reason why we have an office here in Germany – it allows us to tap into the local innovation ecosystem for deals, and also serves as a good central base within Europe.”
Ecosystem collaboration
Emerald has maintained its geographic focus on Europe and North America since it was founded in 2000, according to Moor, who added: “Over the last two decades, the DACH region has seen a steady increase of CVC activities with most major industrial corporations having a CVC practice. We have co-invested over this duration with many and are fortunate to have multiple close relationships with numerous of those as LPs and partners in our fund.
“Besides its venture funds, Emerald also manages the Technology Fund, a Switzerland-focused loan guarantee program sponsored by the Swiss government to support startups and small and medium-sized enterprises. Under this program, we had the opportunity to support close to 100 companies in their growth ambitions.”
Henkel Ventures is also working with other funds such as HTGF, its CVC peers, incubators, accelerators and universities to identify disruptive technology that would strategically fit Henkel, according to Bavaj.
“We maintain very close relationships and are very open to having collaborations with startups from these organisations, even if there is no room for us to invest,” Bavaj said. “Our main objective is to identify exciting new technologies and materials for Henkel through collaborations.”
Markovic said BayWa RE Energy Ventures stays in touch with its VC and CVC peers through events and regular calls to exchange dealflow, inside or outside of the DACH region. “We also visit a lot of pitching events hosted by accelerators or universities to get to know promising companies at an early stage, and to keep in contact until they are in a stage where they fit our investment focus,” she added.
BCG has supported various CVC units – in DACH and beyond – to navigate through the crisis through its corporate venturing and incubation subsidiary, BCG Digital Ventures, and its VC affiliate B Capital, Brigl said.
“We helped to refine innovation and corporate venturing strategies to prepare for a rebound or drove the acceleration of venturing activities, for instance, expanding portfolios and building up new ecosystems,” he added.
“At the same time, we have closely worked together with the government and associations to help the ecosystem to navigate through the crisis and to win the future. For example, we supported the German Startup Association to prepare a study on employee stock options which outlines key measures to reinforce the German startup ecosystem.”
While EnBW New Ventures does not work directly with the government, it has partnerships in place with early-stage investors with government backing, according to Leick. “We have some links with universities based on personal relationships and try to engage from time to time to convince students to join the VC industry,” he added.
“When it comes to CVCs and VCs, we know the ones that are active in the smart infrastructure space and exchange on a regular base with them to discuss investment trends or common interests in order to prepare to invite them into deals based on such knowledge.
“It is great to work with players that are in the field for 20 years, but we also enjoy working with fresh minds who are managing their first funds. After all, it is exciting to discuss how to support the entrepreneurs to build a successful and sustainable company with products that bring our three core targets together: people, planet and profit.”
Stanley Ventures works closely with co-investors and deal sourcing entities in DACH in the same way its international team members do in other geographies. Wright said: “There is a strong ecosystem of early-stage founder support networks and plenty of co-investors [in DACH].”
EVC also teams up with many CVC units on co-investments and dealflow. “Cooperation with incubators and universities was intensively cultivated even before the CVC unit was founded in 2012, but strengthened since then,” Mohr said.
“Institutions such as HTGF, the European Innovation Council, the European Investment Bank, the Federal Ministry of Education and Research and the Federal Ministry of Economic Affairs and Energy have made a significant contribution to the development of the ecosystem.”
EBS’s Gutmann agreed that CVCs rarely work alone. “In fact, many companies possess an arsenal of ‘innovation weapons’ from which CVCs can draw, screen and source,” he said. “Even more so, many companies collaborate beyond organisational boundaries through joint startup programs – such as Startup Autobahn – or syndicate investments. Universities and their entrepreneurial activities are, of course, also a major vehicle to connect to innovative students and researchers.”
The Swisscom Ventures team also maintains close relationships with many CVC and VC investors across DACH, Mégret said. “Those relationships are, first of all, an excellent source of dealflow, but we also like to take advantage of them to make referrals for local companies we like, but just do not fit our criteria yet. Swisscom is engaged with various local startup programs and our team is closely involved in some of those as well.
“We also collaborate with our universities – ETH Zurich and EPFL Lausanne – through their innovation transfer units and try to represent the interests of our local entrepreneurs as best as we can when we meet with public officials.”
Innogy Ventures’ Engel concluded: “Collaboration is essential these days and will become even more important in the future. The great challenges societies face – climate change, waste of resources – and the massive transformation of industries – for example, energy, automobile and banking – cannot be achieved in silos or by single companies or sectors alone. Partnerships and alliances will need to be formed.
“We are very open if it comes to collaboration with CVCs even if they come from competing corporates or funds. Same is true for teaming up with other VCs. I even see a true mutual benefit by collaborating and jointly investing by VCs and CVCs. CVCs can provide a diligent view on the technology and market and VCs can provide that pure ‘ruthless’ investor view.”
