Only Germans, perhaps, could feel they are "poor, but sexy" but when the then Berlin mayor coined the phrase
a little more than a decade ago he caught the mood of the country’s capital.
Although it is the largest economy in Europe, Germans were paying a heavy price for reunification after the collapse of the Soviet Union and the transfer of the capital from Bonn back to Berlin in 1999. In a bid to provide jobs and reinvent itself, the mayor’s choice of "arm, aber sexy" to describe a city trying to attractive the creative industries rather than the traditional mittelstand of medium-sized industrial companies has seemed to work.
Attracted in part by low rents, entrepreneurs have flocked to Berlin rather than the established venture capital heartland in Munich or the financial capital of Frankfurt. The co-mingling of the German and English languages also nods to the creativity and artistic freedom he was seeking to encourage and Germany has been ranked first but of 139 countries for capacity for innovation in the latest World Economic Forum Global Competitiveness Report for 2010-11.
But capacity is nothing without the tools to innovate, including capital to support entrepreneurs. And while the country’s independent venture capital (VC) and leveraged buyout industry struggled after the collapse of the dot.com bubble and againsttax and regulatory headwinds, the state teamed up with some of the country’s biggest corporations to set up a seed-stage investment fund.
Started in 2005, High-Tech Gründerfonds is a €272m ($370m) state-backed fund supported by industrial groups BASF, Deutsche Telekom, Siemens, Robert Bosch, Daimler and Carl Zeiss. Gründerfonds is now preparing for this month’s close of its second seed fund around its target of €280m, and Alexander von Frankenberg, managing director of High-Tech Gründerfonds, said an unnamed five of the six corporate venturing backers of the first fund had recommitted to the second, while five new investors had also committed and "another two to three" were likely to join.
However, while there are plenty of smaller VC funds able to provide seed finance, Germany continues to suffer from a scarcity of larger VC firms able to provide the longer-term funding necessary for these start-ups to develop.
German VC firm Earlybird’s recent report, authored by Henrik Brandis and Jason Whitmire, in contrasting VC investment in Europe and the US explained the issue in more precise terms. Despite European investments yielding proportionately greater returns on average (Center of Private Equity Research recently put the figure at 11.4% against 7.7% in the US) investors remain less attracted to Europe than to the US.
The relative dearth of financial investors has led the country’s large corporations to try to step into the breach.
In October last year, von Frankenberg said companies had also provided more than a fifth of the €250m in follow-on funding to the 205 ventures seeded by High- Tech Gründerfonds over the previous five years, and also bought a number of its portfolio companies. These exits include Textunes, sold to Thalia last month, and Germany-listed chemicals company Evotec agreeing to buy Kinaxo Biotechnologies, a drug discovery company, in February.
But though many of Germany’s biggest firms, including Siemens, Deutsche Telekom and BASF, have corporate venturing divisions, some firms’ investments are limited largely to businesses related to their specific sector and often outside the country.
Based in Karlsruhe, the corporate venturing arm of software company SAP has been investing since 1996 with only a fraction of its sizeable portfolio – companies such as iTAC, Onventis and RIB – based in Germany.
The majority are headquartered in the US. Similarly, when BMW launched its i-Ventures unit in February with the intention of investing in urban mobility companies, it was based in New York rather than Germany. When larger investments do come, foreign backers can reap returns in a promising sign of future investment trends. US-based media group Comcast’s Ventures unit (after its merger with Peacock Fund), together with UKbased private equity firm GMT Communications Partners benefited from Berlin-based gaming portal Bigpoint’s $350m sale, the German backers having exited three years ealier.
German venture investment is increasingly shifting towards more modern cloud computing and gaming start-ups, and many of these are based in Berlin. Social betting company Crowdpark and B2B customer service provider Customer Alliance are just two of the more promising Berlin computing companies, while SoundCloud has garnered media praise for its music sharing service.
A significant reason for this is that, much like the west coast of the US, Berlin’s cosmopolitan outlook makes it the natural home of the German software industry, but the largest corporate investors continue to be based in more traditional industrial and financial strongholds, or the country’s former capital. Headquartered in Bonn, Deutsche Telekom’s T-Venture corporate venturing unit is the prime corporate investor in Berlin-based cloud computing company Zimory, tipped for flotation in 2013.
The investment market as a whole has shown signs of improvement. Figures released in March by the German Private Equity and Venture Capital Association showed a 59% increase in Germany-based private equity investment between 2009 and 2010 as the market began to recover from the financial crisis, although the majority of the investment consisted of buyouts.
And given the country’s relative macro-economic stability during the downturn, and competitiveness (fifth according to the World Economic Forum), in part due to German businesses being "aggressive in adopting technologies for productivity enhancements", Berlin and the country has a chance to ally its industrial strengths with creative sectors to maintain its innovative edge.
Key indicators 2009
Population: 82.2 million
Gross domestic product: $3,352.7bn
GDP per capita: $40,875
GDP as share of world total: 4.03%
Source: Global Competitiveness Index 2010-11 rankings by
World Economic Forum