For Germany the historical question has always been why it has not had a more active startup and venture capital scene given its large Mittelstand – medium-sized private companies – a wealthy economy and a strong education system.
However, perception and reality seem to have changed in the past five to 10 years, with Berlin rivalling Munich as a local startup hub, plus many other centres, such as Dusseldorf, Dresden, Cologne and Stuttgart, trying to compete for the next generation of high-paying jobs and funding.
Germany boasts some impressive numbers across the so-called triple helix of innovation – the combination of governments, universities and corporations. In this regional report, we look at how the country has been faring internationally in corporate, government and university venturing, beginning with the corporate world.
It should not come as a surprise, following GCV’s in-depth profile of media company Bertelsmann in last month’s edition, that the Germany-based corporate has dominated investments over the past 12 months. In fact, Bertelsmann was involved in 26 deals, towering over telecoms firm Deutsche Telekom in second place with nine deals, according to our deals database GCV Analytics. Closely following in third place was retailer Tengelmann, with eight deals.
In total, German corporations were responsible for 133 deals out of 1,608 across the world – approximately 8.3%. The majority of global deals involved US-based companies – 883, or 54.9%, but Germany beat other European economies such as the UK, whose corporates accounted for 65 deals, or 4%, a reversal of five years ago when Germany trailed in corporate venturing behind the UK in 2011’s Global Corporate Venturing annual figures.
A range of German corporates warrant a closer look, beginning with Rocket Internet’s founders, the Samwer brothers, who control three separate vehicles with billions in combined assets – Rocket Internet with a cash balance of €1.7bn ($1.9bn) after its €6.5bn initial public offering, €420m in the Capital Partners Fund and €500m in the Global Founders Cap vehicle. Rocket has invested in 16 of Germany’s 20 largest deals, of at least €50m, between 2012 and the end of 2015.
The e-commerce behemoth’s business model is largely to create or back local copies of internationally successful businesses, grow them at an astounding pace and seeking an exit. It is a strategy that does not always work out. Brazil-based carpooling app provider Tripla shut down in March due to its inability to meet high operating costs.
A month earlier, Rocket Internet and its food delivery portfolio company Foodpanda sold $140m worth of assets to rival JustEat. The decision involved Rocket Internet dropping five food delivery services in Spain, Italy, Brazil and Mexico. Foodpanda had already sold its Vietnam operations to rival Vietnammm in December.
HelloFresh, a recipe and meal delivery service majority owned by Rocket Internet, first sought a $332m IPO in late October but halted plans two weeks later.
That has not held off investors hungry for the next big thing. Rocket Internet, in January, achieved a $420m first close of its growth fund Rocket Internet Capital Partners. The company itself invested $50m in that fund.
More recently, in July, Rocket’s fashion holding firm Global Fashion Group attracted $363m from Rocket Internet, the aforementioned capital partners fund and investment firm Kinnevik.
Rocket Internet has not been the only entity throwing big numbers around. Iindustrial product manufacturer Siemens revealed in June that it was to invest €1bn in disruptive technologies, such as artificial intelligence and blockchain-based data transfers, through a new corporate venturing unit launching this month. Siemens, which already has Siemens Venture Capital (SVC), has dubbed the new vehicle Next47 after the year the company was founded, 1847, and it will include both SVC and its accelerator, STB, which have invested nearly €500m already.
Next47 will consider both external startups and ventures launched by its employees. The corporate venturing division’s first focus will be a partnership with aircraft manufacturer Airbus, aimed at developing hybrid electric propulsion systems for small planes and medium-sized passenger planes.
Deutsche Börse, the stock market manager, also entered the corporate venturing field this year. DB1 Ventures, launched in June, will both manage the company’s existing portfolio, including ledger technology developer Digital Asset Holdings and VC firm Illuminate’s IFM Fintech Opportunities Fund, and make new investments.
DB1 will focus on strategic deals and invest primarily in growth-stage businesses. Although it has not been revealed how much money DB1 will have, it is funded through its parent’s balance sheet.
A few other players entered the game as well. In October last year, financial services provider Berliner Volksbank launched Berliner Volksbank Ventures with an initial €20m in capital.
In April, advanced materials producer BASF established agribusiness-focused accelerator AgroStart in partnership with Brazil-based startup accelerator Ace, which will invest in South America-based startups.
Last month, pharmaceutical firm Bayer partnered Israel-based commercialisation firm Trendlines to back Israeli agricultural technology startups. Bayer has provided $10m to the initiative. And Germany-based industrials group Trumpf also launched a venturing unit in September.
One final corporate worth looking at is telecoms firm Deutsche Telekom. The company has gone through significant changes this past year, launching corporate venturing subsidiary Deutsche Telekom Strategic Investments (DTSI) in October 2015 to reunite its existing investment structures – T-Venture and Telekom Innovation Pool.
DTSI has €360m of capital under management but has generated mystery around Deutsche Telekom Capital Partners (DTCP), a €500m unit announced in 2014 that was to take over T-Venture’s operations.
DTCP remains an active unit and in April revealed it had hired Jack Young, number two on GCV’s Rising Stars 2016 list. Young was previously the head of North America at Qualcomm Ventures, the investment division of the semiconductor manufacturer.
Young told GCV at the time of his move to DTCP: “We are very financially driven, meaningfully looking for returns. This is closer to the traditional venture structure than a normal corporate VC. We have a broader investment horizon, looking at enterprise software, cybersecurity, internet of things and related internet infrastructure in general with technology heavy companies.”
While he clarified that DTCP had a structure more similar to a corporate-backed venture capital fund than a traditional corporate venturing vehicle, he did not say why Deutsche Telekom changed its mind about using DTCP as the successor to T-Venture as originally intended.
Meanwhile, Germany’s public investors have been in a giving mood. The government’s Ministry of Economic Affairs and Energy (BMWi) launched two VC initiatives with a combined firing power of €1bn as recently as July, with the support of the European Investment Fund (EIF) and the Germany-focused European Recovery Program (ERP) Special Fund.
This boosted the money managed by the ERP/EIF fund of funds and the European Angels Fund to a combined €2.7bn.
ERP is a €1.7bn initiative that invests in venture capital funds with a primary focus on Germany-based early to development-stage technology startups operating in sectors such as life sciences, energy and internet and communications technology. The European Angels Fund is a co-investment vehicle of the EIF with selected business angels.
The decision to increase the two funds followed the establishment of a €500m ERP/EIF Growth Facility fund in March. Apart from the EIF and the ministry, that fund also attracted Germany’s federal development bank KfW. The three partners also launched €225m co-investment fund Coparion at the same time.
It has been a good year to be a German startup. Public-private partnership High-Tech Gründerfonds (HTGF), also operated by BMWi, set out on its third fundraising efforts with a €300m target.
In fact, HTGF has been doing increasingly well as a seed investor – the number of startups approaching the fund for investment more than doubled between 2009 and 2015, and with 40 to 50 commitments a year, HTGF is responsible for more than half the seed investments in Germany (see profile).
Since 2009, the seed financing environment in Germany has changed significantly, in large part due to HTGF’s activity, its evaluation on behalf of BMWi found. Its report said: “On the one hand, compared to the situation some years ago, at least some groups of technology- oriented young businesses find more and improved financing opportunities today.
“Business angels have become more active as investors in the seed phase of technology-oriented companies. Furthermore, a number of accelerators have started their activities in Germany, attracting innovators and founders and offering access to networks and other support.
“A number of German companies, some of them Mittelstand firms, have set up corporate venture arms and actively seek access to young innovative businesses in order to stimulate change in their established business units. Alternative financing, such as crowdfunding, has gained increasing attention.
“Not least, public funding for technology-oriented young companies via grant schemes, for example the BMWI’s Exist programme, has become more widely available. On the other hand, little has changed with regard to the subdued investment activities of institutional VC investors in the seed phase. As is the case in many European countries, in Germany too, private venture capital funds hardly invest in seed companies.”
But some VCs countered that entrepreneurs in Germany had been failing to help themselves. In a “letter to German entrepreneurs”, VC firm Index Ventures expressed concerns that about half of incubated companies’ equity goes to the accelerator and only about a fifth to management – the remainder to new investors, which may have to repay services from the incubator, too – while typical accelerators might take 5% to 7% for €15,000 to €25,000.
The letter added: “A startling number of German startups that we have spoken to have ownership structures which put them at a real disadvantage when raising their first venture round.”
Despite this, HTGF’s successes are in addition to state-level initiatives such as Bayern Kapital, a Bavaria state-owned investment firm that has been appearing regularly on our sister publication Global Government Venturing’s radar.
Meanwhile, KfW invested in the Partech Growth Fund in November last year. The $75m vehicle, set up by VC firm Partech Ventures, has two other public investors, France’s public investment bank BPIfrance and the EIF.
The country temporarily suffered one setback – finance minister Wolfgang Schäuble blocked a bill in May that would have provided tax breaks for investors in Germany-based startups. The bill had been in the works since September 2015 as part of the government’s coalition agreement – Germany is governed by the Christian Democratic Union, Christian Social Union of Bavaria and the Social Democrats – to usher in a new Gründerzeit, referring to a period of significant entrepreneurialism and strong economic growth in the 19th century.
However, last month the government did implement the expected changes, making it possible for investors to reclaim losses on investments in startups through tax breaks. The new regulation came into effect retroactively from the beginning of the year.
With this much capital available from the government, it is perhaps no surprise that our sister publication Global University Venturing did not track a single new fund launched by a German institution over the past year. That does not mean, however, that the country’s higher education ecosystem is not thriving.
Mathias Ockenfels at Point Nine Capital and Thomas Olszewski at Frontline Ventures, in their report on Germany’s venture ecosystem, said there was “very entrepreneurial education at business schools, such as WHU, HHL Leipzig [and] Mannheim”, and “strong engineering talent from top universities, such as KIT Karlsruhe, RWTH Aachen [and] TUM Munich”.
Sven Greulich, partner at law firm Orrick Herrington & Sutcliffe, organised a corporate venture capital event in WHU’s Düsseldorf campus in April for 180 attendees, including executives from many large corporations. Greulich told them: “CVC activities have recently reached new heights in Germany and are expected to continue to grow with new players from the traditional German engineering and machinery industries expected to enter the market in the near future and ramp up their investments.”
One institution hoping to thrive in the coming year is the German Cancer Research Centre (DKFZ), a member of Germany’s largest scientific organisation Helmholtz Association of National Research Centres. DKFZ is one of 27 international institutions to have joined Easy Access IP in August 2016.
Easy Access IP, created by Viclink, the technology transfer arm of Victoria University in New Zealand, is a program to give free licences to local companies and non-government organisations to commercialise public research. While the initiative is still in its early days, it has the potential to increase collaboration between academia and industry and ensure more research makes it to market.
Existing spinouts in Germany have been doing well too. Biopharmaceutical startup Topas Therapeutics, for example, attracted $15.7m in series A capital in March from investors including EMBL Ventures, the investment arm of research institute European Molecular Biology Laboratory.
Intriguingly, Topas – which hopes to treat autoimmune diseases, allergies and drug-induced immune reactions – is technically a spinout of drug discovery company Evotec, but it is commercialising research licensed from University Medical Centre Hamburg-Eppendorf, the teaching hospital of Hamburg University.
Nexwafe, a producer of wafers for solar cells spun out of Fraunhofer Institute for Solar Energy Systems, also celebrated a successful series A with $6.7m in capital supplied by private equity firm Lynwood (Schweiz). Fraunhofer Society, a research organisation boasting 67 institutes throughout Germany, previously backed the company through its investment division Fraunhofer Venture in July 2015, though with what amount is unknown.
Elsewhere, Technical University of Dresden, its research arm Institute for Applied Photophysics and spinout Novaled were given the Technology Transfer Award by trade association German Physical Society in March. Novaled, which produces OLED (organic LED) displays for smartphones, tablets and TVs, was sold to consumer electronics manufacturer Samsung in 2013.
While Germany has made significant strides in boosting its university spinout ecosystem, it is dominated by a single player, research organisation Max Planck Institutes.
Ulrich Mahr, in charge of spinout activities and portfolio management at the association’s tech transfer arm Max Planck Innovation, told Global University Venturing last year: “Max Planck certainly has a high number of mergers and acquisitions deals in Germany. If you look at the 10 biggest acquisitions, three were linked to Max Planck Society, and that is a significant proportion. The same goes for IPOs, where some of our spinouts are heavy-hitters in Germany.”
It could be claimed that Germany still has a way to go, and of all three triple helix areas that is arguably most true for university venturing, where the country’s output is dwarfed by international peers such as the US or the UK.
Admittedly, the country’s struggle to increase research commercialisation stems from a crucial legal aspect that makes Germany substantially different from its neighbour France, which has successfully centralised tech transfer through its regional Satt program – tertiary education in Germany is a matter for individual states, not the federal government.
Technology transfer is also a relatively recent endeavour. It began with Ruhr University Bochum in 1975 and the country’s first tech transfer office, but it took the university another two decades to formalise the arrangement in 1998 and created a legal entity to handle the process, Rubitec.
The country does have some national initiatives, such as TechnologieAllianz, which unites 200 scientific institutes, though the umbrella organisation rarely appears in Global University Venturing reports.
However, the relative regularity with which spinouts from the country do pop up on GUV’s radar shows the country has come a some way since the 1990s – spinouts accounted for a mere 1% of all new businesses formed between 1996 and 2000, according to a study released by the Centre for European Economic Research in 2002.
And with the government readying so many large funds, and HTGF often involved in funding rounds for spinouts already, the future looks brighter for one of Europe’s strongest economies. u
Profile: High-Tech Gründerfonds
James Mawson, editor-in-chief
G
ermany’s public-private partnership for venture capital, High-Tech Gründerfonds (HTGF), is preparing for the closure of its third fund at about €300m ($335m) having helped transform Europe’s largest economy’s entrepreneurial ecosystem over the past decade.
Last month, Germany’s Ministry for Economic Affairs and Energy (BMWi) published results for HTGF’s €304m second fund, after an evaluation by Technopolis Group with positive reviews and with a strong case study to show off in Heliatek’s €80m round of equity, debt and subsidies (see case study).
BMWi’s conclusion after the evaluation was: “HTGF has positioned itself as Germany’s most important seed-financing provider by quite some distance. It boasts a highly integrated network of contacts, comprising financing partners as well as innovative startups offering appealing investment opportunities.”
Between 2009 and 2015, the number of founders and young companies that contact HTGF in order to explore investment opportunities more than doubled from around 700 to about 1,500, while the number of its new investments per year was more or less constant at 40 to 50 deals.
Data from the German Private Equity and Venture Capital Association (BVK) indicates an HTGF market share of more than 50% of all seed investments in Germany among institutional investors, falling to just above 20% when angel investors are included.
Matthias Machnig, Germany’s state secretary, said: “HTGF has become a quality brand for startup financing in Germany. It is regarded as a reliable initial investor by numerous private and public investors alike. Interest among foreign investors has also increased substantially. Overseas venture capital investors had accounted for significantly less than 10% of investments in follow-on financing in 2009 [just before the second fund was launched], but this figure stood at a third in 2014 and 2015. The public-private partnership model has also proven highly effective, which is why we are looking to continue and further expand the fund.”
Investors in this public-private partnership include Germany’s state-owned BMWi and development bank KfW, as well as strategic corporate investors, including Altana, BASF, Bayer, Braun, Robert Bosch, CEWE, Daimler, Deutsche Post DHL, Deutsche Telekom, Evonik, Lanxess, Beteiligungs, Metro, Qiagen, RWE Innogy, SAP, Tengelmann and Carl Zeiss.
HTGF expects to begin investing from the third fund in autumn next year and hopes to secure €90m from corporates, with a minimum commitment of €3m to €5m. HTGF II attracted €44m from corporates with a minimum commitment of €2.5m.
Besides their investments in the HTGF funds, until the end of November 2015 the 18 industry investors had committed an additional €53m for direct investments in 30 HTGF portfolio companies. In three cases industry investors acted as buyers in HTGF exits, with other industry sales including Siemens acquiring HTGF’s Magazino stake in July last year. However, the main advantages enjoyed by HTGF investors include access to new technologies, innovative business ideas and joint development projects with the startups, according to BMWi.
Michael Brandkamp, managing director of HTGF, which has 28 investment managers out of a team of about 40, said: “The evaluation shows that we have achieved our goal of kickstarting the seed financing market in Germany. Since 2005, the German startup and investor scene has undergone major positive changes. However, HTGF does not just provide capital, as its primary function is that of a networking catalyst and partner. That is why it is great to see that non-financial aspects are becoming an increasingly important reason for founders to take advantage of the services HTGF has to offer.”
Thibaud Le Séguillon, CEO at Heliatek, added: “HTGF has invested in every round and presented Heliatek to a number of potential investors – with the right contact in the right context. We have had access through them to a large network and advice. HTGF’s public-private partnership has been part of its success, as it sees all startups and makes connections.”
And whereas a 2013 comparative study by trade body the European Private Equity and Venture Capital Association – now renamed Invest Europe – showed an average negative rate of return for seed funds and early-stage funds, HTGF is expected to break even.
An HTGF estimate of the exit potential puts the realistic repayment potential of its €272m Fund I at about €270m, with €200m as the lowest expected return. As of 31 December 2015, the total value of the fund, which was launched in 2005, in relation to the capital called, stood at 78%, which was above the expected minimum rate concerning the fund’s performance at closure.
The first HTGF fund, which started in 2005, made total investments of €243.2m – slightly less than the total it had raised, and has so far generated returns to its investors amounting to €67.9m.
HTGF’s seed financing is designed to enable startups to take an idea through prototyping to market launch by investing an average €600,000 in companies and up to a total of €2m per portfolio company in follow-on financing. Technopolis recommended that this limit, which was reached by HTGF in Heliatek, be raised to €4m for its third fund as evaluators found no evidence that private venture capital investments in the seed phase were crowded out by HTGF’s investment activities.
On the contrary, evidence it gathered found “a substantial amount of crowding-in of private investments can be attributed to the central role of HTGF as market maker and instance for quality screening among potential investment targets. For many private and public venture capital companies, HTGF acts as a reliable and trusted initial investor whose selection and financing functions have become a quality brand in the German seed market”.
In the period 2005-15, HTGF portfolio companies completed 701 rounds of follow-on financing. Private investors participated in 546 investment rounds (78%). HTGF provided €96m in follow-up financing while other investors contributed €981m, with €459m coming from private sector venture capital funds.
In the past three years, 2013-15, there were on average 101 follow-up financing rounds annually, with a total investment volume, including HTGF, of an average €125m, of which third parties invested €110m, with €92m (83%) coming from private investors.
As BMWi’s report said: “Both the total volume of private third-party investments and the investment share of private investors very clearly exceed the expectations of the HTGF investors when setting up the first fund in 2005.”
The survey by Technopolis found portfolio companies received an average €2.4m of equity capital, excluding HTGF, whereas companies in a control group secured equity funding amounting to an average €1.6m.
The comparison of the latest survey results with the 2009 evaluation said founders now made contact with HTGF at an earlier stage. The proportion of founders looking for capital for at least six months before the first contact with HTGF dropped from 40% in the 2009 survey to less than 20% in the 2016 survey.
Founders also contact the HTGF increasingly with non-financial motives in mind. The share of portfolio companies seeking HTGF’s management know-how and its special expertise in the seed phase grew significantly between the 2009 and 2016 surveys. Most portfolio companies said they experienced HTGF as a “competent partner that offers adequate and transparent investment conditions”, but 80% mentioned the high interest rate of the convertible loan – which was reduced in late 2015 from 10% to 6%, deferred for four years – as a negative feature of HTGF investment conditions and were also critical about the loan conversion rules.
HTGF can invest only in companies contacting it within a year of establishing or starting their operational activities. Many interviewees from portfolio companies and companies from the control group, and interviewees from HTGF network partners pointed out that the current age limit was too short to allow HTGF to invest in companies with a structurally longer seed phase.
Due to improved grant financing schemes, such companies would often explore the possibility of HTGF investment only at a stage when they were no longer eligible. HTGF said the proportion of requests rejected on grounds of the age limit had risen from 8% in 2009 to 14% in 2015, and this restriction may be amended for its third fund.
In response to the changing supply side environment for seed financing in Germany, HTGF could also in future have more freedom to make investments that diverge from its standard investment model and to finance such companies alone or jointly with private investors, Technopolis said.
However, this is less likely to include more deals outside Germany, such as HTGF’s investments in Italy-based Wise Group’s E3m A round in 2013, as its sourcing ability was smaller outside its home country, insiders said.
