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Reading recently about Germany’s €30 billion plan for its startups, I was intrigued. Did the country start to envy La French Tech? Is it hoping to rival post-Brexit U.K.? Perhaps both, but it also has a national goal — making sure that profits from homegrown successes stay home. Let’s explore. — Anna
Second, third, or eighteenth?
European startups have been weathering the venture capital downturn quite well, and funding declined only slightly in the second quarter compared to the first three months of 2022.
German startups, however, had it worse: According to EY, they collectively attracted 20% less capital in the first half of 2022 than during the same period last year. This includes private equity, but venture capital declined even more sharply, from €4.44 billion to €2.89 billion (which is roughly the same amount in U.S. dollars.)
Looking more broadly at Europe, this tally places Germany behind the U.K., but also behind France, whose startups began to sometimes attract more venture capital than their German peers in 2019. That’s by total amount — but things look even worse if you consider Germany’s population of 83.24 million — larger than France’s population of 67.39 million.
According to Dealroom’s latest report, the European countries that attracted the most VC funding per capita in the first half of the year were Estonia, Iceland and Switzerland. Germany lands 18th — and fell four spots compared to 2021.
Adding a little bit of perspective, things don’t look that bad for German startups. There are still plenty of success stories, and they aren’t as hard hit by the war in Ukraine and by energy crisis as other sectors. But with “La French Tech” now boasting more than 25 unicorns, German decision-makers likely became increasingly aware that they could do better.
Addressing a lack of domestic funding
A key issue for Germany’s startup scene is the undersupply of domestic venture capital. Even when funding was on the rise during the first three months of 2021, it wasn’t fueled by local money.
“The rise was largely down to an increase in late-stage capital, but, as the majority of German VC firms are focused on early-stage deals, many have remained on the sidelines, with the country’s largest venture rounds not featuring any local backers,” PitchBook reported last year.
Commenting on foreign interest in homegrown startups, Christophe F. Maire, founding partner of Atlantic Labs and its spin-out, FoodLabs, told TechCrunch that “the strong inflow of [capital from the] U.S. and U.K. has shown Germany’s potential, particularly regarding talent and intellectual property, but (early) venture remains a local game and a healthy ecosystem requires strong local partners.”
Maire also alluded to a data point corroborated by PitchBook, which noted that “a report from German state-owned bank KfW found that VC investments in Germany represented 0.047% of GDP between 2017 and 2019, compared with nearly 0.1% in the U.K.”
These findings didn’t fall on deaf ears: Since 2020, KfW is the entity in charge of coordinating Germany’s Future Fund, into which the country committed to investing €10 billion by 2030. “It is hoped that this financial infusion will create an additional €20 billion in private venture capital investments,” public agency Germany Trade & Invest said at the time.
Germany’s new strategy for startups
Considering that it was first announced in 2020, it may seem surprising to see Germany’s “€30 billion plan for startups” make headlines now, in the summer of 2022. But it isn’t entirely incorrect: The German government does have news for startups.
In a joint press release this July, German ministries announced that the country’s Federal Cabinet had adopted “the first comprehensive startup strategy of a German government. Following the Cabinet decision,” the document added, “the measures that have been defined for ten fields of action will now start to be implemented.”
The main objectives of the startup strategy have been named as follows:
- Strengthen financing for startups
- Help startups to attract talent including through improved employee ownership opportunities
- Develop a spirit of entrepreneurship and facilitate the setting up of new businesses including digitally
- Strengthen female entrepreneurs and support diversity in startups
- Facilitate startup spin-offs from science and universities
- Improve the policy environment for startups which serve the common good
- Mobilize startup competencies for public contracts
- Make it easier for startups to access data
- Strengthen regulatory sandboxes and facilitate access to them for startups
- Put the focus on startups
The document implicitly acknowledges that the strategy has been long in the making, noting that it is “the result of an extensive participatory process.” This might have led to improvements: When I asked them about what changed in the strategy over that period, Earlybird UNI-X partner Frédéric du Bois-Reymond and Earlybird partner and co-founder Hendrik Brandis told me that “topics such as diversity or digital/tech sovereignty have rightly gained more relevance.”
What’s next?
Germany’s full strategy is outlined here, and seems to have been well-received.
For the two Earlybird partners we talked to, “it’s definitely an essential step in the right direction to support the startup ecosystem from the public side in a broader way, and we welcome the efforts. Still, our ecosystem is behind relative to others, in terms of euros spent on startups in relation to the GDP. So while it’s great to now get going, what’s needed is a follow-up, filling the strategy with actual progress, and additional initiatives.”
The priority investment areas outlined by the strategy are “AI, quantum technology, hydrogen, medicine, sustainable mobility, bioeconomy and circular economy, as well as climate, energy and environmental technology.” This too received a stamp of approval from Maire, who said this “looks good broadly,” with the Earlybird partners agreeing that “major topics have been covered.”
Nothing else to say, then? Not so fast. In a statement, the chairman of Germany’s Startup Association, Christian Miele, called the strategy “a good working basis for the coming years.” But he added that “a strategy is only as good as its implementation.”
We will definitely be watching to see how Germany implements this plan.
(Correction: An earlier version of this newsletter post misstated the year-on-year change of Germany’s venture capital tally. According to EY, it remained relatively stable, going from €3.39 billion in H1 2021 and €3.38 billion in H1 2022.)
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