Who Is At Fault?
If you look at Germany’s startup landscape as an outsider from the U.S. or the UK, you might ask yourself: “What’s wrong here in Germany?” While Germany has the talents to build great things – as you can see in the automotive and aviation industry – there is no real tech startup lifting off the ground.
In fact, when you think about German startups as an outsider you will probably not come up with more companies than SoundCloud, Wunderlist, or ResearchGate.
Also when it comes to venture capital, Germany seems like a desert. An article of Handelsblatt compared the amounts large venture capital companies worldwide have raised between 2007 and 2016. The result: there is only one German VC company in the Top 100 ranking by raising 1$ billion. Also, the total amount of money invested in European startups is less than a quarter of the total amount invested in U.S. startups. Even more ridiculous is the fact that many German or European companies must raise venture capital from U.S. VC companies. Handelsblatt also mentioned that ResearchGate collected an amount greater than $100 million in funding from Bill Gates and other foreign investors.
German Risk Averseness
That Germany is not an apparently poor country – neither in cash nor talent – is well known. However, why do German founders move to the United States to start their startup? Why are German startups depended on venture capital from the United States?
Is it because Germans are – in general – more risk averse? Alternatively, are German VC principals too shy to knock on the doors of German multi-millionaires?
It is well known that Germans are somewhat risk-averse. This risk averseness is probably found on both sides of the table: at the VC level and the individual investors level. Here is my theory on why the German VC market is so tiny:
First, German investors are more risk-averse in general. This is proven on many levels. Germans tend to save their cash on their bank account rather than investing it in an index fund. The minority of Germans who do invest in the stock market are investing more conservatively than U.S. investors in general. Therefore the risk averseness should be even more present in the private equity market. It is therefore unlikely that wealthy people do actively approach venture capital companies to invest their money in high-risk ventures. However, could it work the other way around? Do venture capital companies adequately sell their funds to German investors?
Unattractive Investments are Hard to Sell
This might lead to the second reason why the German VC market is too small: German VC companies cannot sell their fund to the broader public. As a result, German investors invest in a DAX index fund earning a 7% return rather than an 870% return over five years. However, a part of the reason why so few VC companies are sufficiently funded may lay in the business models of German startups. Who is genuinely interested in investing in a non-innovative calendar app or an app to track a woman’s menstruation? To be honest, it does not sound very promising to me, and it is unlikely to achieve an 870% return on such investments. The third reason why the German VC market is underfunded is, therefore: unattractive investment opportunities.
Europe = Pessimistic
I think that the overall attitude in Europe is somewhat pessimistic. In Europe, no-one has an exciting and optimistic vision of the future. Most people try to make the best of today and have a rather pessimistic picture of the future. This is different in the United States, where people still look forward to exciting technologies which might lead to a promising future. The negative and pessimistic attitude of European investors and people, in general, will necessarily lead to an underfunded VC market. I see little hope for the German startup and VC scene unless the mental attitude of German entrepreneurs and investors is changed.
Innovation Leads to Excitement
So what are some steps to resolve this situation? I think it is the best idea to tackle reason number three: unattractive investment opportunities. The media, as well as public figures, should select promising and innovative startup teams in Germany and raise their public awareness. By making people and investors aware that there is the chance of a better and more exciting future we might shift the attitude of German and European people. Investors might even get excited about actually committing a large sum of money to a VC fund to participate and promote a brighter future thanks to bold tech startups and their founders.
What is your opinion? Might European pessimism be a real reason for the lack of innovation and VC funding in Germany and Europe? Leave a comment below!