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The writer is the founder of Thamesa site supported by the FT on European start-ups
At the beginning of this century, an investor from Mars could have bet big on Germany as one of the winners of the Internet revolution. Filled with world-class engineers, industry-friendly bankers, and dynamic entrepreneurs, the country seemed well-positioned to transform its mastery of hardware into software. But it didn’t happen that way. As two recent reports make clear, there is at least one critical cog missing when it comes to turning smart startup ideas into global digital businesses: growth capital.
Germany lags far behind the United States, China and the United Kingdom in creating tech unicorns, or start-ups valued at more than $1 billion. Although the country has many giant pension funds, they allocate only a tiny fraction of their money to venture capital, which provides most of the rocket fuel. start-up. Across Europe, venture capital funds invested 77 billion euros last year, far less than the U.S. total of 188 billion euros. But even in Europe, Germany was underweight: As a share of GDP, venture capital investments in the country accounted for just 0.25 percent last year, compared with 0.33 percent in Europe and 0 .78 percent in the United States.
Is it important ? After all, Germany remains a remarkably prosperous country economy with a strong manufacturing base and a dynamic export sector. Furthermore, the ability to create fast-growing, but often loss-making, technology unicorns may not be the best measure of economic, let alone societal, success. Many Germans would say that the Facebooks, Airbnbs and Ubers of this world are outsourcing problems, eroding community values and labor rights.
Yet Germany could still create and control a much more successful technology sector by drawing on America’s financial virtues without copying its perceived vices. For reasons of both sovereignty and prosperity, Germany must mobilize much more growth capital.
According to a report from the German Private Equity and Venture Capital Association (BVK) As the Internet Economy Foundation notes, Germany’s economic miracle from the 1950s to the 1970s was largely fueled by heavy investment in new and mid-sized companies, the legendary Middle stand. During these years, bank loans to this sector accounted for 4 per cent of GDP. But the comparable figure today is only 1 percent. Germany is still living in the glories of its past and not investing enough in the wonders of tomorrow.
What’s even more galling is that North American investors, who back both U.S. and German venture capital firms, are more exposed to German start-ups than the country’s pension funds. This means that the center of gravity of the German economy could increasingly shift across the Atlantic, thereby compromising technological sovereignty. “If you are not represented in subsequent funding rounds, governance is exported to where the money comes from,” says Klaus Hommels, president of venture capital fund Lakestar.
Take Flix, a start-up founded in Munich that runs an international transportation platform. According to an analysis by venture capital firm Redstone, US pension funds indirectly own around 12 percent of Flix, while their German counterparts own only 0.3 percent. In total, Redstone estimates that US pension funds own 10 percent of German tech unicorns, collectively worth €47 billion, compared to 0.2 percent held by German pension funds. “Until we have a stronger capital base, the fruits of these companies will be distributed there and not here,” says Jeannette zu Fürstenberg, co-founder of venture capital firm La Famiglia.
As an investor, zu Fürstenberg says she is excited about a new generation of start-ups, such as Celonis, Personio and Vay, which show that world-class software companies can be created in Germany. But she looks with admiration at France, across the border, where the government is succeeding in mobilizing institutional investment for the technology sector. The so-called Tibi This initiative has helped create new pools of growth capital. “France is doing an incredible job and we have so much to learn from them,” she said.
Software engineers sometimes talk about the problem of “Frankensteining,” meaning they can bring a project to life by putting different body parts together. Europe has a chance to become a Frankenstein-like start-up sector by combining the inventiveness of Germany (which has a third more patent applications per person than the United States), with the dynamism of the seed investment scene prompted by the British governmentand the growing strength of French scale-up financing institutions.
The only difference with Mary Shelley’s mythical tale is that this Frankenstein “monster” would strengthen its creators rather than destroy them.
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