- German venture capital ecosystem is gaining maturity, but the rate of growth is too slow in international comparison
- The investment volume is lower than the EU average in terms of economic power
- Domestic capital supply for large financing rounds is often lacking, the dominance of international investors increases the risk of emigration
- backlog in the biotech sector / Health particularly big
- KfW chief economist Köhler-Geib: “The German VC ecosystem must take the next stage of development.”
The market for venture capital — equity capital for growth-oriented or innovative young companies (start-ups) — has been on the upswing in Germany for several years: Since 2014, annual VC investments have increased from EUR 0.7 billion to EUR 1.9 billion. EUR increased. Very young start-ups now have reliable access to venture capital and older start-ups in the growth phase can also conclude large financing rounds more frequently. Nevertheless, the German VC market continues to fall behind in an international comparison, because measured against economic strength, the VC markets in other countries have developed significantly better. This is shown by the study by KfW Research “VC market in Germany: Ready for the next development step”.
With an average investment volume of 0.047% of the gross domestic product in the period 2017–2019, Germany is below the EU level. Great Britain had a rate of 0.098% and France 0.068% in the same period. In order to catch up with the European champion Great Britain, German start-ups would have to receive around twice as much venture capital annually to reach the French level, over a third more.
Larger financing rounds represent a particular challenge for the German VC market. Foreign investors are involved in 9 out of 10 financing rounds in the low double-digit million range. For the German VC ecosystem, this increases the risk of the financed start-ups migrating.
KfW’s chief economist, Dr. Fritzi Köhler-Geib, comments: “The German venture capital market is on the upswing, but the pace is too slow. Germany threatens to lose touch internationally in important technology areas for which venture capital plays a major role. The German one The VC ecosystem must take the next stage of development so that large rounds of financing are more often possible without foreign investors and the risk of companies and know-how being lost. This not only requires the framework conditions for financially strong institutional investors but also the conditions for the growth of Start-ups — for example when it comes to retaining employees through suitable capital participation models — need to be further improved. “
In terms of the target sectors for VC investments, Germany hardly differs from the UK, France or the European average. The largest part is in the area of information and communication technologies. There is only a significant difference in the biotech / healthcare sector, where Germany’s 18% share in 2017–2019 is significantly lower. In contrast, the energy and environment sector, with an investment share of 4% in Germany, is fairly well represented in an international comparison.
In 2018 there were around 70,000 start-ups in Germany, i.e. innovation or growth-oriented young companies. Of these, around 9% intend to finance their further growth through risk capital in the next few years. The corona pandemic initially led to a historic crash in the VC business climate in the first quarter of 2020. In order to stabilize the German VC market and cushion the effects of the crisis, the federal government has launched an aid package for start-ups with a total volume of EUR 2 billion. As the quarterly German Venture Capital Barometer collected by KfW and BVK shows, the business climate in the VC market recovered noticeably in the 2nd quarter of 2020.
The study “VC market in Germany: Ready for the next development step” is available for download under Studies and Materials
Despite progress, the German venture capital market is lagging behind internationally was originally published in FrankfurtValley on Medium, where people are continuing the conversation by highlighting and responding to this story.