Europe needs ‘Frankenstein’ for its start-up sector

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The writer is founder of sievedan FT-backed site on European startups

Earlier this century, a visiting investor from Mars might well have bet big on Germany emerging as one of the winners of the Internet revolution. Packed with world-leading engineers, industry-friendly bankers, and fast-paced entrepreneurs, the country seemed in a strong position to turn its hardware dominance into software. But it has not turned out that way. As two recent reports make clear, at least one critical gear is missing when it comes to turning smart start-up ideas into global digital businesses: growth capital.

Germany lags far behind the US, China and the UK in creating tech unicorns or $1 billion+ start-ups. Although the country has many giant pension funds, they allocate only a small fraction of their money to venture capital, which provides most of the rocket fuel for Opening. Across Europe, venture capital funds invested 77 billion euros last year, far less than the US total of 188 billion euros. But even within Europe, Germany was underweight: as a share of GDP, VC investment in the country amounted to just 0.25% last year, compared with 0.33% across Europe and 0. .78% in the US

Does this matter? After all, Germany is still a remarkably successful country. economy with a strong manufacturing base and a dynamic export sector. Furthermore, the ability to create fast-growing but often loss-making tech unicorns can hardly be the best metric of economic, let alone social, success. Many Germans would argue that the Facebooks, Airbnbs and Ubers of this world externalize problems, eroding communal values ​​and labor rights.

However, Germany could still create and control a much more impressive tech sector by learning from the financial virtues of the US without copying its perceived vices. For both sovereignty and prosperity reasons, Germany needs to mobilize much more growth capital.

According to a report by the German Association for Private Equity and Venture Capital (BVK) and the Internet Economy Foundation notes, Germany’s economic miracle of the 1950s to the 1970s was largely driven by heavy investment in start-ups and medium-sized businesses, the legendary Mittel stand. during those years, bank loans to this sector amounted to 4 per cent of GDP. But the comparable figure today is only 1 percent. Germany is still living on the glories of its past and is not investing enough in the wonders of tomorrow.

What’s even more galling is that American investors, who back both US and German venture capitalists, have greater exposure to German startups than to the country’s own pension funds. This means that the center of gravity of the German economy may increasingly shift to the other side of the Atlantic, compromising technological sovereignty. “If you’re not represented in later-stage funding rounds, governance is exported to where the money is coming from,” says Klaus Hommels, president of venture capital fund Lakestar.

Take, for example, Flix, a Munich-based start-up that runs an international shipping platform. According to an analysis by the venture capital firm Redstone, US pension funds indirectly own about 12 percent of Flix, while their German counterparts own just 0.3 percent. In total, Redstone estimates that US pension funds own 10% of Germany’s tech unicorns, with a collective value of €47bn, compared to 0.2% held by German pension funds. “Until we have a stronger capital base, the fruits of these deals 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 crop of start-ups, such as Celonis, Personio and Vay, proving that world-class software companies can be built in Germany. But she looks with admiration across the border to France, where the government is successfully mobilizing institutional investment for the technology sector. The so-called Tibi initiative has helped create new growth capital pools. “France is doing an amazing job and we can learn a lot from them,” she says.

Software engineers sometimes talk about “Frankensteining” as a problem, which means they can bring a project to life by joining together different body parts. Europe has the opportunity to Frankenstein its start-up sector by combining the inventiveness of Germany (which boasts a third more patent applications per person than the US), with the vibrancy of the early stage investment scene incentivized by the UK governmentand the growing strength of France’s scaling-up financial institutions.

The only difference from Mary Shelley’s mythical tale is that this Frankenstein “monster” would strengthen, rather than destroy, its creators.