Dependency on foreign investors could become a problem for (German) startups

The Corona crisis is creating immediate cash flow issues for many startups. In Germany, there are now talks of a startup support plan, potentially similar to France’s €4 billion plan which had been announced on 25 March.

Germany’s startup ecosystem had already become increasingly dependent on large foreign venture capital investors. This leaves it particularly vulnerable in the current situation.

Report - Dependency on foreign investors could become a problem for (German) startups

A new report by in collaboration with venture capital firms Target GlobalHV VenturesLakestarPoint Nine Capital dives into Germany’s venture capital market to see its strengths & weaknesses. The report was just covered by Handelsblatt and features interviews with Jan Miczaika (Partner at HV Ventures), Pawel Chudzinski (Partner at Point Nine Capital), Yaron Valler (General Partner at Target Global). The report received further support from the Berlin Senate Department fur Wirtschaft, Energie und Betriebe.

This report assesses the current state of venture capital in Germany, to facilitate current discussions and provide data-driven insights. It highlights the lack of both German and European growth stage capital.

Until the Corona Crisis, there had been a continuous rise of venture capital in Germany

There’s been a dramatic rise in venture capital investing across Europe, Germany included. In 2019, €6.7 billion was invested in German startups, an all-time record. Venture capital investment rose 46% from 2018: faster than the US, China, France and Israel. Since 2015, investment levels have increased 2.2x. France grew faster: 2.7x during the same period, but from a smaller base.

Germany also continues to rank #2 by number of unicorns, amid a rapidly developing European startup ecosystem. However, France has caught up with Germany by capital invested into rounds up to €50M.

As a result, France has also caught up with Germany in terms of potential future unicorns. And Paris even has overtaken Berlin.

Influx of foreign capital into German startups

In Germany, much of the increase is driven by foreign investment, mainly from the US & Asia.

In 2019, foreign investment into German startups rose 48%. The increase was largely driven by mega-rounds of over $100m into GetYourGuideN26Auto1 GroupFrontier Car GroupOmiowefoxinfarm, and Raisin. Foreign investment has been growing 2.8x since 2015, twice as fast as investment from domestic investors. Highly active foreign investors include names like Softbank, Temasek, Insight, GIC, Tencent and Valar.

Does it matter if late stage rounds are gobbled up by US or Asian investors?

As a result, these foreign investors have built up significant stakes in Berlin’s most promising startups. Does it matter if late stage rounds are gobbled up by US or Asian investors? Not for the startups themselves. But it’s a symptom of a young local ecosystem that is still in need of development.

“For the startups it does not really matter. […But…] On a more general level Germany needs a strong financial sector to remain competitive in a globalised world..”

Jan MiczaikaPartner HV Ventures

Moreover, for a startup ecosystem to keep developing itself, it helps if German investors stay more involved. Today’s most active early stage investors like HV VenturesGFCPoint NineCherry VenturesTarget Global and Project A all earned their stripes by being involved in several German startup successes for a long time. Big names like Zalando have helped create a new generation of skilled people, in turn fuelling growth of new rising stars and potential future unicorns.

Share of German domestic capital has diminished

As a result of this trend in Germany, the share of domestic capital has diminished, while the share of foreign capital has increased. In 2015, 39% of German venture capital investment came from domestic VCs. In 2019, this has decreased to 25%. A similar trend is also visible in the UK.

In Germany, the dramatic shift to larger rounds and influx of foreign money are part of the same trend

The increase in venture capital is driven mostly by an increase of larger rounds above €50 million. And these larger rounds are predominantly funded by foreign investors. German venture capital investors are involved in only 15% of these larger rounds.

For rounds below €50 million, on the other hand, German investors remain as active as ever. There is a trend towards larger rounds as startups venture more into building banks, transportation infrastructure, and other asset-heavier models. As a result, foreign investors are now participating in a larger share of the amount of invested capital.

The “right” proportion of foreign capital

What is the “right” proportion of foreign capital? Being attractive to foreign investors is a sign of strength. For Israel and the UK, the high proportion of foreign investors reflects strong global investor appetite, especially from the USA and Asia (a good thing). Meanwhile, France wants to attract more foreign capital, especially from the USA and Asia. However, Germany now has among the lowest % of domestic capital.

Germany’s early stage venture capital industry is among the strongest in Europe

There are over 150 German VC firms, but 78% of capital is raised by Seed and Series A stage funds, whereas 83% of fundraising is late stage. When it comes to series B and up, the investor landscape looks thin.

German and UK VC firms dominate Europe’s league tables when it comes to backing Europe’s most successful startups. German VC firms invest more globally, almost twice more frequently compared to France. Being globally-focused has enabled German VCs to make landmark investments not only domestically but also internationally (e.g. Revolut, Spotify, UiPath) as well as backing national champions.

Corporate investors

Interestingly, Germany’s corporations are the most active corporate venture investors in Europe. They also invest mostly outside of Germany. Still, German corporations spend only 0.1% of their revenues on external innovation (according to research by Matthias Hilpert,; that’s only a fraction of internal R&D budgets, so there’s plenty of upsides.

German VCs have started raising much bigger funds

German VCs have started raising bigger funds. In 2019, €2.3 billion was raised by German VCs, up 64% from 2018. This includes a new €900M fund by GFC, and a new $700M+ fund by Lakestar (both funds see themselves as global funds but both have German-speaking roots). While these funds generally also invest from early stages, their larger funds give them more flexibility to participate in later rounds too.

According to InvestEurope data, German VCs typically raise 30-60% from the DACH region and 20-30% from government agencies. Investment from pension funds, fund-of-funds, USA and UK investors growing.

Family offices and individuals, pension funds and academic institutions are still a relatively undeveloped source for funding. Pension funds don’t traditionally invest that much in German venture capital. While there are statutory limitations, these limits mostly are not reached yet according to BVK.

Report - Dependency on foreign investors could become a problem for (German) startups