CandidCapital

Despite the successes of the wirtschaftswunder in the four decades following WW2, Germany has struggled to develop a venture capital industry comparable to that of France, let alone those of the the UK or US.
Germany has traditionally been a nation built on proprietorial self-reliance interlaced with a strong sense of the need for collectivism. These tendencies have stood in the way of adopting the Anglo-American model of competitive enterprise based on open and transparent capital markets.

Even today, with widespread acceptance of the need to open up markets, end cartels and promote competition in the interests of consumers, there is a hankering after the “German way” where a wider collective good is pursued through close (and often secretive) co-operation between management and workers, or suppliers and customers, or banks and borrowers. Grafting an effective venture capital industry onto a financial system like this has not been easy.

Nonetheless, by 2001, Germany had the second-largest European venture capital industry, after that of the UK, and Munich had developed an international reputation as one of Europe’s most successful clusters of venture capital backed technology businesses. Germany has developed its venture capital industry largely in the period since reunification. At its peak in 2001, the German Venture Capital Association30 had 215 members. The number of active venture capital investors has declined during the past two years; nonetheless this compares with 160 full members of the BVCA in the UK and 178 full members of AFIC in France, the country with next largest venture capital sector. The German industry invested €4.4bn in 2001, compared with €9.3bn invested by the UK industry.

The German venture capital industry reflects the regionalism of the country’s wider economic and political structures. The largest concentrations of venture capital investors are in Munich and Berlin, with smaller clusters in Frankfurt, Stuttgart and the Cologne/Bonn/Dusseldorf conurbation. These clusters are characterised by the presence of large industrial corporations, which are sources of spin-out, joint-venture, customer and supplier opportunities (such as Siemens in Berlin and Munich, BMW in Munich and Bayer in the Cologne, Bonn and Düsseldorf area); concentrations of technology research institutions and those regional governments, such as that of Bavaria, which have been proactive in promoting new, technology-based businesses.

The direct role of national and regional government in the venture capital industry has been less significant than in Israel, for example. Nonetheless, the Max Planck and Fraunhofer Institutes have been incentivised to commercialise technology through the creation of new companies and the federal government has provided funding to set up dedicated commercialisation arms for these and other research bodies. Much new technology-based business formation over the past five years has been the result of spin-out activity by federal research institutions, and most have involved some venture financing using federal funds.

However, the greatest impact of government, both federal and regional, on venture capital has been indirect. Federal policies to encourage the formation of new businesses – such as the availability of soft loans – has been a significant incentive to venture capital investment, because of the way it skews the financial returns of an investee company in favour of commercial investors. Regional government has had material influence over regional banks and savings institutions, actively encouraging them to form venture capital units in the late 1990s. Among significant early-stage venture capital investors in the Munich bioscience cluster in the five years up to 2002 were the captive venture capital firms of the regional banks of the former East Germany.

The impact of this government involvement in venture capital has been mixed. It has certainly been catalytic in increasing the number of technology business start-ups33 in the past five years relative to earlier periods. It has also contributed to a wider realisation in the country at large that equity, including private equity and venture capital, has a significant role to play in the development of high-growth, but often capital-hungry, technology businesses.

However, both federal and regional government policy has contributed to a distortion of the venture capital market in Germany through the creation of a large number of early-stage venture capital funds which, in turn, have encouraged a plethora of start-up technology businesses. Even if all these businesses were outstanding propositions – with excellent technology, strong market potential and competent management – there are simply too few larger funds to finance them all through the later stages of development. This has created a legacy of maturing technology businesses unable to raise the follow-on venture capital (typically in the range €1m to €10m) necessary to get their product or service to market or, in the case of biotechnology businesses, undertake the clinical or other trials necessary to allow successful transfer of their technology to large pharmaceutical companies.

Germany’s venture capital industry is less international than that of some other European countries – such as the UK and, especially, Israel. Nonetheless, the level of international venture capital activity has been increasing. An example of the new, international investors drawn to Munich is MyQube, a fund raised from large Italian businesses including Benetton and Telecom Italia, which has a reputation for accelerating the development of its investee companies through exploiting its extensive international network of well-placed contacts (including Jim Clarke, the founder of Silicon Graphics, Netscape and Healtheon).

Since 2001, however, inward international investment has significantly dried up although German venture capital investors have continued to invest elsewhere in Europe, especially in the UK and Scandinavia. Polytechnos is the lead investor in Plastic Logic, one of the clutch of semiconducting polymer spin-outs from the Cavendish Laboratory in Cambridge, and Siemens has an extensive corporate venture capital portfolio across much of Europe.

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