3 questions to smart minds

How active are international venture capital firms in Germany?

For this 3 questions to Dr. Albrecht von Breitenbuch M.A.

Orrick, Herring­ton & Sutcliffe LLP
Photo: A. von Brei­ten­buch | O, H & S
8. April 2015

In Germany, no finan­cier has inves­ted more money in German start­ups than High-Tech Grün­der­fonds since 2009. In the mean­time, inter­na­tio­nal venture capi­ta­lists are incre­asingly parti­ci­pa­ting in finan­cing rounds for young German compa­nies in the tech­no­logy sector. Which inter­na­tio­nal VCs are active on the German market and in which invest­ment phases?

For this 3 ques­ti­ons to Part­ner at Orrick, Herring­ton & Sutcliffe LLP in Berlin

1. How active are inter­na­tio­nal venture capi­tal firms (VCs) in the tech­no­logy sector actually in Germany?

In our consul­ting prac­tice for tech­no­logy compa­nies and their inves­tors, we curr­ently see a growing inte­rest of inter­na­tio­nal VCs in German tech­no­logy compa­nies and also a growing invest­ment acti­vity, basi­cally for all invest­ment phases. Howe­ver, we are still at a very low over­all level. Inter­na­tio­nal VCs, espe­ci­ally those from the USA and Sili­con Valley in parti­cu­lar, even if they alre­ady have a Euro­pean office in London, still have so many invest­ment oppor­tu­ni­ties in their home market virtually on their door­step that in most cases they do not (have to) bother to look for alter­na­ti­ves in Germany. In this respect, Germany is in direct compe­ti­tion with other locations.

On the other hand, the gene­ral condi­ti­ons for foun­ders and their compa­nies have impro­ved in Germany in terms of finan­cing opti­ons. There are nume­rous early stage (seed) oppor­tu­ni­ties. At this stage, the foun­ders are not neces­s­a­rily depen­dent on inter­na­tio­nal inves­tors at all. The diffi­cult part is in follow-up and growth finan­cing. Here, the German invest­ment land­scape is in urgent need of capi­tal injec­tion from outside. Stra­te­gi­cally thin­king foun­ders involve inter­na­tio­nal or inter­na­tio­nally networked VCs early on in the first finan­cing rounds, so that these subse­quently open doors for further finan­cing rounds.

2. What diffi­cul­ties do inter­na­tio­nal VCs have to over­come in order to come to Germany?

In our expe­ri­ence, the biggest diffi­cul­ties for inter­na­tio­nal VCs are the lack of a network and market know­ledge when ente­ring the market. — It starts with the iden­ti­fi­ca­tion, scree­ning and evalua­tion of invest­ment oppor­tu­ni­ties and ends with the nego­tia­tion, struc­tu­ring and execu­tion of an invest­ment. As long as the VC lacks his own market know­ledge and network, he must accept econo­mic discounts, uncer­tain­ties, addi­tio­nal effort and, if neces­sary, costs. Stra­te­gi­cally, these diffi­cul­ties should be signi­fi­cantly redu­ced with each invest­ment. They can be redu­ced to a mini­mum with the right team set-up right from the start. In our consul­ting prac­tice in such a team, we often support inter­na­tio­nal VCs or the foun­ders who want to win one in such situa­tions by proac­tively provi­ding back­ground infor­ma­tion on the legal frame­work, “trans­la­ting” local pecu­lia­ri­ties into the respec­tive other legal under­stan­ding and ensu­ring a smooth tran­sac­tion process based on our expe­ri­ence. This can help manage expec­ta­ti­ons and outco­mes, and create an invest­ment frame­work and comfort level for inter­na­tio­nal VCs that is compa­ra­ble to what they would expect with a “home investment.”

3. Is the German “ecosys­tem” ready for inter­na­tio­nal VCs?

In our expe­ri­ence, the German invest­ment land­scape is basi­cally ready for inter­na­tio­nal VCs. This is also eviden­ced by the nume­rous invest­ments made in the recent and recent past in Berlin start­ups alone, such as: only 
in 6Wunderkinder, 
Insight Venture
Kite Ventures
in Deli­very Hero, 
MCI Manage­ment
in Auctionata, 
in Klara, most recently 
in Outfittery.

If the parties invol­ved are properly posi­tio­ned, the initia­tion and hand­ling of invest­ments will be smooth, espe­ci­ally with regard to mutual expec­ta­ti­ons. There are a large number of promi­sing tech­no­logy start­ups in Germany in various areas — first and fore­most e‑commerce, fintech, medtech, hard­ware, soft­ware. Many start­ups and their products have links to the successful German SME sector. The demand for venture capi­tal is by no means covered, so that inves­tors can get into good nego­tia­ting posi­ti­ons, also vis-à-vis exis­ting inves­tors, espe­ci­ally in the area of larger tickets and later stages. There are now estab­lished market stan­dards that have come very close to the condi­ti­ons that apply inter­na­tio­nally and in other markets. Above all, inter­na­tio­nal VCs can now also access a network of their peers who have alre­ady successfully inves­ted and estab­lished them­sel­ves in Germany.

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