An ecosystem and network of investors, founders and corporate funds has ignited a new spirit of innovation in Germany that is also causing a stir internationally and attracting investors. Talents from all over the world are founding companies in Germany, globally active investors are scouting and financing promising startups. Germany is well on its way to once again becoming a center for start-ups with international innovative strength.

After the bursting of the Internet Bubble in 2000, the financing environment for capital-intensive start-ups and non-profitable but fast-growing companies deteriorated significantly. Capital increases through IPOs were much easier than today. At that time, the short distance between start-up and listing on the stock exchange could be financed relatively easily by private venture capital, sometimes supplemented by public co-financing and support programs.

The collapse of the stock markets after 2000 to 2003 led to an almost complete disappearance of both venture capital financing opportunities and stock market exits. Very sharply declining valuations, high default rates among portfolio companies and disappearing exit opportunities resulted in disappointing returns, often even losses, for venture capital funds. Both the Kauffman Foundation and the European Venture Capital Association (EVCA) report negative returns on average in the venture capital industry. Not even half of the 99 funds in which the Kauffman Foundation invested were able to repay the capital they received.1 On average, seed and early stage funds achieved an IRR of - 0.98%. Even the top quartile, as the best 25% of venture capital funds generated a return of only 12.5% p.a.2. Not surprisingly, investors were reluctant to invest further in venture capital funds, especially as private equity funds were able to generate very attractive returns during the same period. Many VCs were no longer able to place new funds and exited the market. Even the successful funds took much longer than planned to fundraise and often fell short of targeted fund sizes. With few exceptions, this trend continues today, with the result that far too little venture capital is available for high-growth companies with a thirst for capital.

In Germany, the public sector at the federal level as well as at the state level has attempted in various forms to close the financing gap, especially in start-up financing. The EXIST programs, for example, subsidize university start-ups, and a number of (research) funding programs support sophisticated development projects with non-repayable grants. High-Tech Gründerfonds provides equity capital in the start-up phase as lead investor, and KfW's ERP-Startfonds supplements the funds from private equity investors as co-investor.