Press Release I Economic Driver Venture Capital: How Germany can Accelerate Innovation and Growth
There is too little venture capital (VC) in Germany – especially for the growth phase of newly founded companies, and it is limiting the country’s growth, digital transformation, and most importantly, chance to play a major role in the world’s next economic chapter. The necessary capital is missing to transform innovative business models into successful companies, and in light of the international competition among technology locations, this lack of European innovation power hinders sustainable growth. The new study Venture Capital – Fueling Innovation and Economic Growth by Roland Berger, the Internet Economy Foundation (IE.F) and the German Private Equity & Venture Capital Association (BVK) analyzes current innovation deterrents and outlines how these can be overcome.
“There are multiple vicious cycles we have to break to stop the downward spiral consisting of too little capital and emigration tendencies of start-ups out of Europe“, says Regina Hodits of the BVK. “It will be decisive to find solutions that mobilize more capital from institutional investors.“ In fact, off-market lenders are going to have a significant role in creating and growing global champions. “It is no coincidence that the five most valuable companies in the world are all headquartered in the United States: They have a longstanding tradition of financing young enterprises through venture capital*“, Hodits continues.
A lack of venture capital dilutes the growth of innovative industries
Although venture capital investments in Europe have tripled to € 16 billion over the past five years, there is a significant gap compared to the US; where € 64 billion were invested in 2017 alone. “Asia is catching up rapidly“, Friedbert Pflüger, chairman of the IE.F, says. “Countries like China are investing immense amounts of state money into tech-ecosystems, and within a short period of time they have managed to close the gap to the United States. As a result, China has positioned itself as a global leader in pivotal future industries such as artificial intelligence.“
In Germany, a precarious funding gap particularly exists for the Later Stage in which start-ups are dependent on capital to grow and be established on the market. “In the US, more than half of VC-investments amounting to € 34 billion go into this important phase“, Regina Hodits points out. “However, in Germany it is less than a third of an already insufficient amount of venture capital.“
The study is now available for download:
Download the study as a PDF
Vicious cycles must be broken
The study identifies two vicious cycles reinforcing one another which are currently impeding venture capital. The first is the vicious cycle of insufficient VC: On the one hand, there are too few large venture capital investment funds which could be considered suitable investment opportunities for institutional investors such as pension funds and insurance. On the other hand, aforementioned large-volume funds can only form with the capital these investors provide.
The second vicious cycle pertains to the companies and their lack of scaling. Since there is too little venture capital, start-ups are too undercapitalized to grow. Thus, they lag behind their international competitors which, in return, results in a lack of success stories that could generate new capital for promising start-ups.
We see that the way to break the vicious cycles involves 6 steps to turn Germany into a VC champion
- Create major leverage for later stage investments
- Establish a German “Fund for the Future”
- Actively communicate success stories
- Enable the public to share in venture capital growth
- Have a legal framework in place that drives venture capital mobilization
- Launch a “Science, Startups and Growth” excellence initiative
“A vivid venture capital landscape is a key factor for an international technology location competition.“, says Klaus Fuest, Chief Analyst for Roland Berger and a co-author of the new study. “Whether Germany will maintain its competitive position among industrial locations such as the US and China will crucially depend on mobilising venture capital in the future."