Despite progress made, German venture capital market lags behind internationally

• Germany’s venture capital ecosystem has gained maturity, but its growth rate is too slow by international comparison
• Investment volume is below EU average based on country’s economic strength
• Domestic capital for major financing rounds is often lacking, dominance of international investors means increased risk of migration
• Shortfall is particularly large in biotech/healthcare
• KfW’s Chief Economist Köhler-Geib: “The German VC ecosystem must take the next development step”

The market for venture capital – equity capital for growth-oriented or innovative young enterprises (start-ups) has been on the up in Germany for some years now. Since 2014, annual VC investment has grown from EUR 0.7 billion to EUR 1.9 billion. Very young start-ups now find reliable access to venture capital, and older start-ups in the growth phase are more often able to close large financing rounds as well. Still, the German VC market is falling behind further in an international comparison because other countries’ VC markets have evolved much more positively based on the strength of their economies. These are the findings of the study by KfW Research entitled “VC-Markt in Deutschland: Reif für den nächsten Entwicklungsschritt” (“VC market in Germany: Ready for the next development stage” - in German).

With an average investment volume of 0.047% of gross domestic product in the period of 2017–2019, Germany is below the EU average. The United Kingdom achieved a ratio of 0.098% and France 0.068% in the same period. In order to catch up with the United Kingdom, the European champion, the German start-ups would have to receive roughly twice as much venture capital each year, and over one third more to reach the level of France.

Large financing rounds pose a particular challenge for the German VC market. Foreign investors are involved in nine of 10 financing rounds with amounts starting in the low double-digit millions. For the German VC ecosystem, that increases the risk of start-ups that need finance leaving the country.

The Chief Economist of KfW, Dr Fritzi Köhler-Geib, commented as follows: “The German venture capital market might be growing, but the rate is too slow. Germany is at risk of falling behind internationally in important areas of technology for which venture capital plays a major role. The German VC ecosystem must take the next development step to make large financing rounds possible more often even without foreign investors and to reduce the risk of businesses and expertise leaving the country. This means we need to further improve not just the enabling conditions for financially strong institutional investors but also the growth conditions for start-ups – for example by retaining workers through suitable share ownership models.”

With regard to the target sectors of VC investments, Germany is hardly any different from the United Kingdom, France or the European average. Information and communication technology takes the largest share in all these markets. A significant difference exists only in the field of biotech/healthcare, where Germany’s 18% share in the years 2017–2019 was much lower. In contrast, the energy and environment sector is relatively strong in Germany by international comparison, with an investment share of 4%.

In 2018 Germany had some 70,000 start-ups – innovation- or growth-driven young enterprises. Of these, around 9% intend to finance their further growth with venture capital in the coming years. The coronavirus pandemic initially led to a historic slump in VC business confidence in the first quarter of 2020. In order to stabilise the German VC market and mitigate the impact of the crisis, the German Federal Government launched a support package for start-ups in a total volume of EUR 2 billion. As shown by the quarterly German Venture Capital Barometer surveyed by KfW and the German Private Equity and Venture Capital Association (BVK), business confidence in the VC market recovered noticeably in the second quarter of 2020.

The study “VC-Markt in Deutschland: Reif für den nächsten Entwicklungsschritt (VC market in Germany: Ready for the next development stage”) is available for download in German at Studien und Materialien.