Germany lacks startup funding

The startup scene in Germany is picking up steam, but it's still missing a key ingredient: Funding for the post-startup stage. It's hard for companies to find the big money they need to scale up and become successful enterprises.

You won't get that impression walking around Code_n, the area at Hanover's CeBIT technology fair dedicated to startups. 50 young entrepreneurs, some of them wearing sparkly top-hats to draw attention to themselves, staff booths showcasing various gadgets for the Internet of Things: wearable sensor-laced shirts, parking apps, domain-specific software.

"The situation for startups in Germany has gotten better," says Florian Nöll, head of the German Startups Association, "especially in the first phase, it's easier to get funding." About half of a typical startup's early-stage funding is covered by the state.

Nöll's group has a booth over at Scale11, a newly introduced exhibition hall for startups with far less glitz than the one with the chaps in sparkly hats. Here, startups present ideas on stage and hold workshops.

The substantial increase in the amount of exhibition space devoted to startups at this year's CeBIT, compared to previous years, goes to show: Silicon Valley-style entrepreneurship is starting to get taken seriously in Germany.

Growth funding in scarce supply

Stephan Brand and his Mannheim-based company Contagt, which has developed an 'indoor guide' - a navigation app that helps people navigate their way to their destinations inside buildings - had no trouble getting their company started. The city provided seed-funding.

"Being located outside of Berlin might actually help, because we're one of relatively few startups in our town, so we can establish closer relations with supporters," he told DW. Berlin is Germany's startup capital - there, startups have to compete for attention and support.

Now Contagt has eight employees and wants move into a high-growth phase. Brand is hoping to find a big industrial partner in his region, but he's using CeBIT to grow his network and cast a wider net.

The funding bottleneck for German startups tends to be the middle-stage funding round - usually around two to ten million Euros - that young businesses need in order to expand and establish themselves in their markets.

"In the middle funding rounds, Germany is a 'death valley' for startups. Many potentially successful business models fail just because they lack the necessary funding," Florian Nöll says.

About 70 percent of middle-round funding comes from venture capitalists based outside Germany, he says, and most foreign VCs focus only on Berlin, Germany's startup hub.

Berlin's Allryder, creator of a 'smart city' urban transit app, has made it through the valley of death. "It's been really difficult to get funding and to find the corporate players. German corporations aren't used to working with startups," says COO Tom Kirschbaum. Four years after its founding, the firm now has collaboration deals with Lufthansa, Volkswagen and Nokia, and is looking to go international.

Risk aversion

Kumardev Chatterjee from the European Young Innovators Forum sees Germany's business culture and mentality as a barrier that startups have to work hard to overcome. "Germany is very good at incremental innovation," he says, "but people don't want you to take risks and generate chaos. There's little support for disruptiveness."

Chatterjee's non-profit helps companies apply for a funding program called Horizon 2020, initiated by the European Commission in 2014, and as yet little-known among entrepreneurs. His worry is that founders will move abroad. "You run into a lot of German entrepreneurs in Silicon Valley and London," he says.

Horizon 2020 supports young, disruptive businesses with up to 2.5 million euros; it's meant to close the middle-round funding gap faced by relatively extravagant projects that might fall between the cracks in Germany otherwise. So far, Horizon has funded nearly 400 businesses.

More conservative projects seem to have an easier time getting middle-round funding. Julia Kasper, daughter of a carpenter from Koblenz in Rhineland-Palatinate, had no problem finding money, even though her company isn't based near Berlin. She created an online business called Holzgespür that offers customized furniture from sustainably grown wood.

Most of her friends and family tried to discourage her from starting the business. Fortunately, she didn't let herself be put off. She's now faced with the luxury problem of having to choose between several funding offers for her expansion plans. In order to get not just money, but smart money - money accompanied by expert advice and support - she's leaning toward signing a deal with a local business angel who has experience in furniture.

Partnership solutions

Florian Nöll from the German Startups Association is hoping to foster more such collaborations between startups and experienced businesses. He's pushing a mentoring initiative that will pair up young entrepreneurs and managers from established mid-sized companies.

"Young people benefit from the experience, gain new partners and potential customers, while midsized companies get in touch with innovative methods and ideas they might otherwise have missed," Nöll says.

If the mentoring system works, it might prevent promising startups from leaving the country for lack of funding - though it could also slow the innovative force of some of the most disruptive thinkers.