There is a lack of venture capital (VC) in Germany, especially in the growth phase of newly founded companies. As a result, the necessary capital to establish successful companies from innovative business models is lacking. In view of the international competition between technology locations, this lack weakens the innovative power of the European economy and hinders sustainable growth. The new study "Fuel Venture Capital: How we fuel innovation and growth" by Roland Berger, the Internet Economy Foundation (IE.F) and the Bundesverband Deutscher Kapitalbeteiligungsgesellschaften e.V. (Association of German Private Equity Firms). (BVK) analyses existing investment barriers to venture capital and explains how these can be overcome.
"There are several vicious circles that we must break in order to stop a downward spiral from lack of capital and migration tendencies of start-ups outside Europe," says BVK board spokeswoman Dr. Regina Hodits. "Solutions aimed at mobilising more institutional investors' capital for venture capital are crucial." After all, the willingness of private investors to invest plays a decisive role in the emergence and growth of global champions. "It is no coincidence that the five most valuable companies are based in the USA: There is a long tradition of financing young companies with the help of venture capital," Hodits continues.
Lack of venture capital weakens growth in innovative industries
Although venture capital investments in Europe more than tripled in the past five years to almost 16 billion Euro, there is still a clear gap compared to the USA. Last year, risk capital of almost 64 billion Euro were invested there. "Asia is also catching up rapidly here," says Prof. Dr. Friedbert Pflüger, Chairman of IE.F. "Countries like China are investing huge government funds in tech ecosystems and have managed to close the financing gap with the USA within a very short time. As a result, China has taken global leadership in key future sectors such as artificial intelligence."
In Germany, the financing gap is particularly worrying in the so-called later stage, because start-ups are dependent on capital for growth and its establishment on the market at this stage in particular. "At 34 billion euros, more than half of VC investments in the USA will go into this important phase," explains Dr. Regina Hodits. "In Germany, on the other hand, it is less than a third of the already low venture capital.
The study identifies two vicious circles that reinforce each other and are the cause of the lack of capital. The first is the "vicious circle of lack of capital formation": on the one hand, there are too few large venture capital funds that can be considered as investment opportunities for institutional investors such as pension funds and insurance companies. On the other hand, large-volume VC funds can hardly be created without the capital of this group of investors.
The second vicious circle concerns companies and their lack of scaling. As there is not enough venture capital in circulation, start-ups are undercapitalised in order to grow further. This leaves them lagging behind international competitors. As a result, lighthouse companies are missing, which leads to further capital flowing into promising start-ups.
The Way Out of the Vicious Circles
The authors of the study recommend six measures in order to break these vicious circles:
- Mixed-funded promotion models: In particular, the Later Stage could be more effectively financed if up to one euro were contributed from government funds for every euro invested by private investors.
- German Future Fund: This creates new incentives for institutional investors such as insurance companies to invest in innovative business models via venture capital funds at reduced risk.
- Active promotion of examples of success: the state, associations and other multipliers should communicate successful lighthouse projects in the technology sector much more openly. This makes investing in further start-ups more attractive.
- Improved legal framework: Bureaucratic obstacles should be removed, new incentives for venture capital investments created and increased planning certainty for start-ups and investors should be ensured.
- Participation in VC growth: More capital-based elements in the pension system - including investment opportunities in venture capital - allow contributors to share the benefits of the digital economy while increasing available venture capital.
- Excellence Initiative "Research, Founding, Growing": Its aim is to support scientists, students and research institutes in bringing their results into the market through the establishment of high-growth start-ups.
"A vital venture capital landscape is a key factor in the international competition among technology locations," explains Klaus Fuest, Chief Analyst at Roland Berger. "Whether Germany will continue to compete for the best business location in the future depends crucially on whether we can keep up with the USA and Asia in mobilizing venture capital.
Roland Berger, founded in 1967, is the only one of the world's leading management consultancies with German origins and European roots. With around 2,400 employees in 34 countries, the company is successfully active in all globally important markets. Roland Berger's 50 offices are located in central business locations around the world. The consultancy is an independent partnership exclusively owned by around 220 partners.
Internet Economy Foundation
The Internet Economy Foundation was founded with the aim of being a curious think tank, independent advisor and competent dialogue partner in the dynamic world of the Internet. It aims to become a pioneering voice for politics, business and society, providing information on the latest developments and identifying the interests of the German and European Internet economy in a global context.
German Private Equity and Venture Capital Association e.V.
The German Private Equity and Venture Capital Association e.V. (BVK) has been the voice of the investment capital industry in Germany since 1989 and unites 300 members. Around 200 of the members are venture capital companies that invest in German companies through venture capital, growth financing or buy-outs. The group of members also includes institutional investors. In addition, there are almost 100 so-called associated members, i.e. consulting firms, service providers and other institutions that cooperate with investment capital companies.