Tech hubs in Germany supporting booming sector, says expert

New research by investment data analysts CB Insights found that venture capitalists (VCs) invested more than double the amount in German technology companies in 2014 than they had done in 2013.

$1.28 billion was invested by VCs last year, compared to $578 million in 2013. In the third quarter alone last year VCs invested $555m in German technology companies. CB Insights said the third quarter figure was "driven largely" by the $350m of investment secured by Berlin-based online food-ordering service Delivery Hero in the eighth funding round the company launched following the initial seed investment it received in 2010.

The most active VC in Europe last year was German-based, CB Insights said. High-Tech Gründerfonds, which invests in technology start-ups, invested in more than 30 different businesses in 2014, it said.

"High-Tech Gründerfonds is a public private partnership backed by the German federal government – the Ministry of Economics and Technology and a bank owned by the federal government – and a number of large German industrials," Munich-based corporate law and M&A expert in the technology sector Eike Fietz of Pinsent Masons, the law firm behind Out-Law.com, said. "It’s no surprise that they are the most active, at least going by number of deals, since they are well-funded, are specifically aimed at helping technology companies at an early stage."

"The other notable players in the list are German Startups Group, based in Berlin, a relatively new kid on the block and very active, and Earlybird, based in Munich, which is one of the last successfully operating VCs in Germany which started in the dotcom era and survived the ups and downs of the market," Fietz said.

Fietz said that within Germany, Berlin and Munich are particularly strong centres for technology start-ups.

He said Munich is known more for 'hard' technology, with it home to a number of highly ranked universities and very successful high-technology companies, as being the location of the headquarters of world-leading research organisation Fraunhofer. Fietz said 'hard' tech requires more funding in the early stages of development but that the state of Bavaria had provided support in that regard. Ilse Aigner, Bavaria's minister of economic affairs and media, energy and technology, recently set-up a €100 million public VC fund to support technology companies in the area.

Fietz said that Berlin is better known for attracting creative people and has a strong presence of "internet-side" technology businesses, such as those involved in e-commerce and the development of mobile apps.

"Both Berlin and Munich have healthy ecospheres for VC investments: creative founders, internationally focused founders, founders who are willing to learn from the US, VC money, local government backing, experienced advisors and are attractive as cities to live, which in return attracts founder-talent," Fietz said.

Fietz said that Germany offers an attractive alternative to the US' Silicon Valley for technology sector investment.

"Investing in the Valley, people are likely to have to pour a lot of money into start-ups," Fietz said. "In Germany, which hasn’t had many globally successful start-ups in recent years for reasons which can be overcome, international investors seem to think that they need less money, possibly because of government-backed co-funding. Seeing the healthy start-up environments, chances are that the next big thing will come from either Berlin or Munich, or from both."

However, Fietz issued a note of caution on reading too much from the CB Insights figures. He said the figures showing a more than doubling of VC investment in German technology companies were driven "by a few large investments". For the "boom" to last, it will need to be shown that technology investors are able to make substantial returns on their investment, he said.

"The problem that the German VC scene has had in the past is the lack of big ticket investments and exits," Fietz said. "The recent investments might help to change the game, but it will only last if we see a few large exits as well in the next couple of years."