News & Analysis

Germany's government may have changed but appetite for Europe's second-largest VC hub has not as well-funded overseas investors continue to drive deal value to record levels.   

German startups raised a record €11.3 billion (around $12.7 billion) in venture capital funding in the first three quarters of 2021, up over 70% from last year's overall total, according to PitchBook data.

The rise was largely down to an increase in late-stage capital, but, as the majority of German VC firms are focused on early-stage deals, many have remained on the sidelines, with the country’s largest venture rounds not featuring any local backers. 

"The German startup ecosystem is itself still a bit young compared with markets like the US and in my view, that's why a lot of the investors are still focusing on the early stages and growth capital is largely coming from outside of Germany," Picus Capital partner and managing director Florian Reichert said.

German investors were absent from rounds such as process mining software provider Celonis' $1 billion Series D in June and content platform Contentful's $175 million July Series F. US investors Durable Capital Partners and T.Rowe Price led the latter's financing, while Tiger Global led Contentful's round.

Compared with other European countries, the German VC industry still accounts for a tiny portion of economic activity. A report from German state-owned bank KfW found that VC investments in Germany represented 0.047% of GDP between 2017 and 2019, compared with nearly 0.1% in the UK. 

The lack of domestic capital for late-stage German startups is leaving a gap for foreign investors to plug. US investor participation in German VC rounds has soared in the past few years. In the first three quarters of the year, 154 deals worth €8.5 billion included US-based firms compared with just 94 deals five years ago totaling €1.7 billion, according to PitchBook data. 

"It isn't a problem for [German] startups but could be for [domestic] investors," said Uwe Horstmann, general partner and co-founder of Berlin-based venture firm Project A. "We have several successful growth-scale companies in Germany at the moment but most of their funding is coming from abroad, which also means that the benefits of those successes are also abroad." 

German investors are missing out on the huge returns that late-stage deals offer, according to Horstmann, but there is also concern that those startups raising capital from foreign VCs will end up moving their operations abroad. 

According to a study by the chairs of entrepreneurial finance at the Technical University of Munich, around two-thirds of growth companies that are co-financed by non-domestic investors are subsequently sold to foreign investors or go public in another country, as opposed to one-third of growth companies who receive funding from domestic investors. 

Nevertheless, Picus' Reichert sees signs that German investors are starting to look beyond their remit. A recent example is Munich-based early-stage investor HV Capital, formerly known as HV Holtzbrinck Ventures, which launched a €535 million vehicle in October of last year not only to lead seed and Series A rounds, but also to invest in later rounds for growth-stage startups that aren't already in its portfolio. The German government also recently announced a €10 billion fund to help late-stage startups expand their businesses. 

"We can see German investors increasingly looking at later stage investments. Given our long-term investment philosophy, growth stage investments are also becoming increasingly relevant for us," Reichert added.

This is an updated version of an article first published on April 6, 2021 to include data from the Pitchbook 2021 DACH Private Capital Breakdown