The German technology startup scene is heating up nicely, but it’s not quite there yet. That’s fair enough: the real energy has only been showing itself in the last year or two.
But how do you get investment in the next generation of services pumping? There’s local support for the earlier stages of venture money, but the reality is that your Soundclouds and Gidsys are looking overseas for serious capital. So where –- if anywhere -– do German VCs fit into the picture?
That’s a conversation that flared up over the weekend when VC Paul Jozefak called for German equivalents to creative fundraising platforms like Kickstarter and AngelList. It turned out to be a controversial suggestion.
Jozefak, a veteran of Neuhaus Partners and SAP’s Corporate Ventures fund, said that a VC-backed initiative of that kind would seed more companies, get more deals flowing and grow the ecosystem as a result. Also, if German VC funds are in there early, and if they work together on it, they might become more relevant to the successes emerging from Berlin and elsewhere, he said.
“Unfortunately, I still wouldn’t say that there’s a solid base of German VCs established. Ask any entrepreneur where they send their business plan first and it’s usually a UK-based fund (Index, Accel, Balderton) or even a U.S. investor (USV, Redpoint, Kleiner, etc). The German VCs remain Plan B,” Jozefak wrote.
Jozefak’s not calling for a clone of Kickstarter or AngelList, rather asking for people to try “coming up with creative, new financing initiatives” that achieve similar results in quickly seeding more startups. He sees this as a way of taking on “hungry young players” like Rocket Internet and Team Europe, which are incubators that have gone on to start their own funds, but that also pump out “copy-cats”.
“So many international players have positioned themselves in Germany that the local VCs are being pushed aside and becoming fall-back options,” Jozefak told me. “[German] VCs all go it alone and forget the network effect of creating groups. Same goes for platforms. It’s difficult to get it started on its own. Were Kickstarter not financed by USV or weren’t some of the early angels on AngelList prominent guys from the Valley, they’d be nowhere or at least not as far….let’s put it that way.”
But Jozefak is a provocateur — he previously called for the establishment of a German VC ‘Old Boy’s Network’ — and his latest call has garnered a mixed reaction.
In an email conversation, entrepreneur and angel investor Christophe Maire (an early backer of Soundcloud, which went overseas for VC funding) told me there is indeed “a gap between early stage opportunities and the availability of local venture capital with the skill/attitude/experience comparable to USV, Redpoint, etc,” but something like AngelList would make no difference.
Maire said foreign VCs were getting the good deals because locals were generally too risk-averse and “somehow conditioned not to aim big”. And even if it’s foreign investors who do well out of Berlin firms, he said, that still “helps grow the ecosystem.”
Is organic best?
Ciaran O’Leary, a prominent local player with Earlybird Venture Capital, reckons VCs shouldn’t be in the business of starting these initiatives at all.
“I think for seed and angel [funding] we need strong organic initiatives that are supported but not driven by VCs,” O’Leary told me. “I am skeptical of purely VC-driven initiatives on seed programs. For example, Kickstarter was created and is driven by passionate entrepreneurs [then] backed by VCs – I don’t think VCs throwing money at an ‘initiative’ will create anything of similar value.”
O’Leary — who has also outlined his thoughts on how German venture can play the international game — pointed out that Earlybird is itself encouraging early-stage startups with a new seed program, starting at €250,000 a shot ($330,000), and planning syndication with overseas VCs. The idea is for Earlybird to lead in the seed and A rounds, and “syndicate with the Tier A of the US and UK” for the B and C rounds.
“[Overseas VCs] like working with a strong and like-minded VC on the ground. So it can be win-win and I’d say were right now piecing together three to four investments of that type,” O’Leary said, adding that Earlybird was also building an “active angel network” that will co-invest while also working alongside existing accelerators and incubators.
The only way is out
Of course, what’s really needed to validate the Berlin startup ecosystem is — as so many people have wistfully told me — high-profile cases of German companies being snapped up by big international names.
Rapid growth and quick sell-out are not the hallmarks of companies in a country where slow-and-steady, long-term businesses are the norm. But the Berlin startups are playing in a different kind of international game, and many if not all eyes are on the exit door.
“This is the one big thing missing in Berlin, despite very encouraging early signs,” O’Leary said. “But it will be two or three years before we see several big exits turbo-charging the seed scene.”
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