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Venture Capital Summary

Core Content

Venture capital (VC) is a critical driver of innovation, growth, and economic prosperity. It is not just a funding instrument or an asset class, but a key enabler for the development of new technologies and the creation of jobs. Germany, despite being a major economic power, lags behind the United States and China in terms of venture capital investment, which hinders its ability to attract and nurture tech firms. The study conducted by the Internet Economy Foundation (IEF), the German Private Equity and Venture Capital Association (BVK), and Roland Berger highlights the need for Germany to mobilize more private capital to remain competitive in the global digital economy.

Main Points

• Venture Capital's Role in Innovation and Growth: VC is essential for funding startups and innovative companies, especially those with digital and research-intensive business models. It provides not only capital but also strategic guidance and expertise, helping companies scale and succeed.

• Global Competition: The US and China lead in VC investment, with the US investing EUR 63.8 billion in 2017 and China approaching EUR 62 billion. Europe, including Germany, invests significantly less, with Germany's VC investments amounting to only EUR 1.1 billion in 2017, which is 0.035% of GDP.

• Investment Backlog in Later Stages: The most significant gap in VC investment in Germany is in the later stage, where companies need substantial capital to scale. German later stage startups receive on average EUR 3.3 million, compared to EUR 24.4 million in the US and EUR 56.5 million in Asia.

• Need for More Private Capital: To close the gap, Germany needs to mobilize more private capital. The study suggests that just 0.7% of Europe's pension funds (totaling over EUR 7 trillion in 2017) could bring Europe up to the level of the US in VC investment.

Key Barriers and Solutions

• Barriers: The German VC market is underdeveloped, with relatively small fund sizes and a lack of sufficient later stage investment. These issues create a cycle of underinvestment and hinder the growth of innovative companies.

• Solutions: The study proposes six steps to turn Germany into a venture capital champion:

  • Create major leverage for later stage investments
  • Establish a German "Fund for the Future"
  • Actively communicate success stories
  • Enable people to share in venture capital growth
  • Have a legal framework that drives venture capital mobilization
  • Launch a "Science, Startups and Growth" excellence initiative

Economic Impact of Venture Capital

• Job Creation and Productivity: VC-funded companies grow faster and create more jobs than non-VC funded firms. These companies are often at the forefront of innovation, contributing to new markets and services.

• Digital Dividend Sharing: Venture capital allows broader segments of the population to benefit from the digital economy. This includes consumers, pensioners, and employees of innovative firms, who can profit from the growth of VC-backed startups.

The Three Pillars of Digitalization

• Access to Efficient Infrastructure
• Access to a Broad Spectrum of Digital Services and Applications
• Sharing in the Growth of the Digital Economy

The German VC Market

• Growth in VC Investments: German VC investments increased by almost 7% in 2017 compared to 2016, and have more than doubled since 2012.

• Funding Sources: The study includes data on the distribution of VC investments in Germany, highlighting that seed and startup funding has grown more than later stage funding.

• VC Fund Size: European VC funds are generally smaller than their US counterparts, with the average private VC fund in Germany being EUR 105 million. This limits the amount of capital available for later stage investments.

Conclusion

Germany must act quickly to close the gap in venture capital investment. Without sufficient VC, the country risks falling behind in the global digital race. The study emphasizes the need for a coordinated effort involving government, private investors, and the broader ecosystem to foster a thriving VC market and support the growth of innovative startups.