Startups in Germany are catching up in the race for the digital pole position.
Startups

Germany's answer to Silicon Valley.

With its vibrant local startup scene, Germany is catching up in the race for the digital pole position.

Startups from Germany

Author: Anja Steinbuch
Photos: Kay Nietfeld/dpa, Dagmar Schwelle/Laif, websitebutler.de, Getty Images, GetYourGuide.com, Shutterstock.com, 3yourMind.de, Uli Benz/TU München, Stocksy.com 
DTSI
Deutsche Telekom pools strategic Venture Capital investments in the new business unit Deutsche Telekom Strategic Investments (DTSI).

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Germany has had its fair share of Startup success stories: Zalando, Kreditech, TeamViewer, Trivago and DailyDeal, for example. They’re either major players in their own right or have been sold for a pretty penny to US corporations. They arrived in the big leagues as secret German-engineered heroes of the digital economy. But there aren’t enough of them to guarantee success in the global marketplace, warn observers. That’s why a host of networks and initiatives between the Alps and the Baltic Sea are working furiously to ensure the next paradigm-changing digital business idea comes from the land of poets and thinkers.
Christian Pott stands at his new office counter. The founder of Websitebutler wears jeans and sneakers. When he and his three co-founders, Philipp Gohlke, Hendrik Köhler und Malte Sieb, aren’t burning the midnight oil at their new offices at Alexanderplatz, they can sip cappuccino in a lounge chair or simply eat pasta with co-workers in the kitchen. The quartet that founded the startup in 2013 can spread out on a single floor measuring over 560 square meters.
That’s enough room for their young business, which is currently shaking up the German website development market. James, its self-learning system, works virtually flawlessly and autonomously thanks to artificial intelligence. Customers either complete an online questionnaire describing what they want the website to achieve or simply call up the company. Then, they supply pictures and website copy. The system uses this raw data to build a website. The Berlin team prides itself on providing personal service. “Our customers don’t have much time. That’s why we aim to handle everything related to the website for them,” explained Pott. At the end of this painless process, Websitebutler’s 1,000-plus customers (including Stroba Bau, Barbers Berlin and Weilands Wellfood) receive a customized, low-cost website that is constantly managed by professionals. Websitebutler even has room to expand in Berlin; its team of 40 employees will be growing soon. But what about Silicon Valley, Munich or Hamburg? Nothing doing, according to Pott and his three co-founders. “Berlin is perfect for us in terms of finding contacts, investors, employees and, obviously, new customers.”

BERLIN: START-UP CITY

The hottest place for startups right now is Berlin. Munich was more attractive in the 1990s, but Berlin has retaken the crown with 600 startups over the past two years, according to the Chamber of Industry and Commerce. Munich only logged around 300 in the same period. Quantity is secondary, though. Success is more about development opportunities for entrepreneurs, staff and equipment costs and, above all, access to finance. And all these factors tilt the scales in Berlin’s favor.
KKR, Spark Capital, Nokia Growth Partners and other notable venture capitalists gave Johannes Reck 100 million euros to realize his vision of building an app for booking city tours and theater tickets instead of just flights and hotels. His startup, GetYourGuide, began life as a student initiative with 15 employees in Zurich in 2008. The startup grew quickly and now employs over 200 people at offices in Berlin, Zurich, Rome and Las Vegas.
3yourMind has received funding from EOS, the global market leader for industrial 3D printing with laser sintering. The 3D printing startup, which was spun off from Technical University Berlin, targets large and small companies interested in using 3D printing to quickly and inexpensively manufacture prototypes and small parts. Siemens is already using its services, and architects employ 3yourMind to create building models in less time. German Accelerator, a development program run by the German federal government, sent the 3D experts to the US to put the finishing touches on their technology. The startup recently opened an office in San Francisco to build interest in 3yourMind’s software solutions among dynamic young companies in innovative sectors.

MORE VENTURE CAPITAL, LESS REGULATION

Many members of the German startup community feel a twinge of envy at the sight of Silicon Valley. Growth happens so quickly over there in California. Entrepreneurs can set up a company within minutes and collect venture capital in a fraction of the time required in Germany. Their wish list for Germany: more venture capital, more loans, less regulation and especially more speed. But something is happening. Europe is catching up, believes Christian Leybold from Eventures, a venture capital firm. Internet businesses used to be limited to regional markets, but today, they can quickly expand worldwide in sectors such as smartphone apps. At the same time, they have access to inexpensive services from all over the world.
There are more reasons for Europe’s resurgence. More and more money is now flowing in the other direction – from the US to Europe. VC funds are opening offices in London, Paris and Berlin. According to studies, in 2016, around 88 billion dollars poured into the European deep tech segment – the sector that generates ideas for artificial intelligence, the internet of things and machine learning. In these technologically advanced fields, Germany has a world-class educational system and thus an excellent environment for growth.
Digital research has caught the attention of more and more industrial firms, too. In Germany, carmakers and machine producers are the biggest cohort of “conventional” manufacturers seeking or building relationships with startups. This cross-fertilization benefits the German scene. Two-thirds of Europe’s largest corporations have invested directly in tech firms. One-third of them have bought a startup since 2015. Examples include Allianz, Audi, BMW, Daimler, Munich Re and ProSiebenSat1. Their interest has accelerated the pace.

VENTURE CAPITAL CULTURE

“We need a venture capital culture in Germany,” demanded Christoph Keese, Executive Vice President at Axel Springer SE. The financial differences are still staggering. Around 2.5 million people live in Silicon Valley, which is home to 20,000 startups with access to 60 billion dollars in venture capital. Second place goes to Tel Aviv, with around 4,000 startups, close to 450,000 inhabitants and 3.6 billion dollars in VC funding. Berlin, with 3.5 million residents, has only around 2,000 startups that can tap into 700 million dollars in venture capital. Even so, that’s still 30 percent of all of Germany’s startup firms.
“Starting a business is easy in Germany. The hurdles begin when firms seek follow-on financing.“
Iris Bröse
BITKOM
“Germany is catching up, though”, said Iris Bröse. As the startup specialist at Bitkom, Germany’s leading IT industry association, explained, “Around half of the company founders surveyed in our latest startup report said that they would set up their businesses in Germany again. Only 30 percent thought the US would provide better conditions for growth.”
The difficulties start in the second funding phase, according to Bröse: “Starting a business is relatively easy over here, too. But the hurdles really begin when German firms move on to follow-on financing for larger sums.” The tax regime is still not attractive enough, particularly for international investors. But red tape and overregulation get in the way as well, said Bröse. For an object lesson, just consider flinc. The Darmstadt based startup developed a ride-sharing app to bring together drivers and passengers across Germany. Now, though, it has run afoul of the German Person Transportation Act. According to the Act, flinc drivers have to obtain a passenger endorsement for their driver’s license once they start to transport people regularly. Being in Germany has benefits, too, said Bröse, such as German data protection laws. “Germany is perceived and admired the world over as a trailblazer for data privacy.”

DIGITAL HUBS EMERGING

The US startup scene isn’t as monolithic as it may appear from afar. Silicon Valley is the obvious choice, but Washington, Chicago and Boston are also abuzz with startups. In Germany, market players are hard at work to develop local centers of their own. Bitkom, under the auspices of former Federal Minister for Economic Affairs Sigmar Gabriel, has initiated five hubs to attract digital value creators. The hub in Frankfurt promotes the digitization of the financial industry. In Dortmund, the hub focuses on the logistics industry in partnership with the Federal Research Ministry and the Fraunhofer Institute for Material Flow and Logistics. Hamburg is also home to a logistics hub, but it concentrates on maritime shipping with support from the port industry.
The Munich hub devotes its energy to the future of mobility. Its stakeholders include BMW and Susanne Klatten, a major shareholder in the carmaker, as well as the incubator UnternehmerTUM, the Bavarian Ministry for Economic Affairs, the Federal Ministry of Transport and the Munich city government. That – along with the presence of major carmakers in Ingolstadt and Munich and a test track for driverless vehicles on the A9 highway between Munich and Nuremberg – has primed the region to emerge as a Silicon Valley for mobility. Last, but not least, the Berlin hub focuses on the internet of things and the digitization of financial services. Publicity campaigns will alert startups worldwide to the opportunities that Germany has to offer. “The hubs represent an open digital ecosystem where corporations, SMEs and startups in key industries work with universities, research institutions and investors to drive digital transformation,” explained Iris Bröse.
Communications technology and life sciences are the likeliest sectors to receive funding from investors.

WHAT ABOUT THE MITTELSTAND?

Even the backbone of Germany’s economy – the mid-market family companies known as the Mittelstand – is cooperating with the young digital rebels. “La Famiglia” is a venture capital fund set up by members of German family-owned businesses, including such household names as Siemens, Miele, Braun and the Swarovski family in Austria. Besides the investors, the network also includes successful German entrepreneurs like Sebastian Pollok (Amorelie) and Sven Rittau (Zooplus). According to fund manager Robert Lacher, “We want to bring together the smartest entrepreneurs and the best ideas with companies that have been successful for generations.” 
So far, La Famiglia has made seven companies offers that they couldn’t refuse. They include Coya, an insurance startup, and Freight Hub, a digital freight forwarder. This old economy initiative has another goal: to nurture pioneering ideas without depending on large industrial investors. Instead, the ideas will gain momentum through knowledge and contacts from “the family”. At the same time, the investors hope to pick up on new technologies and digital trends early on.

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