Founders and their start-ups should have it easier in Germany, promises the policy in their coalition agreement. The results from the start-up barometer of the auditing and consulting firm Ernst & Young (EY) confirm that something has actually happened.
German start-ups were able to collect a total of 2.4 billion euros from investors in the first half of 2018 – seven percent less than in the previous year, when especially the initial public offering of Delivery Hero had set a record. By contrast, the transaction volume of pure venture capital investments – excluding IPOs – rose by 3.5 percent in the first half of the year to a new high of 2.2 billion euros. The number of investments reached a new record with a total of 272 transactions – three percent more than in the same period of the previous year.
EY considered companies whose founding date back no more than ten years. In addition to traditional risk capital investments, the study also takes into account cash inflows from initial public offerings and ICOs (Initial Coin Offerings).
Initial Coin Offerings contribute € 250 million
For the first time, ICOs have emerged significantly as a new form of financing this year – despite strong criticism from many sides. In total, German start-ups took a total of € 250 million for 13 ICOs in the first half of the year. In the previous year, only one such transaction had been counted, which contributed eleven million euros.
Whether this form of financing will continue to gain in importance, however, remains to be seen. “After the hype in the first half and negative publicity due to lack of regulations, it is currently slightly more difficult for start-ups to finance themselves through ICOs,” says Peter Lennartz, Partner EY. “However, corporations, investment banks and regulators are now also engaging in this form of financing and the related business models based on blockchain technology, so there is a lot of growth potential here.”
The start-up cities in Germany
Berlin is and remains the start-up capital and the international lighthouse of Germany – but especially Bavaria, North Rhine-Westphalia and Hesse caught up in the first half of the year. “In Berlin, the most important and largest ecosystem for start-ups has been established in recent years – here the framework conditions are also in line with international standards, foreign investors have long been on the screen Berlin,” observes Lennartz. “Berlin is also a laboratory of experimentation and rapid development, so in 2017 and 2018, the city has become the most successful location in Germany for cryptocurrencies and ICOs, if not in Europe.”
By contrast, other start-up ecosystems in Germany are more difficult. However, current developments show that specialization in specific areas, intensive cooperation between universities, research institutes, established corporations and start-ups, and regional policy support, lead to remarkable and promising future successes. “
E-commerce companies continue to receive the highest investment volume
Most of the money flowed into e-commerce companies again in the first half of 2018. Overall, the start-ups in this area came to 975 million euros – after just under 1.4 billion euros in the same period last year. By contrast, investments in FinTech companies increased again, from 332 to 396 million euros. Investments in software and analytics – from € 207m to € 386m – and mobility – from € 62m to € 150m also increased significantly.
“Most of the money is still spent on ecommerce, which requires a lot of investment in building structures and marketing, and especially foreign investors expect the biggest market opportunities in this segment with limited risk,” says Lennartz. “More innovative and more technology-driven segments have traditionally had a harder time, but we’ve also seen very encouraging signs recently, especially investing in start-ups with innovative data analytics, software as a service, artificial intelligence, blockchain or cyber security business ideas significantly more investors than before, which can only be positive for Germany as a business location. “
The largest five transactions in the year to date have all concerned Berlin start-ups in the area of e-commerce and FinTech. In January, the used car platform Auto1 collected 460 million euros. In June, the furniture mail order company Home24 received 172 million euros in its IPO. In March, the bank start-up N26 was able to raise 132 million euros.
Improvement of the framework conditions for start-ups necessary
According to Lennartz’s assessment, not only is there a need for greater financing activity, especially in the area of small and medium-sized financing rounds. The government-imposed framework conditions have not developed very well recently, although some deficits have been known for a long time: “Better depreciation options for start-ups would increase the attractiveness of start-ups.” In the UK there are tax incentives for investors – they get them 20 percent of the investments in start-ups credited to the taxes. ” The state could also simplify work permit regulations and visas for international talent, Lennartz said. “In addition, bureaucratic regulations such as minimum wage or basic data protection regulation tie up enormous forces in the young companies, which actually want to and should concentrate entirely on their founding.”
Better data networks are also very central: “We need to expand the digital infrastructure in Germany, which is the basis for digital business models to function in practice, because Germany lags behind other states,” says Lennartz.
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