A climate indicator for the German startup ecosystem

In the past two decades, the German startup scene evolved from a small, hidden niche neither much noticed in the wider German economy nor in the international startup scene, into a thriving, bustling ecosystem that attracts attention, capital and talent from all constituents of German society, and increasingly from all over the world.

Like every evolution, this development was not a linear process. We saw activity almost coming to a stop after the dotcom bubble burst in 2001; the revival of interest in the Internet somewhere around 2005 (remember the term Web 2.0?); the establishment of Berlin as the centre of gravity for the German startup scene in the second half of the 2000s; the financial crisis of 2008; the rise and fall of company builders as the dominating force in German startup creation between 2007 and (roughly) 2013; the IPO of Zalando in 2014 as final proof that Germany can create multi-billion Euro companies; etc. etc.

Over the last three years, the development of the German startup scene seems to have accelerated. The number of exciting startups being created increased; the ambition of founders to build very large and sustainable companies grew; the ecosystem available to support those ambitions developed; and more capital is made available from German and international VCs, as well as from corporates, business angels, or family offices; all seems to have grown exponentially. Alexander Hüsing from Deutsche-Startups coined a great expression for this development in late 2018: The golden fall (and then the golden winter and the golden spring!) for the German startup scene.

The HV x F.A.Z. startup climate indicator

To show the current state of Germany’s ecosystem and to track its developments, we decided to initiate a climate indicator together with “Frankfurter Allgemeine Zeitung”, one of Germany’s leading newspapers.

We set out with the objective to show a new perspective on the German ecosystem: We wanted to ask the founders and members of C-level management of German startups how they would rate the circumstances in which their businesses operate. What challenges do they face? What opportunities do they see? Our indicator aims to reflect the founders’ perspective and therefore to obtain a more differentiated picture of the German startup ecosystem.

In the course of our first round of surveying, we asked the participants the following questions:

• How do you rate your access to qualified personnel?
• How do you rate your access to venture capital?
• How do the regulatory conditions in Germany affect your business?
• How intense is international competition?

We were very happy to see 105 young companies participating in our first survey, which we ran in the beginning of 2019. While some results confirmed our experiences from the ongoing dialogue with our portfolio companies, others surprised us — especially in their clarity.

Strong competition for qualified personnel

When we talk to founders inside and outside of our portfolio, there is one common challenge that seems to keep everyone up at night: Finding and attracting great people. We were therefore not surprised to see that 62.9% of startups surveyed have difficulties finding suitable talent. The current strong economic situation in Germany exacerbates the competition for the best brains, which also affects startups.

This challenge does not get easier as a startup grows, on the contrary: Without exception, all participating startups which have already completed their Series C or Series D financing rounds, rate the search for top talent as difficult. Earlier-stage companies seem to have a bit of an easier time (probably because they need to hire smaller numbers), but even in that segment, 67.4% of companies that recently completed a seed round share the assessment that it is difficult to attract top talent.

Startups see positive financial climate

For a long time, everyone in the German startup ecosystem was complaining that there was too little venture capital available. Luckily, these times seem to have changed: Only a quarter of the startups surveyed (24.8%) describe their access to financing as difficult.

The stage where accessing capital still seems to be most difficult is the seed stage, but even at this stage, only 30% of participants rated access to financing as difficult. And access to financing seems to get easier over time (contradicting the long-held claim that there is too little growth capital available): None of the startups surveyed which have already collected more than € 50 million in venture capital found access to new capital difficult.

Again, we were not surprised by these results. As VCs we see the changes in our daily work: Increasingly, we have to pitch to founders to get to invest in the most exciting deals, rather than founders pitching to us. And while this makes our jobs a lot more stressful, it is a great development for the German startup ecosystem.

Difficult regulatory environment

Things seem to be less rosy for German startups on the regulatory side. Only 8.6% of our climate indicator participants stated that the current regulatory environment supports their business. And while the number of positive responses is maybe not a surprise (who ever rated regulation positively?), the share of negative responses did surprise us: A full 66.7% of respondents rate the regulatory environment in Germany as negative and thus feel explicitly restrained in their entrepreneurial activities by regulation. This is a remarkable result that shows how urgently the dialogue between politics and startups must be intensified.

One regulatory hurdle that startups perceive in their operations might be the treatment and taxation of stock options for employees. As the war for talent (see above) is increasingly fought internationally, German startups need to be able to offer stock-based compensation that is competitive to packages in the U.S. or the U.K. to attract the best employees.

German startups feel international competition

Speaking of international competition: 77.1% of all startups surveyed are internationally active, and 48.6% of the startups surveyed stated that their sector is internationally highly competitive, while only 16.2% do not see themselves in intense international competition.

We believe that this sense of international competitive pressure amongst German startups is a positive sign: Instead of remaining in a national niche, German startups address large, global markets, which are by definition characterized by a high level of competition. But as we can see from an increasing number of German startups which turned into international market leaders — like Delivery Hero, Zalando, Flixbus, GetYourGuide or Auto1, to just name a few — German companies can emerge as winners in these highly competitive markets.

Conclusion and outlook

Overall, we believe that our new startup climate indicator shows an accurate picture of the environment that German startups are currently facing: A favourable financing environment together with a less favourable regulatory environment, and an intense level of competition for talent and for customers, in which German startups nevertheless can be successful. It will be interesting to see how the founders’ perception of these dimensions will develop over time. Moreover, future editions of the indicator can reveal insights into the perceived effectiveness of potential regulatory incentives or roadblocks for German startups. Altogether, the results of the first edition are a great point of departure for future inquiries. We will have the second round of results by the summer and are already curious to see first indications of developments in the scene.

If you are a founder or member of a German startup’s C-level management team, we cordially invite you to participate in the second round of surveying, which we are currently conducting.

Click here to participate or find more information on the indicator on hvventures.com.