The French and German Startup Ecosystems 🥐🥨
If you are looking for some insights about Croissants and Bretzels, the difference between Macron and Angie or an opinion about Bordeaux vs. Riesling — this is not the right blogpost for you. However, if you are into tech and startups then Bienvenue and Willkommen. 😃
Germany and France have a lot of history together, are important partners when it comes to politics and economics, and actually share a close friendship. In terms of venture funding, Germany and France are also the 2nd and 3rd biggest countries in Europe after the UK, which makes them super attractive for emerging founders and VCs.
In this article we will talk about similarities and differences that we observed: the geographical distribution, the fundraising processes (how to get a TS, what to expect, how to deal with investors), and the role of universities. At the end we will also briefly explain why it makes sense for french founders to work with german VCs and vice versa.
- Germany’s startup distribution is more decentralized than France
France and Germany could not be more different when it comes to the geographical distribution of startups.
France has a centralized system with 54.1% of the startups located in Paris. Berlin also has the highest percentage of startups in Germany (17.7%) but way less than Paris.
Why is this? French politics and economics are centered around Paris whereas Germany has a federal state system with strong industrial and economical regions like the South and Western regions. But universities also play a role: only ~10% of german universities are in Berlin, whereas ~35% of french unis are located in Paris.
However, both countries show a clear trend: more startups are created outside of the capitals and can be found in Dresden or Lille for example (see map below).
Some strong french startup cities to watch out for:
- Rennes is strong in cybersecurity and IoT
- Lille is a hub for digital health
- Lyon is known for pharma
On the other side of the border:
- Munich is strong in mobility and insurtech
- Hamburg is known for logistics
- Karlsruhe is an important hub for AI
2.VC money deployed in France is increasing at high pace
Let’s have a look at some numbers first: total venture capital money deployed in France and Germany was pretty similar in 2020. However, the difference compared to 2019 is much more significant in France. French VC money deployed increased by 25% from 2019 to 2020, in Germany it was (only) 11%. La France is booming! 🚀
We also looked at the differences in funding amount for each round, from pre-seed to series B (average of the last 2 years) and realised a few things: On the pre-seed level France shows slightly higher amounts (400k vs 380k) but Germany is leading the later rounds from seed to series B.
Why is this? The German startup and VC landscape is more mature and there have been more and hence also larger rounds in the later stages. This might change soon, we can already see that VC money deployed in France is increasing and in a few years we will see more later stage funding, IPOs, exits, and unicorns in France. French founders, we are watching you 👀
Securing the Bag — Getting through the fundraising process!
The good news is that the fundraising processes are quite similar and easy to follow in both ecosystems. Especially since the pandemic changed the way we interact with each other, most deals are closed via Zoom Calls. (We miss seeing you face to face! 😢).
So we decided to collect a few cross-border hacks that can be useful for both the frenchies and germans out there:
Starting from the first point of contact until a Term Sheet (jippi yeah!) you should expect 3–5 weeks to pass. If you master the whole process, you should expect 1–2 calls to start, followed by either deep-dive calls on the product/commercial topics or a Q&A from the VC as well as a workshop where your core team meets the VC team.
If everything works out, the Investment Committee will send you a Term Sheet, which stands for a couple of days. You did it — if you want! Now the tough decision is to choose an investor if you have options. Our recommendation: Optimize for smart money and not ownership or valuation. 1M from a Top VC can help you much more than 3M from the wrong investor.
The bad news is, while planning your financials and runway you should plan with a 2 months buffer until the money is wired. The time between signing of Term Sheet and Money in the Bank can be long — the more complex the round and the more parties involved, the longer it will take. 1 month is quick, 3 months shouldn’t throw you over.
You should keep in mind that VCs would most likely try to stick to their fund model which would reflect a 10–25% equity ownership in your company in most cases.
How can you accelerate this process? How can you make sure that you won’t lose momentum? Have your Data Room ready with growth figures, customer validation and all relevant data points — and — try to get your references in line. Early stage VCs invest in you as a founder, therefore they want to find out how it is to work with you. We will pick up the phone and call the references provided to hear why you are the best founder to work with.
You, as a founder, should do this too. Ask the VC for references to founders in order to find out how it is to work with the VC. It’s a two way street!
There are certainly a couple of things you should avoid. The obvious red flags like being not honest, low data accuracy and pushing FOMO (eg. Fake Term Sheet etc.) shouldn’t be subject to discussion.
One important thing to have in mind is CapTable Hygiene. Keep your shares together and do not give away too much equity (x < 5%) for temporary help, eg. fundraising advisors or mentors. Everyone in the company with equity should play / have played a crucial role in your company.
While fundraising, you should be in the driver seat, the company is your baby. No one knows the company better than you. This is why you as a founder should always meet the investors at the table. Remember: Seed Investors invest in you as a founder!
3. University structures play an important role in both ecosystems
Some of the differences we see between France and Germany root in the different regional university structures.
First, la France. Let’s look at the last biggest fundraising rounds: 52% of the founders came out of the top 5 french universities: one of those is HEC, which built a successful entrepreneurial program in the last years. However, there are also new types of schools such as Ecole 42 and HETIC that are becoming relevant for the startup ecosystem: their graduates are developers and techies, which nicely complements the talent pool graduating from the traditional business schools.
A lot of french graduates don’t want prestigious corporate jobs anymore: a recent study showed that more than 25% of the HEC Paris alumni want to start their own business. VCs and investors are aware of this and are doubling down on those schools — they kicked-off scouting programs and even started dedicated funds for universities (e.g., the Paris Saclay funds). Around €400m were raised for HEC startups in the last 4 years. Coming back to our capital centered landscape from before, HEC is located in Paris and a lot of founders stay there…
Now looking across the border. Germany has a much more fragmented university structure with schools spread across the country. Here, the top 5 unis only generated ~13% of the founders we saw in 2020.
In Germany we see a similar shift from business to tech universities as in France: most graduates that founded startups 10–15 years ago came from business unis like the WHU. Some still do but more founders now come from tech universities all across Germany. The one with the highest number of founders is the Technical University in Munich. One of their key success factors was the development of the Center for Digital Technology and Management (CDTM), which brings out a bunch of high potential founders every year.
You made it to the end, thanks for reading! Before you go, one thing you should remember from this article: France and Germany are strong startup ecosystems and should use their friendship, strong economic ties, and the fact that they are neighbours to create more synergies for their startups. French startups that are expanding to Germany should work together with German VCs (and vice versa): local VCs know the local industries and have contacts to the “old economy”/corporates (super critical for B2B startups). They can open a lot of doors, reduce sales cycles, and increase your customer base. On top of that, local VCs can help you recruit local talent, access incubation programs, overcome language barriers or even find the right office space.
Thanks for reading, Auf Wiedersehen et À bientôt!
If you are thinking about raising a round and are looking for a VC then ping us at charlotte@pauaventures.com, maximilian.wilhelm@speedinvest.com, shiraz.mahfoudhi@speedinvest.com, victor@alven.co.
Also, if you want to listen to our panel discussion then check out our youtube video: https://www.speedinvest.com/blog/germany-and-france-a-tale-of-two-startup-ecosystems
