Generation Change in the German Venture Capital Landscape

There are some new kids on the block…

We have seen some material changes in the German Venture Capital landscape in the past few years and a serious discussion has emerged about the so called “Next Generation Venture Capitalist.”

Before I became a partner at Capnamic Ventures, a German Next Generation VC based in Berlin and Cologne, I was a co-owner and partner at a First Generation VC for almost 9 years. Before that, I was venture backed by some First Gen VCs (1999–2007). I have been asked to participate in a podcast discussion about “The Next Generation of Venture Capitalist in Germany” powered by Joel Kaczmarek (chief editor of Digital Kompakt). Based on my experiences and motivated by the podcast discussion I have taken the opportunity to evaluate this matter.

As an entrepreneur I had some very good experiences with VC and (let me be f*** honest) some terrible experiences too. 13 years later, my former co-founders and I are still laughing and shaking our heads when we meet and relive our old war stories. When I moved over to the other side of the table in 2007, and became a VC, I promised myself that I would act, behave and work in the way I wanted VCs to when I was an entrepreneur.

First Generation does not necessarily mean old or slow

First of all let me make clear that there is no negative assessment or value judgement in the two terms “First Generation VC” and “Next Generation VC.” Just as an example — If we take a look into the US Venture Capital landscape, we will recognize that the majority of the best performing and well known VC firms are older firms (e.g. Sequoia founded 1972, Kleiner Perkins founded 1972, Greylock Partners founded 1965).

The first movers deserve great respect

The German VC industry is much younger, everything started in the late ’80s or early ’90s. People like Rolf-Christof Dienst, Frank Böhnke, Falk Strachek, Gerhard Köhler were part of this initial generation establishing VC funds, and some still play a vital part of the VC industry in Germany today. You can see their influence in German VC firms such as Technologie Holding, TVM and Wellington, all of which were the nucleus of the entire German VC industry. Unfortunately most of these VC firms are not active anymore.

Distinguish First from Next

First Generation VC Firms
Established in the late ’90s (some even before)
Selected firms: Creathor, Earlybird, Neuhaus, Target Partners, TVM, Wellington Partners

Next Generation VC Firms
Established after 2010
Selected firms: Blueyard, Capnamic Ventures, Cherry Ventures, Paua Ventures, Point9

The German VC landscape is changing

  • New VC firms are able to raise new funds (e.g. Blueyard, Capnamic Ventures, Cherry Ventures, Paua Ventures, Point9).
  • New VC firms have much more entrepreneurial experience in their teams. This is why we see many more investment managers and partners with entrepreneurial backgrounds in Next Gen VC firms compared to the First Gen VC firms.
  • New VC firms are able to raise money not only from institutional investors, but from corporate investors as well. It seems the “Old Economy” of Germany started to understand that innovation is important and that they won’t find real innovation inside their sometimes slower moving organization. More and more corporations are investing in VC funds. We hope that German corporations will become an additional exit channel in the future. Today, however, the majority of tech startups are getting acquired by international buyers.
  • Most of the new VCs have a clear value proposition, positioning and a clear investment strategy (B2C, B2B, tech focused, execution case focused).
  • Some “old” VC firms are not active anymore and have stopped investing because their team fell apart and/or they are not able to raise new funds.
  • Succession is a big challenge for the First VC generation. Most of them are not able to execute that generational shift. The consequence …. see the bullet point above…

Build, behave and change to last

If we compare the US and the German Venture Capital Industry, one important question will emerge:

Why doesn’t Germany have legacy VC firms who successfully managed a generation change?

A VC firm is a living organism. VCs are a vital part of the entire startup ecosystem. That means they have to adapt and change in order to be successful participants in this exciting space that is the startup economy. This adaption is closely tied to the culture, spirit, and the ability to change with the times. Factors like interaction between founders and investors, efficiency and the competence to work in syndicates with other VCs are also key.

Today founders and their supporting networks are way better informed, and much more well connected than in the late ’90s. They want a real partner who will work with them on equal ground, and who is working his ass off to support his portfolio companies. They do not want to pitch and discuss with a potential investor who is just sitting in an ivory tower, looking to get a good deal. After the investment, it is not enough for a VC to join in on a board meeting every quarter, or to ask for monthly reporting. What founders want and need is a partner who is just as excited as they are about the entire business.

I believe that the real power of a VC comes from its network, experience, credibility and the combined brainpower of all active investment professionals. That’s why I hope that we will see legacy VC firms successfully manage their succession and generation shift. If the First Gen VCs won’t make it — I am sure the Next Gen VCs will be smart and flexible enough to adapt themselves in the future.

Nevertheless we will see an even stronger network of new kids on the block (Next Gen VCs) because there is an increasing demand for VC in the growing German startup ecosystem.

Podcast with Joel Kaczmarek, Filip Dames, Christian Leybold and Olaf Jacobi

https://soundcloud.com/dkompakt/next-generation-vc-podcast