According to the recent study "Venture Capital Fuel: How We Fuel Innovation and Growth," there is a lack of venture capital (VC) in Germany, especially in the growth phase of newly founded companies. This means that the necessary capital is lacking to establish successful companies from innovative business models. The study was published jointly by Roland Berger, the Internet Economy Foundation (IE.F), and the German Private Equity and Venture Capital Association (BVK).
How can barriers to venture capital investment be overcome? — An important question addressed by the current study "Venture Capital Fuel: How We Fuel Innovation and Growth." This is important because, given the international competition among technology locations, this lack of venture capital weakens the innovative power of the European economy and hinders sustainable growth.
“There are several vicious circles that we must break in order to stop a downward spiral of lack of capital and the migration of startups to non-European countries,”
says BVK board spokeswoman Regina Hodits.
“What is crucial are solutions that aim to mobilize more capital from institutional investors for venture capital.”
She is convinced that the willingness of private investors to invest plays a key role in the emergence and growth of global champions.
“It is no coincidence that the five most valuable companies are based in the USA: there is a long tradition of financing young companies with venture capital,”
Hodits continued.
Lack of venture capital weakens growth of innovative industries
Although venture capital investments in Europe have more than tripled to almost €16 billion over the past five years, they still lag significantly behind the US, where venture capital investments totaled almost €64 billion last year.
“Asia is also catching up at a rapid pace,”
says Friedbert Pflüger, Chairman of the IE.F.
"Countries like China are investing immense government resources in tech ecosystems and have managed to close the funding gap with the US within a very short period of time. As a result, China has assumed a global leadership role in key future sectors such as artificial intelligence."
In Germany, the financing gap is particularly worrying in the so-called later stage, because startups at this stage are particularly dependent on capital for growth and their establishment on the market.
“In the US, more than half of the VC investments, at €34 billion, fall into this important phase,”
explains Regina Hodits.
“In Germany, on the other hand, it is less than a third of the already low total venture capital.”
Vicious circles must be broken
The study identifies two mutually reinforcing vicious circles that are the root cause of the capital shortage. The first is the "vicious circle of insufficient capital formation": On the one hand, there are too few large venture capital funds that could be considered as investment opportunities for institutional investors such as pension funds and insurance companies. On the other hand, without the capital of this very investor group, large-scale VC funds can hardly be created.
The second vicious circle concerns companies and their lack of scaling. Because there is too little venture capital in circulation, startups are undercapitalized to continue growing. This leaves them behind compared to international competitors. This creates a lack of flagship companies that would encourage further capital to flow into promising startups.
As a solution to break this vicious circle, the study proposes, among other things, mixed-financed funding models and calls for better legal frameworks to remove bureaucratic obstacles and create new incentives for venture capital investments.
Mobilizing venture capital is crucial for the future
“A vital venture capital landscape is a key factor in the international competition between technology locations,”
explained Klaus Fuest, chief analyst at Roland Berger.
“Whether Germany will continue to compete for the best business location in the future depends crucially on whether we can keep up with the USA and Asia in mobilizing venture capital.”
