German venture: A ghost town?

John Bakie
07 October 2010

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At the very peak of the economic boom in 2007 the German venture market looked set to take off and regain much of the ground it had lost following the dotcom crash, with large sums of capital flowing into the hands of entrepreneurial businesses. However, with the onset of the financial crisis and ensuing recession, the market has become eerily quiet, which could hamper innovation in the future.

Between the dotcom crash and 2007, Germany's venture scene could be fairly described as lacklustre, with just 17 deals recorded by unquote" in both 2005 and 2006. However, the market picked up rapidly as the global economic bubble expanded; it even seemed to have weathered the post-Lehman Brothers shockwaves that characterised much of 2009. But in 2010, venture capital investment in Germany has continued to fall, with just a handful of investors seemingly active in the country.

The market peaked with 99 deals in 2008, worth a combined total of €394m, but continued to perform relatively well through 2009, with 64 investments totalling €153m. But in 2010, the market has continued to contract, with just 24 transactions completed.

Dr Michael Brandkamp of High-Tech Gründerfonds, believes fundraising problems in recent years could be to blame for the sudden stall in activity. "The main problem the German market is facing is a lack of fundraising," he says. "It's been bad because LPs tend to follow the cycle and invest at the top, whereas venture capitalist funds prefer to invest at the bottom of the cycle." With a strong fundraising year in 2007, this led to increased activity in the proceeding years, which is only now tailing off.

The result of this is that very few players are now active in the market. While this has the upshot of providing high quality dealflow and attractive valuations for those still investing, it has reduced opportunities for syndication, and could hamper the market as a whole.

With widespread media reports of startup businesses struggling to raise financing, largely due to a lack of available bank credit, a lack of funding from venture funds could compound problems. As the global economy recovers, businesses need capital to fully take advantage of new opportunities.