Germany: Public venture funds providing the seeds of growth

The absence of investments by privately-backed investors is likely due to poor rates of return which have often dropped below zero. The risks associated with early-stage investment are high and the prospects of making significant returns are low, and cannot completely compensate for this growing level of risk. Although government-backed funds, such as High-Tech Gründerfonds, can help compensate for a lack of seed funding investments from the private sector, they also need private investors to contribute in co-investments.

Michael Brandkamp from High-Tech Gruenderfonds estimates the failure rate for companies in the seed funding stage is around 30%. Some private investors say they have experienced even larger failure rates than this. Wellington Partners says that only half of the seed stage companies make it through to series-A funding.

Due to the high failure rate, Venture Capital companies like Wellington are looking for start-ups with a very high exit potential, which are extremely disruptive and have at least one entrepreneur to build an effective team around.

Despite the difficulties in getting private money to invest in start-up businesses, Brandkamp believes there are reasons to be positive. He is convinced that a majority of now emerging start-ups will have good chances to succeed. "The upcoming start-ups will be supported by positive developments regarding the economic situation in Germany, which is a good environment for successful development right now."

Furthermore, despite the lack of private players in seed sector, it is providing the support companies need to reach the next stage and attract private investment. As Brandkamp states: "about 70% of follow-on finance rounds after the seed funding stage are backed by private investors such as venture capital firms, business angels and corporates." While seed stage funding is dominated by government-backed investors, this initial funding gives confidence to private investors to follow up in later stages.

For example, in 2010 High-Tech Gruenderfonds portfolio companies were able to raise €97m in follow-up finance rounds of which almost half were provided from German venture capital companies, while the other half comes from foreign venture capital funds such as France, UK, Benelux as well as Switzerland.

Short-termism means that many seed-stage companies will struggle to find backing from private venture capital funds. But, the mix of government-backed funds and dedicated players in the market should provide these firm's with the capital they need to reach the next level of development.

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• Topics
• UK / Ireland
• Southern Europe
• DACH
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• Early-stage
• seed