Startups are currently having a hard time getting money in Germany. According to estimates by industry insiders, the market for venture capital, i.e. for financing that is made available to young growth companies, has shrunk by 40 percent compared to the previous year. One company that is resisting this is the Berlin investor 468 Capital, which is backed by experienced investors Ludwig Ensthaler, Alexander Kudlich and Florian Leibert. Both are ex-Rocket Internet managers. Kudlich was CFO of the now mothballed venture capitalist.
468 Capital's portfolio includes the company Aleph Alpha, which specializes in artificial intelligence, and the battery manufacturer Customcells. The company also brought Tonies, the provider of audio boxes for children, public. “We definitely don’t have the problem that we don’t have enough good founders or good topics,” says Kudlich in the “Zero Hour” podcast. “The start-ups are becoming more technically and content-wise, and their quality is increasing from year to year.”
The market for venture capital is considered problematic in Germany, also because the increased interest rates have changed the situation on the markets. Is it getting tighter for startups now?
Ludwig Ensthaler: We are in a market phase in which there is little going on, that is very clear. But one thing is also clear: the right topics continue to be heavily funded. Two stand out: artificial intelligence and everything related to the energy transition, i.e. the electrification of the national economy. These are two big mega topics that are going very well. In addition, a lot of focus is on the companies that really have quality. The Getyourguide holiday experience platform is a good example, but there are others.
Alexander Kudlich: What is striking is that the very early financing rounds are actually still going very well. The sooner, the easier, one might say. That also makes sense: If you invest today in an early phase, i.e. in a pre-seed or seed round, then you have an investment horizon of six to ten years anyway. And most good early-stage investors continue to invest. The later, however, the more volatile it becomes. Where there were the biggest exaggerations in the ratings, there are now the biggest understatements.
It is said that the right ideas still make money. Do these ideas exist in Germany?
Kudlich: We definitely don't have the problem that we don't have enough good founders or good topics. The start-ups are becoming more demanding technically and in terms of content, and their quality is increasing from year to year. We are even seeing that start-up activity is increasing.
Ensthaler: A lot is actually happening. A good example is the AI startup Aleph Alpha, which is also part of our portfolio. They are currently receiving a large round of financing. And rightly so, because they are building great things. In the battery segment you could mention Customcells from Itzehoe. A lot comes out of the research-strong institutes such as the Fraunhofer Institutes. We certainly have no shortage of companies in the right areas.
Do these companies get money in Germany – or will they inevitably look to the USA at some point?
Kudlich: Ten years ago we always talked about a financing gap in the early phases. There has been good progress there. But if you as a company need 40 or 60 million euros from an investor, then things are still pretty thin in Germany. The supply of capital from abroad is larger, although not necessarily reliable. International capital is more volatile.
In the end, does it really matter whether a company is financed in Germany or whether the money comes from elsewhere? Isn't the most important thing a good idea?
Entsthaler: In a perfect world, that's true. But the reality is completely different. Even the venture capitalists from San Francisco used to not even make it to Los Angeles. That's an hour by plane. We're at least nine hours from California, and that creates a lot of breaking points.
How does this manifest itself?
Ensthaler: An excellent example is Biontech, probably the last big deep tech success story from Germany. They didn't find an institutional venture capitalist and were financed by family offices. It would certainly have been easier for them to get capital if they had simply been located somewhere else. There are many examples of this. It will therefore be very crucial to have local growth capital in Germany if we want to have new DAX companies in the technology sector.
Kudlich: It's also the case: If the more mature companies, which are actually less risky, are always financed internationally, then at some point the big successes for German investors will be missing. And we simply need some significant returns to German investors so that venture capital gains reputation as an asset class.
Biontech, the example given here, actually shows that it can be worth taking a risk, even through a family office. And it seems that there is certainly money for such projects. Why is this money not flowing enough into new technologies?
Entsthaler: A lot of development work has already been done, by us but also by others. Now it's time to move on to the next level, and that is the growth area. This is on a scale that can no longer be easily covered by family offices. We need funds that have a volume of one billion euros. But that's where institutional investors come into play.
And do we have them?
Ensthaler: We don't yet have the environment that allows capital to be diverted into these funds. That's the next big building block that's coming up now. If we don't do that, something crucial will be missing. Then you can initiate a lot of great topics, but we won't be able to finance them through to maturity.
Listen in the new episode of “Zero Hour“
- What's the point of taking companies public with so-called Spacs
- Why the DAX no longer reflects the German economy
- What the “next big thing” will be
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