Tuesday, May 17, 2016

Silicon Valley - Where German Entrepreneurs Meet German Investors

Germany continues to be Europe’s economic engine. So far so good. The challenge is that a lot of that growth comes from old established industries. There is no start-up culture to speak of and that does not bode well in the long run. A look at venture capital spending in Germany compared to the United States is telling – and scary.
A lot of VC goes into the sexy industries. Admittedly, what’s sexy today often is a total turn off tomorrow but some of today’s poster children were dismissed as turn offs long before they got sexy. Think Facebook or Google. Putting your money on “sexy” is risky and therein lies the first issue. I was at the Berlin Franchise Forum in May 2016. One of the speakers told us that German VCs only part with their money when they are convinced that there is a 30% rate of success. On the contrary, U.S. VCs simply assume a 95% failure rate. Even more crucially, they don’t expect a huge profit from their investments either. What drives them is to get the next big thing off the ground. On the hunt for the next Google, they are willing to risk a lot of money.
How much they risk is staggering. In 2015, U.S. VC investments reached almost $60 billion. A huge chunk of that money goes to Silicon Valley. In fact, between 2013 and 2015, an annual average 50% of all U.S. VC investment went to the Bay Area. That is quiet impressive for a region with a population that accounts for less than 1% of the U.S. total.
What about Germany, the European economic powerhouse? Less impressive. VC investing is at a frustratingly low level. German VCs invested less than $800 million in 2015. This figure represents 1.3% of total U.S. VC investments and 3% of the money that went into Silicon Valley. And while every German man, child and woman spent about $10 in VC, that rate was $190 for the United States as a whole and a staggering $6,500 for Silicon Valley alone.

Even more frustrating is how little VC investments in Germany changed. While U.S. VC investments almost doubled between 2013 and 2015, from $26 billion to almost $60 billion, German levels stagnated. In 2015, it stood at $780 million, up from just over $700 million in 2013. In 2014, the rate had even dropped by 20% to $650 million.
While not all VC investments go into start-ups they can facilitate the growth of new sectors. Similarly, not all VC investments go into sexy industries and companies but they do facilitate job growth. How long Germany can ride on its old and aging industries is an open question. It will also take a change of the German mind set from the current level of risk aversion all the way to how start-ups can actually get started.
Ironically, German VC has been flowing into Silicon Valley for years. In 2015, for example, conservative stalwart Bertelsmann was part of a VC group that invested $105 million in Udacity, a provider of online vocational training courses. Those $105 million equal 13.5% of all VC investment in German that year. By the way, Udacity’s founder and CEO is Sebastian Thrun, a German computer scientist. It’s scary to think that German entrepreneurs take their talents to Silicon Valley where they meet the VC of German investors.


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