Germany, middle class country. The hidden champions and many highly profitable small and medium-sized enterprises – they have made the country what it is: a rich country, the fourth largest industrial nation in the world. But what it will be one day could be different. Because the companies, the start-ups that are supposed to continue to move forward in the future, lack money. A lot of money: two trillion euros by around 2040, says Klaus Hommels. Two trillion?
Hommels, a successful venture capitalist – he was early on with companies like Spotify or Skype – has long been singing the song about a lack of capital. He himself founded the European venture capital fund Lakestar. He recently hired McKinsey consultants to back up his arguments with additional figures.
Between 1950 and 1970, Germany provided its companies with around four percent of the gross national product (GDP) in financing each year. Most of the money came from banks. Companies like Bosch, Daimler and Knorr-Bremse were able to grow in this way. Only: They did it relatively slowly. But today is even more different than it was then. Not only do companies have to get bigger much faster if they want to be successful, their life cycles are also shorter. And above all, it is about tech companies that also have the potential to grow significantly faster than companies that produce something.
Germany is losing ground
But in order for it to get started in the first place, capital is required. Just where should it come from? The ratio of financing to GDP is now only around one percent. Money is still there, but it is used differently than in the USA, for example. Banks and insurance companies are out of venture capital, and pension funds are also out of the picture. The universities in this country are also largely funded by the state, in the USA, on the other hand, in addition to tuition fees, they live primarily from funds that are fed from donations. Harvard University alone has $ 43 billion in assets with which to do business and invest.
As much money flowed into German start-ups in the past year, just under 17.4 billion euros after 5.3 billion euros in 2020, as the consultants from EY have determined. The number of financing rounds also grew strongly – by 56 percent to 1160. This also included more major deals of more than 100 million euros. The priorities are still Berlin (10.5 billion in venture capital) and Bavaria (4.4 billion). If one follows Hommels’ argument, however, a good five times more money would have to flow in to ensure the country’s competitiveness. According to McKinsey and Lakestar estimates, Germany would need around 12,000 growth companies and 150 superstars, i.e. particularly successful start-ups, in order to remain competitive. In order to manage this financially, around 80 to 100 billion euros in investments would be necessary per year, which would also create more than four million jobs.
According to figures from Capital IQ, a Standard & Poor’s subsidiary, Germany is losing ground in many areas of the economy and is becoming more and more dependent on the USA and China. Take the chemical industry, for example: Germany’s share of the world’s top 30 companies slipped from 14 percent in 2000 to six percent (2021). In 2021, none of the energy suppliers worldwide will be among the top ten, in 2000 there were at least two. A bank is also no longer in the top ten. Even in the automotive industry, the share fell from 18 to 15 percent. And the three employers who find tech talent in Germany the most attractive are: Google, Microsoft and IBM. As far as the digital infrastructure alone is concerned, Germany now has a trade deficit of around 30 billion euros annually.
“When I did Spotify, they were illegal.”
Hommels’ conclusion: “We need funds, otherwise we will depend on the US for financing,” he says, “they can put 300 million into something.” In this country, however, many companies starved to death on their outstretched arms, also because they lacked the courage to support up-and-coming companies. “When I did Spotify, they were illegal, they didn’t have any contracts with the record companies. And Skype didn’t have a business model.”
In order to raise the money, Hommels sees the state above all having a duty. With deregulation, he must create the possibility of promoting innovation. Hommels thinks it is smarter that the pension fund, for example, works more like the US pension fund. Insurance companies should also be given opportunities to provide venture capital. Because what is not generated in this way has to be achieved afterwards in terms of social benefits.
But isn’t it risky to invest a lot of money in start-ups? Investor Hommels often hears this question. “We Germans don’t get along very well with a company going bankrupt,” he says. But if a fund is big enough, “you can’t lose money,” he says with conviction. “That balances out across the portfolio.”
How big can a company get?
Having a knack for promising start-ups is not a bad thing. What does someone like him pay attention to? “The standards are: How big can a company get and what kind of money do you need for it.” The most important thing for the investor is the founders, their enthusiasm and their ability to inspire others, as well as a good idea, of course.
In order for more money to flow into innovation, Hommels is calling not only for regulatory changes, but also for providing more information about growth financing and lowering the hurdles for investments so that non-millionaires can also participate. What gives him hope: Germany has always been good at building industries through steering taxes. It is not about subsidies, but about start-up funding.
And finally, Hommels also sees the younger generation as being more willing and more competent to establish themselves. The start-ups of the past often lacked business know-how. That is different today, also because the universities have recognized, for example, that spin-offs and start-ups are important and support them accordingly. The success of online trading platforms also shows that younger people are less reluctant to invest money.