Author: Dr. Tanja Emmerling, High-Tech Gründerfonds
Indian startups seeking to expand to and set up a business entity in Germany can turn to a variety of sources when seeking investments. Selecting the right type of expansion financing is largely a matter of matching your needs to the restrictions of the source. Each type of financing has its own strengths and limitations. This chapter provides an introduction to the German financing landscape and the particularities when coming from India.
1. Venture Capital
Market Snap shot
The Indian Start-up market and its VC ecosystem are maturing as a result of showing exit records with almost doubling exits in 2018 compared to 2017 and a reasonable outlook that there are more exits to come. Therefore, more and more bigger funds are participating in the market and also Corporate Venture Capital firms are increasing their local presence. In addition, as India is taking over the Asian growth leadership, it becomes an interesting market to scale.
In the DACH region, many new and follow-on funds have been raised in 2017and 2018. By the end of 2017, Europe saw a new high in Venture Capital investments reaching almost €17 bn. And in 2018 Investments in Europe were increasing further, even though the growth was not as strong as the previous year. Looking at Germany with a regional focus, a, Berlin was the region were the majority of the VC money was invested, right after London. As a trend, growing deal sizes were notablewhile deal count trended downward. With Auto1 Berlin reached the highest investment size of 460 m € of Softbank . This deal showcases also that the largerdeals were usually facilitated by the participation of foreign investors. Therefore, the DACH is now home of internationally known companies like Auto1, Check24, Flixbus or Biontech. As a consequence, more accelerators and serial entrepreneurs educate the next generation of start-up founders.
At which stage are German VCs most active?
More than 50% of the transactions take place in the first round. While the amount of money increases from phase to phase, the amount of transactions per phase decrease as only the minority of companies reach later stages.
What are the cultural differences between German?
German VCs are very interested in understanding the company, the technology and the underlying business model thoroughly and completely. This may be an advantage for start-ups with complex and innovative products. Therefore, well structured KPI data, comprehensible documents as well as clean financials are required.
Which factors are particularly important for German VCs in an investment?
German VCs concentrate on hard facts and data: financials, team, technology, IP, strategy and execution. It is important to show what you already reached and that your unit economics to perform according to your business case.
Which are the relevant points that should be included in a pitch to an investor?
The basic structure of a pitch is the same for every VC. Topics that have to be addressed are: problem, solution, product or proof of concept (PoC), market, business model, USP, competition, team and financials. German VCs do prefer data, facts and figures over great storytelling and presentation skills of the founder.
Is there something like a general timeframe of an investment decision?
The time required for fundraising depends very often on how prepared the company is for starting a due diligence process and the stage of the company. For follow-on investments start-ups should start fundraising at least 6-9 months before the planned financing round. Even though investors claim to make decisions fast, identifying the right partner and completing a due diligence process takes its time. With few complications and cooperative behaviour of the founders, the due diligence can be finished much faster, or it can take much longer if problems occur, for instance if relevant data is not well available or unstructured. Good preparation on the entrepreneurs’ side is therefore crucial for the duration of the project. Every VC is looking forward to a fast and smooth DD, which of course also saves the start-up time and money.
2. Business Angels
How popular is the “business angel culture” in Germany compared to Israel?
After fiends, family and fools, Business Angels represent a very important financing source in early stages. Over 30% of German start-ups report to have accepted Angel investments. Thus Business Angels are a very important factor in the venture capital ecosystem.
How is the tendency of German business angels to invest in foreign companies?
In general, business angels want to bring brain and experience to the table. In the early stages of the company, they like to contribute actively to the success of the start-up or even take a board seat. Therefore, they prefer investments in geographic proximity to their residence or place of work, sometimes even inside of Germany.
At what stage are German business angels most active?
Business angels prefer to invest in the pre-seed and seed-stage of start-ups as there is less investment necessary than in later rounds. Usually, business angels are not able to invest the same amount as a VC can and therefore cannot participate in later financing rounds. Furthermore, business angels are most effective in early rounds as they can help setting up the basis of the company with their expertise and advisory work.
How can you find the right business angel? Are there platforms to connect?
In the vast majority of cases, contacts are made through existing networks and contacts between the founder and the angel. In addition, there are business angel networks (e.g. BAND, the Business angel network Germany) which are being used to connect both parties. Further possibilities to connect and find a suitable angel are all kinds of start-up specific events like pitch days, business plan competitions and business incubators.
What factors are particularly important for German angels to make an investment?
The most common reasons for non-participation are the sought investment amount and valuation of the company, personal differences, low growth potential, business model and the existing ownership structure. The personal level plays a major role in their investment decision as they can only invest a certain amount. Nevertheless, most business angels do have a sweet spot that is often connected to their professionel expertise.
3. Corporate Venture Capital
How strong/weak is he CVC market in Germany?
The past two years have shown a significant growth in CVC Investments. This is understandable as many corporate investments go beyond immediate financial gain and are often more reflective of the need for corporations to innovate and expose themselves to disruptive start-ups in their industry. Along side with CVC, many Corporate opened
What are the strongest players?
Most active CVCs included German CVCs such as Bertelsmann Digital Media Investments, Siemens Venture Capital, Tengelmann Ventures, Robert Bosch Venture Capital or Vorwerk Direct Selling Ventures. But also Boehringer Ingelheim Venture Fund or Merck Global Health Innovation Fund are worth to be mentioned.
Do CVCs promote external companies or rather spin-off projects?
CVC mainly supports external companies, as there are usually other budgets from the balance sheet reserved for spin-off projects.
How established is crowdfunding in Germany and what are the most prominent platforms?
Crowdfunding is perceived as a legit alternative to traditional venture capital. Thorugh, it is mainly used for reward based campaigns for pre-financing of production. In this space, the most prominent platforms are Seedmatch, Companisto, indieggogo and kickstarter.
5. How relevant are ICOs for financing?
In Germany, the first ICOs were limited to blockchain based projects and utility tokens which means tokens that were tecnically required for the product use. But the market has quickly widened from pure utility tokens to other form such as seurity tokens. Nevertheless, in Germany there are no specific regulations for ICOs yet but authorities expect IC