Encourage financial support for startups, potential tax losses notwithstanding

Encourage financial support for startups, potential tax losses notwithstanding

Venture Capital (VC) plays a pivotal role in shaping ideas from the drawing board to market readiness, particularly in sectors like climate technology, biotech, artificial intelligence, and more. These fields are crucial to Germany's future competitiveness. Despite this, Germany's VC landscape is not as open and dynamic as it needs to be.

The Looming Venture Capital Deficit in Germany

According to recent studies, merely 20-25% of European VC investments flow into Germany compared to countries such as the USA. This poses significant challenges for German startups when scaling, leading to what experts call the “scaling trap” – resulting in undercapitalized startups that struggle to compete internationally in the long run. German investors tend to be more conservative than their counterparts in the US, which contributes to this issue.

The Scary Spiral of Risk Capitals and the Scaling Trap

Reduced risk investments mean less funding for potentially highly profitable startups, especially in later stages after the seed round. This cycle sets off a chain reaction – a clear decline in risk capital investments has been observed in Germany over the years. In 2023, German startups raised six billion euros, marking a 39% decrease from the previous year and highlighting the investment gap. As few "unicorns" emerge from Germany, the ecosystem struggles to attract significant capital providers.

A Step Beyond State Money: Unlocking Germany's Potential

In the coalition agreement, the emphasis is on state funds to boost innovations, particularly supporting young companies and startups to make Germany a hub for key technologies like AI and microelectronics. However, relying solely on more "state money" is not the answer to the scaling trap.

The Dangers of Hidden Subsidies and a Planned Economy

The idea of the state distributing tax money like a watering can and directing spending towards specific industries or technology fields can result in hidden subsidies and the precursor to a planned economy. The future is not always predictable, and it is hard to decide whether biotech or AI should be funded when everything is essential for our future.

Three Primary Guidelines for Meaningful State Investments

State investments should be strategic and transparent, keeping competition fair and private investors engaged. Here are three criteria for meaningful state investments:

• Innovation Level: The project should have the potential for groundbreaking technological advances and the ability to open up new markets or change existing ones.
• Economic Benefit: The long-term growth and scaling potential of the company should be substantial, and the project should create significant new job opportunities.
• Sustainability and Societal Benefit: The project should help address environmental concerns such as CO2 emissions and improve societal well-being.

Time for a Change: Mobilizing Private Investment

To address the venture capital deficit in Germany, the government can take measures to improve the framework for private investment across all sectors and industries:

• Tax Incentives: Offer targeted tax incentives, such as improved depreciation options, to encourage private investors to invest in promising sectors.
• Matching Funds: Create programs or supplement existing VC funds where the state matches every euro brought in by private investors, strengthening trust and multiplying private capital engagement.
• Risk Minimization: Reduce risks for private actors through state guarantees or insurance, making it easier for private investors to invest.

However, it is crucial to remember: Venture capital means risk. The risk is that the money could be lost. While the state should invest, it must be more strategic and intelligent about doing so. A combination of incentives and support sends a strong signal to the market and founders, making Germany an attractive location for innovations and technologies.

Carsten Puschmann is an investor, serial entrepreneur, and innovator who specializes in investing alongside family offices in promising startups. As the founder of a venture builder and two private investment clubs, he offers investors a wide range of high-caliber investment opportunities. Carsten supports startups in the pre-seed and seed phase in securing risk capital and optimizing business models. Business Punk magazine ranked him among the 100 most innovative minds in the German digital economy in 2024.

Enrichment Insights: Germany Venture Capital Landscape

To enhance the venture capital landscape in Germany, policymakers can implement several strategies:

1. Policy Reforms: Introduce policies to encourage VC investment by providing tax incentives for VC firms and investors, as well as streamlining regulatory processes for startups.
2. Public-Private Partnerships: Foster collaborations between government agencies, universities, and private investors to create a supportive ecosystem for startups.
3. Investment in Early-Stage Ventures: Encourage VC firms to invest in early-stage startups by providing guarantees or co-investment opportunities with government-backed funds, helping bridge the gap between seed and growth stages.
4. Diversification of Funding Sources: Attract foreign investors and promote alternative funding models like impact investing, particularly beneficial for climate technology and biotech sectors.
5. Sector Hubs: Establish and strengthen sector-specific hubs in cities like Munich, Berlin, and Hamburg, similar to how Geneva is a hub for life sciences, attracting talent, investors, and companies focused on AI, biotech, and climate technology.
6. Research and Development: Encourage collaboration between academia and industry, translating research into scalable businesses, particularly in areas like AI and biotech.
7. Market Access Programs: Implement programs that help startups access larger markets, both domestically and internationally through trade missions, networking events, and partnerships with established companies.
8. Scaling Support: Offer resources and mentorship specifically for helping startups scale, such as training programs focused on growth strategy and operational efficiency.
9. Talent Attraction: Develop policies to attract and retain top talent from around the world, such as streamlined visa processes and competitive salaries.
10. Education and Training: Enhance educational programs in fields like AI, biotech, and climate technology to ensure a continuous supply of skilled workers.

• "What about exploring the potential of artificial-intelligence in finance, investing, and technology sectors for Germany's startups? Could this offer a strategic avenue to fill the venture capital deficit?"
• "In the quest to attract more private investment in Germany, could offering artificial-intelligence-based tools to help startups make informed decisions, identify growth opportunities, and monitor market trends be a useful addition to current incentives?"

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