Saturday, January 22, 2005

A VC in Germany -- Observations, Comment and Opinion

Where are we ?

a quick recap

  • Venture capital in Germany began with such a burst of energy and enthusiasm somewhere around the end of 1996 and the beginning 1997. Perhaps March, 1997, was the pivotal date -- that is when the Neuer Markt (remember that?) launched. Venture-backed German-based technology start-ups had a hot IPO exit channel right at home. The Neuer Markt gave focus and momentum to a new Silicon Valley-style of venture investing. Yes, there were VC's and VC funds prior to the Neuer Markt, but it was a different game.

  • So we had a gold rush from 1997 through, when was it?, perhaps mid-2000. People poured out of consulting firms, accounting firms, law firms and major companies such as SAP and Siemens, and poured into venture funds and start-ups. I was then a lawyer at Arthur Andersen and took on a project to form a venture fund for a group of entrepreneurs sellings goods and services to start-ups in Germany's extensive network of technology centers. Before I could complete and circulate the first of the fund documents the entire team had quit and joined an Internet start-up (indeed, one of Germany's first Internet portals -- now long since bankrupt). It was typical of the times.

  • The nuclear winter set in sometime in the course of 2000 and laid waste to the German venture scene. The story does not need to be repeated. But think a moment how the landscape has changed: the Neuer Markt is long gone, almost every major German company has pulled out, or at least back, from their venture capital programs (selling their portfolios off at fire-sale prices), the proud governmental supporters of new venture, the TBG and the KfW, are no longer important factors, the German tax scene has changed for the worse (causing Germany to earn placement at the bottom of the list of VC-friendly European jurisdictions) and countless VC funds have disappeared.

and now?

  • Somewhere out there in the German universities, the Max Planck Institutes, the Fraunhofer Institutes, in the ashes of crashed start-ups, and, indeed, in the virtual garages of ganz Deutschland the fires of innovation may still be burning, but they burn weakly and cast dim shadows.

  • In the cheerless employee offices of Siemens and SAP the faint hearts of German code writers and engineers beat quietly and loyally, and no one any longer stays up all night writing business plans. Better not even to talk about such things on the job. At McKinsey, KPMG and Haarmann, the traffic is inbound only.

  • The once-vital Venture Capital Forum NRW, which I formed with group of friends in Duesseldorf in 1997 to serve as a catalyst and networking-platform for the exploding venture capital community, has just this month changed its name to the "Private Equity Forum," whatever that may mean. What it does not mean is "excitement" or "passion." It might as well now be called the "Consultants, Lawyers and Accountants Forum." No one without a necktie admitted.

  • Wellington Partners is one of Germany's best and most respected VCs, with savvy leadership from Rolf Christof Dienst, and a team of some of the best young VCs in all of Europe in Frank Boehnke, Bart Markus and Joerg Ueberla. Wellington reached a long-awaited first closing of its third fund just prior to Christmas -- at EUR 85 million. Enough said.

  • Cipio Partner is perhaps the most vibrant and exciting new fund in the German VC scene. Based in London and Munich, it was founded by three well-qualified guys from Atlas Ventures, Broadview and b-business partners. With the help of a deep pocket investor, Cipio has rapidly acquired a portfolio of 55 companies by buying secondaries from, among others, Infineon, Daimler Chrysler and Deutsche Telekom. Now they are staffing up and hiring some of the best and the brightest from the German VC community. Congratulations to them. But what does this say about the German VC scene, when the hottest action lies in working over the desolate portfolios of terminated corporate VC arms? The investment managers in this game must acquire a new skill set: bankruptcy law, employment contract termination, and venture triage. They must become experts in closing companies rather than starting them. Instead of start-ups, this is about finish-ups. We are at the beginning of this new era, and it bears watching.

In this blog, which will continue, I want to try to make sense of what is happening today in the German VC scene, and I hope to provoke comment from others who are out there trying to survive and make good things happen.


Anonymous said...

Keep writing about German VC. Some of us are interested in your view. It is picking up. Dr Neuhaus, TVM Life Science and a couple of others are investing (and raising new money).

Anonymous said...

A few comments here. What we now see is the result of risk-averse thinking, or shall we call it de-risking, driven by the desire to strike it rich fast locally, rather than original innovation leading to world-wide leadership. The quick flip rules, same reason why Cipio is picking up the rubble in the secondary market (where is misery, there is opportunity, like in sub-prime mortgages in the US). On the entrepreneurial side, the thinking may be in part driven by an uncertain business and political environment in a country that at any time may force its residents, for instance, to give up private health insurance for the common good (view it as a fund of sorts for a moment), in a process that resembles the Sowjet-era disappropriation of assets in the former East Germany (this is called Gesundheitsreform). Who knows what is next, may be a special tax for emigration (not immigration) imposed by Germany some day.

This is disappointing, since the country itself has a history of real innovators in their respective fields. In the Web space, there is a culture of copy/paste innovation, kick-started by the infamous brothers that founded

So, chances are, you will unlikely encounter an equivalent of a Google success story in Germany, both from a valuation perspective (current market cap of $207B recently surpassed Pfizer’s), as well as performance (26% profit margin @roughly $1M rev/employee). Or facebook @ a $15B valuation. That leads to fund performance. Yes, people are investing, but sadly, hype and arrogance (fueled by management fee) is often disproportional to the return of the fund, which even in the U.S., can be disappointing at times in the cycle.

Shiny offices are important in Germany, but they are a burden on the bottom line. Enough said. You won’t find a now-billionaire Google seed investor, showing up in Jeans, T-Shirt and Birkenstocks that sits down with you in a local coffee shop and tells you how a venture is done (“..when we started soandso, we had no clue…”). Where was the real passion for innovation and technology left on the way?

But wait, things are changing…. Zurueck zur Weltsptze! Titles like this should make one think twice….
In science maybe. But the real buck will be made elsewhere (see the 4TB PC drive story ).

Yes, the top scientists are coming back from America, attracted by heavily government-subsidized, brand-new (why?) research facilities with glass corner offices in the middle of town. Even a secretary gets one. Overspending, overspending (leading to ever-increasing tax burdens). Nevertheless, the party seems to be in fully swing and the Wirtschaft is booming. So what’s wrong in this picture?

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