GISEP | Financing for Startups
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Financing for Startups

Author: Chiara Sommer, High-Tech Gründerfonds

 

Israeli 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 in comparison to the financing opportunities in Israel. For elaborations on public funding, please see the respective chapter.

 

1.       Venture Capital

 

How strong/weak is the German VC market compared to Israeli VCs?

Compared to Israel, Germany has a higher total amount of deals and funding through venture capital. German funding reached $ 2.9bn in 272 deals, compared to $ 2.6bn and 211 deals in Israel, both in 2015. More information can be found in the global venture capital trends report by EY.

 

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 and Israeli VCs?

Israeli VCs are clearly oriented towards internationalization as the domestic market is very small. Culturally, Israel’s start-up industry resembles more the US market than the German one. This is particularly reflected by the share of venture capital activity in the GDP of Israel. In comparison, German VCs are less interested in internationalization as the German target market is huge and expansion into the DACH region can be done cost-efficiently.

 

German VCs tend to be more conservative and risk conscious. 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, detailed and comprehensible documents as well as financial plans have to be prepared.

 

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. Numbers are more important than emotions. In America and Israel the vision of the founder, as well as his enthusiasm are of higher value than in Germany.

 

Are there differences between pitches in front of a German or an Israeli VC?

The basic structure of a pitch is the same for every VC. Topics that have to be addressed are the 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? If so, does it differ from that in Israel?

A general recommendation is to start fundraising at least 6 months before the planned financing round. The due diligence-process that leads to an investment decision usually takes 2-3 months in order to cover all relevant aspects. 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 data has to be searched for extensively. 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?

With 24%, business angels account for the largest share of investors after private VCs in Germany, and are thus a very important factor in the venture capital ecosystem. The culture is particularly widespread among university professors and successful founders and entrepreneurs.

 

How is the tendency of German business angels to invest in foreign companies?

In general, business angels like to contribute actively to the success of the start-up, in the early stages of the company. 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. 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 are the cultural differences between German and Israeli angels?

German business angels are investing small sums opportunistically in a relatively large number of companies. They often prefer equity investments over loans.

 

What factors are particularly important for German angels to make an investment?

The most common reasons for non-participation are the sought investment amount, personal differences, low growth potential, business model and the existing ownership structure, in that order. The reason behind is that Business Angels can only invest a certain amount and that the personal level plays a major role in their investment decision. It can be seen in HTGF’s network that many business angels are not solely focused on one industry, but are investing opportunistically. Of course, most business angels nonetheless do have a sweet spot that is often connected to their line of work.

 

3.       Corporate Venture Capital

 

How strong/weak is he CVC market in Germany, compared to Israel?

According to a report by BCG, Germany took first place in Europe with $1,3bn. in the last 5 years in corporate venture capital. Additionally, a trend to more CVC activity in Germany is recognizable. The share of CVC in the venture capital market was 11,9%, according to the Venture Capital Report 2016 by Technology Foundation Berlin.

 

Several large companies announced plans to further increase their venture capital activity, e.g. Deutsche Bahn announced to invest more than €1bn. in start-ups, while BMW iVenture raised a new fund with $530mil. AUM in Silicon Valley. Many big corporations like Evonik, Siemens, Vorwerk, Lufthansa, BASF, SAP and the publishing industry are doing corporate venture capital.

 

What are the strongest players?

The list of the 100 most active CVCs worldwide, published by cbinsights, includes 5 German CVCs:

  • Tengelmann Ventures ranked 26th,
  • Bertelsmann Digital ranked 36th,
  • Boehringer Ingelheim Venture Fund ranked 49th,
  • Robert Bosch Venture Capital ranked No. 51
  • Merck Global Health Innovation Fund ranked 53rd.

 

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.

 

4.       Crowdfunding 

 

How established is crowdfunding in Germany and what are the most prominent platforms?

Crowdfunding is perceived as a legit alternative to traditional venture capital. In the first six months of 2016, entrepreneurs, companies and projects received a total funding of € 67.6 mil., compared to EUR 50.7 million the year before. The most prominent platforms are Seedmatch and Companisto.

HTGF
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