Aileen Lee is an exceptional figure in the venture capital world. The US-American has held important positions in the field for over 20 years, formerly at VC giant Kleiner Perkins, an early Google and Twitter investor, and since 2012 at her own fund, Cowboy Ventures. Such a successful career is remarkable for a woman in the boys' club of the VC world. However, Lee's most enduring success is probably the coining of a term: Unicorn. Unicorns are start-ups that are worth at least one billion US dollars or euros. In 2013, when Aileen Lee first spoke of unicorns, there were 39 such companies worldwide. They were rare, just like horned horses.

Today, unicorns are no longer so rare. The business analytics platform CB Insights now counts 842 start-ups with a valuation of at least one billion US dollars worldwide, and the trend is rising. Germany, long not a major start-up nation, is also enjoying an increasing number of highly successful young companies. This year alone, there have been success stories almost on a weekly basis. So all is well in Germany as a start-up location?

Not quite. It is true that many founders today have no problem getting money to get their ideas off the ground; in the scene, this is referred to as the seed phase. But as soon as it comes to boosting their own growth and, for example, turning a prototype into a series, many founders in this country face a problem. "On average, a US company receives ten million euros more venture capital in this phase than a German one," complains Ulrike Hinrichs. She is a managing board member of the German Private Equity and Venture Capital Association (BVK), the industry association for the venture capital and private equity sector. "Nine out of ten large financing rounds in Germany, for example, require the capital strength of foreign investors," she explains.

Hinrichs describes what has become notorious as the venture capital gap. At the latest when it comes to the really large sums, financing rounds in the three-digit million range, the flow of money often dries up in this country. Then investors from abroad step in. Just a few examples from this year:

- In September, the e-commerce start-up Berlin Brands Group received 700 million US dollars, all from Boston-based investor Bain Capital.

- The content management platform Contentful raised 175 million US dollars in July, mainly from Tiger Global in New York.

- The solar plant rental company Enpal received the money that turned it into a unicorn in October from Japanese investor Softbank.

- Fintech Mambu received 110 million euros this year. The capital came mainly from TCV (USA), Tiger Global and Arena Holdings (also USA).

This list could go on and on. Of course, German investors are sometimes involved with small sums, but it is clear that without US, Japanese or Chinese investors, nothing works for German start-ups in the growth phase. This is not only annoying for the founders themselves. Because when the venture capitalists later exit, i.e. sell their shares, the profits also flow abroad. What cannot be created in this way is a functioning start-up ecosystem in which VC profits are reinvested to promote the next good ideas.

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Insurance companies hold back

There are many reasons for the gap. But it is definitely not due to A lack of capital. "Large pension funds, pension schemes and insurance companies are on the lookout for lucrative investment opportunities, which is particularly reinforced by the current period of zero interest rates," says BVK Managing Director Hinrichs. German insurance companies alone are sitting on holdings of 1.7 trillion euros. But so far, hardly any of this has ended up with start-ups. According to Hinrichs, there is often a high level of risk aversion among the large capital providers, especially with regard to the supposedly less secure venture capital.  

But financial institutions are not just holding back out of a misguided sense of caution. In some cases, they are not allowed to enter into riskier forms of investment. The supervisory authority Bafin imposes strict requirements here. For example, insurance companies must be able to guarantee that they will fulfill their contracts at all times. And this becomes difficult if large sums of money are parked in VC funds whose success cannot be guaranteed. Only around one in ten start-ups ends up becoming a successful company, so for every Delivery Hero or Tesla, there are around nine losers where investors lose money.

But there is also an obstacle for institutional investors to make a big entry in this country, even if they are not subject to regulations: "German venture capital funds are generally ten times smaller than funds in the USA," says Hinrichs. This means that they are often too small for large investors, for whom an investment in the single-digit million range is often not attractive.

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The state tries to help

So the gap is known, as are the reasons. But how can it be remedied? Many in the scene are pinning their hopes on the state. And it seems to want to tackle the problem. This year, the German government set up a future fund worth billions to finally motivate private investors to invest more in German start-ups. This is mainly done via funds of funds, which are managed by KfW, for example, and in turn invest in other venture capital funds. The federal government is providing ten billion euros and hopes that a further 20 billion will come from private investors. The first three of these funds of funds are now allocating money, at least in theory. In September, in response to a question from the Green Party, the Federal Ministry of Economics stated that only 30 million euros had been called up by then and 80 million had been committed. The reasons: Even in the Future Fund, the criteria according to which the money is invested are tough, plus there were probably teething problems with implementation.

So the government start-up aid is still a while off. Nevertheless, there are initial signs that something is happening in the German venture capital scene, even without support. The VC business climate indicator, which the KfW development bank regularly surveys for the industry in Germany, jumped to an all-time high in the second quarter of 2021. "The mood surpasses anything we have seen before," said Fritzi Köhler-Geib, Chief Economist at KfW, commenting on the figures. According to the survey, deal volumes are increasing significantly, especially in later rounds. However, this has an unintended side effect: the entry hurdle for participating in such rounds becomes higher, making it even more difficult for some German funds to keep up. Köhler-Geib also speaks of a "nuisance" for investors, but also says: "This can also be seen as a success, namely that German start-ups that have been able to 'establish themselves' are now trusted more." German investors will have to stretch themselves in any case if they do not want to lose out on the positive development of the start-up scene.

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