Start-up Ecosystem

10 Jun 2020

Start-up Ecosystem"Seize the opportunity to emerge stronger than before."

Titel: Peter Fricke

The Deutsche Börse Venture Network was founded in 2015 to better supply start-ups with growth capital. The Deutsche Börse Venture Network facilitates access to capital for companies from the early to the late growth phase and offers customized services. The network will turn five on 11 June. In an interview, Peter Fricke, who heads the Venture Network, explains how the ecosystem has developed, where start-ups still need support and the impact of the corona pandemic.

Mr. Fricke, Deutsche Börse Venture Network was launched in 2015 in close cooperation with the Federal Ministry of Economics to strengthen the financing of growth companies in Germany. What has happened since then?
When we started to build a pre-IPO platform for growth financing in 2015, the market was mainly characterised by e-commerce companies and considerable financing gaps. A lot has happened in the ecosystem since then. Business models have become more complex and we are enjoying international attention, especially in the areas of software/analytics, fintech and mobility. Capital is also increasingly available. Venture capital (VC) financing in Germany has more than doubled in the last five years to around 6 billion euros, but not least because of foreign investors. In addition, there have been many positive impulses, both from industry and politics, for example through the third fund generation of the High-Tech Gründerfonds or the launch of KfW Capital. All in all, political attention to the start-up scene in Germany has increased considerably. The positive business climate which we have seen over the past years has also led to an increase in the number of start-up exits. Many of these former founders are now active again as business angels or VC investors – funnelling the money back into the ecosystem. So, a lot has been achieved, especially for founders in the early stages of financing.

How did you experience the first five years of Venture Network?
We started in 2015 with just under 70 members and have grown very rapidly since then. Today, the Deutsche Börse Venture Network comprises over 200 start-ups and 400 investors, a total of over 600 members. As a platform for growth financing, we accompany the companies in our network during the entire journey of their growth path. The 200 growth companies from our network are now active in over 30 countries and employ over 25,000 people. Since 2015, the companies have raised more than 3.6 billion euros in capital. On the investor side, we have succeeded in covering the entire range of relevant investor classes. Thus, our network includes access to over 400 domestic and international investors from the areas of venture capital, private equity, venture debt, family offices and corporates. And what I am particularly pleased about is that seven companies from our venture network have already gone public on the Frankfurt Stock Exchange and have been able to further expand their growth path via the capital market. We are in close contact with other very promising stock market candidates. A further milestone was that we opened our network, originally geared towards late-stage companies, to growth companies with annual revenues of more than one million euros since 2017. The strong interest is also reflected in our investor roadshows, through which we have brought our start-ups together with investors in recent years - not only in Europe, by the way, but also in the USA and China.

What has changed on the investor side?
It can be said that the larger financing rounds in Germany are almost exclusively led by investors from the USA or Asia, although capital is increasingly available in Germany as well. In the last few years many new VC funds have been launched in Germany, especially in the 40 to 100-million-euro fund size range, which are primarily specialised in early-stage start-ups. Co-investments are also on the rise, i.e. capital investment agencies, insurance companies and family offices are increasingly interested in direct investments in young technology companies. However, we note that, compared to other investor groups, more expertise needs to be built up here. We are also observing a greater willingness on the part of investors to use digital formats to identify new potential investments, including the use of platforms for secondary transactions, especially in the USA. I expect these trends to be further intensified by the corona pandemic. These are both developments that we - as a Venture Network - closely accompany.

Keyword Corona Pandemic: What influence does this have on financing growth?
Corona is hitting the start-up ecosystem hard. Of course, the current situation is particularly tough for start-ups in the travel, real estate and sports/wellness sectors. It is difficult for companies in these sectors, especially if they cannot postpone the financing round planned for 2020 or replace it with a smaller internal round with existing investors. The decisive factor here are the next few months, during which we hope to avoid the loss of small or large potentials. This is where the Corona Matching Facility of KfW Capital and the European Investment Fund (EIF) can make an important contribution. We are also seeing venture capitalists currently supporting their portfolio companies even more intensively and in even closer contact with their own investors. Investing in new investments is thus delayed considerably or, in the worst case, completely suspended. Many investors therefore expect the number of new investments to be reduced by almost half in the second quarter. This was one of the key findings of our recently published survey, the VC Investor Sentiment. New rounds of financing are therefore not impossible, but currently much tougher.

What is your advice to start-ups in the current situation?
The most important thing is to adapt the fundraising strategy and schedule it according to the current situation. It is essential for founders to understand the implications of the situation. To do so, they should reflect on the impact on their own venture, on VC investors, but also on society and the economy. Personal contact with investors and multipliers is crucial for this. They must explain their adjustments to the business plan, which shows investors that they have understood the situation and are reacting. In addition, investor pitches are currently taking place almost exclusively virtually. To this end, we have launched various online formats in the Venture Network, aiming to prepare start-ups as best as possible to this changed situation. We are also observing an increased demand for individual advice from us in the network.

Are we seeing a revenge for the fact that in Germany, we do not have a pronounced start-up culture due to risk aversion?
There is still room for improvement when it comes to start-up culture in this country. This starts in the schools and universities. It is important that we give the right impulses to young people to deal with important issues such as company foundation and the function of the capital market. But when it comes to risk aversion, it's not only the founders who are important - of course, it also takes courageous and well-trained employees who are prepared to work on a future-oriented technology and to forgo lucrative and supposedly secure job offers from the banking, automotive and consulting sectors. Here, more incentives must be created for young people to decide to start at young technology companies, for example through attractive employee participation programs. They must participate even more strongly in the development and success of their employer. The plans to improve these framework conditions in the Federal Government's recently adopted economic stimulus and investment programme are therefore an important step in the right direction. Effective design and implementation are now essential.

It seems like the current crisis is a good indicator of how stable our ecosystem really is.
No, I don't think so. The Corona Crisis is the most comprehensive crisis we've had for a long time. Even very well-established start-ups are reaching their limits in some cases - this area of the economy is no different from other players in industry and SMEs. But what has been created in recent years is worth preserving. We should not make the same mistake that we made in and after the dotcom crisis. Because here we have missed the opportunity to create a breeding ground for innovative technology companies in Germany. Now individual American tech giants are worth more than the entire DAX family and US start-ups are flying Nasa astronauts into space. These are the dimensions in which we must think. We must use and promote the existing potential now - the sky is no longer the limit!

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