The End of the German Start-up?

The concept “German entrepreneur” may soon be an oxymoron.

According to the German Venture Capital Association (BVK), ever fewer researchers and engineers are taking the step toward self-employment, simply because the financial risks have gotten too big.

“That has a negative impact on the crucial creation of a new generation of entrepreneurs focused on innovation and technology,” BVK board member Michael Groß said at a press conference in Berlin on Tuesday. He also said there was an “extreme dearth of capital” for start-ups.

Though Germany has plenty of scientists and businessmen with decent ideas, the country has never been considered the world’s greatest place for a start-up. A heavy reliance on bank lending and plenty of bureaucratic red tape have always handicapped entrepreneurs in their search for funding, however, as the “New Economy” technology bubble burst a few years ago things have gone from bad to worse.

The BVK said private equity investments of its 187 members in 2003 fell about four percent to €2.6 billion ($3.3 billion) from the year before. Although the majority of that funding went to small and mid-sized firms, most was concentrated on established companies and corporate takeovers. Perhaps even more telling, the share of funding for high-tech companies has plummeted from 54 percent in 2000 to 25.4 percent last year.

That could bode ill for German Chancellor Gerhard Schröder’s call to make 2004 a year of “innovation” and scientific research. Schröder hopes that encouraging new partnerships between science and industry could help boost the country’s economic growth. But if the money for German start-ups continues to disappear, the new initiative will likely have difficulty producing substantive results, since big corporations have never been particularly known as hotbeds of innovation and new ideas.

Funding drying up

According to the Berlin daily newspaper Der Tagesspiegel, the government-backed Technologie-Beteiligungs-Gesellschaft (TBG) venture capital fund for young high-tech companies is aware of the problem. TBG’s Michael Brandkamp told the paper that only 40 percent of the firms supported by the fund are able to find continuing funding.

“It’s staggering how much the financing for start-ups has fallen,” Brandkamp said, adding investors have become reluctant after getting burned during the “New Economy” boom. “The market is failing.”

Der Tagesspiegel reported that Germany’s respected Fraunhofer Institute – which helped develop the MP3 digital music format – is also concerned that private start-up money is drying up.

Even those entrepreneurs that established their start-ups long before the high-tech crash on the stock market are having a hard time rounding up cash these days. It is widely speculated that German software golden boy Stephan Schambach was forced to leave his company Intershop earlier this month to help ease the search for an investor.

The 33-year-old Schambach founded Intershop in 1992 and was long been considered the best example of the entrepreneurial spirit to emerge from eastern Germany. But after wild growth throughout the 1990s, the company was plagued by operational problems and a sinking share price, which forced it to slash its staff and look for new financing.