Mission Market Access

Many observers have been quick to criticize the German startup scene in recent years. For having too few ideas, being too risk-averse, and mobilizing too little seed capital. Entrepreneurs in China and the US are far more willing to take risks, everyone says: “Just think of Silicon Valley.” The current figures seem to confirm the timidity of Germany’s startups. According to a list published by the Chinese magazine Hurun, there are only 26 German companies among just over 1,000 unicorns worldwide – meaning startups valued at over $1 billion. A look at the founding monitor maintained by the Kreditanstalt für Wiederaufbau (KfW) shows that the number of new startups has more than halved since the early 2000s. Is there a lack of entrepreneurial spirit in Germany? Prof. Klaus Fichter dismisses that suggestion. “We definitely don’t have a startup problem in Germany,” says Prof. Fichter, head of the Berlin-based Borderstep Institute for Innovation and Sustainability. He maintains that the number of startups has declined because the labor market is offering many interesting jobs – and because many people prefer secure employment. “It’s much more important that young people found companies today because they see an interesting business model for their idea, not because they have to form a startup out of necessity.” 

Prof. Fichter sees two main themes dominating the startup scene today: sustainability and green technologies. Following digitalization, they have been the megatrend for a few years. “A safe water supply for the world population, renewable energy, recycling and the circular economy are the big issues,” says Prof. Fichter. He adds that the demand for green products is growing, and so is the pressure on industry to provide relevant solutions. “Sustainability is no longer a question of whether we want to save the world, but a fundamentally different form of doing business. Sustainability is a decisive success factor for companies today in terms of competitiveness. The young people founding startups today understand that.”  

Each year, the Borderstep Institute publishes the Green Startup Monitor, which surveys over 1,700 startups about their situation, financial support or their self-image. For 2021, the Monitor concludes that almost a third of all startups now have a “green business model”. Of the transformation-oriented startups, 35 percent are “green”. The Monitor categorizes startups as transformation-oriented if they have the potential to stir up the market. They are focused on ecological and social sustainability goals, but they also want to change markets through rapid growth. Prof. Fichter: “Ultimately, the success of the German startup scene doesn’t depend on simply increasing the number of startups, but on helping the startups with great potential for change and success to break through and grow.” 

The Internet portal Startupdetector also confirms that green technologies are taking off. In 2021, around 3,400 new startups were reportedly founded in Germany, with the “environmental technologies” segment increasing by at least 140 percent compared to 2020. That is quite substantial given the far lower figures for other industries. In the same period, the number of startups grew by 85 percent in the media sector and by only 44 percent in the gaming industry. “It’s clear that potential founders have the sustainability megatrend in mind these days,” says Prof. Ulrich Lichtenthaler, Professor of Management and Entrepreneurship at Cologne’s International School of Management (ISM). There is far more public awareness about the subject, and many students have focused on it in their studies. Investors have also started paying attention. The ISM organizes an annual startup competition. Prof. Lichtenthaler recalls that far fewer business ideas with a focus on sustainability were submitted five years ago. Everything revolved around data management, digital platforms and interfaces. Those are still important startup fields, but he sees sustainability growing in significance. “Up to now, the trends of digitalization and sustainability have tended to run side by side,” says Prof. Lichtenthaler. “Now you can see both aspects overlapping in the new startup ideas.” He points out that server farms worldwide account for about three percent of carbon dioxide emissions. Video streaming sent data volumes skyrocketing. “As a result, topics such as efficient data storage are very popular. This will make for very interesting business models in the future.” 

In the meantime, startups are far ahead of established companies when it comes to sustainability. According to a study by the Society for Knowledge and Technology Transfer (GWT), only 0.15 percent of German companies are “extremely sustainability-oriented”, meaning they have a business model geared towards green technology. The same study counts about three million companies nationwide that need to catch up on sustainability. Prof. Lichtenthaler explains that most companies have taken small steps to minimize negative impacts on the environment with energy-saving machines and more environmentally friendly production processes and substances. “They’re trying to become more sustainable without it costing too much or affecting the business model. People fail to see that completely new products, services and solutions in their core business can succeed not despite, but precisely because of their focus on sustainability.” He refers to this core-business orientation as “positive sustainability” or “positainability”. This means creating a business model that is both economically successful and sustainable while making a positive impact. “Many established medium-sized companies have really failed to see the attractiveness of sustainability up to now. The startups, on the other hand, are more likely to make it a selling point.” 

According to the Green Startup Monitor, many sustainable startups have been cropping up in the fields of energy and electricity, agriculture and the textile industry. The numbers are far lower in tourism, in construction and real estate, and in banking and insurance. The young company cleansort specializes in sorting and recycling metal scrap. It demonstrates how to successfully occupy a niche, but also how much stamina it takes to implement an idea. The Managing Director of cleansort, Philipp Soest, took around seven years to go from idea to market launch (read more in our portrait at dialog.vde.com/cleansort). He was supported by funds from the German Federal Environmental Foundation.  

As the example of cleansort shows, the vast majority of startups need financial support. The capital requirements of green startups are often higher, since they want to launch completely new and sometimes disruptive concepts. Klaus Fichter of the Borderstep Institute still sees room for improvement. The problem is that the climate, sustainability and the environment were insignificant issues for many years when doling out support to young companies. “In German and European research funding, that’s quite different now,” Prof. Fichter says. “Projects are defined as missions focused on sustainability and the environment. In the case of startup funding, for example via KfW or the EXIST startup grant awarded by the Ministry for Economic Affairs, only conventional aspects such as marketability and scalability have been important in the past. Ecological or social sustainability were not considered in the eligibility criteria. That sends mixed messages.” Fortunately, he sees the situation slowly changing now. 

In July, for example, the same ministry published a comprehensive startup strategy that calls for promoting sustainable ideas more strongly in the future, among other measures. Mario Brandenburg, Parliamentary State Secretary in the Federal Ministry of Education and Research, believes that thinking in terms of social challenges and missions is essential. He is therefore committed to promoting topic clusters. “We have seen that bundling funding measures and consolidating knowledge in clusters really accelerates development. So we’ll focus more on important missions and increasingly bundle the corresponding funding measures in hubs and centers of excellence, just like with artificial intelligence.” 

Klaus Fichter stresses that there are already many advisory services for startups as well as public funding, especially as seed capital for newly founded companies. But he also explains that young companies need the most capital when an idea is ready for the market and production is being launched and scaled up. “In that phase of growth, companies quickly spend tens of millions of dollars. At that point, government capital alone is no longer enough.” He adds that, in the US, it is common for larger companies, foundations or family offices that manage private assets to invest money in order to make young companies grow quickly. “We don’t have enough of that in Germany and Europe. Stakeholders here are not ambitious enough to fill the funding gap in the all-important growth phase. That has to change.” In Norway, startups are now also being financed with funds from the state pension fund. “That would be conceivable in Germany too. Why not use money from the pension fund to support young companies? Of course, with intelligent safeguards and risk spreading.” 

Mario Brandenburg also admits that, despite positive developments, the German venture capital market still has some catching up to do. The volume of venture capital has risen in recent years, he says, but if you look at the invested venture capital in relation to gross domestic product, Germany remains in the middle of the field internationally. Particularly for deep tech spin-offs, which greatly rely on foundational research and development, financing is difficult, “as this usually involves a high risk and requires large investment sums in some cases.” With its Future Fund and the individual modules of this fund, the Federal Government will support innovative, technology-oriented startups in their growth phase with a total of €10 billion by 2030. Together with investments by private investors, up to €30 billion of private and public capital are to be mobilized.  

But founding a company is not just about money. Anyone who is willing to found startups also needs orientation. Many of them come from universities or research institutes, are engineers or natural scientists, and have little experience with topics such as business plans, financing and government regulations. This is a significant hurdle especially when young people want to enter highly regulated industries. According to Mario Brandenburg, Germany is still far too highly regulated compared with other European countries, which makes founding a company more difficult. In Estonia, for example, you can found a company quickly, easily and digitally – without a notary and in just a few minutes. France, on the other hand, has cut the red tape needed to found a company with its French Tech initiative, making the country more attractive for foreign entrepreneurs. “Both examples show that we need less regulation and more freedom in Germany. With more audacity and freedom, we can go from being a straggler to being a startup powerhouse in the heart of Europe. We have the potential to do just that,” says Brandenburg. 

As the Green Startup Monitor shows, green companies are currently being founded mainly in the highly regulated energy and electricity sectors. Four years ago, the German Energy Agency (dena) set up the Start Up Energy Transition Hub (SET Hub) in order to guide founders on the path to their own companies in three stages. Stage one consists of SET Academies, which are two-day seminars conveying basic knowledge about the regulatory framework of the energy system. Anyone who has already set up a company can use an online form to apply for the second stage, SET Mentoring. This format discusses regulatory aspects, as well as scaling potential and the impact of the business model. SET Pilots has been a third stage since 2022. Startups can test and implement their ideas and solutions in pilot projects. The focus here is on digitalizing the energy market and refining smart meter technology. “To sum it up, we help participants identify regulatory hurdles so that they can adapt their business model accordingly at an early stage,” says dena division head Philipp Richard. “That’s important for recognizing obstacles in good time. It would be disastrous if the founders encountered them just before the market launch.” 

Richard gives an example: In the future, it might be useful to trade electricity directly between neighbors in a city or a district – basically via the shortest path possible. A private individual with a photovoltaic system could also supply neighbors who need electricity. Experts refer to this direct power transport as peer-to-peer. However, it’s necessary to ensure that the stability of the power grid – specifically the balancing group – does not deteriorate when thousands of private customers trade electricity in the local network. Founders need to consider aspects like this when developing new business models. “It’s often difficult for them to find the right contact person with the authorities or at energy companies for their particular case,” says Richard. “There are around 300 competent experts at dena who can provide young people with information on every aspect.”  

To bring together founders and experts from the energy industry beyond the SET Hub, dena opened the Future Energy Lab at the Tiergarten commuter rail station in the center of Berlin a few months ago. Across three floors, it hosts shared areas and work spaces where startup founders can join forces with specialists for several days or even a few months to discuss and develop project ideas and business models. “Sustainable energy solutions and climate neutrality are on many people’s agenda today,” says Richard. “Young companies are definitely backing the right horse here. The only open question is when the horse will race out of the starting gate. We want to help them do that.”  

There is no lack of support in Germany for young people who want to found startups today. Many universities and research institutions provide advisory services for founders and entrepreneurs to help get startup teams ready for business. Part of the process is also figuring out whether self-employment is really the right choice. “Many of our startups are a case in point that there is tons of support for companies in the founding phase nowadays,” says Ulrich Lichtenthaler of the ISM. “A lot has happened in this area over the past five years.” He concedes, though, that things get more difficult once founders work their way deeper into the planning and technical aspects. “Less advice, but higher quality and with greater technical depth – that’s what the founders want.” For Lichtenthaler, one thing is particularly important for promoting the startup culture in Germany: showing young people early in their studies that founding their own company could be an option. “Crucially, this requires role models. As trivial as it may sound, our guest lectures by candidates from The Dragons’ Den draw huge audiences. There’s hardly a better way to make students more aware of the startup mentality.”