Where's Berlin's Venture Capital?

One of the aspects that makes Silicon Valley, Silicon Valley – ok, maybe THE aspect that makes it what it is, is the huge amount of venture capital that entrepreneurs have access to. In the second quarter of 2014 – the second quarter – venture capital firms invested $7.1 billion in SV startups. Say what you will about possible bubbles, and overheated investment climates, but that number is what makes Silicon Valley the tech world’s equivalent of the Amazon Jungle: a lush, fertile environment that supports an almost unlimited number of creatures.

Berlin’s growing startup scene does not feature quite as much money. In 2013, for example, the total amount invested in Berlin in all startups was 133 million euro. Silicon Valley has a ton of other advantages relative to Berlin, of course: the concentration of talent, a long history of entrepreneurship, and a generally more business-friendly regulatory environment than Germany. But access to VC makes everything that happens in the Valley possible.

When I was researching for my thesis last year, almost everyone we spoke to said that access to capital was tight, and that the most readily available sources for German startups weren’t in Germany at all, but rather VC firms in London and California. This is a problem. Without money, even killer firms aren’t going to grow. Even worse, people with cool ideas are going to hear about Beriln’s lack of capital and they are either going to go find a normal job, or they are going to move to where there is capital. Berlin has a lot of advantages, which I will talk about in different posts, but without increasing the amount of venture capital here in the city, the conversation about turning Berlin into a legitimate European tech hub is dead before it starts.

German officials aren’t ignorant of this issue. They can see the crazy differences in dollar/euro amounts between Silicon Valley and Europe. The problem is, from their perspective there is not a huge amount they can do to directly influence it. The famous German conservative mindset means that their risk tolerance (Risikobereitschaft) is really low, particularly in comparison with risk-loving valley capitalists.

The Government can’t – and won’t – get into the business of funding startups themselves (besides a myriad of smaller-scale loan programs, the largest of which is a grant of about 300,000 euro), so the question is how to either 1) get German venture capital firms to embrace risk; or 2) ease access to foreign capital for German-based entrepreneurs.

To that end, the Government has just begun debating the so-called Venture Capital Law, which will ease restrictions on investing and hopefully open up firms’ pocketbooks. It’s being pushed by the leftist SPD party, which says that Germany “needs a mentality shift” if it is going to be able to compete as a technology hub. The law was heavily advocated by the trade association Private Equity and Venture Capital Association, so there is some private-sector momentum to make something happen.

Whether the law will be passed is an open question. An even larger question is whether the law itself can do anything to shift the conservative German investment mindset into embracing a bit more risk.

At minimum, Germany has a long way to go in that sense. One of the startup founders that I spoke to last year said that in America, failure as a startup was viewed as normal, and even commendable as long as you learned something from it. In Germany, the view is totally different. Nobody wants to invest money with an entrepreneur who's failed once, "because if they already failed once, that means they are a failure."