Let’s continue our European startups landscape tour with Germany!!
Willkommen.

Digital Transformation in Germany

At #9 on the Global Startup Ecosystem Ranking, and #2 in Europe behind London, Germany is in a good place for start-ups to grow. Germany has the largest population in the EU, currently standing at 81.63 million.
In Germany, the major hubs for start-ups, digital transformation, design and disruption are Berlin with just over 1.300 start-ups and that represent 31.1 % of all of the start-ups in Germany, Munich (11.5%), Hamburg (8.3%) and Stuttgart (7.9%).

In 2015, Berlin alone has raised a staggering EUR 1.97bn for start-ups, according to the industry service Dow Jones Venture Source. Just to name some of the most famous ones: Rocket Internet (who is now publicly listed), Zalando, Zanox, or Wooga, and others like Auctionata, Delivery Hero, Home24, Outfittery, SoundCloud or ResearchGate.

Next to Berlin, there are entrepreneurial activities in Hamburg and Munich. Both cities host innovative and commercially successful start-ups such as Bigpoint, Kreditech, WestWing, Windeln.de, Zooplus or Xing.
The digital industry turns out to be the most important area for German startups: more than half of them are associated with the categories software as a service (15.3%), ecommerce (10.1%), IT/Software-development (8.6%) or online related services and applications (combined 18.6%).

The local co-working spaces: The Factory, Betahaus, St. Oberholz.

German Unicorns – Online customers to the front!
Delivery Hero, an online food-ordering service operating in 34 countries
Hellofresh who delivers great recipes and fresh ingredients to their customer’s doorstep
Auto1 Group, a used car purchaser based in Berlin
Home24, Europe’s largest online only retailer for home furniture and living

Investment / Funds
Growth and later-stage investments are largely completed by investors with a strong financial background. Whereas there are a few German investors able to participate in growth and later stage investments such as Earlybird, Lakestar, Holtzbrinck Ventures or Rocket Internet, these financing rounds are dominated by foreign investors from the UK, the US and increasingly also from Asia.

Investors in the Top 30 German start-ups, according to the cumulated funding volume, include (amongst others) players like Kite Ventures, Phenomen Ventures, DN Capital, Insight Venture Partners, Blumberg Capital, Kreos Capital or Luxor Capital, contributing not only equity but also venture debt instruments. This is complemented by investment banks, such as Goldman Sachs and an increasing number of financial investors like KKR or Scottish Equity Partners.

In Germany, more and more Corporate companies are investing in start-ups, especially the media and automotive industry such as Axel Springer Digital Ventures • Bauer Venture Partner • BASF Ventures • Bertelsmann Digital Media Investment • BMW i Ventures • Deutsche Post Ventures • Deutsche Telekom Capital Partners • amongst many others.

Accelerators / Incubators
In addition to investing, some Corporate companies have established incubators and accelerators. They are similar in terms of financial support, providing workspace or business advice:
• Allianz Accelerator
• agile Accelerator (E.ON)
• Axa Innovation Campus
• Axel Springer Plug and Play Accelerator
• Bevation (Bertelsmann)
• BMW Start-up Garage
• CoLaborator (Bayer)
• CommerzVentures (Commerzbank)
…amongst many other.

Taxation in Germany
Taxation in Germany is not dissimilar to the structures in other western countries, such as the UK. You pay income tax throughout the year, deducted each time you receive a wage.
What follows is the current rate of tax (in Euros):
• 0% on income up to 8,004
• Progressive rates 15% – 42% on income between 8,005 and 52,881
• 42% on income between 52,882 and 250,000
• 45% on income of over 250,000

Corporate tax is set at 33.3%.
VAT / Sales Tax is 19.%. With a reduced rate of 7%.

Apparently this level of tax associated with the legal complexity of setting and developing a business in Germany place the country at the last place in the EU when it comes to legal and tax framework for venture capital. In particular, Germany is seen as not attractive as a location for funds, so they often headquarter in other European and non-European countries.

“Although Berlin’s lifestyle is very attractive to startups, its red tape and legislation can be hard for small businesses to overcome. Kevin McDonagh, CEO of Android consultancy startup Novoda, says: “Germany is renowned for its bureaucracy and process. The first few months were very difficult to get anything done, legal and day-to-day running. Doing it in a foreign language with foreign laws is difficult.”

Furthermore, an announcement was made in December 2015 that the draft 2016 annual economic report would include a tightening of antitrust law. The move is now official: the German government has announced a significant expansion in merger controls – a fatal decision for start-ups and investors in Germany.

Talent acquisition in Germany
In Germany as in most countries, there is a big lack of skilled developers. Salaries can be really high for Senior Developers and most of the time start-ups are struggling to compete on this element alone.

One way that German Start-ups have gone about his challenge is to attract young talent from Eastern Europe who are willing to relocate to German. It is being successful thanks to 3 main factors:
1. They adopted English as the main work language
2. They allow working remotely and flexibility
3. They allow unlimited vacation

Next month… Copenhagen

If you didn’t catch our tour of France’s startup landscape, click here.

Sources:
CBS
EY
StartUp Valley
Startup Overseas

Author

Sophie Cohen is Head of Research and Delivery for the MitchelLake Group. She has over 15 years experience in executive search across various industries including industrial, pharmaceutical, finance and digital.

Sophie is a trained Psychologist and has lived and worked in France, the UK, the US and Australia. She speaks French and English fluently.

SophieCohen

sophiec@mitchellake.com