Specialized Digital Hubs Set Germany Apart From Other EU Tech Ecosystems

Germany is considered one of the hotbeds of venture capital (VC) funding in Europe, with startups in the country raising a record 11.3 billion euros (around $12.3 billion) in the first three quarters of 2021, a jump of more than 70% from total fundraising the year prior, according to PitchBook data.

Unlike France, the United Kingdom, or the Netherlands where capital cities form a single, major digital hub, the German startup ecosystem has the unique trait of housing a network of digital hubs across the country outside major hubs like Berlin and Munich.

“If [someone launches a startup] and wants to serve a particular industry, they do not necessarily go to Berlin or Munich, but they try to be close to their customers,” Christian Knott, managing partner at German venture capital firm Capnamic, told PYMNTS in an interview.

These smaller, specialized digital hubs, from logistics-centered Hamburg to automotive-focused Stuttgart where leading brands like Porsche and Mercedes-Benz are headquartered, specialize in a different tech area and have the added advantage of providing access to local resources and specialized talent than Berlin and Munich.

But as the German VC ecosystem continues to expand with multiple digital hubs, most VC firms are only focused on seed and Series A deals, leaving a gap at the late-stage investment phase, particularly from product-market fit to scaling internationally.

“Series B is a difficult area to invest in because there’s usually still some risk with international relationships and high valuation expectations,” Knott explained.

To plug this gap, Capnamic builds relationships with funds that are interested in later rounds and connects them to startups, he noted, adding that once startups can overcome that challenge and “get on the radar of all the big global funds,” it becomes easier to raise money in subsequent rounds.

Some of those funds are from overseas investors that are filling the gap where there’s a lack of domestic capital, especially at the real growth stage, which is heavily dominated by international funds, he said.

Serving German-Speaking Markets

Founded in 2013, Capnamic supports early-stage, technology-based startups from the German-speaking region of Germany, Austria and Switzerland.

With the help of the early-stage investor, entrepreneurs linked to startups like LeanIX, Staffbase, parcelLab and Capmo can turn their young companies into fully-fledged businesses, receiving assistance on product-market fit, on executive hires, or simply mapping out their investment goals.

According to Knott, startups in the smaller Austrian and Swiss markets need to internationalize comparatively quickly, and they intuitively turn to countries like Germany and France first when they are ready to scale internationally.

The Berlin and Cologne-headquartered VC firm currently has 350 million euros ($381.6 million) of capital under management, and to date its portfolio companies have raised 900 million euros ($981.3 million) in funds.

This month, the German company announced a $215 million raise, its third venture capital fund to grow startups in its target markets and help them scale internationally.

For startups looking to raise capital for the first time, he advised entrepreneurs to research VC funds that are interested in their area of specialization without necessarily “overemphasizing” their vision, adding that “tailoring your pitch to the person you are speaking with makes a ton of a difference.”

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