Sense of adventure
June 1, 2011
The received wisdom is relatively simple – if the economy is doing well, investors put their money together and buy companies. If it's not, they avoid risks. At the moment things are going well, and so even Germany's relatively modest venture capital market is in good shape.
The German Private Equity and Venture Capital Association (BVK) recently reported that investors plowed 4.5 billion euros ($6.4 billion) into businesses in off-exchange transactions in 2010 – that's 59 percent more than the year before.
As Germany began to overhaul its energy policy, investors discovered green technologies, and negotiations are now under way with the government to make it easier to invest in that particular burgeoning industry. So is venture capital the new fashion in Germany?
"I wouldn't call it that, but there are very clear developments – there are waves that bring stronger ups and downs with them," said Uwe Walz, professor at the Center for Financial Studies at the University of Frankfurt.
Germany as a developing nation
Walz describes the venture capital (VC) industry in the United States is "big and truly important," adding that around half of all initial public offerings on the US stock markets are on VC-supported companies.
According to Walz, the German VC industry only started in the mid-90s, and is about "half-way mature" now. It got its first big boost – and ensuing bust - with the dotcom bubble at the turn of the century.
At the moment it is experiencing what Walz calls "a real upswing" again.
Better profits earlier
Obviously, the promise of future profits is what drives the VC business, which is another reason why a bull market often brings investors to look for companies outside the stock market to invest money in.
A brief glance at economic history explains why: Economists estimate that, on average, 80 percent of a company's profits come in the early stages of its life - its foundation, establishment and development.
Once a company makes goes public, there is potential for around 20 percent more increased value, but little more.
Ralf Hafner, of the investment bank Silvia Quandt, has a more prosaic explanation for the current upturn: there's more money around. "The market for outside financing is open again," he says.
Big fish eat the little fish
And it's not just private investors who look for such opportunities. Major corporations are on the hunt for VC investments as well. Deutsche Telekom, BASF, Siemens, and several pharmaceutical companies have recently acquired new subsidiaries that look for attractive start-up investments.
Walz believes that, particularly in the pharmaceutical industry, these subsidiaries often become like outsourced research and development departments. The professor says that his research shows that larger organizations tend to resist new ideas, which is why executive boards often decide to let "smaller, independent units" deal with innovation.
On top of that – if large companies don't have any new ideas, they can just buy them by taking over younger technology companies.
Respecting the entrepreneur
This pattern was apparent recently when Microsoft bought the Internet telephone service Skype for $8.5 billion (6 billion euros). Such massive business transactions are still unthinkable in Germany because the equity financing market is that much younger than in the US, and the range of available companies is much smaller.
According to Walz, that's also because entrepreneurship itself is not valued in Germany as it is in the US. On top of that, US businessmen are more likely to go on the market at the first opportunity, while Germans like to perfect the final technical details before going into business.
But Walz has also found that once a takeover has been completed, the hunger for innovation within the younger company declines. It's become more "grown-up," he says, "And therefore it is, per se, less innovative."
Author: Michael Braun / bk
Editor: Sam Edmonds