Startups More opportunities for budding businesses

Plant breeders in the city: the Infarm team in Berlin;
Plant breeders in the city: the Infarm team in Berlin; | Photo (detail): © Infarm

The mood on the German start-ups scene is good. Still, the general conditions could be even better.

Guy Galonska did not allow himself to be deterred either by the language barrier or by the oft-lamented bureaucracy. The young Israeli, who was born in 1989, moved to Berlin with his team where in February 2014 he established his company Infarm, which is short for indoor farming. In what was once a factory building at the back of a real courtyard in Kreuzberg they cultivate plants without soil or sunlight aiming at making a contribution to revolutionizing the supply of foods in towns and cities.

Galonska consciously opted for Berlin although Tel Aviv is itself a hotspot for start-ups. “We got the feeling that the European market is much more receptive to our concept,” he explains. “Indoor farming is particularly relevant in countries with cold winters.” And he is convinced that Berlin offers the best quality of life. “It’s cheap, open-minded and has a strong counterculture – all of which are necessary for an indoor farming start-up.” Berlin is anyway Germany’s “start-up capital” and, according to the study Deutscher Startup Monitor, other start-up hotspots here, the cities of Munich and Hamburg and the metropolitan region of Rhein-Ruhr, all lag far behind Berlin.

Wanted: Venture capital

The mood on the start-up market remains good, as Florian Nöll, Chair of the German Start-ups Association, reports. It must be said that the overall number of start-ups in Germany is on the wane. “However, start-ups in the new economy are still booming,” explains Nöll. If we compare the conditions for start-ups in Germany with those in other countries one of the principal problems is a lack of one thing – funding. “Today, if anybody in Germany wants to start their own business it is easy for them to find enough capital for the purpose,” comments Nöll. “But for the later stages of financing, when we are talking about sums of between two and five million euros, things become very difficult.” Accordingly, although the German Private Equity and Venture Capital Association estimates that from 2011 to 2013 2 billion euros of venture capital were invested in new companies in Germany, more than 30 times as much money, the equivalent of 64 billion euros, was made available over the same period in the United States.

There are various reasons for this, one being that Germany has too few domestic investors. And whereas, for example, the major pension and insurance funds in the United States are allowed to put a percentage of the monies they invest into high-risk business such as financing start-ups this is not possible for banks and insurance companies in Germany. “This is a great disadvantage for us because even if we are only talking about a small proportion of the relevant investment capital it does mean that a large amount of money is not available to us in Germany,” explains Nöll. His association is hoping that the new Venture Capital Act planned by the federal German government will remedy the situation. In his opinion, another disadvantage is the fact that in Germany there is no stock exchange segment for the shares of young high-tech companies. He also believes that this is why a large number of companies go public outside Germany. However, as of June 2014 Deutsche Börse launched a new platform to finance growth companies – the Deutsche Börse Venture Capital Network. And Nöll thinks that this is at least a start.

The search for incentives for investors

The tax situation in Germany is also the subject of criticism. For instance, in its 2012 study, Venture Capital und weitere Rahmenbedingungen für eine Gründungskultur (Venture capital and other general conditions for a start-up culture), the Fraunhofer Institute for Systems and Innovation Research ISI writes that this dearth of tax breaks for start-ups and research and development activities puts Germany in a bad position in terms of the general conditions regarding tax concessions compared with other European countries. The researchers also note that in this isolated case a wide range of grants, loans and investment capital just does not exist in Germany.

The German Start-up Association has a slightly different take on this. “There is a psychological aspect to this, as well,” explains Nöll. “Tax breaks are a direct incentive for investors. By contrast, grant schemes are usually complicated, time-consuming and, in practice, often involve the kind of disadvantages that are difficult to predict.” Nöll finds the French model more attractive, a model whereby all citizens are allowed to invest 1000 euros per annum in young companies and to deduct this amount directly from their taxes.

More advertising welcome

Finally, there are also bureaucratic constraints. Indeed, Nöll reports that it is, for example, much easier and quicker to establish a company in the United States or in the UK than it is to found a GmbH in Germany. “Of course, this does not prevent anybody from setting up a company here but the process could be considerably more efficient,” criticizes Nöll. Something similar applies to work permits for specialized employees from abroad. “That is an area where we could simply be better than the United States,” opines the Head of the Start-ups Association. And he thinks that Germany should engage in more advertising for itself as an attractive place to live and work.

Guy Galonska and his team have risked taking the step. He does believe that the financing conditions in Germany are not ideal. On the other hand, as he points out, Berlin is so cheap that money goes further. He at least would do it again says Galonska and his advice to other start-ups is: “If you have a good product then come to Berlin.”