German Corporate Venture Capitalists

Introduction

German Corporate Venture Capitalists (CVCs) are Venture Capital (VC) firms that are owned by a German corporation or have a significant presence in Germany. Like CVCs in other countries, German CVCs invest in startups and emerging companies, typically in exchange for an equity stake in the same company.

German CVCs may focus on investing in startups that align with the strategic objectives of the parent company, such as technologies or business models that could complement or enhance their existing operations to stay at the forefront of innovation, potentially generate financial returns, and support the growth of startups in Germany and beyond.

In addition to providing funding, German CVCs may also offer support to the startups they invest in, such as access to the resources, expertise, and networks of the parent company. This can help their startups grow and scale their business more quickly.

According to data from Statista, the total value of VC investments in Germany amounted to €11.5bn in 2021, up from €7.3bn in 2020. This represents a significant increase and demonstrates the growing interest in the German startup ecosystem among both domestic and international investors.

In terms of the number of VC deals, there were a total of 1,228 deals in Germany in 2021, up from 1,102 in 2020. The majority of these deals were seed-stage and early-stage investments.
The largest sector for VC investments in Germany in 2021 was software, which accounted for around 34% of the total investment volume. Other sectors that attracted significant investment included healthcare, FinTech, and e-commerce.

According to a report by the German Private Equity and Venture Capital Association (BVK) and KPMG, the number of CVC deals in Germany increased significantly in 2020, with 112 deals completed, up from 80 in 2019. The total value of these deals was €1.6bn, up from €1.3bn in the previous year.

The report also notes that the number of CVC funds in Germany has increased steadily over the past few years. In 2020, there were 80 active CVC funds in Germany, up from 74 in the previous year. According to a report by PE Magazin, almost €4.0 bn in investments were made in Germany in 2021, more than ever before. For 2020, the investment volume was set at €1.9bn.

According to PWC data, the global amount of direct investments into startups increased by over 300%. In terms of sectors, CVCs in Germany are particularly active in the technology, healthcare, and mobility sectors, according to the same report. These sectors accounted for the majority of all CVC investments made in Germany in 2020. Overall, the data suggest that CVCs are an increasingly important part of the German VC landscape, with a growing number of funds and deals being completed each year.

Overview of Corporate Venture Capitalists

Objectives: The primary objective of a CVC is to provide strategic benefits to its parent company, such as gaining access to new and disruptive technologies or business models, as well as potentially earning a financial return on investment.
Investment Focus: CVCs often invest in startups that align with their parent company’s strategic objectives. CVCs select startups with a similar technological focus but that have a non-overlapping knowledge base, and they integrate technologies generated from these ventures that create strategic value. This aligns with traditional strategic theory, recommending the internalization of R&D to keep a competitive advantage.
Longer Investment Horizon: CVCs typically have a longer investment horizon than traditional venture capitalists, with an average holding period of around 5-7 years. This longer horizon allows CVCs to focus on strategic benefits beyond just financial returns.
Additional Support: In addition to providing funding, CVCs may also offer additional support to the startups they invest in, such as access to their parent company’s resources, expertise, and networks. This can help the Start-Ups to grow and scale their business more quickly. Furthermore, research suggests that CVC-backed start-ups can obtain higher valuations at the IPO than non-CVC-backed ones.
Potential Challenges: One challenge that CVCs may face is maintaining their independence and avoiding conflicts of interest with their parent companies. CVCs must balance the strategic interests of their parent company with the need to provide fair and impartial investment decisions.
Growing Trend: CVCs have become increasingly popular in recent years, with more and more corporations setting up their venture capital arms to invest in startups and emerging technologies. This trend is expected to continue as companies look for new ways to stay on the cutting edge of innovation and potentially generate financial returns.

PricewaterhouseCoopers (PwC) acknowledges financial and strategic goals as the main drivers in CVC investments. Through strategic goals in particular, companies are increasingly gaining access to future technologies, digital talent, and knowledge, for example about new markets or business models. For many companies, this is a crucial step in securing their future viability.

For the purpose of this article, we looked at the investment hypotheses of 32 CVCs, which are the VC arms of the biggest German companies, mainly listed in the indices DAX and MDAX. While it is possible to cluster them into the fund sizes and ticket sizes of each investment or the stages that the CVC mainly wants to fund, the focus was on the strategic rationale of the CVC as a whole. It can be seen that the majority of the CVCs have an investment hypothesis primarily targeting investments in startups with new technologies or new approaches directly related to the core business/business units of the parent company. The CVC acts rather as a matchmaker, which connects the startup to the respective business unit of the parent company, where the value is created through resources and expertise. Also, another strategy that can often be seen is for CVCs to invest in startups not directly related to the core business of the parent company, but in adjacent fields, thereby expecting to scale this business with corporate resources and later on integrate it as a new business unit. A particularly interesting investment hypothesis/strategy is, what can be described as “hedging”. Thereby, the parent company of the CVC comes from an industry facing a huge disruption and pressure to change or adapt the business model, e.g. due to increasing ESG requirements. The investing CVC, therefore, protects itself from possible downside risks that the core business of the parent company might be facing in the future. One problem of CVC activities is to make the achievement of strategic goals measurable. This is necessary to justify lower returns in the company and to anchor CVC activities permanently. The existing approaches, which work with scorecards or are based on the real options approach, are usually not very operational. An interim solution can only be to document the goals clearly and to develop specific key figures for each of them in order to make it possible to check whether the goals have been achieved. A second problem area is incentive systems. The more the CVC activities are organizationally integrated into the company, the more difficult it usually is to give the CVC management a share in the investment success with a carried interest, because this could generate envy among the other employees of this company. This problem is solved by establishing independent VC companies. In addition, they are often in a position to poach successful CVC managers; the CVC providers accordingly have an adverse selection problem.

Conclusion

Overall, the German VC market is growing rapidly and has attracted significant attention from investors around the world. With a strong ecosystem of Start-Ups, innovative technologies, and a supportive regulatory environment, Germany is poised to continue to be a major player in the global VC landscape.

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Editor: Noah Halbritter