“Germany is completely underexposed in the venture capital field”

In an interview with FOCUS Online, eCAPITAL CEO Paul-Josef Patt illustrates why, from his point of view, Germany is lagging behind in the area of start-up investments and how it is gambling away its future.

In a conversation with Finanzen100 editor Isabella-Alessa Bauer, Patt, who has been investing in technology start-ups with eCAPITAL for 20 years, takes a critical look at the German start-up scene and explains where its difficulties lie in general but also for founders and investors in particular.

Among other things, he explains why the resistance that Elon Musk and the Tesla Gigafactory in Brandenburg are facing is, in his view, risky for Germany as a business location, why Germany could lose touch with its international competitors and why we are legitimately afraid of China.

Read the complete interview (translated from German into English) below. The original text can be found here.


FOCUS Online: Protests, complaints – Elon Musk is not welcomed with his new factory in Germany in the way he probably imagined – how do you experience the excitement about the Gigafactory?

Paul-Josef Patt: We should be glad that Tesla CEO Elon Musk decided to build the factory in Germany. It’s absolutely wrong how we encounter him here: We would rather save the barn owl and trees in Brandenburg than create new and probably future-proof jobs. This is misguided, but unfortunately increasingly cultivated German culture – we are also switching off all technologies at the same time. Not only the nuclear power stations, but also coal and lignite. This is at least risky for Germany as a business location.

Elon Musk is a highly talented visionary

FOCUS Online: Tesla is currently valued higher on the stock market than Volkswagen and BMW combined – Musk has made his start-up big. Nevertheless, he is repeatedly criticized. Some accuse him of being detached from reality. How do you see that?

Patt: Elon Musk is a highly talented visionary and the perfect example of a successful entrepreneur. Only if a founder is obsessed with his idea in the most positive sense, like Elon Musk, he has a real chance to turn the theoretical idea into real products. Only then he will prevail against all odds. You have to believe again and again that you can do it.

FOCUS Online: What does the start-up scene in Germany look like – do we have our own obsessed entrepreneurs?

Patt: Oh yes, I can think of a few names immediately. But let me put it this way: We have some other strengths, too. We Germans are the best engineers. Here you will find companies that are technically brilliant. In the US, on the other hand, you shouldn’t always look too closely into the machine room – but the Americans are the absolute world champions in marketing. Things don’t always work out, but you”ve launched your product, sparked curiosity and desire – and sometimes you earn money quite quickly.

Our engineers in Germany do not dare to bring their products to daylight until their technology is at least 120 percent mature. We want to do everything particularly well, but we are often not courageous and self-confident enough to emphasize our performance accordingly.

We are underexposed in the area of venture capital

FOCUS Online: It sounds like we still have to learn how to sell. What is the general state of the German start-up and investors’ scene?

Patt: Germany has caught up significantly in many fields. Ten years ago, I would never have imagined so many start-up activities and such an ecosystem for founders seeing today.

A lot of things have improved – but it must also be said quite clearly: we are still completely underexposed in Germany in the area of capital for start-ups (venture capital). Last year we had 6.2 billion euros in venture capital investments in Germany. That is a new and certainly a respectable record, and yet the USA is stronger by a factor of 12 to 13 when you put the amount of venture capital in relation to the gross domestic product. We are not really improving significantly, while China has increased its volume of venture capital fifteenfold in recent years. Countries like the Netherlands or Sweden have also been ahead of us for a long time.

We are the largest economy in Europe, the continent’s growth engine, but we are at the bottom of the list when it comes to start-up investment. This is – let me state it so dramatically – a disaster. We are acting far behind our capabilities and gambling away the future.

FOCUS Online: What is the reason for that?

Patt: It starts with the availability of capital. German institutional investors, pension funds or insurance companies are extremely reluctant to invest in venture capital funds. This triggers a chain of reactions: Where there is not enough capital available for founders, the corresponding ecosystem is also missing. This situation continues until the exit channel. Germany has no equity culture and thus, also no IPO culture – the exit markets are missing.

If you have good exit markets, you have good returns for the investors. And then you have new money for founders almost automatically – and more start-up teams emerge. That works in Silicon Valley, where the wheel is turning faster and faster. We, on the other hand, have a system that inhibits itself: without capital, you can have the best founders and technologies in the world, but their products cannot be brought to market fast enough. Often, their products cannot be brought to market at all.

We need success stories

FOCUS Online: What does it take to improve the situation?

Patt: First and foremost, we need real success stories. If there are flagship companies, this will also spur others to follow suit. That gives courage. Start-up successes motivate young people to found a company themselves, to take the long and certainly also difficult journey and to take personal risks.

FOCUS Online: But large financing rounds are executed repeatedly, and the number of start-ups valued at more than one billion euros is also increasing…

Patt: There are some areas where you just have to have a completely crazy idea – and in no time you’ve collected two million euros and more. There are hype topics that many investors are running after breathlessly.

Things look somewhat different in the technology sector. It is not perceived sufficiently. One reason for this is that these business models are often complicated and not always easy to understand at first glance. As an investor, you see an app with which you can order pizza – that’s easy, everyone understands that. You quickly develop the feeling: I’ll invest in this one. When the tech founder comes to the pitch, you don’t always immediately understand what the details are all about. Take eCAPITAL – we have 20 years of experience in the market and a highly competent team of different technologists: physicists, engineers, computer scientists and chemists. But only with this expertise it is possible to intellectually pervade and really understand certain things.

In addition, technology-focused start-ups need more time – and carry a higher risk. There is hardware involved, you have to invest real money and think in longer cycles.

There are great teams in the Tech sector

FOCUS Online: But then it simply makes more sense to invest in e-commerce and the like, doesn’t it?

Patt: Not necessarily. There are great teams in the Tech sector. There’s a lot going on in there, a lot of potential. We repeatedly opt for start-ups that supposedly have a more difficult business model. Why do we do that? Because we trust the founders and trust them to succeed. And we have made good experiences with this.

In 2013 we invested as lead investor in sonnen GmbH, a provider of intelligent energy storage systems and highly innovative energy services for private households. Hardware was involved. It was and still is a complex business model. At the time, we spoke to many major investors who said: We’re not gonna do this deal because we don’t fully understand it.

In 2019 – only six years later – we sold sonnen to Shell New Energies. sonnen had grown from ten to 650 employees, and two million euros in sales had become more than 80 million – and sonnen turned out as a global market leader! This shows the enormous power and the high importance of such companies for Germany as a business location. And we as investor have returned one fund almost completely.

FOCUS Online: You also mentioned the problem of exit markets earlier. What is the problem here?

Patt: IPOs are not being pushed to the extent and with the force that we would need. In the past, a start-up company had to go public if it needed 100 million euros or more. Today, a company raises 200 million euros from two or three venture capitalists from abroad.

The part of the market that used to be served by the stock exchange no longer exists today. Instead, the financing rounds are getting bigger and bigger – however, these investors all still need to make a profitable exit. Some of them will certainly succeed in doing so, but in the case of other so-called unicorns (start-ups with a valuation of more than one billion euros), I’m curious to see where and how the investors want to recover their invested capital at a profit. You only have to recall the WeWork example.

I’m very worried that the bubble will burst

FOCUS Online: Does that seem like a bubble to you?

Patt: If you can’t see a bubble in this context, you have to be blind. And I have the great concern that the bubble will burst before the exits have been realized. At the moment, it’s proving to be extremely easy to raise new rounds and get higher and higher valuations. There are some completely crazy financing rounds. But where is the exit? You don’t hear much about that.

I’m a burnt child of the 2000s, so to speak, because I experienced the crisis myself back then. But many of my colleagues have only been in the industry for ten years – they can’t even imagine that things aren’t improving and that there is no growth. Since 2009, things have only gone up steadily. Anyone who only became involved at this point in time cannot imagine that things could ever be any different.

I am convinced that we have a profound overvaluation in some sectors. The investment volume in Fintechs and Insurtechs grew by almost 100 percent last year. But in other sectors you can see what happens when things get tougher. In e-commerce, investments have collapsed by 50 percent. You have the first insolvencies and follow-on rounds that simply fail.

It’s easy to forget that out of 100 start-ups, only one or two companies make it – but the other 98 have also received money. And the high valuations naturally also have an effect on the founders’ expectations: Teams come to us that make 300,000 euros in sales and call for a valuation of 17 million euros or more. Who will pay that? I think there is too much euphoria in the market.

FOCUS Online: What is your outlook for the future – also in an international comparison?

Patt: If you look at the number of patent applications in 2018, Germany is still second in international comparison and even first in Europe. Only the Americans apply for more patents than we do. We invest three percent of our gross domestic product in research and development. Here, too, we are in second place in a global comparison – only Japan is a little ahead of us at 3.3 percent.

However, if you look at the fields of start-ups and capital, it looks radically different. We are legitimately afraid of China. China has moved a lot of capital out of the country in recent years. The most elegant way to do this was to buy companies abroad. China is conspicuously interested in the precious and valuable technologies of these companies – as an investor, you notice this very quickly when you are involved in the negotiations. It’s like real life: you just have to be careful who you get involved with.

eCAPITAL is a venture capital firm that provides early to growth stage funding to technology companies in the fields of software & information technology, cybersecurity, industry 4.0, new materials and cleantech. Founded in 1999, eCAPITAL has a history of supporting entrepreneurs determined to build companies with lasting significance. Partnering with eCAPITAL means joining an international network of business leaders, entrepreneurs, technologists and potential partners. eCAPITAL is located in Germany and currently manages funds with over EUR 220 million under management.

Sylvia Richter
Hafenweg 24
48155 Münster, Germany
Tel.: +49 251 70 37 67 0
eMail: info@ecapital.vc