Stock Exchange

German startups lack confidence and capital

As the German Startups Group reported back in February, Berlin startups "made in Germany,” such as Delivery Hero or Mister Spex, are highly regarded by institutional investors. However, most young companies seem to shy away from going public.

The German startup scene hesitates - GSG CEO Christoph Gerlinger

Not only would an IPOs provide a startup with capital, but it would also be a signal to the entire startup ecosystem and the successful implementation of a business idea in general. Less than ten companies went public in Germany in the course of the past year of 2013. For comparison, in the U.S. there were more than 200 IPOs with an upward tendency for 2014.

As Christoph Gerlinger, CEO of the German Startups Group, recently hinted at in an interview with the German online magazine Gründerszene, currently there are in his view at least 100 German startup companies suitable for an IPO due to their size and turnover figures. This includes German flagship startups such as Wooga, Delivery Hero, SoundCloud or ResearchGate.

Answers to the question regarding the reasons for the reluctance of IPOs are manifold. Increased reporting and transparency standards are often cited as bureaucratic hurdles. However, according to Christoph Gerlinger, there are a great number of advantages including permanent access to capital, retaining control due to an atomized structure of shareholders as in free float, increased public awareness, and the ability to implement high-value stock options for talented employees to keep them committed to the company.

Certainly, it is not only the startups themselves that benefit from an IPO, but also their current and future investors. Current investors are able to sell their listed shares at will, while future investors are granted easier access to an investment in startups.

Germany, like the United States (NASDAQ) and the UK (High Growth Segment), truly deserves a high growth stock market segment. Such a high-technology market segment, as currently planned in Germany and demanded by proponents such as Philipp Rösler, Stephan Schambach, and Christoph Gerlinger, would serve as a seal of quality for issuing growth companies and draw attention the attention of investors and the press to themselves. Thus, they would achieve higher ratings and therefore better financing terms. Such an attractive second exit channel, alongside trade sales to strategic or financial investors, could improve the financing conditions of the entire startup ecosystem and thus lead to innovation, growth, jobs, individual wealth for founders and venture capitalists (which predominantly flows back into the system), tax revenue, and general prosperity to Germany according to Christoph Gerlinger - a desirable development for Berlin, its so-called "Silicon Alley" startup scene, and for Germany as a whole.

Zulily, Tableau Software and GrubHub act as promising role models

IPOs seem to belong to the American business and entrepreneurial world and are part of the agenda of an entrepreneur. To many German startups there are American counterparts with similar products and business models that demonstrate exemplary business conduct.

In November 2013, the American children's fashion retailer Zulily successfully found its way to the NASDAQ, collecting capital in the three-digit million range. For German startups like or Meinespielzeugkiste, which have also dedicated themselves to the target group of families with small children, Zulily could serve as a role model.

The American specialist on business intelligence data visualization, Tableau Software, is has been a part the list of successful IPOs in the U.S. last year since it was able to raise a comparable amount of money as Zulily did. It is conceivable that the German supplier of appropriate business intelligence software as a service (SaaS ), Datapine, could achieve this benchmark as well.

Recently, the Amercian online food delivery service GrubHub went public in the U.S., as did its British equivalent JustEat in UK. The former collected about 148 million USD at a company value of approximately 1.72 billion USD, while the latter almost collected 170 million USD with a value of over 4 billion USD. Certainly, this is a good omen for the announced IPO of the German equivalent Delivery Hero with its three-digit million revenue.

Currently, the fact that Alibaba, the Chinese counterpart of Amazon, is planning to go public in the U.S. is causing a stir. The IPO is shaping up to be one of largest IPOs in the history of the technology industry at an estimated enterprise value between 150 and 250 billion USD, which would top the IPO of Facebook.

The German Startups Group recommends a higher number of IPOs

There is, in our view, no reason why a high-tech stock market in Germany will not work or why German startups should shy away from the stock market. Christoph Gerlinger himself has successfully floated two companies on the stock market and suggests to take this option into consideration and to make use of it more often. There will be a few icebreakers to come soon.