This is how young companies are overcoming the bias against startups and getting funded
It may sound unusual for the city that has made its name as the banker of Europe, but local companies in Frankfurt are facing difficulty finding funding.
While personally rejecting the idea that raising a large round is the end all of the startup world — preferring to focus on the technology and viability of the businesses involved — the ability of a startup to bring in investors that will back them as they go through their growing pains can make or break a young company.
There have of course been some success stories this past year as insurtech startup Clark raised €13.2 million, saving app Savedroid took home €1 million, and automated investment advisor (aka. Robo Advisor) Ginmon pulled in €4 million over the summer, which was led by Passion Capital out of London.
However, Dr. Thomas Funke of Frankfurt’s new startup hub Tech Quartier tells Geektime that the scene needs more activity on the funding front. Seed funding is hard to come by, adding that the banks ask a lot of questions (and perhaps the wrong questions), which makes loans not much of an option.
Part of the issue that he points to is the small number of local VCs and angels, forcing the companies to look for corporate investments that can take a long time to materialize. Funke believes that the banks should be giving out more seed money based on conditions that are more appropriate for the startup business, and not based on traditional understandings of who should qualify for an investment.
Until the companies there 1) begin to mature and 2) become highly scalable, produce large exits or IPOs, or show some other kind of progress that can be taken to the bank, convincing the old school financiers that this is a worthy place to park their cash will be a really uphill battle to say the least.
Echoing the frustration of getting companies funded is Daniel Kuczaj who along with Stefan Maas, run the Pitch Club. This local group brings together entrepreneurs and investors, helping to facilitate these much-needed connections and raising over €10 million in seed for the young companies.
Kuczaj informs Geektime that despite the fact that there is a lot of money in the area with big M&A deals and IPOs, much of this cash has not found its way down to the seed funding of startups. “For years now small seed investments of €100,000 to €1 million were pretty difficult because the VCs had to do the same, costly due diligence with a €250,000 deal like they have with a €5 million deal.”
Thankfully he says there is now progress on this front, due in large part to the Pitch Club.
“We managed to address and bring together a solid base of investors in the meantime,” he explains, noting that, “In the last nine sessions of the Pitch Club over 90 startups pitched their companies in front of more than 300 investors. And as almost half of the companies got funded we have a pretty good sourcing edge and a high quality on the startups and investor sides.”
Moving forward on funding, Funke believes that as the local startups gain more visibility and generate more success stories either through exits or other markers of growth, then the seed money will start to come in. Part of this work he says will need to focus on increasing the attractiveness of Frankfurt startups for international investors.
Getting the attention of the global investors will probably take some time as they build up the profile of the local companies. While the concentration thus far on products that are focused on the German-speaking market may be a logical place to start from, expansion to other regions will likely be a necessary step. Companies like Ginmon have already started to internationalize, and have found backers from the UK.
My hope is that Tech Quartier will be able to act as a broker, not only with the foreign investors seeking solid Frankfurt companies, but with their partners as well from the corporate banking sector. Deutsche Bank and Commerzbank may be tough nuts to crack, but they are starting to understand that they need the technology that these startups are putting out. If they are smart, they will begin offering strategic investments to be the first in line to access this innovation.