Risk Aversion No Pain, No Gain

German startup guru Philipp Freise says Europe is too shy when it comes to backing entrepreneurs, and that it will only catch up with the U.S. if investors loosen the purse strings.
Talking tech: Philipp Freise.

Philipp Freise is a tech veteran who currently heads the global technology and media growth team at U.S. private equity group Kohlberg Kravis Roberts. Having worked in both Germany and the United States, he is a passionate advocate for greater European capital investment in startups. He spoke to Handelsblatt at KKR’s Frankfurt office about the future of technology investments.

Handelsblatt: The company you work for has a global perspective. In the big picture, is there a venture capital gap in Germany?

Mr. Freise: In Germany, but also in Europe, there is no lack of good ideas, of creators of start-ups. When I graduated from WHU-Otto Beisheim School of Management in 1997, in principle there were only three alternatives: Bertelsmann, consulting and investment banking. That was it. Founders of start-ups were few and far between.

Oliver Samwer, the co-founder of the online retailer Zalando and the incubator Rocket Internet, was a year behind me. He was, so-to-speak, the pioneer of German start-ups. More than one-third of those graduating today will attempt to become founders. That gives you a good indication of the change that has taken place.

Didn’t we already have a wave of start-ups being founded at the turn of the millennium?

Yes, there were names like Stephan Schambach with Intershop and me, too. We believed technology was changing the world. We still do today and we want to close the gaps that are unfortunately still there. The fact remains that we have too little growth capital.

How big do you calculate the gap to be?

In Europe, for example, we have only around a fifth of the venture capital in the tech sector available in the United States. Moreover, in America, a major portion of the capital flows in the decisive growth phase, when the companies must make larger investments. In Europe, on the other hand, more capital is invested in the early phase segment, when it is all about financing the founder and getting the company started.

So there is a lack of staying power after starting up?

There is a lack of funding for growth. If you don’t want to be active in just one country or have success with just one product, you must be able to finance expansion as well. That is the gap. That’s where the deficit lies.

What is the cause?

Well, from 1999 to 2001, we first had to learn that things don’t always go in one direction. You must be able to deal with setbacks. And the capital markets in Europe aren’t as deep, so there is less money for the expansion phase. But that is changing now and is one reason why we are also so active.

Why is the situation today different from the Internet boom at the turn of the millennium?

Because technology today is international, much more so than at the turn of the millennium. Just take the music streaming service Spotify. It came out of Stockholm to become a global enterprise. They have raised several hundred million dollars in growth capital. But another thing is also true. There aren’t as many examples in Europe as out of Silicon Valley. They’re simply not as tight with money there. But, we can close this gap in 10 to 15 years. That’s our great opportunity.

How do you want to close the gap? Where’s the capital going to come from?

I see three sources of financing. The startup founders of the first and second wave give money, partly from their own funds. Among them are people like Klaus Hommels, who already was involved with Skype, Xing and Spotify. Or, the Samwer brothers, who also step up as financial backers. The second source is international investors such as KKR. The third source is crowd-sourcing. That’s the new form of capital injection we are seeing.

Are there also political failings?

The subject is very clearly on German Chancellor Angela Merkel’s agenda. The construction of fast broadband, for example, is enormously important. We must continue to invest in it. And the culture has to be right. The entrepreneur is still celebrated in a big way in Silicon Valley, while at the same time you are allowed to fail with an idea without being stigmatized as a loser.

But the stigma of failure is still there?

It is still there, but less so. I experienced it myself. In 1999, I went to Pixelpark and founded a venture park – the grandfather, so to speak, of Rocket Internet. We were just ten years too early with our idea, but at least we tried. At the time, we had hired 70 highly motivated people and made eight investments. We had to close down the park after two years. But I took the positive experience and the vim and vigor and moved over to KKR.

You’ve made a flying start, and are probably more in the air than on the ground. What drives you every day?

I’m looking for Europe’s Mark Zuckerberg.


Peter Köhler heads Handelsblatt's banking team in Frankfurt, Daniel Schäfer is head of the paper's financial pages. To contact the authors: [email protected], [email protected]