Delivery Hero made a party out of its stock market debut last Friday, with a courier delivering the stock exchange bell to the Frankfurt exchange in one of the company's distinctive red boxes as red and white glitter rained down on the trading floor.
The Berlin-based company, which was founded six years ago and owns food delivery brands including Foodora, Lieferheld and Pizza.de, was valued at €5 billion ($5.7 billion). It’s the biggest IPO in Germany so far this year, and the flotation should bring in €450 million for Delivery Hero's owners, which include Rocket Internet, the German startup incubator that spun off Zalando in 2013, and Naspers, a South Africa-based Internet and media group.
Investment in German startups is more attractive than ever, with a new entrepreneurial spirit pervading the venture capital scene. In the first half of 2017, German startups raised a record volume of €2.16 billion in 264 financing rounds, according to a study by consultancy EY, doubling the level of investment in the same period in 2016 and exceeding the previous record of €1.95 billion from the first half of 2015.
Two mega deals have garnered attention on the German venture capital scene this year. Naspers acquired its stake in Delivery Hero for €387 million in May. That same month, used car portal Auto1 collected a total of €360 million from various investors.
The enthusiasm is refreshing. After the Internet bubble burst, Hendrik Brandis, co-founder of European investment company Earlybird, expressed doubts in 2003 about "whether there could still be a future for startups and venture capital." A decade later, Dieter Kempf, then president of digital association Bitkom, complained that investments in young companies needed to be organized in a more attractive way and venture capital increased significantly. He said this was "a question of a culture that welcomes investors."
The situation has evidently improved since then. "The German startup scene has been very lively again in the first half of the year," said EY Partner Peter Lennartz. The positive performance of the stock markets has probably contributed to this, he added, making a successful exit for investors via flotation more likely. Delivery Hero's stock market debut could provide a further boost here.
Berlin is the uncontested geographical center for German startups, trailed by Bavaria and Hamburg. Two-thirds of all investment in Germany, almost €1.5 billion, went to companies in the capital city in the first half of this year. The number of financing rounds in Berlin stagnated, however.
The current glut of money is leading to skepticism, with some people reminded of the gold rush atmosphere of 2000, when completely impractical business models caused the Internet bubble to burst. "There are definitely parallels between today's market and the euphoria around the turn of the millennium. The startups in Berlin are often overheated; too much money from family offices and US investors is going into the business models there," said Paul-Josef Patt, head of Münster-based venture capital investor eCapital.
However, Mr. Brandis pointed out that Germany still lags far behind the United States when it comes to venture capital investment. Even allowing for the difference in size of the economies, he said, the German market would have needed about another €8 billion in the first half of this year to bring it up to the same level as the United States. He imagines a completely new approach could be needed to fill the gap, such as a German future fund powered by budget surpluses.
Major US venture capital firms including Kleiner Perkins and Sequoia have invested in young German companies such as task management app Wunderlist, travel search engine GoEuro and styling service Outfittery. But Mr. Patt believes the hype could have already peaked.
German state-owned development bank KfW is planning to invest €2 billion in German and European venture capital funds over the next decade, having identified an annual funding gap of €500 million to €600 million for young companies. "Germany now has an impressive, diverse startup scene. But at the moment, financing is causing problems for many of these innovative companies," said Ingrid Hengster, a member of KfW's executive board.
Mr. Brandis said that German companies often lacked the funds to grow following a successful launch: "In the United States, for every dollar you receive for setting up a company, you'll later get $5 to $6 for growth. In this country, it's only $2.50." For this reason, he said, development often stalls once the company reaches a medium size or the company is taken over by a foreign group.
There is also some debate as to whether the valuations of startups are too high. "Valuations in the United States are many times higher, but the cost base is completely different there. It's much cheaper to get programmers in Berlin, for example," said Thomas Schubert, a partner at Berlin law firm Dentons. Mr. Brandis believes prices have become excessive in areas such as virtual reality and artificial intelligence, but that valuations are still reasonable for the Internet of Things.
Meanwhile, e-commerce in Germany has seen a massive influx of fresh funds. According to EY's calculations, venture capitalists invested €939 million in the German market in the first half of the year, six times the amount for the first half of last year.
Peter Köhler is a Handelsblatt editor in Frankfurt, reporting on banks, private equity firms, venture capital and corporate funding. Robert Landgraf is deputy editor of Handelsblatt’s financial news section. To contact the authors: [email protected] and [email protected]