Germany's Mittelstand is embracing both venture capital investing and venture building. But which will be the dominant model?
In the past couple of months, the new corporate venturing units set up by German and Austrian family-owned companies have one thing in common: they combine venture building with venture capital investing.
Corporations around the world are increasingly taking an interest in building their own startups, but it is in Germany and other German-speaking countries that creating companies is becoming an integral part of corporate venturing. It is being built into CVC strategy from the outset. Some experts say it may even overtake VC investing as the main innovation tool for the region’s predominantly family-owned businesses.
Recent new CVCs that build companies include Bau Ventures, the corporate venturing unit of German real estate services company Drees & Sommer. The new unit incubates and co-creates ventures as well as invests in startups related to the built environment.
Blum Ventures, the new CVC arm of Austrian furniture and fittings company Blum Group, is another corporate venturing unit that has a VC investing and venture building remit.
Germany’s economy is dominated by medium-sized family-owned businesses, the so-called Mittelstand, which makes venture building a particularly good fit. The companies are used to bootstrapping startups and, some argue, have an entrepreneurial family tradition that make them particularly suited to business creation.
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But, perhaps more than larger, publicly owned companies with plenty of access to capital, Germany’s family-owned businesses, some founded 100 years or more ago, face the most disruption from technological change and the economic transformation caused by AI, factors that may hasten their adoption of CVC.
“Companies are facing so much change,” says Florian Nὃll, global venturing & EMEA startup and scaleups leader at PwC in Germany. “All our clients say that the world is getting so complex that they have to work in partnerships with ecosystems to be able to satisfy their clients.”
The real estate sector is an industry that faces digital transformation from AI, internet of things, robotics and digital twin technology but remains one of the least digitised.
“We have a really changing world around us, and we don’t do venturing predominantly to earn money, it’s a strategic safeguarding of our core business and to help the core business to transform into this digital future,” says Sascha Hempel, partner at Drees & Sommer.
The family-owned company, founded in 1970, is the anchor investor in the independently structured Bau Ventures. Daniel Hinz, managing director of the unit, says one-third of the fund will be dedicated to building or co-creating ventures with entrepreneurs, while the rest will be for investing in startups.
The venture building side will focus on testing business ideas on the market before they are built into commercial companies, a model that the team has honed after seeing what works and what doesn’t. “Venture building is working in some cases, but, in most cases, it is failing, especially in a corporate environment,” says Hinz. “We are doing what we call a build-first approach. We build rapid prototypes, rapid MVPs from a software perspective, and we validate this together with the business units on the market.
“Once there is market validation from a business unit, we’ll bring a business model and the technology behind into the market,” says Hinz.
The team will also co-create companies with founders who already have a minimum viable product. The young companies receive capital as well as operational support in product development, technology and market access.
The hybrid approach
Venture building and CVC investing can complement each other well, says Matthias Hille, the managing director of Whataventure Fund, a new €15m ($17.5m) investment vehicle that works with corporates to co-create and co-invest in startups. “Combining corporate venture capital with venture building is a very effective strategy. Through CVC, companies gain access to valuable deal flow and market insights, while venture building allows them to actively leverage their assets, IP, and market access to create and scale new business models,” says Hille.
For family-owned mid-sized businesses, just doing VC investing can often be a hindrance to innovation as they don’t always have the capital to invest in enough startups to benefit from strategic insights. “CVC tends to work best for larger companies, as building a meaningful portfolio requires significant capital to diversify across multiple investments,” says Hille. “Most successful corporate venture capital units typically manage at least €10m or more to achieve that scale.”
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Venture investing is nevertheless an important part of CVC for Germany’s family-owned businesses. The fact that they are not beholden to shareholders seeking short-term profits makes them arguably well suited to corporate venture investing where financial returns can take 10 years or more.
“If you are running a CVC in a family business, there is a higher chance of survival in the first four or five years,” says Nὃll at PwC. “And you need to survive the first four or five years, because you are unlikely to see exits. It is a kind of valley of death for CVCs as they are asking management for money to continue investing while not having any successful exits.”
“If you are running a CVC in a family business, there is a higher chance of survival in the first four or five years.”
Florian Nὃll, global venturing & EMEA startup and scaleups leader at PwC in Germany
But, being family-owned can also be a hindrance to venture investing as these kinds of businesses tend to be wary of innovating away from their main business line. “Family-owned businesses often take a long-term, generational view and are naturally entrepreneurial. However, they can also be more protective of their core business, which sometimes limits their willingness to explore disruptive opportunities. Balancing this tradition with openness to innovation is crucial to stay competitive.,” says Hille.
The need to act fast and be taken seriously as investors, means CVCs of family-owned businesses are seeking to structure their investment units with independence from the parent.
The team at Bau Ventures chose to structure itself independently from Drees & Sommer so that it could offer VC-style compensation. “If you want to have an exceptional team that you know can do the work, you need to have something like an incentive scheme, like a carry approach that all the VCs have,” says Hinz.
Startups are more willing to have a corporate investor on the cap table, he adds, if they know that the venture unit is independent enough from the parent company to make decisions quickly. At the same time, they want a CVC to be close enough to the parent to connect them with business units.
The pull of fund-of-funds investing
For many of Germany’s Mittelstand companies, however, their ability to launch a CVC, independent or otherwise, is beyond their resources. It is perhaps for this reason that fund-of-funds investing is popular. By becoming a limited partner in a VC fund, mid-sized companies can gain strategic insights as well as financial return while not having to have much in-house VC expertise.
One of the most well-known German VCs with mid-sized limited partners is High-Tech Gründerfonds (HTGF), a public-private early-stage VC investment fund. It has 45 private investors including German companies and family offices investing in its fourth, €500m fund.
German family-owned businesses’ long-term outlook makes them ideal limited partners, says Achim Plum, managing director of HTGF. “Their long-term orientation — thinking in generations rather than quarters — aligns perfectly with our early-stage investment horizon.
“Their stable ownership structures and strong reputations within the German Mittelstand ecosystem enhance our network reach and credibility,” he says.
Other VC funds with a German corporate investor base include Mätch VC, which targets businesses from the Mittelstand, and industry funds that pool investors from a specific industry, such as May Ventures, a new €30m fund backed by German banks.
As more German corporates choose venture building alongside startup investing, a hybrid approach may become the most dominant feature of innovation in the Mittelstand.
But Hille says he expects venture building could even overtake investing as the most common form of business innovation in this sector.
“I believe we’ll see fewer traditional VC-style corporate funds and more company creation funds that actively build ventures together with corporates. This model creates deeper strategic and financial value.
“Traditional VCs will continue to play a role, but for corporates and their LPs, company creation funds will become increasingly important.”
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