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The rosy times for German startups appear to be passé as they struggle with a weak economy and tougher financing conditions. According to a Startup Association survey conducted by Deutsche Presse-Agentur, the business climate in the industry is at one of the lowest levels since the low point during the Corona pandemic in 2020, with the current score of 38.1 points only slightly higher than in 2020 (31.8 points). This continues a trend that has been seen since the record-breaking 2021.
The survey, which is based on a similar calculation method as the Ifo Institute, reflects a high level of uncertainty among founders. About 65 percent of the startups surveyed have difficulty assessing the future situation. Nevertheless, a slight increase in business expectations is evident, while the current business situation remains at the lowest level since the beginning of the pandemic.
The association stresses that after a wave of innovations that followed the shock of the pandemic in 2020, the current situation has become more difficult. Rising inflation and higher interest rates have led startups to act more cautiously. One-third of companies have reduced hiring and adjusted funding plans.
Since 2022, German startups have faced major challenges. While they were able to raise record amounts from investors in 2021, geopolitical tensions, rising interest rates and economic uncertainty have dampened the market. Investors are more cautious, resulting in many startups having to cut jobs and funding dropping dramatically in 2022. The situation remained tight in the first half of 2023, as startups raised about half the funding they did last year.
In particular, the ability to secure large funding rounds has declined sharply. There has not been a round over 250 million euros this year, compared to four such rounds in 2022 and eight in 2021, and the majority of founders rate the willingness of funders, particularly venture capital funds, as poor.
In view of these challenges, the startup association is calling for increased support from the German government. In particular, the expected "Future Financing Act" should be passed promptly to strengthen the location for founders. Among other things, this law should offer more favorable regulations for employee shareholdings and easier access to the capital market for growth-oriented companies. However, the implementation of this project has been delayed so far.
On Tuesday, the federal ministries of economics and finance announced that a new financing instrument called "RegioInnoGrowth" will support startups and small innovative SMEs. For this purpose, the federal government plans to provide up to 450 million euros from the Future Fund and the ERP Special Fund. Companies can each receive up to five million euros in funding.
The German startup world could be on the verge of a groundbreaking change as the German cabinet is expected to pass the Future Financing Act tomorrow. This law brings with it significant innovations in the area of employee equity participation. According to a recent survey commissioned by the digital association Bitkom, three out of four startups hope that the new regulations will make employee ownership more attractive.
Currently, 38 percent of the startups surveyed offer their employees the opportunity to share in the company's financial success. An impressive 48 percent of the companies surveyed can imagine introducing such employee share ownership schemes in the future. Only 6 percent of respondents are fundamentally opposed to the concept.
The survey reveals that 73 percent of startups would benefit from improved employee ownership plans. These are considered important for a variety of reasons: 87 percent of respondents would like to additionally motivate their workforce to make an active contribution to the company's success. A further 77 percent see them as a way of retaining employees in the company over the long term. Similarly, 63 percent of startups have been able to attract personnel on the basis of such shareholdings who would otherwise be difficult to recruit because of their salary expectations.
The current participation models show that virtual shares (33 percent) are currently the most frequently used, followed by share options (6 percent) and real shares (3 percent). Among the startups that already offer employee shares, executives are involved in 37 percent of cases. In 36 percent of the companies, selected employees participate alongside executives. In 27 percent of cases, all employees even receive a share.
The planned solution to the problem of so-called "dry income" is particularly encouraging. In the future, taxes will only be due when employees can actually realize profits from their shareholdings. Previously, taxes were already levied when employees changed employers, which affected the attractiveness of employee share ownership.
However, there are also critical voices. The planned flat tax rate of 25 percent was removed from the government draft, which raises uncertainties about the exact tax burden. This issue is to be clarified in the further parliamentary process.
The survey makes clear that many startups have so far refrained from employee share ownership, primarily because of the bureaucratic burden (30 percent), the complicated legal situation (27 percent) and the lack of tax appeal (26 percent). Despite these obstacles, 48 percent of respondents see the possibility of employee ownership as promising and could envision using this option in the future.
With the upcoming Future Financing Act, employee ownership in the startup scene could finally get the boost it deserves. The expected regulations could not only boost corporate success, but also help to retain highly qualified employees at the up-and-coming companies in the long term.
In terms of technology adoption and innovation, German startups play a decisive role, as a recent study by the digital association Bitkom shows. The survey of 203 technology startups from Germany makes it clear that artificial intelligence (AI) and Big Data occupy the top positions. Currently, 53 percent of the startups surveyed use Big Data and data analytics, while 49 percent rely on AI. These trends are expected to continue to grow as they top the list of technologies that startups are considering - 39 percent are thinking about adopting AI, and 31 percent intend to use Big Data and data analytics.
Compared to the overall economy, startups clearly set themselves apart from established companies. Across the economy, only 15 percent are using AI, while another 25 percent have plans to use it or are discussing it. For data analytics, the share in the overall economy is 39 percent, and for discussions about it, 37 percent.
Bitkom President Ralf Wintergerst welcomes this development and predicts that startups will help make AI and Big Data more accessible to small businesses and SMEs. He emphasizes that these technologies will not only be used, but also further developed to bring new products and services to market.
To promote the spread of AI applications from the startup sector, Bitkom points to the AI voucher for small and medium-sized enterprises envisaged in the German government's startup strategy.
In addition, technologies such as the Internet of Things (IoT), 5G and 3D printing are emerging on the startup scene.However, virtual reality (VR), augmented reality (AR), blockchain and the metaverse are still in the development and discussion phase.While only 8 percent of startups are currently using VR/AR, 22 percent are planning or discussing its use. The situation is similar for Blockchain, which is used by 5 percent of startups but planned or discussed by 22 percent.For the Metaverse, 3 percent of startups are already users, while 15 percent are planning or discussing its use.
Wintergerst emphasizes that while technologies such as the Metaverse, VR/AR and blockchain have been discussed for some time, their breakthrough has yet to occur. Companies are encouraged to closely follow developments in the startup space and gain their own experience with these technologies early on.
Other technologies such as drones, robotics, autonomous driving and quantum computing play a lesser role in the German startup scene. Nevertheless, some startups are also discussing or planning future use here.