German SaaS companies are increasingly considered the gold standard for quality products and financial potential. The ‘Deutsche Qualitat’ is internationally revered and its companies are bolstered by a supportive government that invests in early-stage funds. For example, the private-public partnership, HTGF has helped finance more than 750 startups since 2005.

But why Germany? And what has created such good conditions for successful and attractive SaaS companies?

A maturing market

A decade ago, the B2B SaaS market in Germany was barely crowded, with only a few specialised venture capital investors. Since Senovo made its first SaaS exit in 2014, however, the landscape has grown quickly.

This maturation coincided with two things. A wider European boom in enterprise software startups saw the SaaS market grow its share across all markets and at times, outpace fintech. But more importantly for Germany, as SaaS became the latest investment trend, some of the big US private equity (PE) firms had, by this time, firmly established themselves in Germany. 

As with anywhere in the world, understanding local business etiquette is a must and Germany was previously seen as a place adverse to change, riddled with red tape, and where local insight and local connections were essential. Carlyle, Goldman Sachs, and Blackstone have now all been operating in Germany for the best part of two decades and all have offices there. They, as well as others, have shed their perception as foreign investors and have ingratiated themselves with the market – and gained the knowledge needed to operate successfully in it.

This is mirrored on the startup side. Today, many founders are experienced professionals with multiple successful exits under their belts.

Decentralised DNA

It has taken time for investors to properly bed themselves into Germany’s decentralised tech market. Unlike the other European tech hubs such as the UK or France, where most tech investment activity lies in London or Paris, Germany’s tech expertise is split between different German cities and regions.

To complicate it further, these regions and their cities then have sub-specialisations. Munich, for instance, has a greater share of SaaS companies – and tech startups overall – while Berlin is known for its consumer SaaS expertise.

This means investors in Germany are not greeted with a unified investment landscape, but a decentralised, more varied, and regionally diverse proposition – and they have to approach it accordingly. It has been vital for investors to understand the differences between regions – as well as cities within those regions – and how these have been changing over time.

The different specialisations of cities make it possible for startups to surround themselves with like-minded and specialised individuals, incubators, and clients specific to what they do.

What’s next for the market?

Like in most European countries, academic spinouts are at once a vital source of innovation and a key point of contention among investors, founders, and policymakers. Germany spends the same percentage of GDP on R&D as the US and it tops the European Patent Office’s index with the most applications filed. But despite this, many spinouts are failing to attract early-stage investment, let alone go commercial and scale.

A key reason why startups fail to scale is down to how intellectual property (IP) is transferred. Typically, German universities retain IP rights to any innovation based on academic research, and spinouts are offered either the option to purchase the IP, license it for a payment, or have it transferred to them in return for shares. When a startup is seeking early-stage capital, the last thing they want to do is to part with liquid capital, and that is exactly the problem the first two options pose.

Early-stage capital comes far easier to startups with their own IP – which ultimately makes their chance of a successful exit much higher. Germany could make further gains in the SaaS market by addressing how IP is transferred.

However, obstacles like these aren’t reflected across the industry. Generative AI is already making some of the biggest changes to the market. There’s been an uptick in Gen AI unicorns and it’s likely this will only continue. Institutions like Fraunhofer, which focuses on generative AI research, will be influential in further solidifying Germany's position as a leader in SaaS and early-stage innovation.

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