Germany’s budget crisis has thrown into question whether state subsidies for deep tech and climate tech startups will go ahead as planned.
Berlin froze payments from its climate transformation fund, which originally planned to invest €212bn over a period of three years, in November following a court ruling that a portion of the funds allocated was illegal.
The fund originally planned to spend $20bn on international chipmakers like Intel and Taiwan’s TCSM to invest in the country,
“These subsidies, particularly of this magnitude, were a strong statement of ambition and confidence in the German innovation economy. Pulling these subsidies makes the German ecosystem look weak,” says Maureen Haverty, deeptech investor at Seraphim Space.
The situation is still largely in flux, with many German VCs that invest in deeptech unsure of how the budget hole will affect their portfolio companies in the long term.
Germany’s startup commissioner Anna Christmann told Sifted in an interview this week that the money earmarked for its €10bn Future Fund — launched in 2020 to bolster startups and make more late-stage capital available in Germany — is safe.
“On the financing side (for startups) we are doing quite well,” she says.
“But, of course, when it comes to the budget, it will be important either way that we will have room for investments in climate tech because that is very important for Germany and our future in green industry and economy.”
A threat to chipmaking
Early-stage German semiconductor startups, buoyed by plans from the German government to funnel huge sums into the sector, have also reaped rewards, picking up a record $50.4m in pre-Series B rounds so far this year.
But there are concerns that the budget crisis will shake investors’ confidence in the German semiconductor sector.
[The budget crisis] may give both local and global investors pause for thought on whether they invest in semiconductors or not
“[The budget crisis] may give both local and global investors pause for thought on whether they invest in semiconductors or not,” says Haverty. “[They’ll be thinking] what major policies were their startups relying on that could be cancelled at short notice?”
More generalist investors — which have turned to the semiconductor sector as governments have ramped up chip spending in the pursuit of tech sovereignty — could also think twice before backing German startups in the short term, says Michael Kissner, founder and CEO of Akhetonics.
“There are a lot of investors that are very new to deeptech and this kind of thing can scare them off quite easily,” he tells Sifted. While the startup’s public funding isn’t impacted by the budget crisis, it’s already had investors asking about the implications, he adds.
Black Semiconductor — which Sifted understands is currently raising a round in the region of €500m, 70% of which is meant to come from an EU fund, the IPCEI — says that while the startup isn’t impacted “seriously” by delays, it “might see uncertainty on timelines” as a result of the budget crisis.
There are hopes among founders and investors that the German government will find the money from other sources, but it could delay funding for projects by up to a year, says Gopalakrishnan Balasubramanian, cofounder and CEO at German semiconductor startup XeedQ.
“This uncertainty is really bad for startups. Not only in funding but also plans around recruitment and infrastructure. This is all going to have a negative impact,” he tells Sifted.
Will startups leave Germany?
Germany’s $20bn financial package was the heftiest chip support scheme from any nation state in Europe, and was seen as a statement of the country’s intent to become the leading semiconductor hub in Europe. It was also hoped the funds would go some way to competing with the weightier $52bn and $143bn chip packages in the US and China.
But now there are worries that the drop in confidence around Germany’s financial commitment to tech more broadly could make the country’s brightest and best startups consider upping sticks to more attractive ecosystems.
There’s already signs that some of Europe’s most promising scaleups have been unable to resist the allure of eye-watering government support packages overseas. Climate techs like FREYR, Climeworks and Marvel Fusion have all expanded across the Atlantic in the past year to take advantage of the US’s $369bn IRA act.
“Startups which are unsure of Germany might move to other places,” says Balasubramanian. If that happens with semiconductor startups, “Germany is going to lose”, he adds.
The budget crisis has also left some investors concerned about the future of their deeptech portfolio.
Gerrit Jurilj, partner and deeptech investor at Swiss industrial tech VC b2venture, says the government’s failure to address the budget deficit will affect the firm’s deeptech companies “directly and indirectly”, particularly when it comes to follow-on funding opportunities, subsidies and government contracts. Though he declined to specify which companies will be affected.
It will also “endanger our ability to innovate in important future technologies at a time when Europe cannot afford it”, he adds.
When it comes to the semiconductor industry, Germany could become the “epicentre” of Europe if plans from industry giants like Intel and TCSM go ahead, drawing in international talent, says Haverty.
“A concentration of talent leads to employees moving around, spreading ideas and founding great startups. Without these ecosystems it is hard for any startup to flourish, particularly in specialised sectors like semiconductors.”
This piece has been updated to clarify that Germany's Climate and Transformation fund was initially planning to invest €212bn over a period of three years.