Frankfurt: A startup ecosystem in need of foreign talent and risk-taking VCs?
eyond banks and corporates is a startup scene in the Frankfurt region that has a wealth of potential. But a traditional outlook has meant that there’s room for improvement in terms of attracting talent and investment opportunities.
While traditionally associated with corporates and a more conservative approach to conducting business, the region of Frankfurt Rhine-Main has many advantages for startups which are often overlooked.
Frankfurt Rhine-Main refers to the area surrounding the city of Frankfurt and covers more than 14,800 km². Frankfurt am Main (otherwise known as Frankfurt), Darmstadt, Mainz, Offenbach and Wiesbaden are the five biggest cities that call the German region home.
Frankfurt’s breadth of industries, impressive landscape of corporates and universities and highly qualified talent pool is “a magnet for people from around the world” and has attracted “a big expat community,” says Sissel Hansen, founder and CEO of Startup Guide.
Among the region’s success stories is BuyVIP, which was acquired by Amazon, and fintech company 360T, Germany’s largest startup exit, which was acquired by Deutsche Borse in 2015 for $803 million.
With startup activity frequently making headlines, the region is utilizing all its assets to raise the profile of its startup scene. To find out more, we spoke to Pedro Ferreira, an entrepreneur who helped us curate Startup Guide Frankfurt out of his passion for building up the city’s startup ecosystem.
More than just fintech
The region has a longstanding history of industry and successful entrepreneurship and is consequently ambitious to boost its profile in many key areas, says Pedro.
With fintech as its primary industry, between 2012 and 2017, over 55 percent of all local VC investments were acquired by fintech startups.
Frankfurt is looking to stake a claim on the world stage as the leading hub for AI and cybersecurity as well. 8.5 percent of all startups in Frankfurt are in the AI or big data and analytics subsector.
Home to the busiest airport in Europe, as well as the European Space Agency (ESA), logistics and space are among the industries that Frankfurt has a unique opportunity to flourish in. Pedro adds that the automotive and healthcare sectors are also key areas for growth.
Bridging the gap between corporates and startups
Globally renowned for its esteemed banking sector, Frankfurt is known for its corporate and, perhaps more conservative way of conducting business. But according to Pedro, recently there’s been a surge in the number of former bank or insurance managers moving over to the startup world.
“Many of the people who are working in the startup scene at the moment have come from the traditional banking industry,” he says. Industry experts working for, and founding, startups have helped to bridge the gap between the corporate and the startup worlds.
Corporates are now trying to “recruit employees from startups and incorporate them into the more traditional, corporate model,” Pedro says. Financial institutions looking to retain young customers by creating more efficient, online payment solutions are among the corporates seeking the technical advice of startups.
I used to be a recruiter for a startup and it’s very hard to convince talent to work for startup companies.
Launched in Frankfurt in 2016, Deutsche Bank’s Digitalfabrik is a center for programmers and finance experts to develop digital banking projects. Right from the beginning, the Digitalfabrik had fintechs on board. The Digitalfabrik moreover employs 450 “digital natives,” Die Welt newspaper reported in 2017.
Meanwhile, Frankfurt-based CommerzVentures, the corporate venture capital fund of Commerzbank Group, invests in “the most ambitious, young” startups seeking to disrupt the traditional financial industry.
“Using the startup model is a unique way to improve, innovate and attract professionals from a broad range of industries,” Pedro says. “It’s innovation like this that is transforming the Rhine-Main region and setting us apart from others.”
In spite of the development of this model and a burgeoning startup community, the region’s talent base remains largely untapped.
A 2018 report by Startup Genome, an organization that conducts research on startup ecosystems, found that the Frankfurt region does not have a shortage of talent. Rather, it has not yet “activated its full talent potential.”
Pedro says that many students are more interested in pursuing traditional career paths and tend to find working for corporate companies far more “appealing.” This could be attributed to the large number of corporate players in the region that have, over the years, become adept at marketing themselves to recent graduates – making it difficult for startups to compete.
“I used to be a recruiter for a startup and it’s very hard to convince talent to work for startup companies,” he says. “However, I do think that the universities are on the right path. There a number of initiatives, such as Talent Space, that are trying to showcase how different startups work and how appealing entrepreneurship can be.”
While people used to come from far and wide to climb Frankfurt’s corporate ladder, this mentality is “slowly changing,” Pedro says, adding that there is an increasing number of “international people joining the startup scene and young people emerging from universities.”
But the ecosystem in the financial hub will need to adopt a more “international mindset” and focus on incorporating “companies and entrepreneurs from outside of Frankfurt” in order for it to flourish.
Improving the investment landscape
Pedro thinks Frankfurt’s traditional business culture partially accounts for the difficulties the region has in attracting talent. He also believes this has had a deep effect on startups gaining investment.
“The venture capitalists in Frankfurt are mostly risk-averse, in my opinion,” Pedro says, adding that investors are less likely to invest in verticals outside the sphere of traditional industries.
This is ostensibly a challenge for Germany as a whole, and not just for Frankfurt. The capital risk for startups is often too great for investors, which leaves a significant gap in early-stage funding.
The venture capitalists in Frankfurt are mostly risk-averse.
What’s also lacking in Frankfurt is that does not yet have a very active regional early-stage fund that could invest more liberally than VCs would.
“The ecosystem in Frankfurt is still very German,” Pedro says, adding that it can be difficult to get started with your business if you don’t speak the local language.
Startup density in Frankfurt is significantly lower than in other German cities, with many entrepreneurs choosing to start up in Berlin, where they know that English – the common language of business – is more widely spoken.
Community and coziness
While Frankfurt’s corporate reputation may give off a less appealing vibe than the trendy lifestyle of Berlin or Cologne, the startup scene has a small town feeling that Germany’s more established startup communities don’t necessarily have.
“One thing that I like about Frankfurt is that it is very small. In the morning, you could be working at WeWork, and then you may only need to walk across the street to have a meeting at Mindspace,” Pedro says.
As a consequence of this cozy size, people are used to helping each other, and there is a strong culture of founders helping founders. Corporates, having provided “physical spaces to work side by side,” have given entrepreneurs the opportunity to meet each other and cross-pollinate their ideas.
“Take advantage of the sense of community here. Network a lot, and don’t be afraid of connecting with, and contacting people,” Pedro says. “If you add value to the community, the community will be more than happy to support you on your way up.”
As an ecosystem that is ripe for takeoff if it can tackle its individual challenges, the region has an opportunity to fashion its own unique startup scene. “We don't need to be the next Silicon Valley,” Pedro says. “We just need to build our own ecosystem and be happy with it.”
To find out more about the startups and founders that are shaking things up in the Frankfurt region, you can purchase a copy of Startup Guide Frankfurt online here.
Main photo of Frankfurt's skyline by Wikimedia/XING