The state must invest in startups – even if billions in tax revenue could be lost

Germany wants innovation but shies away from risk. Investor Carsten Puschmann demands: The government must learn to risk billions – otherwise, all we'll have left are the ideas of others.

Venture capital (VC) is essential for bringing ideas from the concept phase to market maturity. Especially in capital-intensive areas such as climate technology, biotech, or artificial intelligence, the availability of VC often determines whether a startup succeeds or fails. These sectors are also considered key to Germany's future viability.

Germany lacks an open and dynamic venture capital landscape. According to recent studies, only about 20 to 25 percent of European VC investments flow into Germany. Compared to countries like the US, European—and especially German—startups often face significant challenges in scaling.

This so-called "scaling trap" results in undercapitalized startups that can no longer compete with international competitors in the long term. One reason: German investors act more conservatively than their US counterparts.

There's a tendency to invest less in high-risk, potentially highly profitable startups, especially in later stages after the seed round. This sets in motion a negative cycle: In recent years, a significant decline in venture capital investments has been observed in Germany.

In 2023, German startups raised six billion euros, a 39 percent decline compared to the previous year, highlighting the growing investment gap. The lack of large-scale financing opportunities, in turn, leads to fewer "unicorns" emerging from Germany. This, in turn, weakens the ecosystem's ability to attract significant investors.

It remains with the two truisms: “Money attracts money” and “money goes where attention flows”.

The coalition agreement, which is no longer so new, emphasizes that state funds should play a key role in promoting innovation. They are intended to support young companies and start-ups in particular, establishing Germany as a leading innovation hub in key technologies such as AI and microelectronics.

But the answer to the scaling trap cannot lie solely in the call for more “government money.”

By this I mean, on the one hand, the idea that the state distributes tax money according to the watering can principle, and, on the other hand, that spending is politically directed towards certain sectors or fields of technology.

The former would be nothing more than hidden subsidies, essentially digital agricultural diesel. The latter is the precursor to a planned economy. But the future can't always be planned. Who wants to decide whether biotech or AI should be promoted when everything is important for our future?

Government involvement alone will always distort competition and crowd out private investors – especially when political objectives are the sole funding criterion. Government risk investment will always be a balancing act that requires clear and transparent criteria.

For me, the following three criteria could be decisive – in addition to economic viability, which is a prerequisite for any investment:

• Degree of innovation: Does the project have the potential to achieve groundbreaking technological advances? Can the company enter a new market or fundamentally disrupt an existing one?
• Economic benefits: What is the company's long-term growth and scaling potential? Can the project create significant new job opportunities?
• Sustainability and social benefits: Does the project contribute to reducing environmental impacts such as CO2 emissions? Does the project improve social well-being?

I therefore believe that the new federal government’s intention to subject the entire start-up financing architecture to an “efficiency check” is the right step.

I also believe the strategy of using state funds to specifically mobilize private capital is correct. The state should strategically use its capital—which we all make available to it and which, strictly speaking, is therefore all of our capital—as a lever to mobilize private investment.

Instead of relying solely on direct investment, the government must take measures to improve the framework for private investment in all sectors and industries:

• Tax benefits: Targeted tax incentives, including improved depreciation options, encourage private investors to direct their capital into promising sectors. Tax relief for investments in companies that meet at least the three criteria could significantly increase economic engagement.
• Matching funds: The government could develop programs—or supplement existing VC funds—in which it matches every euro contributed by private investors by a certain amount. Such funds would strengthen trust and multiply the commitment of private investors.
• Risk minimization: The government could reduce investment risks for private actors through government guarantees or insurance. This would also lower the entry barrier for private investors.

But what must always be clear: The word "venture capital" literally carries danger. The risk is that the money is lost. Is the government even allowed to invest under these conditions? Don't we all still have the Northvolt disaster fresh in our minds?

In the worst case scenario, this bankruptcy could cost more than a billion euros in German taxpayers' money. So, shouldn't the government provide venture capital? I mean, it actually has to. It might have to do it more wisely than in this particular case. But it has to. A combination of incentives and support sends a strong signal to the market and to founders and would make Germany a more attractive location for innovation and technology.

And to return to the potential maximum damage of one billion euros: The entire public budget of the federal, state, and local governments reached approximately 2,082.1 billion euros in expenditures in 2024. One billion euros therefore represents just 0.048 percent of total expenditures. I would have accepted that risk.

Carsten Puschmann is an investor, serial entrepreneur, and innovator who specializes in investing in promising startups alongside family offices. As the founder of a venture builder and two private investment clubs, he offers investors a wide range of high-profile investment opportunities. Carsten supports startups in the pre-seed and seed phases by raising venture capital and optimizing business models. Business Punk magazine named him one of the 100 most innovative minds in the German digital economy in 2024.