Germany may be late to the digital age party, but German companies are eager to catch up with the rest of the world. An increasing number of firms are now forming partnerships with startups in an effort to step away from conservative business approaches and embrace a rapidly evolving tech culture. Since German companies are the foundation of the country's standing as the largest economy in Europe, company executives and even government officials are concerned that they could lose that position if they are not able to rapidly shift paradigms in favor of a rapidly advancing digital age. (See article: Why Germany Is The Economic Powerhouse Of The Eurozone .)

Startups in Germany Hindered by Lack of Funding and Digital Strategies

Firms such as Evonik, Deutsche Telekom, Metro, and Bayer have now begun to invest heavily in startups in an effort to boost innovation while also gaining much needed digital expertise. To date, digital innovation in Germany has remained hampered largely due to the lack of venture capital. Last year, however, German startup investments more than doubled to reach $1.74 billion. Even so, that amount remained far behind the amounts being invested in the United States, where startups attracted almost $50 billion. (See article: Number One Country For Tech Start-Ups: USA)

Further hindering the transition to a digital age in Germany is the lack of commitment to a digital strategy. According to a study published by Accenture, less than half of the top 500 companies in Germany possess a comprehensive digital strategy. An even smaller number of German firms, just 11 percent, utilize social media, according to the European Commission's Digital Economy Index. (For related reading, see article: Implementing A Small Business Social Media Strategy.)

German Government Shifting Its Approach to Startups and Innovation

In an effort to change the country's approach to innovation, the German government has announced plans to provide support to startups. These plans include a pre-market web platform that makes it easier to connect startups with investors.

Still, some critics have been quick to point out that as welcome as such plans might be, they may not be enough, since the lack of venture capital investment has significantly impacted the ability of startups to thrive in Germany. 

German Chancellor Angela Merkel has stated she believes that a deeply entrenched fear of failure could also be holding back startups. During her weekly podcast, she recently stated, "This culture of investing in start-ups….of taking risks and of being able to live with the fact that only 1 in 10 projects will end successfully…is something that is perhaps more pronounced in the United States, and maybe even South Korea."

Additionally, startups have been less than pleased with the legislation that Germany has recently announced that it will put in place to regulate crowdfunding, and are concerned that it would result in limiting their ability to raise investment funds online. This has proven to be a significant obstacle for startups in Germany in the past.  (For related reading, see article: As Crowdfunding Matures, Investing In Startups Gets Easier.)

It must be noted, though, that during the third quarter of 2014, Germany generated $1.5 billion in equity financing, becoming a favored European destination for such deals. During that same quarter, Germany took in more than 50 percent of all VC-backed investment in Europe, setting a new record. Even so, startups in Europe, particularly Germany, often face significant challenges when it comes to securing venture-backed funding. While seed rounds in the United States typically exceed $1 million, that is not the case in Europe, where investors are usually hesitant to invest more than $300,000. With a scarcity of angel investors in Europe, German startups often find it difficult to raise the funds they need to get their feet off the ground. (See article: The Stages In Venture Capital Investing.)

Although crowdfunding has proven to be a successful method for helping German startups to bring in the funds necessary to launch new technology, it is not without risks. In most instances, such crowdfunding efforts are not based on equity stakes within the company, but are instead pre-orders for the company's product. 

German Startups Continue to Forge Ahead

Despite the limitations facing German startups, such challenges have not prevented the move toward future innovation in the country.According to TechCrunch, Deutsche Telekom recently announced it would be establishing a $620 million fund to be used for investments in German startups. The new fund, Deutsche Telekom Capital Partners, will be used for startup investments and providing large rounds of strategic private equity investments.

An increasing number of German companies, in fact, are now beginning to regard Berlin as a hotbed for technological innovation. This is largely due to the large number of emerging startup firms now settling into the city. Following the fall of the Berlin Wall, a number of budding entrepreneurs settled into the city. These firms, and those coming after them, have managed to forge ahead in the new technological age despite a lack of funding.

Last fall, German Accelerator announced the selection of 18 startups to be partnered with industry mentors while spending up to six months in Silicon Valley and New York City. Approximately 80 firms vied for the highly selective competition. 

Startups in Germany Exploring New Directions in Emerging Digital Age

German startups are also increasingly moving in a variety of different directions as they explore the potential offered by technological innovation. Many of those startups have elected to draw upon their traditional German engineering roots to propel their hardware-centered firms to the top. Among them is Bragi GmbH, a Munich-based startup that has raised more than $3.3 million via Kickstarter. The firm's primary product is Dash headphones that offer real-time foreign language translation.

The vast number of mechanical and electrical engineers that call Germany home have also begun to increasingly venture out on their own. Among them is LUUV. The plug-and-play video-image stabilizer for GoPro cameras and smartphones has recently brought in almost $50,000 via crowdfunding. Panono, which produces a panoramic camera ball capable of taking pictures in all directions simultaneously, initially set a goal of raising $900,000 during its crowdfunding round but managed to bring in $1.2 million.

Engineering may be steaming ahead in a new culture built on technological innovation in Germany, but there are an increasing number of signs indicating that big data could be shaping up to be the next trend for German startups. Firms such as RapidMiner and Datameer have pulled in millions in funding in just the last couple of years.

Yet another area experiencing a high rate of growth is payment services. Firms such as Payleven and SumUp, focused on card payment services, have begun to expand rapidly and are now engaged in fierce competition.

The Bottom Line

Germany still faces a number of significant challenges that make it difficult for startups to compete on a global scale, particularly with investment-heavy startups in the United States. Even so, the startup scene in Berlin and other cities is finally beginning to change, which could provide the impetus Germany needs to become a major contender in the tech industry.