How Merz Used Startups to Defend Germany's Economic Prospects
Chancellor Friedrich Merz has repeatedly pointed to a jump in startup formations as evidence that the German economy is being talked down unfairly. In recent weeks he cited the numbers both in a government declaration and a summer interview, arguing that young companies can become tomorrow's champions for employment and prosperity.
The scene indeed looks better than many would have predicted a few years ago. The defense sector has produced multibillion-euro startups like Helsing and Stark in record time. AI-powered translation service DeepL, robotics firm Neura, process-mining specialist Celonis, and conversational-AI players Parloa and n8n are all holding their own internationally. Moreover, a global tech shift back toward hardware – quantum computing, fusion, drones and rockets – plays to Germany's industrial strengths far more than the e-commerce and search-engine booms of the past decade did.
Yet the numbers tell a different story when placed in a global context. According to EY, German startups attracted just under €5.3 billion from investors in the first half of 2025, 14% more than a year earlier. But that figure is dwarfed by the $122 billion that OpenAI alone raised a few months ago. German venture-capital players calculate that, to reach the same volume of growth investment relative to GDP as the United States, the country needs an extra €30 billion every year. Similarly, Bitkom forecasts IT-sector revenue in Germany will exceed €170 billion in 2026 – growth of 5.4%, far better than the stagnant overall economy. Yet Gartner expects global IT spending to jump 14.2% to $6.37 trillion, meaning Germany is still under-participating in the artificial-intelligence super-cycle.
The entire European tech ecosystem is now valued at roughly $4 trillion, having quintupled since 2016. That sum, however, is less than the market capitalisation of US chipmaker Nvidia. The implication is clear: Europe has no shortage of good ideas, but it lacks the ambition – and critically the capital – to turn successful startups into economic heavyweights that actually move the needle.
Why the Investment Calculus Still Doesn't Add Up for German Tech
The Hardware Advantage Is Real, but It Isn't Scaling Fast Enough
Germany's traditional engineering competence in areas like quantum computing, nuclear fusion and advanced drones gives it a structural tailwind that pure software plays never provided. The fact that marquee names in defense and industrial robotics are now emerging from Munich, Aachen and Dresden validates the country's research strengths. However, the absolute sums being deployed remain too small to turn these national champions into global platforms quickly. Without a step-change in the availability of growth-stage capital, even hardware bets will struggle to reach the scale needed to compete with US and Asian rivals that are raising entire national R&D budgets in single funding rounds.
The €30 Billion Gap Is Both a Funding and a Structural Problem
The annual €30 billion shortfall identified by domestic venture investors is not merely a matter of persuading more limited partners to write cheques. It reflects a European ecosystem where institutional investors – pension funds and insurers – allocate a fraction of the portfolio share to venture capital that their US peers do, often citing regulatory barriers that are more solvable than they concede. At the same time, the habit of selling successful startups at the first viable exit, rather than holding and building them into independent global corporations, starves the ecosystem of the serial entrepreneurs and liquidity that fuel US tech hubs. The result is a venture market that looks resilient on a year-on-year basis but is structurally incapable of producing companies the size of an Apple or a Nvidia.
Fragmented Capital Markets Undermine Europe's AI Ambition
The fact that Europe's entire tech ecosystem is worth less than a single US chip company is more than a statistical curiosity. It indicates that even when European startups achieve breakout success, they lack a deep, unified capital market in which to list and raise further funds. The European capital markets union, long discussed but never completed, would make it easier for high-growth firms to stay in Europe instead of moving their legal headquarters and IPOs to New York. Until that project moves from white papers to actual legislation, even Germany's best AI and defense startups will face a hard ceiling on how large they can grow while remaining headquartered in Berlin or Munich.
What Founders, Financiers and Ministers Can Do to Close the Gap
- Founders: Refuse to settle for a domestic exit at the first offer. The examples of DeepL and Celonis show that building a global customer base from Europe is feasible; the missing piece is the will to stay independent long enough to become a €10 billion-plus anchor company that then recycles talent and capital back into the ecosystem.
- Venture investors: Actively educate and lobby German and European pension funds and insurers to allocate at least 1% of their portfolios to a diversified fund-of-funds VC vehicle. The €30 billion shortfall cannot be closed by existing niche players alone.
- Corporates: Move from cautious pilot partnerships to meaningful strategic acquisitions of startups. A single large trade sale by a DAX company can return more capital to the ecosystem than dozens of small exits, providing the liquidity that early-stage investors need to back the next generation of founders.
- Government: Accelerate IT-skills visa processes and strip away any bureaucratic steps that add more than two weeks to a hiring decision for foreign tech talent. Simultaneously, make the new startup strategy measurable by publishing quarterly updates on concrete metrics – number of visas issued, days to approval, and volume of institutional capital unlocked by regulatory changes.
- EU policymakers: Prioritise the capital markets union and harmonised insolvency law. Without a single deep market for tech listings, Germany's strongest startups will continue to incorporate and list in the United States, taking their high-value jobs and tax revenues with them.
Risk & Opportunity Assessment
| Commercial Risk | High | If Germany's IT sector continues to grow at only 5.4% while global IT spending expands at 14.2%, the country risks missing the AI-driven commercial expansion and seeing its established industrial champions lose relevance in a software-defined economy. |
| Competitive Risk | High | The €30 billion annual growth-capital gap compared to the US means German startups are systematically outspent and outscaled by American and Asian rivals, especially in capital-intensive hardware sectors like quantum and fusion. |
| Regulatory Risk | Medium | Persistent regulatory fragmentation in the EU, particularly the lack of a capital markets union and burdensome visa processes for tech talent, directly limits the ability of German startups to access the funding and skills they need, though the new government strategy signals potential improvement. |
| Reputation Risk | Medium | Chancellor Merz's repeated use of startup numbers to claim economic vitality could backfire if the underlying investment gap becomes widely understood, undermining the narrative of a tech-forward Germany and deterring international limited partners. |
| Technology Disruption | High | The global tech pivot to hardware - where Germany has natural advantages - creates a narrow window to consolidate a leadership position; failing to exploit it will allow US and Chinese competitors to dominate the next generation of quantum, drone and fusion platforms. |
| Commercial Opportunity | High | Coupling Germany's existing industrial strengths with institutional capital reform could create a €30 billion annual funding unlock, enabling the scaling of defense, AI and hardware champions into global players and adding a genuine growth engine to a stagnant national economy. |
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