European startups have always suffered from the eternal startup problem: how to get out? However, in Europe the problem has always been particularly acute. How many large European industrial or corporate giants do they acquire or hire? Not many, and not enough.
It’s part of the reason so many European startups end up heading to the US. The US is one of the few markets where you can achieve decent scale, and it also has the potential to exit via a sale to one of the global technology platforms or to public markets.
Now a new, albeit slightly different, German private equity fund hopes to solve at least part of the problem, and at least in Germany, which will be its main target.
Private equity investor FLEX Capital (based in Berlin) says it has now closed its second €300m fund with the aim of effectively amassing German-speaking medium-sized tech companies and giving these merged entities greater global scale. . This is an unusual use of PE funds and puts FLEX in a slightly different category than your average PE team.
Investors include funds of funds, institutional investors from Europe and the US, and the founders of some successful European companies, such as Christoph Jost, Peter Waleczek, Felix Haas, Jan Becker, Andreas Etten and Dr. Robert Wuttke.
The opportunity seems to be there. In the DACH region (composed of Germany, Austria and Switzerland) there are an estimated 11,000 medium-sized Internet and software companies that generate between €5 and €30 million in sales per year.
Christoph Jost, Managing Partner of FLEX Capital, describes his thinking in a statement: “In order to achieve the necessary strengthening of our own software sector in the DACH region through innovation and growth, more capital and knowledge must flow into a software successful and technology companies that are already category leaders… The new fund will allow us to do exactly that once again: invest in outstanding entrepreneurs and management teams that are looking for a competent partner for the development of their software companies.”
Since its founding in 2019, FLEX Capital has acquired 13 midsize software companies, including Nitrado (multiplayer game hosting); ComX, a B2B sales enablement platform; EVEX group, for audiologists and opticians; and OMS group, a software group for output management.
One of FLEX Capital’s backers is Felix Haas, best known for co-founding Amiando and IDnow, as well as co-organizing and hosting Bits & Pretzels, Germany’s largest founders’ event.
Haas explained the FLEX strategy to me in more detail: “We buy between 51% and 100% of a company. We’ll focus on smaller software startups (eg, $15 million in revenue, $3 million in profit), and then combine them with two or three other competitors. Then you will have a much bigger leader (for example, a company with revenue of 100 million euros and profit of 20 million euros). So the companies are big enough for an initial public offering or to be sold to the more “normal” private equity firms.
If Haas is right, then the German startups have just had a potential new exit opportunity. And in this downtrend macro environment, that can’t be a bad thing, especially if you’re a startup that’s struggling to grow and looking for the exit doors.