In-depth look at the German scale-up market with Philipp Herkelmann and Julius Göllner

We’re thrilled to have had the opportunity to sit down with two of the highly recognisable and respected figures in the German scale-up ecosystem: Philipp Herkelmann and Julius Göllner. Our Director Partnerships DACH, Menno de Graaf, delved into their experiences and perspectives, gaining valuable insights on the current state of the German scale-up landscape. With Philipp’s and Julius’ extensive backgrounds in investing, entrepreneurship and community building, we’re eager to learn from their expertise.

Philipp and Julius, two of the leading voices in the German scale-up ecosystem

While Philipp Herkelmann and Julius Göllner are already recognised personalities in the German scale-up ecosystem, let’s give them a proper introduction. Philipp Herkelmann is a technology and talent expert who has spent his career focussing on identifying the next big thing in technology and cultivating the talent necessary to bring those innovations to life. After leaving his role as a partner at Entrepreneur First, Philipp recently has been dedicating himself to his thesis on the future of technology and its impact on the talent landscape. He believes that AI will have a profound impact on almost every field, and he’s exploring its potential implications for the talent landscape and entrepreneurship in Germany. With his expertise and forward-thinking approach, Philipp is poised to be a key player in shaping the future of technology and talent in Germany and beyond.

Julius Göllner is a dynamic figure in the German scale-up ecosystem, with a focus on building the SaaS community through his platform, ARRtist. While SaaS may not be a new topic, Julius believes that the German-speaking market still has room to grow and catch up to other geographies in terms of ecosystem development. 

In addition, Julius is an entrepreneur, angel investor, and has a portfolio of around 40 B2B investments under his belt. His experience and expertise in both entrepreneurship and investing give him a unique perspective on the challenges and opportunities present in the German scale-up ecosystem. With his dedication to building up the SaaS community and his impressive track record in investing, Julius is poised to continue making significant contributions to the growth and success of the German scale-up landscape.

Normalisation of the venture market

Venture capital investments have been through a lot of turbulence over the past year. With a surge in investments in 2020 and 2021, followed by a significant slowdown in 2022. This normalisation of the market, in combination with more expensive capital and fewer budgets available has made it more difficult to raise capital. And as a result, it has put pressure on companies to cut costs, review internal processes, and extend their runway. As the market slowly relaxes, with the cooling down of investments, we’re now at a tipping point and may have already crossed it. 

According to Julius, as companies get closer to IPO, it becomes more difficult to raise capital nowadays. Growth financing was the first to slow down, followed by each subsequent stage, resulting in significant pressure on capital, and higher costs. As a result, founders are becoming more aware of capital efficiency. He does see a slow relaxation happening as we come out of the phase of uncertainty. Despite this, later stage companies, especially those in Series A and Series B who were on high terms 12 to 18 months ago, now seek a longer runway for their next financing round. To avoid a down round, they need to generate way more revenue to justify their valuation. Therefore, they’re pushing for capital and process efficiency to have more time to reach the necessary revenue levels.

Shift towards efficiency, prioritising profitability over growth

As mentioned, there's a significant mindset shift happening across companies in Germany. While growth used to be the primary focus, with a constant push for acquiring more funding, expanding rapidly, and penetrating the market, there's now a strong emphasis on building efficiencies. Nearly every founder with whom we speak these days mentions that their main goal this year is to become profitable, even in earlier-stage companies.

This is something Julius can only agree with, “I think it's a very logical step for companies to shift their focus towards building efficiencies and moving towards profitability. Just 12 months ago, the cost of capital was very low, and startups could easily spend 3 to 4 Euros to generate one additional Euro of Annual Recurring Revenue (ARR), as capital was readily and widely available for low cost. However, the capital market has changed now, and companies are much more focused on growing capital efficient rather than just chasing growth at any cost.”.

Scale-ups can no longer afford to spend large amounts of money to pursue an aggressive growth strategy. As a result, companies are now more strategic in their hiring, marketing, and business development efforts. They’re looking for ways to maximise the value of their capital while minimising costs. This trend is not limited to any specific stage of funding and is being observed across the board.

Regional differences in Germany's scale-up ecosystem

Germany's startup ecosystem is composed of different hubs, each with their unique characteristics. Berlin, for instance, is known for being very international and modern. However, as one moves down south towards Munich, the city is known for having a more finance-oriented environment that can be more challenging to penetrate.

Despite these differences, Philipp observes that the impact of market sentiments on the mindset seems to be consistent across the country. “There are significant differences at a national level. In Germany, investors have always tended to be more cautious and require scale-ups to demonstrate significant traction before investing. In contrast, in the UK, investors may be more willing to invest based on the internal rate of liquid CV, rather than traction. Although I believe that in these times, everybody wants to see traction.”

Julius shares Philipp's perspective on the importance of traction in the German market, but he also offers his own hypothesis regarding the regional differences. According to Julius, pre-seed fundraising may be easier in Munich than in Berlin due to the more organised and streamlined ecosystem in Munich: “The scale-up ecosystem in Berlin is highly fragmented, with many investors, universities, and accelerators operating independently. In contrast, Munich boasts an impressive flywheel that begins with a university program focused on entrepreneurship and is followed by established acceleration and investment programs. These programs have been around for several years, offering a low-risk option for investors due to the proven track record of successful startups that have gone through them. The streamlined and organised nature of the Munich ecosystem, with its lower complexity and variety, makes it particularly more effective in supporting early-stage startups.”.

How the market sentiment impacts capital, talent, and product strategies

It’s evident that due to market volatility, capital is becoming more expensive. Companies are implementing hiring freezes and being more defensive in certain areas. Particularly, later-stage VC-backed companies with highly impacted commercial, product, or tech demand.

According to Julius, capital becoming more expensive will most importantly affect the speed of growth. “Companies will prioritise efficiency in their growth strategies. A simple way to achieve this is by breaking down the case to an FTE level. Such as determining the required number of SDR’s and AE's, as well as the performance marketing budget necessary for reaching a target. By reducing excess in these areas, companies can easily achieve their goals.”

However, Julius notes that despite the current market volatility, there’s still a talent shortage in certain areas, particularly in sales. The demand for sales professionals is extremely high, resulting in a salary increase for go-to-market functions. “In the past, we’ve witnessed extravagantly high salaries being offered for sales roles, with fresh college graduates being offered up to 100.000 euros without any prior experience. These salaries are normalising, but it ultimately depends on the supply and demand in the market. If there's a high demand and limited supply, then salaries will inevitably increase.”.

Sales talent shortage is a common issue across many scale-up hubs, but it’s particularly acute in Germany. Finding junior sales professionals to join tech companies, especially, is a major challenge. Ideally, the candidate must be a German native with a good command of English and an interest in technology. This often requires searching within academic circles, even though sales isn't typically taught in universities. Regarding Julius, “Unfortunately, only 1% to 2% of German universities offer tech sales related education, which worsens the underlying talent shortage in the country.”.

On the product and tech side, the talent market is also changing. Previously, there was a tendency to focus more on developing many features to see what sticks, instead of solving a single critical problem for a customer. This has significantly changed, in Philipp’s perspective. “Companies are no longer hiring a big amount of people, or for example experimental product teams. Most companies, including those in my private portfolio, have significantly reduced any functions that were not contributing to breaking even. This means eliminating any experiments or bets and people who were just occupying warm chairs in anticipation of future employment.”

Currently, the emphasis is on optimising products, enhancing automation, and reducing costs for both the company and its clients.

Future stars in the job market are AI-savvy

As the market continues to shift and certain profiles become increasingly in-demand, it begs the question: who will be the star players in this new market situation? Philipp's perspective is that individuals who have acquired proficiency in using AI systems will become the new star players. As with the help of AI, these individuals can deliver more output, iterate faster, and become much more productive. 

As a result, team structures and functions may undergo massive changes. “For instance, engineers and computer scientists who work with AI systems can increase their output by 100 times, which allows them to iterate on code themselves rather than relying on a team of engineers. This improves iteration speed, which is essential for venture product development. Therefore, the individuals who possess the depth and ability to work with AI will likely become the key players in the future working landscape.”

This might suggest that companies in Germany are shifting their hiring strategies according to this trend. Although this is not the case yet, Julius believes. “Currently, many are still trying to grasp the ongoing changes. It’s rare to come across organisations with hiring strategies that consider the future demands brought about by AI. However, I expect that this will become more common within the next 6 to 12 months.”

While there’s a lot of talk and experimentation within certain departments, such as the tech side, overall adoption is still limited. In particular, when it comes to hiring, there has not yet been a large-scale shift towards incorporating AI into the process.

Important trends to keep an eye on

As you can imagine, we could have talked for hours with Julius and Philipp. Unfortunately, we couldn't include everything in this report. However, to wrap things up, here are some important trends that both of them believe founders, revenue leaders, people leaders and talent should pay attention to.

1. The importance of mission and purpose

It's clear that offering competitive salaries and benefits is a necessity for attracting talent. However, it's also important to note that individuals who are solely motivated by high salaries are likely to be transient. If they can earn even slightly more elsewhere, they will be tempted to move on. These individuals may not be the best fit for a company that’s focused on building a truly exceptional organisation.

In the particular industry segment where Philipp worked, which focused on attracting top engineers, having a strong mission was crucial. This mission needed to be both ambitious and impactful, with a focus on sustainability. “One of my portfolio companies has addressed the issue of perishable goods in supermarkets by utilising AI to combat the massive sustainability problem of food waste. The company received an astounding 8000 applications for a single engineering role.” Showing, to attract top talent, whether it's for technical or revenue-related positions, it's essential to have the right mission. 

Philipp adds, “Purpose was once compared to a drug, but now it's more like currency. People want to work on something they can truly believe in. This trend is gaining more significance in the talent market.”

2. The importance of employer branding

According to Julius, employer branding is becoming increasingly important for early-stage companies. This doesn’t necessarily mean hiring an Employer Brand Specialist, but rather ensuring that it’s a skill within the founder's capabilities. Founders need to be proactive in finding stages and networks to share their story and increase awareness among potential employees. 

In the past, the focus may have been on selling to potential clients first, with employee recruitment as a secondary priority. However, this balance has shifted, and employer branding needs to be at the forefront of the founding team's minds.

3. Hiring international talent

There’s still a global lack of talent, and from Julius’ point of view, that is something which of course will not be healed this year. So, in his opinion, we need to have a more globally-oriented talent acquisition mindset. “We’re witnessing a growing number of international talent relocating to Germany, particularly for senior positions at later stage companies. This shift may be slow, but I believe it will eventually become a fundamental requirement for companies when it comes to talent acquisition. And it’s something that should be considered in the hiring process, in my opinion.”

4. The rise of exceptional talents 

A noteworthy trend observed by Philipp is the rise of exceptional talents who, much like football stars, attract significant attention. These individuals, who represent the top 1% of their respective countries, are scouted at a young age, typically around 16, 15, or 18 years old. 

The market has witnessed a growing recognition that global impact can be driven by individuals under the age of 20, with experience being less of a determining factor than talent. However, hiring such exceptional individuals is becoming increasingly difficult as they are treated like superstars by numerous other stakeholders in the market.

5. Lose the fear of technology, and develop some curiosity around it

Philipp emphasises that if he were to build a team today, he would only hire individuals with a tech background or at proven ability to dive into technological concepts and make use of them. As he believes that by now everyone should have displayed some level of technical interest and understanding. As a founder or leader in a company, you will eventually need to work with a team that understands technical concepts. It may not be immediately necessary, but it will likely happen sooner rather than later. Therefore, it's crucial to have individuals on your team who can quickly adapt and understand these concepts.

“What I see happening currently is the widespread commodification of generic business knowledge. To stand out, having technical expertise is essential. If you're not already doing so, start developing your technical skills. Don't be afraid of technology. Instead, be curious about it. Dedicate at least an hour a week to read and learn about it, this will help you take a significant leap forward.” says Philipp.

Julius fully agrees and believes that within the next 12–18 months this will become a self-fulfilling prophecy. Hiring strategies will also change, and this point will become much more critical for later-stage companies. “AI may seem new now, and only a few people may have used it extensively. However, in 5 to 10 years, it will become a major commodity. Just like Excel, which is used in almost every job. If you don't know how to use Excel, you'll be out of business”.