TQ Co-Director Dr. Thomas Funke Photo Credit: TQ

More than just banks and corporates, something is brewing in this German city that could make it the next center for global fintech

Berlin has fast become known as the hub for much of Europes culture and tech scene, offering a hip vibe that has drawn significant talent to the city over the past decade.

But moving past the spotlight on Berlin is the quiet giant of Frankfurt. With its burgeoning cadre of mostly early-stage companies that are emerging from the mass of corporates long associated with the city, it offers an alternative look at how startups are developing in Germany that may be surprising.

Helping to lead the charge is the new team at Tech Quartier, Frankfurts first hubspot aimed at nurturing the young community and supporting entrepreneurship. Backed by Goethe University, the Technical University of Darmstadt, and Wirtschafts und Infrastrukturbank Hessen among others, TQ is led by Managing Director Dr. Sebastian Schaefer and Co-Director Dr. Thomas Funke.

Tech Quartiers Managing Director Dr. Sebastian Schaefer and Co-Director Dr. Thomas Funke Photo Credit: TQ

As entrepreneurial evangelists and educators, Schaefer and Funke see Frankfurts role in the financial center of Europe as an advantage for the citys startup sector to build from. Quite naturally, they have decided to focus on fintech. It does not hurt that the Federal government has named Frankfurt Germanys fintech ecosystem in the Digital Hub program.

Looking to fintech would seem like the logical first step for the community, seeing as finance and banking have traditionally played such a key part of the city. Funke tells Geektime that somewhere between 20-25% of the local startups are in the fintech game, with e-commerce coming in with a strong showing as well. Leaning more on the side of B2B, there has been a growth in B2C, as seen in the case of investing technologies. However Funke says that many of these companies are not able to attract the necessary talent to grow to their potential, apparently stemming from both the supply and demand sides of the equation.

Goethe University, Frankfurt Photo Credit: Gabriel Avner / Geektime

With major banks like Commerzbank, Deutsche Bank, ING DiBA and others calling Frankfurt home, these global financial institutions offer startups an incredible yet relatively untapped customer base. As only Munich has a stronger corporate density, TQ and others see ample room for various kinds of partnerships, ranging from strategic investments to more basic customer client relationships.

Despite the opportunities, startup growth has remained slow for several key reasons. These include basics like an insufficient number of the right kind of talent, difficulty in raising funds, slow adoption process from corporates, and a general low energy around the idea of startups outside of a core group. For a country with so much economic potential and a reputation for smart planning, the number of inefficiencies in how corporates offer products and how the consumers treat their money is rather astounding.

According to Prof. Andreas Hackethal of Goethe University, German private households bank deposits increased from 37% in 1999 to 39% in 2015. At the same time, securities went down from 29% to only 23%. Comparatively, this is a very significant amount of money that is not being used to grow the economy. With an aging population that will need to augment its income beyond what the state pension can provide, the public will need to be smarter with their money. This need creates room for products like Robo Advisors that will offer cost-effective measures of engaging the public and bringing them into the market.

Prof. Andreas Hackethal of Goethe University Photo Credit: TQ

Like many places that speak of the need for innovation, at this stage, the corporate engagement has been mostly lip service with a couple of caveats. Germany is not unique in this regard, but perhaps because of the sheer size of the potential industry, it is that much more apparent. To their credit, the local banks are prepared to put down money on supporting great organizations like TQ, and have made noises about opening up their own internal innovation departments. Deutsche Bank has already opened a Digital Lab, that employs over 400 people, to help them develop new technological solutions for their customers, but the feeling is that they are not bringing enough to the table. Perhaps recognizing this, all the major banks, and a number of top consulting firms, are backing TQ as their point of contact with the startup community, a touch point that has been seriously lacking up until now.

Break down sessions at TQs fintech event Photo Credit: TQ

Funke is encouraged in the changes he is seeing. He tells Geektime that the corporates are taking a much more hands-on approach, saying that they feel the need to stay on top of what is happening in the startup innovation sector. Ive never seen movement this fast from the corporate side. Different players like the university and others said that they needed a hub.

When it came to getting backing from the financial community, Funke says that the Economics Ministry of the Hessen state Tarek Al-Wazir wrote a letter to the banks about the plan. He asked if they wanted to sponsor the initiative for a hub and the corporates quickly responded. Whether from peer pressure or their significant interest, they appear to be on board.

The real proof of their commitment will come when they start becoming the startups paying customers. Sounding perhaps like a stereotype (yet true), the German corporates work on a much slower decision-making time frame than one might find in places like the US or Israel. Add to this the necessary considerations for the banking sector, and you hit even more bumps in the road. That can be untenable for a startup.

Hoping to explore what can be done to remedy the situation, TQ hosted an event this past December at their new offices in the heart of the city. In attendance were industry leaders in the startup and corporate sectors, including Prof. Hackethal, Startup Genome CEO JF Gauthier, Tomas Peeters of ING Diba, and Sven Korschinowski from KPMG.

Breaking into smaller groups, the attendees discussed the myriad challenges facing the nascent ecosystem with hopes of developing ideas that could be incorporated into a white paper for guiding their growth. Beyond the normal issues that any scene faces lack of sufficient talent, funding problems, etc. that will be highlighted in a series of follow-up articles they hit upon a couple of interesting points.

The discussion board from the meetup at TQ Photo Credit: Gabriel Avner / Geektime

First is the need to establish more connections where the community can meet and cross-pollinate on ideas and collaboration. There are events like the meetups between startups and investors, like the Pitch Club, that have helped tens of companies raise over 10 million in much-needed seed funding. If Tel Aviv has Startup Alley around Rothschild Blvd., where will Frankfurts startup leaders run into each other while going out to pick up coffee?

TQ will help to play a role here, becoming the new home to the Frankfurt Accelerator that is already setting up for its second round of companies. Founded by partners Ram Shoham and Maria Pennanen, they are leveraging Israeli companies looking for new markets in Germany. They are working to bring new energy to the scene, while bringing a classic and experienced accelerator that has been lacking in the city. As the first real accelerator in town, they have done a lot of the hard work of showing that startups have a place at the table, helping to break ground for those that will follow.

It is important to look at some of the success stories that have already happened on the scene and understand how they give entrepreneurs hope that they too can really build something at home in Germany. Probably the most well-known example is that of 360T, which was bought by Deutsche Brse in 2015 for 725 million. While not quite a unicorn, it marked an important moment for the German fintech startup ecosystem. Speaking with Schaefer, he tells Geektime that his team sees their role at TQ as developing and applying a systematic approach to help develop companies to the point that stories like 360T will become not only replicable but far more common.

Frankfurt Accelerator offices Photo Credit: Frankfurt Accelerator

Next month, TQ will be launching its own accelerator program called the Hessian Israel Partnership Accelerator (HIPA). It will bring young startups from the Frankfurt area together on projects with new teammates from Israel, helping to promote connections between the two ecosystems. They are also opening a new initiative with BCG Europe called TopStars, that they hope will kick off this summer.

Having visited plenty of up and coming startup ecosystems around the world, I always encounter the same set of questions about how to a nascent scene can grow to something resembling what we have in Tel Aviv.

From my short visit in Frankfurt, I witnessed a core group of passionate people who are determined to succeed not only with their own ventures, but to bring the ecosystem up with them. These are people like Funke and Schaefer who understand both the potential that is laying here beneath the surface, and that they will need to stir people from their positions of comfort if they want something to really happen.

Germany and Frankfurt will need to shift into high gear and become more aggressive if they want to reach the next stage. They have a talented and reasonably experienced crew of entrepreneurs and a customer base that others would kill for. Educating the market that, if they want to succeed in the years to come, they will have to learn to adapt and embrace the startup community. Not just coopt them for immediate access to technology, but be supportive partners for the long run.

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Uncovering Frankfurt's up-and-coming startup ecosystem - Geektime