A 10-Point Checklist Preceding Your German Expansion

Should Germany be the first foreign market you open? ✈

Germany is one the recurring candidates for French start-ups starting their international expansion. But should you start with Germany?

SPOILER: It depends on how easy it is to succeed. Since this is a unique decision to each company, here is a checklist of 10 things to look into before considering Germany as the destination for your first international expansion. 

Bonus: Replace [Germany] with any other location you might be interested in. It works too ;)

1. Where does Germany stand in your equity story? 

What do you want to achieve by choosing to expand in Germany? Be the market leader in Europe? Double your customer base? Raise valuation to new heights? To be called a European leader, Germany is one of the three markets to conquer alongside France and the UK. It’s also a strategic country to penetrate the DACH market (100+ million people). In comparison, the Italian speaking market will cover half the size and have less buying power. Whether it’s the destination or a milestone in your road-map, investors view a German performance with an optimistic eye. A successful performance in Germany will probably lead to a higher valuation vs. the same performance in Spain or Italy.

2. Is Germany the sexiest market for you?

Germany is a large market with 80+ million people, with a GDP/Capita among the highest in Europe. It’s a predictable and stable economy where you can replicate your French success. But beware of big numbers and take a closer look at the market dynamics. How does the market work? How fierce is the competition? Having no competitor in the market could be a real blessing or a large pitfall. On the contrary, existing competitors is not always the proof of demand on an existing market. Talking to people who work for, or with, competitors in the targeted German ecosystem is key for you to gaining valuable insights. A green light could be: common buyers’ persona and use cases, not too much product localization needed, or no additional cost on your supply chain.

3. Can you afford Germany? 

Your expansion budget is critical to your decision-making. Being only 500 km away from Paris with no hard border to cross, Germany is cheaper than the UK for example. This proximity makes it easy to test the market from France. It’s also a country with less competition compared to the US or the UK. But, as mentioned, the cost of living is high and Germany is not a country you always can manage remotely. Initial investments such as hiring a local team and renting an office will be a significant cost that can quickly become substantial. Launching Germany with less than 500K€ is not a reasonable bet.

4. Is there a Product x Culture fit? 

Did you know that Germans are very fond of US SaaS tools and don’t mind English in the business environment? Did you know that 25% of all online goods purchases in Germany end up being sent back to the retailer? Local customs could have a significant impact on your business operations or margins. For example, part of Revolut’s struggle in Germany was because the initial IBAN they issued to customers was a British one, which created trust issues among users.  Despite massive investments, the UK leader was never able to overcome the local player N26. Understanding the extent to which your product needs to be localized is critical to assessing your cultural fit for the region and the corresponding costs. We can already tell you that the B2B market will be easier to enter than the B2C. However, you will still need to show some German logos and have a German-speaking sales and customer success team to gain the trust of your potential customers.

5. Is there a Product x Geographical fit?

As an example, you should know that Germany, unlike France, is a very decentralized country with no major “big hub”. Each zone has its strengths and weaknesses in terms of accessibility, customers, ecosystem and talents. Munich is the hub for tech talents and industrial groups, Berlin is known for its B2C ecosystem, and Hamburg is considered as one of the most cosmopolitan cities in Germany, more open to foreigners due to its long history of international trade. Ask yourself: Do these characteristics have an impact on how you will conduct business locally?

6. Will you get stuck because of regulation? 

Germany and France are very similar in terms of regulation. But several sectors (such as digital health, transportation, and real estate), or topics (data protection, trade competitiveness) are even more regulated there, and regulation can vary from one region to another. Are you concerned by this additional layer of regulation? Does it have an impact on your product localization? As an example, Airbnb had to step back on opening in Dusseldorf because of the local ban on short-term rentals. But good news, sometimes German regulation can also be a competitive advantage. It’s the case in the Medtech industry: the Digital Care Modernisation (equivalent of the Article 51 in France) is much quicker to allow public trials of new medical devices.

Unfair advantages

Beyond these macro elements, having unfair advantages could be a determining factor in deciding whether to expand in Germany.

7. Do you have an existing German commercial traction? 

By commercial traction, you must understand recurring SQLs coming from Germany, with a simple sales cycle that generates revenues. If you notice this, it’s a true good signal.

8. Do you have a build-up opportunity? 

A good M&A opportunity can speed up your international expansion. It’s a quick way to get a local footprint, reaching a critical size and buying expertise/talent at the same time.

9. Do your investors have a track record of companies successfully expanding into Germany? 

Are your current investors used to investing in Germany? Good! Use their local brand awareness or ability to speak German to tackle big topics such as sales mapping, introductions to big potential customers, or even with key hiring processes.

10.  Do you have German or bi-cultural employees? 

Having employees who know both your company culture, your product and the target market is a huge advantage. They will be able to help with the different cultural challenges and may be potential candidates to join the German team as lead of expansion. They can also embody your company's culture outside of the HQ.

If most of these points are in your favour, Germany may well be your next country of expansion. Before making a hasty decision, feel free to run through this checklist with other countries to define which one is the most relevant. And don’t forget to talk to local people to get an objective view of the market!

Source:

1. http://www.retourenforschung.de/info-ergebnisse-des-europaeischen-retourentachos-veroeffentlicht.html

Germany: A particularly attractive market for MedTech💊

Germany claims the third-largest medical technology market in the world after the US and Japan. It’s by far the largest European market (25% share), twice the size of the French market and three times as large as those of Italy, the UK and Spain. The German medical device market is also one of the most lucrative healthcare markets worldwide, accounting for roughly USD 35.8Bn annually according to the International Trade administration. The attractiveness of the German Medtech market is largely due to the government’s will to go beyond the current standard of care.

There is a strong governmental will to facilitate medical innovation. Indeed, there are multiple ways for Medtech reimbursement depending on whether it’s for capital equipment, general reimbursement of outpatient services, home use, or use in the inpatient setting. In the latter for example, reimbursement for a treatment or procedure is determined via a system (2) billed by hospitals on a fee-per-case basis, which covers hospitalization costs and includes the use of specific devices.

Also, the German Federal Institute for Drugs and Medical Devices has a fast-track program (3), which helps speed up the statutory health insurance reimbursement of prescriptions associated with a list of apps—and by extension—boosting their usage.

It’s easier to show track record. Some practices in medicine such as cardiology or radiology are standardized across Europe, with great figures being recognized on the European scene. It’s also the case with large European medical hubs; therefore, making it easier to gain credibility on the larger scene if you already work with one of them.

All these factors make Germany the place to be for a Medtech looking to expand.

2. The German Diagnosis Related Groups (G-DRG)
3. DiGA (Digital treatments and medical applications)

Sharing value creation for German employees 💰

In France, in addition to base salary and bonuses, startups often grant BSPCE to their employees which benefit from a favourable tax regime. Unfortunately, the German tax system does not offer the same benefits (exactly as the French tax regime in the opposite direction). French startups hiring senior profiles in Germany must therefore propose an alternative.

There are three possibilities but not perfect one:

• Create a local branch and allocate its shares to German employees, then work out an equation linking the local subsidiary and the parent company.

Pros: This option creates a climate of trust as both parties know exactly what will happen when exit comes. German employees are incentivized in a German company, which they fully understand.

Cons: At the time of an exit (sale of the French parent company), it is difficult to reflect the contribution of a subsidiary to the total value of a company. It may seem unfair when R&D, Marketing and Support are in the same place (usually in France). Also, creating a local entity is a heavy burden when only one employee is concerned – which is often the case at the beginning.

• Giving BSA to foreigners within the French entity:

Pros: This is the quick and dirty solution – it works well for small allocations.

Cons: It is not optimal because of the uncertainty of tax treatment: benefits will probably be taxed at the standard income rate (which is often the case for German start-ups as well, so it might not be all bad news for a new employee).

• Opening holdings, loading them with the appropriate amount of cash to purchase shares in the mother company and ascribing the property of those holdings to the foreign employees. It's a much heavier scheme, usually used by larger companies (CAC40 size).

Pros: This generally works very well.

Cons: Requires a massive amount of paperwork and legal counsels.

Share allocation is a burden you face not only during an expansion in Germany but in any other new geography.

Service providers recommended by XAnge 🧰

Below is a non exhaustive list of German providers we recommend in Human Resources, Legal, Marketing, and Sales.

We have also added French and German State institutions which can ease your entrance into this new market.

Going Deeper: France Digitale’s Go-to-Market Kit - Germany

Found this checklist interesting? Do you want to continue your deep-dive on the subject of expansion into Germany? Here’s the full Go-to-Market Kit by France Digitale with contributions by XAnge and other leading VCs:

🇩🇪Welcome to France Digitale’s Go-to-Market kit Germany