Deutsche Telekom Launches A $620M Fund For German Startups And PE Deals

Deutsche Telekom is stepping up its game in the world of startup investing and tapping into the growing tech ecosystem coming out of its home country.

Today the carrier, owner of T-Mobile, announced a new, €500 million ($620 million) fund called Deutsche Telekom Capital Parters, which it will use to invest in German startups, startups further afield, strategic private equity deals.

“One focus will be Germany but it’s definitely not Germany only,” a spokesperson says.

DTCP will also oversee the rest of the carrier’s existing investment activities. The latter includes investments in STRATO, Interactive Media, Scout, Deutsche Telekom Innovation Pool (TIP) and all of T-Venture, its existing investment arm with stakes in about 100 companies.

Indeed, it looks like a downgrading of sorts for T-Venture, which has been around since 1998, and has backed the likes of Jawbone, Appnexus, BlueJeans, Fon, Lookout and around 100 others and has some €300 million under management. Now its role will be relegated to follow-on, rather than new, investments that they have already committed themselves to.

DTCP, which will start operations on January 1, 2015 and will make investments out of the fund over the next five years, is a significant investment and commitment from the carrier.

DT says that this extra $620 million effectively “doubles” the amount of money that the carrier has poured in other tech companies over the years.

“The venture capital fund T-Venture, established in 1998, will be closed to new investments but the team will remain on board and continue to manage the existing portfolio of around 100 companies,” the company said in a statement. “T-Venture will also retain responsibility for follow-up investments within this portfolio. New investments will be executed through DTCP.”

A spokesperson for DT tells me that part of the reason for the new structure is because T-Venture was not set up with much flexibility: it was squarely focused on making investments that are strategic to DT’s own business, and now they would like to tap into the bigger opportunity of investing. Reading between the lines, however, it sounds like part of the reason is because T-Venture may have been too institutionalised and not fast-moving enough:

“DTCP combines the expertise and strength of a large corporation with the agility and flexibility of a small investment company: the best of both worlds to take Deutsche Telekom forward,” said Tim Höttges, CEO of Deutsche Telekom, in a statement.

DT tells me that the limited partners of DTCP will be executives from the bigger operator. There will be no outside partners apart from that.

“I’m excited about the job of unifying Deutsche Telekom’s innovation investments in one place, and being able to attract world-class talent to Germany to create a truly unique innovation engine,” said Vicente Vento, currently Senior Vice President of Mergers & Acquisitions at Deutsche Telekom and CEO-designate of DTCP, in a statement.

On top of that, given the activities that will now be consolidated under DTCP, it’s also a move towards simplifying things a bit more — a big deal for large incumbent carriers who are not exactly known for being efficient.

One source tells us that this was also a way for Höttges and “his captains” to make a mark, and to create a way to interface better with the wider world of VCs. The idea will be to use to money to improve DT’s profile.

“We are meeting with tier-1 VC funds all the time, but no action,” is how the source characterises the general feeling.

The problem up to now has been one typical of a lot of corporate venture firms. The theory had been that if you get an investment from DT, then you would expect your product to get rolled out within DT, and across its 140 million subscriber base.

But in the old structure this seldom happened because in the old structure the investment team had “no teeth” to really impact the mothership and push through those integrations. And that lack of value-add had an impact on DT’s track record in the Valley because started to hinder DT from getting in on the best deals.

In addition to startup investment, there will be some larger rounds in the form of strategic private equity investments with larger companies that work with the carrier, specifically as it continues to transition from being the primary service provider to the network operator that works with third parties to provide services — whether they be video, advertising, games or business services.

Germany, specifically its capital Berlin, has been at the head of the pack when it comes to European cities where startups are converging and growing.

In addition to e-commerce powerhouses like Rocket Internet, it includes Soundcloud, which decamped to Berlin from Stockholm. The newer generation of startups includes the likes of 6Wunderkinder, maker of to-do app Wunderlist — which became the first German investment for influential Silicon Valley VC Sequoia last year. However, as Earlybird VC’s Ciaran O’Leary points out, so far Berlin has been thin on one crucial part of the equation: exits.

Of course, that may be putting the cart before the horse. Relatively speaking, the ecosystem in Germany is still young, and DT’s financial backing could go some way towards boosting those companies a bit more and helping them grow big enough to get to big-exit status.

It comes at a time when others like Google Ventures are also beefing up their activities in Europe; it will be interesting to see how and if these two collaborate on investments together.

Last week DT beat analysts’ estimates in its quarterly earnings, although its net profit also dropped over a year ago — this points to the company needing to continue growing its core business and improve margins, something that lucrative investments, and potential acquisitions based around those, could help it do in the longer term.