By Maria Martinez
BERLIN, Oct 6 (Reuters) - German industry — long the foundation of Europe's biggest economy — may be in free fall, but its once anaemic startup sector is experiencing an unprecedented AI-led boom that has the potential to offset the malaise and even benefit from it.
More than 3,000 startups were founded in Germany in the first half of 2026, according to economy ministry data. That's an all-time record and a 52% increase from the previous six months.
Experts point to the growing availability
of capital and the global explosion in artificial intelligence as fuelling the trend. Around a third of the new German companies are AI-focused.
But weakness in the wider labour market has also diverted talented individuals away from previously safe corporate jobs. New government measures to facilitate startups, meanwhile, aim to develop that entrepreneurial spirit at a time when Germany is in dire need of an economic boost.
"The momentum is coming at the right time," said Verena Pausder, head of the German Startup Association. "Large parts of our industry are fighting for their existence."
GERMAN INDUSTRY FIGHTS FOR ITS LIFE
Germany lost around 400,000 industrial jobs between 2019 and 2025 due to competition from China, according to an estimate from the German Economic Institute IW.
Automakers like Volkswagen and Mercedes and heavy industry giants including Thyssenkrupp have been hit particularly hard.
German industry's existential crisis, however, is creating an opportunity for hundreds of small German startups offering AI-based solutions to help companies cut costs and automate routine work.
"We have a lot of legacy industry that does now have to reinvent itself," said Hendrik Hofstadt, chief technology officer at Berlin-based Langdock, whose software is designed to help companies adopt and benefit from AI.
Founded three years ago, Langdock has grown to around 60 employees and €50 million ($56 million) in revenue.
"It's actually a pretty great market for new players to get into, because there's a real openness towards new solutions," Hofstadt told Reuters.
IT'S NOT ALL AI: PERIOD PAIN RELIEF AND LINGERIE
Software is the dominant sector among new startups, accounting for 28% of all newly founded companies. But other areas are also developing, with healthcare firms making up 9% of new startups and food 6%.
Polina Sergeeva launched her healthcare company Menstruflow in 2023, selling a device designed to ease menstrual pain using transcutaneous electrical nerve stimulation (TENS), a technology already widely employed to reduce labour pain but which needed adapting to help with women's periods.
"When your pain is so bad it destroys your holidays, your plans and everything, then you start thinking, 'Is there something no one's ever thought of?'," Sergeeva told Reuters at a founders' event in Berlin.
Menstruflow's sales rose 300% year-on-year in the first quarter, and Sergeeva's next goal is to obtain medical certification and enter retail stores.
Recent growth in available funding is providing a tailwind for the boom. Between January and September, German startups raised €8 billion in venture capital, more than in all of 2025, according to the German Startup Association's Startup Monitor.
That propitious environment coupled with a transformative night at the KitKatClub — a legendary fixture of Berlin's fetish scene — led Paulina Lutz to rethink her career.
"You work with other founders on their ideas and their dreams and you really start to question: why am I not on the other side of this?" said Lutz, who herself had previously earned a six-figure salary working for a venture capital fund.
In December 2024, she launched her company Nghty Berlin's first lingerie collection. It has since added a second collection and expanded from online-only sales into its first pop-up store.
EASING THE PATH FOR STARTUPS AND KEEPING THEM IN GERMANY
German government authorities want to maintain the momentum and harness the sector as a new engine for the economy. But they must first revamp the country's grim reputation as a challenging environment for entrepreneurs.
Of around 1,800 companies surveyed by the German Startup Association, only about one-third rated Germany as an attractive location for starting a business.
Funding for German AI startups, for example, reached just €5.7 billion between January and the end of September, according to the Startup Monitor. In the US, by contrast, the figure was nearly €308 billion.
To help close the gap, Chancellor Friedrich Merz's cabinet adopted a new Startup and Scaleup Strategy in July, setting out 152 measures intended to improve conditions for startups from founding through to international expansion.
The strategy aims to cut bureaucracy and mobilise more private capital for sectors including technology, biotechnology and defence.
"If these companies quickly move elsewhere looking for funding, then the ideas we develop here end up creating value somewhere else," said Timo Wollmershaeuser, head of forecasts at the Ifo Institute for Economic Research.
($1 = 0.8918 euros)
(Reporting by Maria Martinez; Editing by Mark John and Joe Bavier)
