German startups suffer a chronic shortage of venture capital when they need it most: in the growth period that follows their launch, when they’re trying to get their product or service to market.
State development bank Kreditanstalt für Wiederaufbau (KfW) estimates that there’s a funding gap of €500 million to 600 million per year ($574 million to $689 million).
“We want more company founders in Germany. We need to catch up internationally,” Economics Minister Peter Altmaier said on Tuesday. To that end, he announced the launch of KfW Capital, a public venture capital unit of KfW tasked with investing €2 billion in new companies over the next 10 years and invigorating the sluggish German venture capital market.
KfW Capital will deploy funds from the Marshall Plan, formally known as the European Recovery Program, a US economic stimulus initiative launched in 1948 to help rebuild Western Europe’s war-shattered economies. The German parliament voted to redistribute the funds and double KfW’s capital.
The venture capital sector welcomed the move. “Setting up KfW Capital and increasing the capital are an important step,” said Ulrike Hinrichs, head of the German Private Equity and Venture Capital Association (BVK).
To emphasize its aim to get close to the private venture capital scene, the management of KfW Capital includes investment experts from the private sector such as Jörg Goschin, who ran the startup fund of private equity group Maschmeyer.
An EY study showed that German startups managed to collect some €2.4 billion in funding in the first half of 2018, the second highest in Europe behind Britain’s €3.1 billion. But that’s only the first step. The market often fails to provide the necessary follow-on financing and in many cases, private equity firms only become interested again when a company is up and running and doing well.
KfW Capital will bundle existing government development programs for startups and put the money in funds that invest in startups. That will it to support startups without having to scrutinize every business model itself.
By providing public funds for a startup project, KfW Capital intends to encourage private investors to follow suit. Patrick Beitel, co-founder of venture capital firm Digital + Partners, said KfW could act as a trailblazer. “An investment should be a stamp of quality that private institutional investors can follow,” he said.
KfW Capital has set itself an upper limit for investments. “We can co-finance venture capital funds with a maximum of 20 percent of their fund volume or €25 million at most,” said Mr. Goschin.
Creating an outsourced KfW unit made sense because it will be subject to fewer regulations than the development bank.
But one problem remains, and German startup founders are partly to blame for it, said Mr. Goschin. US startups tend to receive bigger sums in their financing rounds than their German counterparts, simply because they ask for more. In many cases, the Germans don’t want to take in major sums because they’re reluctant to dilute their own stakes. But the situation is short-sighted because it forces German startups to drum up fresh capital every 12 to 18 months, said Mr. Goschin.
“Founders in the US tend to a bit more entrepreneurial,” he said. They collect more money per round and thereby give themselves more time to focus on growing the actual business.
Michael Verfürden is a correspondent for Handelsblatt in Düsseldorf. Peter Köhler reports on banks, private equity firms, venture capital and corporate funding from Frankfurt. To contact the authors: m.verfürden@handelsblattgroup.com, firstname.lastname@example.org