New law

Start-ups May Get Funding Boost

sofatutor
Start-ups such as Sofatutor, a developer of educational aids, have found it hard to source venture capital.
  • Why it matters

    Why it matters

    The new law could help to release government funds, provide tax breaks to investors and remove obstacles to backing start-ups.

  • Facts

    Facts

    • Germany’s start-up sector received backing of just €646 million ($707 million) in 2014, compared to $48.3 billion in the U.S.
    • Germany’s coalition agreement pledges to make the legal and fiscal framework for venture capital more competitive.
    • Berlin-based start-ups employ 75,000 people and reported sales of €11 billion last year.
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    Audio

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Even as a student, Stephan Bayer preferred making videos to studying. He didn’t just make them for fun, however, but shot teaching videos, to help his classmates with their cramming.

When the Berliner decided to turn his idea into the online education platform Sofatutor, he and the other co-founders quickly obtained support from the German government’s funding program for start-ups.

Investitionsbank Berlin, a public-sector development bank for the state of Berlin, also provided a loan through its ProFit development scheme.

It’s a great success story, but with success came problems. Sofatutor grew in 2012, and Mr. Bayer needed money. He had to knock on doors, making a total of 10 applications over a period of six months. Then, luckily, the Munich-based venture capitalists Acton Capital Partners got on board.

“In the United States the boot is on the other foot,” says Mr. Bayer. “Venture capital companies are wooing entrepreneurs.”

Many experts regard the laborious search for risk capital as the biggest obstacle to the start-up scene in Germany. According to the BVK, an association that represents the private equity and venture capital sector in Germany, only €646 million ($707 million) was invested in the sector in 2014, significantly less than in the United Kingdom and only a fraction of the $48.3 billion (€44.2 billion) invested in the United States in the same year.

The number of companies in Germany that have managed to obtain venture capital for their ideas has fallen almost continuously over the last few years.

The number of companies in Germany that have managed to obtain venture capital for their ideas has fallen almost continuously over the last few years. Twelve times as many start-ups are founded in Silicon Valley as in Berlin.

In the coalition agreement between Germany’s conservative Christian Democrats (CDU/CSU) and their junior partner the center-left Social Democrats (SPD), the parties pledged to “make the legal and fiscal framework for venture capital competitive at an international level.” Little has happened to date.

In particular, finance minister Wolfgang Schäuble (CDU) is keeping his foot on the austerity brake, which has so far meant that he and economy minister Sigmar Gabriel (SPD) have been unable to agree on a joint bill.

However, there is now a mood of cautious optimism in government circles. There are reports that Mr. Schäuble could present the key points of a new law at a cabinet meeting in mid-September, where the focus will be on digitalization.

The federal states of Bavaria and Berlin have also been pushing for some time for such a law and have brought their own motions. The SPD parliamentary group in Germany’s parliament plans to present a position paper next week.

Bitkom, an association for the IT sector, has complained that the coalition has so far done little for the start-up sector.

Niklas Veltkamp, a member of the association’s board, says that initial financing is not a problem if the sums involved are relatively low, around €500,000 to €1 million. “However, companies then experience difficulties in the next growth phase if they need to obtain sums of €5 million to €20 million.”

A few small steps will at least be possible even without a new law: State-owned development bank KfW plans to invest up to €400 million in a venture capital umbrella fund over the next five years and hopes this will lead to the release of up to €2 billion in total.

The European Investment Fund also plans to increase the volume of funding it offers from €1 billion to €1.7 billion. Mr. Gabriel hopes to release €500 million for start-up funding through it.

startups_reuters
German Finance Minister Wolfgang Schäuble (l) and Economics Minister Sigmar Gabriel have been unable to agree a plan on start-up funding. Source: Reuters

 

However, a broad alliance of trade associations is pressing for the promised venture capital law. They want fiscal constraints to be removed. “A venture capital law is overdue,” says Hubertus Heil, deputy leader of the SPD parliamentary group.

Many members of the CDU/CSU want the law to be changed so that a tax deduction can in future be claimed for losses accrued during the start-up period even after the start-up is sold. There are also calls for contributions made by managing directors of venture capital companies to be exempt from sales tax, as is the case in other countries.

Many trade associations are also saying that a venture capitalist who sells a young company should not have to pay tax on the profits if the proceeds are reinvested. However, the calls for tax relief are the main reason why Mr. Schäuble has so far been dragging his feet.

While the association of investment companies estimates that a tax exemption for managing directors’ contributions would probably cost only an eight-figure sum, the amounts lost due to losses carried forward could quickly surpass the billion mark.

Mr. Schäuble also points out that the European Commission, the E.U.’s executive arm, could classify an exemption as an unauthorized subsidy. “With many types of tax relief that we would like to have, reaching an agreement with Brussels proves to be a problem,” says Thomas Jarzombek, a spokesperson for the digital agenda committee of the CDU/CSU parliamentary group.

Christian Schatz, a member of the board of BVK, has warned of potential threats from within Germany. Last week the German finance ministry sent out a plan for a discussion on a reform of taxes on investments, which included liability for tax on capital gains on widely spread shareholdings in corporations.

Mr. Jarzombek is already warning that this tax liability would make taking risks less attractive to investors. “It would be the final nail in the coffin for all investments in start-ups,” he said.

Meanwhile, German labor minister Andrea Nahles has indicated that start-ups could obtain relief in another area. Six out of ten employees at some start-ups are interns, and the minimum wage of €8.50 per hour is often too expensive for the founders. Ms. Nahles now wants to examine whether these internships could be added to the list of exceptions, and has suggested that they could otherwise potentially be reclassified as voluntary work.

 

Dana Heide is a Handelsblatt correspondent for energy policies and small and medium-sized companies. Till Hoppe is Handelsblatt’s foreign policy correspondent. Frank Specht writes about the labor market and trade unions. Peter Köhler heads Handelsblatt’s banking team. To contact the authors: heide@handelsblatt.com, hoppe@handelsblatt.com, specht@handelsblatt.com, koehler@handelsblatt.com

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