The quarterly KfW Venture Capital Dashboard presents the developments in the venture capital market in Germany.
German start-ups received almost EUR 1.8 billion in 232 financing rounds in the third quarter of 2023. The volume of deals decreased on the previous quarter, as did the number of deals. The decline in deal volume followed two consecutive increases in the first two quarters of the year. The German VC market thus continues to struggle for direction in 2023 while maintaining a sometimes significantly higher level than in the years before the pandemic.
In addition, the Dashboard provides deeper insights into VC finance activities for German start-ups, including by financing phase, investor origin, technological fields and exit activity. It also compares the market with major international benchmarks. The overview is rounded off by a look at the development of venture debt transactions.
Business sentiment in the German venture capital market continued to improve in the late summer of 2023. The sentiment indicator of the early-stage segment rose by 2.4 points to -19.6 balance points, trending slightly higher than in the previous quarter. Situation assessments slightly converged on expectations, which continue to be significantly more optimistic. The indicator for the current business situation rose by 7.3 points to -32.4 balance points, while the indicator for business expectations dipped slightly to -6.8 balance points (-2.5 points).
Sentiment in the German private equity market stabilised again after cooling down noticeably in the early summer. The business sentiment indicator rose slightly by 5.4 points to -26.4 balance points in the third quarter of 2023. The mood in the market thus remains lacklustre. Situation assessments partly offset previous declines, while expectations deteriorated again. Thus, the indicator for the current business situation rose by 14.4 points to -28.2 balance points, while the indicator for business expectations fell by 3.7 points to -24.5 balance points.
Companies seeking loans encountered increasing obstacles in their credit negotiations with banks. In the third quarter, the KfW ifo Credit Constraint Indicator for SMEs rose significantly to 31.7%, reaching a new high since 2017, when the methodology was changed. The share of large enterprises surveyed that described the position of banks as restrictive also grew to reach 21.3%.
There are two main reasons for the growing difficulties businesses are facing in their attempts to obtain credit. For one thing, loan interest rates continued to rise even through summer in the context of the fight against inflation and, for another, it is plausible that credit institutions are taking a closer look at loan applications amid weaker economic sentiment.
The quarterly KfW Venture Capital Dashboard presents the developments in the venture capital market in Germany.
German start-ups raised just under EUR 2.5 billion in 266 financing rounds in Q2 2023. In the first half of 2023 the German VC market thus proved to be quite capable of adapting to the new environment of interest rate reversal, energy crisis and macroeconomic uncertainty.
The Dashboard also provides deeper insights into VC finance activities for German start-ups, including by financing phase, investor origin, technological fields and exit activity. It also compares the market with major international benchmarks. The overview is rounded off by a look at the development of venture debt transactions.
Following record growth in the previous year, new lending from German banks to enterprises and self-employed persons in the first quarter remained just barely below the level of the same quarter last year. Available data already indicates stagnation for the second quarter. Banks remain cautious in their lending practices but an end to the tightening of lending criteria appears to be in sight.
Credit demand is restrained, crisis-related liquidity requirements have largely decreased. High interest rates and a weak economic outlook are dampening the appetite for investment finance.
For the third quarter we expect new lending to be 10% lower than in the extraordinarily strong third quarter of last year. However, if investment activity by businesses turns out weaker than we expect, lending could contract even more sharply.
After loosening their lending criteria in the first quarter, most financial institutions took a cautious approach again in the second quarter. Both SMEs and large enterprises had to overcome higher obstacles than usual in accessing credit. While the KfW ifo Credit Constraint Indicator for SMEs remained nearly unchanged (25.6%), a significantly higher share of large enterprises (17.9%) reported that banks had adopted restrictive policies.
There is good news to report about small and medium-sized service enterprises and large construction firms. After banks were particularly cautious towards them in the previous quarter, negotiating loans was now much easier for businesses in these two economic sectors.
Sentiment in the German private equity market cooled off again significantly in the second quarter of 2023. The business sentiment indicator fell by -19.5 points to -32.0 balance points. Situation assessments fell steeply and expectations also deteriorated. Thus, the indicator for the current business situation decreased by 26.8 points to -43.0 balance points and the indicator for business expectations dropped by 12.3 points to -21.1 balance points.
Sentiment in the German venture capital market improved again in the first half of 2023. The business climate indicator of the early-stage segment rose by 12.4 points to -22.2 balance points. That nearly made up for the downturn in sentiment recorded at the end of the year 2022. Situation assessments remain on a very low level, however, while business expectations were much more positive again for the second consecutive quarter. The indicator for the current business situation rose by a moderate +6.1 points to -40.1 balance points, while the indicator for business expectations climbed by +18.8 points to -4.4 balance points.
The quarterly German Venture Capital Market Dashboard published by KfW Research presents the developments in the venture capital market in Germany.
In the first quarter of 2023, a total of EUR 1.9 billion was invested in 254 financing rounds in the German VC market. For now, the market appears to be unfazed by the collapse of Silicon Valley Bank (SVB) in the US. However, given the persistently unfavourable overall environment (inflation, monetary tightening, dim prospects for IPOs), a trend reversal is yet to arrive.
The Dashboard also provides deeper insights into VC finance activities for German start-ups, including by financing phase, investor origin, technological fields and exit activity. It also compares the market with major international benchmarks. The overview is rounded off by a look at the development of venture debt transactions.
Corporate lending slowed in the final quarter of 2022 following record growth in summer. The easing of tensions in the energy markets and the subsiding of supply bottlenecks means that fewer loans are required to cover unplanned funding requirements. The increase in new loans from German banks to businesses and self-employed persons was, however, still significant at 19% year-on-year, as calculated by KfW Research. And that although the growth rate almost halved. We expect bank lending to continue to cool in the first half of 2023. In addition to higher interest rates, this will be due to lacklustre business investment and above-average difficulty in accessing bank loans.
Business sentiment in the German venture capital market improved slightly in the first quarter of 2023. The sentiment indicator of the early-stage segment rose by 7.6 points to -34.9 balance points. Sentiment therefore remains on a very low level after plunging in the final quarter of 2022. The insolvency of Silicon Valley Bank weighs on market sentiment.
Sentiment in the German private equity market improved again in the first quarter of 2023. The business sentiment indicator rose by 17.7 points to -12.9 balance points. Situation assessments improved significantly and business expectations became much more optimistic. Thus, the indicator for the current business situation rose by 20.4 points to -16.7 balance points, while the indicator for business expectations gained 15.0 points to -9.1 balance points.
German businesses are able to access credit more easily again. The KfW-ifo Credit Constraint Indicator for the 1st quarter of 2023 is considerably below the previous high levels. Still, one quarter of small and medium-sized enterprises still perceive the behaviour of banks in loan negotiations as restrictive. Credit access therefore remains more difficult than average. The easing of lending policies is mainly attributable to the deescalation of the energy crisis. Loan defaults become less likely as a result of the improved economic risk situation.
Economics in Brief
The debate around a growing number of zombie companies in the SME sector is not new. Such concerns were recently exacerbated by the fact that the predicted wave of insolvencies driven by the coronavirus crisis did not eventuate. However, a special analysis conducted by the KfW SME Panel has revealed that those concerns appear to be unjustified. Only around four per cent of small and medium-sized businesses in Germany show a critical debt sustainability level. Their low profitability does not allow them to meet their interest obligations. Nothing indicates that the share of financially weak enterprises may have grown in the crisis years. In addition to economic support packages, adaptability, innovativeness and robust earning power even in times of crisis along with a broadly solid financial basis have enabled SMEs to get through the crisis well.
Sentiment in the German private equity market developed positively in the fourth quarter of last year. The business sentiment indicator rose by 9.2 points to -30.8 balance points. While situation assessments deteriorated again, the decline was more than offset by improvements in business expectations. Economic optimism is bolstering sentiment.
Sentiment in the German venture capital market cooled off considerably towards the end of the year. After the downward slide in market sentiment ended in late summer, confidence slipped again in the final quarter. The business climate indicator of the early-stage segment plunged by 25.6 points to -42.9 balance points. With the exception of the unprecedented coronavirus shock in the first quarter of 2020, the only recent time sentiment was worse was 20 years ago. Valuation adjustments at the end of the year weighed heavily on market sentiment.
In the final quarter of 2022, the KfW ifo Credit Constraint Indicator for small and medium-sized enterprises increased for the third consecutive time. Of the surveyed SMEs who were in loan negotiations, 31.3% regarded the policies of banks as restrictive – 3.4 percentage points more than in the previous quarter. With that, the Credit Constraint Indicator for SMEs reached a new record high since the current survey methodology was introduced in 2017. Tighter lending conditions affected mainly SMEs in retail (+8.6 percentage points) and the services sector (+6.7 percentage points). For manufacturers, on the other hand, the tense situation in the credit market appears to have eased slightly on the previous quarter (-2.9 percentage points).
According to the current KfW Credit Market Outlook, new lending from banks and savings banks in Germany to companies and self-employed persons increased by a record high 36.1% in the third quarter of 2022. New lending growth thus increased by another 15 percentage points on the previous quarter. Towards the end of the year, however, credit growth has likely started to weaken.
The disruption to economic conditions resulting from energy shortages, supply problems and the resulting price pressure is also evident in the corporate credit market. German businesses and self-employed persons extensively took out new bank loans in the second quarter, despite the imminent recession and increasingly tighter financial conditions.
According to calculations by KfW Research, new lending grew by a massive 21.3% year on year. That is a new record.
The main driver for this strong growth was a combination of high funding requirements for working capital and inventories, KfW loans to companies in the energy sector on behalf of the Federal Government to secure energy supplies, as well as the very weak lending in the second quarter of 2021.
The German private equity market experienced yet another sharp loss of confidence in the third quarter of this year. The business climate indicator fell by 16.2 points to -40.4 balance points. The only time the level has ever dropped this low was during the financial crisis at the beginning of 2009 and the outbreak of the coronavirus pandemic in 2020. Expectations are significantly lower than situation assessments, indicating that private equity investors anticipate a continuing substantial deterioration of the business environment in the next six months.
Sentiment in the German venture capital market stabilised in late summer. Market sentiment has thus stopped falling, although central banks again significantly raised key interest rates to fight inflation in the third quarter of 2022. The sentiment indicator of the early-stage segment remains virtually unchanged at -17.9 balance points (+0.3 points). Situation assessments and expectations have converged. Thus, the indicator for the current business situation dropped moderately, while the indicator for business expectations rose slightly.
SMEs barely have time to catch their breath after the coronavirus pandemic. The Ukraine war and the energy crisis are now causing them trouble. Energy prices are the number one uncertainty and their effects have yet to filter through in full. Business sentiment has deteriorated significantly. Already there are signs that companies are reluctant to invest, pressure on equity ratios is mounting and credit access is becoming more difficult in 2022. SMEs at least entered the current crisis on a solid foundation. In 2021 they largely recovered the deep losses they suffered in the first year of the crisis. Turnover, employment and profitability increased and equity ratios also recovered noticeably in the past year. These are the findings of the KfW SME Panel 2022, which paints a comprehensive picture of the present situation in autumn of 2022 and of the development of small and medium-sized enterprises during the past year.
Financing conditions for small and medium-sized enterprises deteriorated abruptly in the third quarter. The KfW-ifo Credit Constraint Indicator for SMEs experienced a considerable spike to reach a record high. Of the businesses engaged in loan negotiations, 27.9% reported restrictive bank lending policies.
SMEs currently facing the greatest difficulties in accessing credit are service providers, followed by manufacturers. The energy crisis, rising interest rates and the foreseeable recession are likely to be the main factors causing banks to tighten their lending policy towards SMEs. Credit institutions are still significantly more accommodating towards large enterprises. The Credit Constraint Indicator for this size class has dropped over two consecutive quarters and now sits at a mere 11.2%.
Financing environment is recovering from the coronavirus crisis – sustainability is gaining in importance
After a notable deterioration of the financing environment in the coronavirus crisis, the situation eased again slightly for businesses last year. These are the findings of the Business Survey 2022 which KfW has conducted together with 17 umbrella organisations as well as professional and regional business associations. The worsening economic situation and an increasingly tighter monetary policy as a result of the Ukraine crisis now pose new challenges for corporate finance.
Transitioning to a sustainable and climate-neutral economy continues to be an urgent task. The results of the survey show that sustainability is becoming increasingly important for businesses. The issue already plays a role in many loan negotiations as well. Lack of funds and human resources are the main barriers preventing businesses from stepping up their commitment to more sustainability.
The German private equity market experienced a further loss of confidence in the second quarter of this year. The sentiment indicator of the later-stage segment fell by 17.8 points to -24.7 balance points. Business expectations were more heavily affected than situation assessments. The indicator for the current business situation slipped by 13.2 points to -10.9 balance points. The indicator for business expectations plunged by 22.5 points to -38.5 balance points.
A historic interest rate increase by the Fed in the US and expectations of a tighter course by the ECB caused sentiment in the German VC market to continue nosediving in the second quarter. The business climate indicator of the early-stage segment dropped by 26.0 points to -18.5 balance points. Business expectations have fallen more sharply than situation assessments. The indicator for the current business situation dropped to -7.6 balance points (-20.6), while the indicator for business expectations fell by 31.4 points to -29.4 balance points.
KfW Research has calculated that new lending to enterprises and self-employed persons took another leap in the first quarter. New bank loans grew by 15.5% on the first quarter of last year. The strong credit growth is mainly attributable to short-term financing requirements to build up larger inventories as buffers for disrupted supply chains and the drive to secure interest rates against the background of monetary tightening.
Small and medium-sized enterprises needing loans are facing much more restrictive lending policies. After a moderate easing, the KfW ifo Credit Constraint Indicator rose in the second quarter to 20.8%.
The economic forecast in Germany has become considerably more cloudy as a result of Russia’s attack. High energy costs and rising interest rates lead to banks being more cautious when granting loans. SMEs in almost all business areas are affected by this. The retail sector, however, is the exception, which has profited from the lifting of most of the protection measures.
Focus on Economics
VC investors see a number of sectors becoming increasingly important in 2022. Above all, they anticipate that Greentech / climate tech, deeptech and cybersecurity will play a greater role. But investors are pessimistic about the e-commerce sector. With regard to the challenges they are facing, VC investors regard higher geopolitical and economic uncertainty for 2022 as the greatest burden.
The business climate on the German Venture Capital market has fallen again two years after the coronavirus shock. The business climate indicator of the early-stage segment dropped by 35 points to 7.2 balance points in the first quarter of 2022. This was likely due to the inflation-induced accelerating interest rate reversal and the heightened economic uncertainty caused by the war. The indicator for the business situation dropped to 12.8 balance points (-33.0), while the indicator for business expectations fell to 1.7 balance points (-37.0).
The business climate on the German private equity market cooled off drastically at the start of the year. The sentiment indicator of the later-stage segment slipped by 27.5 points to -7.2 balance points. The escalation of the war in Ukraine and resulting high economic uncertainty were likely the main cause for the drop in sentiment. The indicator for the current business situation fell by 24.4 points to 2.2 balance points, hovering just slightly above the long-term average. The indicator for business expectations plunged by 30.6 points to -16.5 balance points.
There was a change in trend in the final quarter of 2021. New bank loans grew 8.2% year on year. Banks had great incentive to show sufficient net lending at the end of the special reference period for TLTRO III operations in order to receive the ECB’s special interest conditions.
Russia’s shocking attack on Ukraine has brought great uncertainty for the development of the economy. Survey data from banks and businesses gathered after the start of the war does, however, speak in favour of lasting growth in the first half year. After that, new business will lose its momentum, as financing conditions look set to tighten. Banks are reassessing default risks against the backdrop of the war and interest costs have been rising again noticeably after a long time as a result of the gradual tightening of monetary policy.
Access to credit improved for small and medium-sized enterprises in the first quarter. The KfW-ifo Credit Constraint Indicator fell to 17.7% and has thus decreased by nearly 5 PP within a year. Given Russia’s attack on Ukraine, it is doubtful whether the easing of credit constraints will continue. The war in the heart of Europe is weakening the economy through a massive increase in the cost of energy, by exacerbating material bottlenecks and by generating enormous uncertainty. Financial institutions are therefore likely to reassess default risks and readjust their lending policy. The sharp tightening of credit constraint for large enterprises (+6.2 percentage points to 14.2%) could be a first sign of this. Large manufacturing firms, which are closely integrated into the international division of labour, have been hit particularly hard.
In the fourth quarter of 2021, German venture capital market sentiment remained on the record high level of the previous quarter. The sentiment indicator for the early-stage segment continued on 41.6 balance points, ending the year 2021 on an all-time high. On average for the year, sentiment was clearly the highest after 2018 since the barometer was launched.
After stagnating in the previous quarter, sentiment in the German private equity market resumed its upward trend at the end of the year. The sentiment indicator of the late-stage segment rose by 9.4 points to 20.2 balance points. Assessments of the current business situation improved for the seventh consecutive quarter and expectations were also slightly more optimistic.
Towards the end of the year banks were more accommodating to potential borrowers from the business sector despite the worsening pandemic situation. For SMEs, however, the KfW ifo Credit Constraint Indicator fell only marginally, while large enterprises significantly benefited from easier credit access. Fewer than one in ten large enterprises had recently deplored restrictive lending policies.
During the same period, SMEs’ credit demand grew again moderately after five consecutive declines. Compared with the long-term average, however, credit demand remains weak. Omicron and global supply chain disruptions are major adverse factors weighing on investment sentiment which are dampening the associated demand for finance.
The slump in the German credit market has bottomed out. That is good news at the end of the year, although it should be regarded with some caution. After all, in the third quarter banks again extended 7.6% fewer new loans than in the previous year.
But lending growth could turn positive again as early as in the final quarter. However, much of the improvement is attributable to the elimination of the negative base effect. Besides, businesses’ need for external finance is also likely to increase slightly more strongly than anticipated. Persistent bottlenecks are contributing to this, making inputs and investment projects more expensive. This increases the associated funding requirements.
The emergence of Omicron has significantly disrupted the economic conditions again. We expect increased volatility in lending business and currently do not anticipate a sustained strong recovery of the credit market until the second half of the year.
Business sentiment in the German venture capital market continued to improve in the third quarter of 2021. The business climate indicator of the early-stage segment rose by 4.9 points to 42.2 balance points, slightly surpassing the all-time high of the previous quarter. The indicators for fundraising and deal flow remained very good. Sentiment components such as exit opportunities and the tax framework, on the other hand, showed more pronounced variations.
German private equity market sentiment continued on the same level in the third quarter of 2021. The business climate indicator for the later-stage segment remained nearly unchanged at 11.1 balance points. Assessments of the current business situation improved, while expectations were somewhat more pessimistic again. The individual sentiment components also changed little compared with the previous quarter and showed a positive picture overall.
The KfW SME Panel 2021 shows that small and medium-sized enterprises got through the crisis year 2020 with relatively few bruises. Flexibility and adaptability enabled SMEs to survive the impact of the coronavirus crisis successfully. In particular, the rapid expansion of digital sales channels limited turnover losses to EUR 277 billion. Despite the worsened income situation, the feared massive depletion of the equity base of broad sectors did not materialise. The overall capital structure of SMEs is robust. However, small businesses sustained significant losses and investment also suffered. More plans were put off than ever before, while smaller crisis adaptation projects predominated. Businesses continue to face major challenges as they begin the transition to a climate-neutral economy and scramble to catch up in the digitalisation race.
Developments in the credit market are currently shaped by remarkably weak loan demand from businesses, according to the current survey conducted for the KfW-ifo Credit Constraint Indicator. Fewer and fewer businesses are requesting loans from banks. In the third quarter, the share of SMEs in loan negotiations dropped significantly to below 18%, marking a new record low.
Credit constraints developed unevenly over the same period, remaining higher than average for both enterprise size classes. But after dropping in the previous quarter, credit hurdles were again higher for SMEs. Tighter restrictions are affecting small and medium-sized service providers in particular.
German companies and the self-employed took out considerably fewer loans in the second quarter than in the previous year. According to calculations by KfW Research, new lending by banks and savings banks with commercial customers shrank by 12.7%. The last time there was a higher percentage decline was during the global financial crisis.
The driving force behind the weakness remains low corporate loan demand. In particular, new loans for short-term funds up to one year are at a low level. The better economic situation and the accelerated flow of state aid payments are likely to be decisive for this.
Even if there is much to suggest that credit growth may emerge from the trough in the second half of the year, it will still take a while for growth rates to turn positive again. In our estimation, this should be the case in early 2022.
Coronavirus crisis weighs on start-up numbers – minor impact on start-ups that are open to VC
The coronavirus crisis has reduced the number of innovation- or growth-driven young enterprises in Germany. In 2020 the number of such start-ups dropped to 47,000. In comparison with the overall decline in start-ups, the number of start-ups open to venture capital remained relatively steady at 8,600. Women are clearly underrepresented in the start-up ecosystem. Female entrepreneurs make up 20% of start-ups on average throughout the years, which is only about half their share in overall business starting activity. This is due to persistent social gender stereotypes and established structures.
The upturn in sentiment in the German venture capital market continued in the second quarter of 2021. The sentiment indicator of the early-stage segment rose by 10.5 points to 37.8 balance points, marking a new record high. The record high sentiment has been fuelled by the sentiment components fundraising, exit opportunities and strength of deal flow. All three achieved top scores. The IPO climate improved the most for the exit opportunities, which the well-filled IPO calendar reflects.
Business sentiment in the German private equity market continued to grow positively in the second quarter of 2021 and is back above the long-term average for the first time since the coronavirus shock. The sentiment indicator of the late-stage segment rose by 25.7 points to 13.4 balance points. Business expectation assessments rose one and a half times as strongly as assessments of the current business situation. Encouragingly, climate components largely demonstrate positive values, with fundraising leading the way.
Focus on Economics
Digitalisation doesn’t stop when it comes to corporate financing meaning it is now possible to gain finance via the online credit platforms of digital providers. The KfW SME Panel shows: Third-party financing via online credit platforms remains the exception among SMEs. In 2018 and 2019, around 77,000 SMEs used this financing alternative to an amount of EUR 3.4 billion. On the whole only comparatively small financing volumes are involved. There is, however, a (very) small group of businesses that use credit platforms to a greater extent. Rapid financing approvals and simple application procedures speak for the credit platforms. Only moderate growth is expected in the short term. However, the coronavirus pandemic could increase acceptance of digital financial services and boost online credit platforms in the long term.
In the second quarter of 2021 the share of enterprises in loan negotiations continued trending downward, although the decline in the SME sector was slightly more moderate than in the previous quarters.
Uncertainty about the easing of temporary supply bottlenecks and the impact of virus variants has likely contributed to credit demand declining for over a year now.
Banks are restricting their lending criteria slightly to large enterprises, particularly construction firms. SMEs, especially manufacturers and service providers, can access credit much more easily again.
Start-up activity in Germany dropped in 2020 as a result of the coronavirus crisis. The number of business starters dropped to 537,000, hitting a new low for full-time start-ups. In 2020, entrepreneurs ventured into self-employment more often to seize a business opportunity. The number of opportunity start-ups has thus remained relatively steady. The coronavirus crisis dealt a particularly heavy blow to self-employed women because of the sectors they tend to work in. Still, the number of female business starters fell only marginally. Aspiring female entrepreneurs appear to have adapted to the new crisis conditions faster and ultimately realised their start-up plans more often than men.
The downward trend in the corporate lending market deepened at the beginning of the year. Compared with the previous year, new lending by German banks to businesses and self-employed persons fell by 6.5%. A slump of this magnitude was anticipated partly as a result of the pandemic-related credit surge in spring 2020.
Below-average demand for credit remains the determining fundamental factor for the credit market weakness. In addition to the increasing disbursement of government financial assistance, the economic recovery is a major driver. As companies' burdens from turnover losses decline, the need for new bank loans is falling. One drop of bitterness remains the continuing reluctance of companies to invest.
However, in view of the significant brightening of economic sentiment, improvement is in sight. With the disappearance of the negative base effect and the stronger economy in the autumn, the turnaround should also take place on the credit market.
Coronavirus crisis is putting pressure on businesses – lending environment is becoming more difficult.
KfW Group has conducted its 20th business survey on bank behaviour and financing in collaboration with 18 business associations.
The most important findings:
- The financing situation of enterprises has worsened. The proportion of enterprises reporting difficulties in accessing credit was 26.5%.
- Around 60% of the surveyed enterprises conducted loan negotiations in 2020. Long-term loans were particularly sought-after.
- The crisis has weighed on enterprises’ financial situation. That has put downward pressure on ratings, with 34.5% of enterprises reporting a lower credit rating.
- Around two thirds of the surveyed enterprises invested in their business in 2020, although less than the year before. However, investment plans for 2021 point to a recovery.
The positive development of VC business sentiment has continued into the new year. In the first quarter of 2021 the sentiment indicator of the early-stage segment rose by 11.5 points to 27.8 balance points. Only a year after the coronavirus-induced downturn in sentiment, nearly all sentiment indicators for the market environment have turned positive – many closing in on their all-time highs. Assessments of fundraising and exit opportunities improved particularly strongly in the first quarter of 2021. Appetite for new investments has climbed to a new high – no doubt also because of the quality and strength of VC deal flow, the assessments of which have also risen to near all-time high levels.
In the wake of the coronavirus slump the recovery of business sentiment in the German private equity market recently improved only very slowly but it has now gained momentum. The sentiment indicator of the later-stage segment gained 18.7 points in the first quarter of 2021, rising to -12.2 balance points, remaining just barely in red territory. Although the various sentiment indicators for the German private equity market paint a mixed picture, most of them improved at the start of the year. Surging economic optimism appears to be leading to a generally improved assessment of the situation of SMEs, so that assessments of the quality and strength of deal flow are positive again, write-down pressure is falling and private equity investors are exhibiting significantly more appetite for new investments. The drop in satisfaction with entry valuations is therefore almost inevitable.
The share of businesses in credit negotiations continued to decline in the first quarter of 2021. Large companies’ demand has stagnated at the low level of the previous quarter. Reluctance to invest and uncertainty about the further course of the pandemic and an increased debt burden in parts of the corporate sector, as well as government guarantee programmes and subsidies are likely to curb credit demand. Banks are slightly tightening their lending policies again but only for SMEs. Large companies, especially in the manufacturing sector, are once again finding it much easier to access bank loans.
Towards the end of the year, new lending by German banks to enterprises and self-employed persons fell behind the previous year’s level by a noticeable -4.3%. Thus, unlike in the spring of 2020, the second coronavirus wave failed to trigger a significant increase in credit demand.
The restrictions imposed in autumn put renewed pressure on many businesses, but the second wave of infections has had a less severe macroeconomic impact. Government financial support combined with businesses’ adaptation measures further stabilised the liquidity position in the fourth quarter. Given the enormous uncertainty, investment financing continues to be in low demand.
We also expect a significant year-on-year decline in lending in the first half of the year. This is partly the result of a pronounced base effect created by the pandemic-driven strong lending activity in spring and summer 2020.
Sentiment in the VC market improved significantly at the end of 2020, fully offsetting the coronavirus-induced drastic confidence loss of the start of the year. In the final quarter, the business climate indicator of the early-stage segment rose by 26.7 points to 17.0 balance points. Business situation and expectations assessments improved at similar rates. The three business climate indicators thus appear to be unimpressed by the renewed lockdown and even exceed the previous pre-coronavirus level. Evidently, the experience from the spring was that the startup scene is less widely affected by the coronavirus restrictions than initially feared.
Sentiment in the German private equity market continues to recover at a sluggish pace. At -30.9 balance points, the sentiment indicator of the later-stage segment hardly improved in the fourth quarter of 2020 (+6.1). Thus, it made up for only around half of the downturn from the first quarter because the path of recovery flattened halfway out of the coronavirus slump. The coronavirus crisis thus continues to weigh heavily on sentiment and impacts on assessments of both the current business situation and expectations.
Despite renewed restrictions on business activity, loans did not attract much interest among enterprises in the fourth quarter of 2020, the KfW-ifo Credit Constraint Indicator survey has found.
The share of enterprises that were engaged in loan negotiations with banks plummeted to a new all-time low in both size classes. Due to the high level of uncertainty about the further course of the pandemic, interest in investment financing in particular is likely to be low at present.
At the same time, companies seeking bank financing are encountering increasingly restrictive financial institutions. The KfW-ifo Credit Constraint Indicator for SMEs rose for the sixth consecutive time to now 22.1%.
In the first half of December, Germany’s SMEs were still relatively unimpressed by rising new infections and the prospects of a tougher lockdown. Their business confidence rose 1.4 points to -10.6 balance points. SMEs’ situation assessments improved noticeably, while their expectations were only slightly higher. The positive outlook for an easing of the situation in the medium term through the rollout of effective vaccines is likely to be neutralised by a dimmer view of the coming months. However, the specific closure of child daycare centres, schools and many stationary retail shops, which went into effect on 16 December until at least 10 January, was not yet specifically known when most of the responses were returned.
KfW Research has calculated that new lending to enterprises and self-employed persons lost momentum in the third quarter. Banks extended just 0.3% more corporate loans than in the same period last year. That is in sharp contrast with the strong growth rates in the first half of the year.
The difficult situation of businesses in the coronavirus crisis has weighed heavily on investment activity. Loans to finance capital expenditure are hardly in demand. At the same time, the economic recovery over the summer months and businesses’ adaptations have reduced their need for liquidity. Credit institutions are moderately tightening their lending standards.
The decline in lending momentum can be expected to continue and accelerate. It is therefore all the more important to keep access to credit open for companies that want to invest now in order to be prepared for future challenges and opportunities.
VC market sentiment continued to recover from the spring coronavirus shock. In the third quarter of 2020, the sentiment indicator of the early-stage segment climbed by 4.7 points to -9.5 balance points. VC investors rated both their current business situation and their expectations better than in the previous quarter, although situation assessments improved only very marginally. In the third quarter, the development of the market environment was mixed. In the fundraising climate as a key factor, however, the rebound from the second quarter continued, with assessments even back in the green zone. VC investors’ concerns over fundraising from the coronavirus crisis thus appear to have largely disappeared.
The recovery of business confidence in the German private equity market from the coronavirus shock has stalled. The sentiment indicator of the later-stage segment stagnated at -37.5 balance points in the third quarter of 2020. Both current business situation assessments and business expectations remained nearly unchanged. The German private equity market environment has ceased to improve since the rebound in the second quarter. On the contrary, many sentiment indicators dropped again in the third quarter. Apart from the assessment of the promotional environment and tax framework, which are in the upper green band, most of the remaining indicators are deep in the red.
The coronavirus crisis has left a deep imprint on the SME sector. The KfW SME Panel 2020 shows that they continue to be severely impacted and their expectations for 2020 as a whole are at a historic low. The turnovers of small and medium-sized enterprises (SMEs) are set to drop more steeply than in the financial crisis of 2009. As a result, many enterprises fear further considerable pressure on employment. Equity ratios are also under stress. But SMEs broadly rest on a solid foundation, partly because of their renewed good performance in 2019. Employment, turnovers and investment rose again last year. SMEs were able to increase their profitability and build up their financial buffers once again, so they entered the crisis from a very good position. But the pathway out is likely to be long and hard and the impact will be felt for a long time.
Banks’ reluctance to give loans to small and medium-sized enterprises continues to grow in the coronavirus crisis. But considering the exceptional economic situation, the criteria are still being tightened with moderation.
The KfW ifo Credit Constraint Indicator for SMEs rose slightly in the third quarter. 21.7% of enterprises reported that banks were being restrictive in loan negotiations. As a result, the gap to large enterprises has widened again slightly. In this size class, credit access improved after criteria were significantly tightened in the previous quarter.
SME service providers encounter particularly adverse conditions for accessing loans. More than one in four currently have difficulties in obtaining loans. At the same time, the situation has eased in other sectors of the economy. Credit constraint decreased across both size classes in the construction and manufacturing sectors.
Number of start-ups in Germany was steady at 70,000 in 2019 – impact of the coronavirus crisis is uncertain
The number of innovation- or growth-driven young enterprises in Germany has stabilised. After rising in 2017 and 2018, the number of start-ups stayed at 70,000 in 2019. It is uncertain how the coronavirus crisis will impact the development of start-ups in 2020. More businesses will close their doors and there will be fewer start-ups, probably leading to more internet-based and digital business models. One fifth of start-up founders plan to employ venture capital to finance their future growth. That is twice as many as in the previous year. The appetite for VC is growing.
VC market Germany: Ready for the next development stage
The market for venture capital has been growing in Germany for some years now. Since 2014, annual VC investment has grown from EUR 0.7 billion to EUR 1.9 billion. But the German VC market is falling further behind other countries, as their VC markets have evolved much better in relation to the strength of their economies. In order to catch up with the United Kingdom, the European champion, German start-ups would have to receive roughly twice as much venture capital each year and over one third more to reach the level of France.
Large financing rounds pose a particular challenge for the German VC market. Foreign investors are involved in nine out of ten financing rounds. For the German VC ecosystem, that increases the risk of start-ups that need finance leaving the country.
The profound shock of the corona crisis has thrown many companies into distress. With their continuously strong lending, Germany's banks and savings banks are making an important contribution to overcoming the economic slump.
According to calculations by KfW Research, the growth of new lending to businesses and self-employed persons in Germany hardly slowed during the second quarter and remained on a high level, increasing by 6.0% year-on-year. The fact that long-term loans in particular were granted is good news for the stability of the economic recovery. Businesses have likely focused on ensuring the survival of their operations, while capital expenditure slipped into the background.
We expect economic momentum to slow in the further course of the year. The ongoing economic recovery is easing the pressure on the liquidity situation, while demand for investment loans should remain weak for some time to come.
Economics in Brief
What does the coronavirus crisis mean for Germany’s VC market? How are market participants responding and what are the consequences? In a special survey, 24 VC investors gave their views on specific aspects.
Start-ups are grappling with losses in turnover, which has also increased the risk of failure. At the same time, the crisis is impacting on their financing situation as even deals already committed to have not been closed. The main reason for this appears to be the great uncertainty caused by the coronavirus shock. However, the threat to further deals not materialising because of the coronavirus should have passed by now. Nevertheless, how long investors will now remain focused on their core business will presumably depend on how well businesses and economies get through the crisis.
Businesses are well-equipped for the crisis
In cooperation with 19 trade associations, KfW Group has conducted a business survey on banking behaviour and financing for the 19th time.
The most important results are:
- The financing situation remained good until the outbreak of the coronavirus crisis.
- The proportion of enterprises reporting difficulties in accessing credit was 13.4%.
- As before, however, small businesses are still much more likely to face difficulties in accessing credit.
- The positive development of businesses’ equity ratio and credit rating continued up until the beginning of 2020.
- Bank loans remain an important source of funding for businesses. Internal funding, however, continues to play by far the most important role in business financing.
The German VC market was unsettled by the uncertain consequences of the coronavirus crisis at the end of the first quarter of 2020 but the initial shock has passed for now. Business sentiment clearly recovered from the all-time low. In the second quarter the sentiment indicator of the early-stage sentiment rose by 50.0 to -11.1 balance points, reversing more than half of the coronavirus slump. VC investors’ assessments of both the current business situation and expectations recovered. The various sub-indicators also improved. VC investors are breathing a sigh of relief with respect to fundraising, exit opportunities, new investment and value adjustments, for example.
Confidence has returned to the German private equity market after the massive coronavirus slump. In the second quarter of 2020 the sentiment indicator of the later-stage segment reversed more than half of the first-quarter losses, rising by 45.6 to -40.6 balance points. Later-stage investors are again taking a more positive view of the current business situation and have higher expectations as well. Although sentiment has risen from its low, most indicators remain negative despite the rebound. Private equity investors are still disgruntled by the fundraising climate, exit opportunities and write-down pressure.
Businesses of all size classes are finding it more difficult to access credit in the coronavirus crisis.
The KfW Ifo Credit Constraint Indicator has reached the highest level since the survey methodology was revised in 2017. More than one fifth of SMEs reported that banks were restrictive in loan negotiations in the second quarter of 2020. However, large enterprises also have to surmount growing obstacles when accessing credit.
But in view of the significantly increased loan default risks due to the deep recession, the difficulties in accessing credit are still limited. This contrasts with the global financial crisis of 2009, when more than 40% of the small and medium-sized manufacturing firms surveyed by the ifo Institute perceived banks’ lending policy as restrictive. The situation today is not just due to the greater resilience of the banking sector but also to the comprehensive economic support packages.
Focus on Economics
The dark clouds of the coronavirus crisis are gradually clearing. Nevertheless, most of the small and medium-sized enterprises will feel the impact of the coronavirus crisis for a long time. That was one of the findings of the second representative supplementary survey based on the KfW SME Panel in early June 2020. Most enterprises do not expect to return to full economic activity before the spring of 2021. Around 2.3 million SMEs were affected by losses in turnover in May as well. Companies lost an average of 46% of their normally anticipated turnover. Overall, SMEs lost around EUR 88 billion in May. This is also putting pressure on their liquidity. It is true that the situation appears to have eased for some enterprises, with 25% currently reporting adequate liquidity reserves. But around one in five will run out of liquidity in four weeks at the latest unless the situation improves.
The coronavirus crisis has led to a sharp increase in lending dynamics. According to calculations by KfW Research, new lending to businesses and self-employed persons in Germany grew by 7.3% year-on-year in the first quarter. The growth rate thus nearly doubled on the final quarter of last year.
At the start of the coronavirus outbreak in March, access to short-term loans was a particularly important instrument for closing the abruptly emerging liquidity gaps. Even if the recovery has begun, German companies are still grappling with severe turnover losses in the pandemic. We therefore expect credit growth to continue increasing and reach its peak in the second quarter.
A number of economic policy measures are facilitating access to loans for businesses, making it easier for banks to expand their credit supply even amid rising risk costs. These measures also include the recently adopted economic stimulus programme.
The uncertain consequences of the coronavirus pandemic have unsettled the German VC market. Business confidence has plummeted to an all-time low. In the first quarter of 2020, the business climate indicator of the early-stage segment nosedived by 72.3 points to -61.3 balance points – an unprecedented decline. VC investors’ assessments of both the current business situation and expectations have deteriorated dramatically.
The coronavirus pandemic has hit the private equity market hard. The German private equity market has experienced a massive loss of confidence. In the first quarter of 2020, the sentiment indicator of the later-stage segment plunged by 94.3 points to -86.7 balance points. Never before have later-stage investors been more pessimistic about both their current business situation and their expectations. The indicator for the current business situation dropped to -82.2 balance points, while the indicator for business expectations fell to -91.2 of -100 possible balance points. The fund-raising climate has now fallen from a record-high level in the previous quarter to just above its previous lowest level.
Focus on Economics
As anticipated, the coronavirus crisis has hit the SME sector with force. A current special survey based on the KfW SME Panel shows the magnitude of the impact. In March, more than 2.2 million SMEs suffered losses in turnover as a result of the crisis. On average, they lost slightly more than half the normally anticipated March turnover alone, or around EUR 75 billion. Still, SMEs are very resilient against crises of this nature because they have continuously improved their equity base and built up financial buffers. This is helping them to temporarily absorb losses in the current crisis and reduce pressure on liquidity. If the lockdown drags on, however, SMEs’ losses will increase and half of them will run out of liquidity reserves by the end of May.
Launched in troubled times but at the right moment:
We are pleased to announce the publication of the first edition of the KfW-ifo Credit Constraint Indicator!
Right now, the new quarterly indicator series by KfW Research is a valuable instrument for monitoring and assessing the supply of credit to SMEs and large-scale enterprises during the crisis. Like the KfW-ifo SME Barometer, it is based on data from the ifo economic surveys.
The evaluation of the first quarter of 2020 shows a good starting position. Credit constraint was low across both size classes. Only 17.2% of SMEs reported difficulties in loan negotiations. That means the impact of the coronavirus on the credit market is yet to be seen.
The coronavirus crisis has hit the export-oriented German economy in what was already a difficult situation. Growing tensions in international trade relations and a worsening global economy also affected SMEs, whose international turnover grew by a mere 3.1% in 2018 to EUR 595 billion, down from 5.5% in 2017. The KfW ifo Export Expectations of the German SME sector were persistently negative in 2019, before crashing through the floor in March 2020. The approx. 800,000 internationally active SMEs have been hit particularly hard by the consequences of the coronavirus crisis in Europe, where their most important sales and procurement markets are located. Even though the trade conflict between the EU and the US is being overshadowed by the coronavirus crisis, one in three SMEs are worried about a possible escalation.
Coronavirus and credit: an important building block to limit the economic fallout
The economy is in the stranglehold of the pandemic. Around the world, drastic restrictions to public life are necessary to protect human life and health. The consequences will be severe because they affect the entire German economy.
The credit market plays an important role in this situation because abrupt turnover losses lead to liquidity shortages in a large number of enterprises. That means German financial institutions have to join forces to get the real economy through the epidemic unharmed. The regulator’s move to loosen equity requirements, the measures of the ECB and expanded promotional programmes from KfW combine to form a convincing package that will bolster the credit market.
The German VC business climate has weakened again but remains good. The business climate indicator of the later stage segment fell by 8.0 points to 10.1 balance points in the fourth quarter of 2019. VC investors rated their current business situation significantly poorer than in the previous quarter, while business expectations remained relatively stable. The indicator for the current business situation decreased to 13.2 balance points (-14.3), while the indicator for business expectations stabilised at 7.0 balance points (-1.7)
The business climate in the German private equity market hardly changed on the preceding quarter. In the fourth quarter of 2019, the business climate index for the later stage segment remained unchanged at 6.3 balance points. Later stage investors gave their current business situation and expectations nearly the same rating as before. The indicator for the current business situation was 11.1 balance points (-1.9), while the indicator for business expectations was 1.5 balance points (+1.9). On average for the year 2019, the business climate in the private equity market was on the upper edge of the normal range and thus remained well behind the two very good previous years.
Focus on Economics
Do digitalisation projects have specific characteristics that conflict with external financing? To answer this question, this study compares the financing structure of digitalisation projects with that of investments using a statistical procedure from evaluation research.
The central finding is that the financing structure of both types of projects differs significantly – even when comparing companies that are similar in size, age, credit rating and the respective project scope. This indicates that special characteristics of digitalisation projects are an obstacle to financing with bank loans.
The number of innovation- or growth-driven young enterprises in Germany has increased again. In 2018 there were 70,000 start-ups, after 60,000 in the previous year.
On average, nine in 100 businesses founded by men have start-up characteristics, as opposed to only three in 100 for women. Businesses founded by women and men differ primarily in how strongly they are innovation- and growth-driven. Examples of suitable measures for closing the gender gap include stepping up efforts to attract women to technical and scientific careers and teaching business skills to school students.
Corporate lending in Germany is losing steam again. According to KfW Research, new lending has resumed its downward trend after a brief interruption. In the third quarter, banks extended 4.6% more loans to businesses and self-employed persons. Although this is still a strong increase, it is well below the 7.0% recorded in the second quarter.
The weak economic outlook, the industrial recession and multiple political uncertainties have dampened the appetite for new loans among both banks and businesses – despite the low interest rate levels. This is slowing down new lending momentum. We expect this trend to continue into the new year.
The business climate in the German venture capital market has deteriorated. The early-stage segment indicator fell by 6.1 points to 16.8 balance points in the third quarter of 2019. VC investors rated their current business situation more positively again but pessimism around their expectations returned. The indicator for the current business situation rose to 26.5 balance points (+2.7), while the indicator for business expectations fell sharply to 7.1 balance points (-14.8).
Sentiment in the later-stage of the German private equity market continues to deteriorate. The business climate indicator of the later-stage segment fell by 3.3 points to 6.4 balance points in the third quarter of 2019. Private equity investors rate their current business situation almost as positively as before but have more pessimistic business expectations, so positive and negative assessments are now balanced. The indicator for the current business situation remains hardly unchanged, at 13.1 balance points (-0.7), while the indicator for business expectations fell to -0.3 balance points (-6.4).
The boom of the credit market in Germany does not seem to come to an end. New lending business, as estimated by KfW Research, expanded in the second quarter by a strong 7.1% year-on-year. Thus, growth momentum was boosted once again. The main driver, however, was new business with short-term loans. These are often used to finance inventories or liquidity bottlenecks. For this reason, the most recent development is probably an expression of the weak economy, which is clouding the prospects for the lending business.
Last year was again characterised by all-time highs for Germany’s SMEs (‘Mittelstand’). Employment in small and medium-sized enterprises (SMEs) broke another record, turnovers continued to soar and investment increased again. The KfW SME Panel 2019 also reveals that enterprises were more successful than ever in loan negotiations. Borrowing preferences once again shifted towards long-term bank loans. SMEs continue on the path of growth in 2019 but the momentum is clearly slowing. As the economic outlook dims, SMEs’ recession fears are growing – if on a high level for the time being. Overall, businesses face a year of uncertainty.
The business climate in the VC market is recovering after two major setbacks. The business climate indicator of the early-stage segment rose by a strong 13.2 points to 23.2 balance points in the second quarter of 2019. VC investors are more positive about their current business situation but, in particular, they hold much more optimistic business expectations again. The sentiment indicators for the VC market environment, however, are increasingly deteriorating.
Sentiment in the later stage of the German private equity market has fallen for the fourth consecutive quarter. The business climate indicator of the later-stage segment dipped slightly by another 2.7 points to 10.1 balance points in the second quarter of 2019. Equity investors are more downbeat about their current business situation than before but again hold more optimistic business expectations. The indicator for the current business situation fell to 14.1 balance points (-9.5), while the indicator for business expectations climbed to 6.1 balance points (+4.1).But despite the cooling business climate, most assessments of the later-stage market environment remain in the green.
For the 3rd time, KfW Group, together with 17 trade associations, has surveyed the businesses on their digitalisation activity. The most relevant results are:
- Two thirds of businesses (66%) have plans to implement digitalisation projects in the next two years. These plans can be observed in all business sectors
- Problems come in to focus with increased commitment to digitalisation
- Data security / data protection and lack of IT competences, including a shortage of qualified IT workers, as well as difficulty adapting the organisational structure and work organisation are the biggest hurdles
Financing climate remains strong despite economic headwind
In cooperation with 17 trade associations, KfW Bankengruppe has conducted a company survey on banking behavior and financing for the 18th time.
The most important results are:
- The economic climate continues to be at an all-time high despite the economic slowdown
- The proportion of companies reporting difficulties in accessing credit has fallen by one-third compared to the year 2012
- Small businesses, however, continue to face significantly greater difficulties in accessing credit than large companies
- Personal contacts and their continuity are very popular with companies despite the trend towards digitization; however, the proportion of companies that value online offers is growing rapidly
At the start of the year, the corporate lending market was still booming in Germany. According to estimates by KfW Research, new lending growth was 6.4% on the previous year, almost as strong as in the final quarter of last year. It thus expanded well above average again.
This figure is surprising given the economic slowdown that has been observable since mid-2018. But apparently it was also driven by a special effect generated by the German automotive industry. This effect should fade soon. As economic momentum slows, the growth rate of new lending to businesses and self-employed persons is set to decrease noticeably.
Sentiment in the German private equity market continued to fall after the turn the year. In the first quarter of 2019, the business climate index of the German Private Equity Barometer dropped by 3.1 points to 64.7 balance points. At the same time, the VC business climate continued to be very good despite the decline, while the later-stage climate stabilised on what is still a “good” level. The market environment exhibited varying developments. The fundraising climate improved to just under its all-time high, while assessments of the level of deal flow rose to a new record. Furthermore, the pricing climate eased noticeably. On the other hand, exit opportunities deteriorated sharply and pressure on write-downs increased.
Bank loans were still in demand among German businesses and self-employed persons in the final quarter of 2018. At the end of the year the corporate loan market was, as expected, quieter than in the summer but new credit business, as estimated by KfW Research, expanded by 6.6% on the previous year at still above-average speed.
The slowdown of economic growth and increasing pessimism within companies will likely be increasingly reflected on the credit market in the next few months. We therefore expect the momentum in lending to slow down. The incentives generated by low interest rates and favourable financing conditions should, however, allow us to see further growth.
Focus on Economics
SMEs have traditionally maintained a close relationship with the banking sector. The ‘principal bank concept’ is widespread in the SME sector and 93% of all enterprises do business with a preferred credit institution. They have very long-lasting relationships that average 20 years. The special analysis conducted by the KfW SME Panel also found that enterprises seek face-to-face interaction even as the branch network shrinks. In 2017, around 65% of SME managers visited a bank branch at least once, on average once every quarter. In general, diversification in banking increases with the size of the enterprise. Large SMEs maintain more business relationships with banks and savings banks, visit local branches more often and focus less on their principal bank for their borrowing needs.
Sentiment in the German private equity market continued to decline at the end of the year. In the fourth quarter of 2018, the business climate index of the German Private Equity Barometer fell by 4.2 points to 67.9 balance points. But although confidence was lower in the second half-year, 2018 was on average the year with the best business climate since 2003 when the German Private Equity Barometer was launched. But sentiment was divided at the end of the year. While the business climate set a new record in the venture capital segment, it cooled yet again in the later-stage segment.
Economics in Brief
Access to finance is a major prerequisite for micro, small and medium-sized enterprises in developing countries to be able to use investment and growth opportunities. It is also an enormous challenge for many MSMEs. This applies to Africa more than to any other region in the world. Here, access to finance is by far the main obstacle for MSMEs. Still, it is possible to identify positive developments in many African countries.
Focus on Economics
Many businesses deplore that high costs, high risks and financing difficulties are making it hard for them to innovate. This study therefore examines whether differences exist in the financing of capital expenditure and innovation and whether these differences may be a sign of limited innovation finance opportunities. In fact, innovation finance is clearly distinct from investment finance. The findings confirm theoretical considerations that specific characteristics of innovation (such as uncertainty about success, difficulties in assessing projects and lack of collateral) are a barrier to external financing with bank loans in particular.