Key promotional area: Innovation – business sector Mittelstandsbank (SME Bank)

Promoting innovation for greater competitiveness and digital transformation

As one of the key challenges facing the German SME sector, digital transformation is putting competitiveness on digital markets to the test. In addition to brisk innovation activity, the rapid spread and commercialisation of new digital products, processes and services are an absolute must when it comes to maintaining competitiveness.

KfW’s new ERP innovation promotion as a key promotional instrument for financing digital transformation

With a commitment volume of EUR 1.54 billion since the programme was launched in the second half of the year, the new “ERP innovation promotion” product family got off to a very successful start. The integrated promotion of innovation and digitalisation is KfW’s way of responding to the future trend of digitalisation in a focused manner and combining it with conventional forms of innovation financing in order to provide targeted support for digital transformation and its innovation potential in the future.

As well as expanding the range of areas in which financing can be used to include digitalisation, KfW is now collaborating with the European Investment Fund (EIF) and is offering to assume 70% of the credit risk for its financing partners as part of the ERP digitalisation and innovation loan to make them more likely to finance innovative or digital projects that are more difficult to assess in terms of their success potential.

In order to improve their balance sheet structure and credit rating, companies opting for the ERP mezzanine for innovation can still make use of the financing package from its predecessor programme, comprising a conventional loan and a loan largely classified as equity (subordinated capital), without having to furnish additional security for the subordinated capital. This offering is complemented by pure debt financing for projects that are novel in the EU based on particularly attractive conditions.

Innovation and growth driver: venture capital for the start-up and growth phase

Good prospects for the German venture capital market.
KfW provides support in all stages of development.

KfW's equity financing offering to technology-oriented start-ups and innovative businesses

Graphic KfW's equity financing offering to technology orientated start-ups and innovative business

Venture capital market in Germany: prospects are good but a catch-up is needed

On the one hand, Germany has developed a very dynamic start-up scene in recent years. Digitalisation of the economy and Industry 4.0 will continue to boost this trend.

On the other hand, however, Germany's venture capital market as measured against the country's total economic output remains small compared to the United States in particular. The USA invests around twelve times as much venture capital as a percentage of gross domestic product (GDP) as Germany, according to OECD statistics.

There is currently a gap in the stage in which companies tap new markets and grow quickly. There is still a considerable need for a greater supply of capital in this segment.

KfW provides support in all stages of development.

The High-Tech Start-Up Fund is the most important and largest source of venture capital in the seed phase. We support young and innovative companies in the start-up and growth phase through ERP Venture Capital Fund investments and coparion.

KfW will make a total of more than EUR 600 million in venture capital available to the venture capital market in the next few years through ERP Venture Capital Fund Investments and coparion alone, thereby leveraging a total investment volume of around EUR 2.5 billion.

As a promotional bank with the requisite staying power, KfW continues to lend constructive support to Germany's venture capital landscape as it becomes a viable independent market – a growth engine for young, innovative tech companies and a driver of renewal of Germany's corporate landscape.

KfW will be gradually expanding its activities in the field of equity finance in the next few years. It will found a subsidiary for this purpose in 2018. KfW’s Board of Supervisory Directors approved the joint initiative by the German Federal Ministry for Economic Affairs and Energy (BMWi), the German Federal Ministry of Finance (BMF) and KfW in June 2017. The new venture capital subsidiary will in future bundle KfW's financing offering in the field of venture capital (VC). This includes the commitment to the High-Tech Start-Up Fund, the investment in coparion and the commitment as part of the “ERP Venture Capital Fund Investments” programme with ERP Special Fund exposure.

The new company aims to improve the venture capital on offer to innovative, technology-oriented companies during the start-up phase and in the particularly capital-intensive early growth phase. Particularly during the stage in which young companies want to tap into new markets and achieve rapid expansion, the supply of capital in Germany is currently insufficient. The shortage in supply of follow-on and growth financing in the start-up and early growth phases in Germany is estimated to be around EUR 500 million to EUR 600 million a year.

The new KfW subsidiary will focus on investments in venture capital funds. These, in turn, will invest in fledgling technology-oriented companies and help to strengthen their capital base in the process. The KfW subsidiary can also invest in what are known as venture debt funds. These funds provide young companies with debt financing to finance their high-risk expansion phase.

The new venture capital company plans to have increased its annual investment volume in VC funds to EUR 200 million by 2020, making around EUR 2 billion available to growth-oriented high-tech companies over the next 10 years.

Equity financing instruments

The most important and largest financier in this area is the High-Tech Start-up Fund (HTGF), which makes capital available to technology start-ups in the seed phase. After the Federal Government, KfW has been the largest investor in the HTGF since it was launched in 2005.

In 2017, KfW continued with its investment in the High-Tech Start-Up Fund (HTGF) in the third fund generation. KfW is once again the largest investor after the ERP Special Fund.

In partnership with the German Federal Ministry for Economic Affairs and Energy (BMWi), KfW launched the ERP Venture Capital Fund Investments promotional instrument on the market in 2015 as the first pillar of equity finance.

In this way, KfW participates indirectly in young German tech companies via selected German and European venture capital funds.

This instrument enables KfW to rely on venture capital fund market expertise and also to mobilise private equity as a state-owned promotional bank.

KfW has invested almost EUR 185 million in 14 venture capital funds since the programme was launched.

As a second pillar, KfW and the ERP Special Fund – represented by the German Federal Ministry for Economic Affairs and Energy (BMWi) – launched the coparion co-investment fund, which participates directly in young technology companies, always together with private investors.

coparion has been stocked with EUR 225 million, of which it can invest up to EUR 10 million per company. Led by an experienced management team, coparion follows a market and performance-based approach, applying conventional market methods and success criteria.

The fund concept is clearly committed to the principle of “quality over quantity” and focuses on exposures with a good risk-return profile. Since the fund was launched, more than 1,200 business plans have been screened and 15 investments entered into in areas such as life science, software, IoT (Internet of Things), platforms and robotics.

Financial Report 2017 (PDF)

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Key promotional area: Innovation – business sector Mittelstandsbank (SME Bank)

Promoting innovation for greater competitiveness and digital transformation

KfW’s new ERP innovation promotion as a key promotional instrument for financing digital transformation

Innovation and growth driver: venture capital for the start-up and growth phase

KfW's equity financing offering to technology-oriented start-ups and innovative businesses

KfW’s equity finance activities

High-Tech Start-Up Fund (HTGF)

ERP Venture Capital Fund Investments

coparion

Read more on our key promotional areas in 2017

Financial Report 2017 (PDF)

Key promotional area: Innovation – business sector Mittelstandsbank (SME Bank)

Promoting innovation for greater competitiveness and digital transformation

KfW’s new ERP innovation promotion as a key promotional instrument for financing digital transformation

Innovation and growth driver: venture capital for the start-up and growth phase

KfW's equity financing offering to technology-oriented start-ups and innovative businesses

KfW’s equity finance activities

High-Tech Start-Up Fund (HTGF)

ERP Venture Capital Fund Investments

coparion

Read more on our key promotional areas in 2017

Financial Report 2017 (PDF)

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