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Start-ups

Start-ups

KfW Capital strengthens innovative German enterprises

In their expansion phase, start-ups require financially strong backers, especially in the form of venture capital and venture debt funds. This is where the new subsidiary KfW Capital comes into play. It pools the equity financing available to innovative enterprises and expands it – to EUR 200 million per year by 2020.

About Mrs Hengster
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Dr Ingrid Hengster is Member of the KfW Executive Board and responsible for domestic promotion.

Entrepreneurship as the backbone of the German economy is today more dynamic than it has been for a long time. In many discussions with entrepreneurs, experts and investors over the past years, I have sensed a growing enthusiasm whenever autonomy and personal responsibility are mentioned. Thanks to new technologies – and digitalisation in particular – a rising number of entrepreneurs are recognising great opportunities to develop new business ideas and to establish them on the market. Wherever you look in Germany, exciting and promising start-ups are springing to life. In light of the fact that we are a country poor in raw materials, this is a very positive development because we need innovative technology firms to ensure we remain competitive over the long term. I am pleased to report that, in the initial phase, entrepreneurs are able to find the right governmental and private financing to turn their ideas into reality.

However, the growth phase of a start-up is absolutely critical for its success. Here it is determined whether a company can establish a position for itself on the market and whether an idea is accepted or disappears all together. In this phase, companies are hiring new staff to occupy the new jobs they are creating and pushing to branch out into regional and international markets. Turnover increases rapidly while profit, on the other hand, is severely delayed or never materialises at all. To be able to navigate this phase of expansion with the necessary force and speed, the companies need reliable and financially strong partners. They are looking for investors who are prepared to take risks, especially venture capital and venture debt funds.

Venture Capital

The term venture capital is used when investors invest in young companies that have not yet established themselves in the market but still show promise. The investor supports the entrepreneurs with equity capital in the hope of a high return. Since it is anything but certain that a young company will develop positively, a total loss must always be expected. It is therefore with good reason that the term venture capital financing is used. Investing in a venture capital fund that invests not only in one, but in several young companies, thereby at least helps spreading the risk.

However, finding partners who meet these criteria is no easy task. Companies often find themselves in this critical phase with insufficient capital available. It is estimated that funding shortfalls amount to something in the region of EUR 500 to 600 million each year. To compound matters, there are simply not enough venture capital funds with sufficient volume that invest in German companies. That is why KfW began to reorganise its equity finance offering a number of years ago – with success. This move paved the way for the recent foundation of the subsidiary, KfW Capital. The implemented financial instruments have already proven their worth, as KfW is already the second largest investor in all three generations of the High-Tech Gründerfonds (High-Tech Founder Fund). KfW also holds an almost 20 per cent share in coparion. Since 2015, the focus of its shareholding activities has been on the investment in venture capital and, more recently, venture debt funds.

With the support of the ERP Special Fund – the revolving fund from the German Federal Ministry for Economic Affairs designed to strengthen the German economy – KfW invested around EUR 73.4 million in 2017 alone. In such endeavours, KfW assumes a maximum of 19.99 percent of the fund volume. The majority of the investment must therefore be provided by private investors. Last year, KfW invested a total of approximately EUR 130 million in equity capital. We are proud to have made such a substantial contribution together with the German Federal Ministry for Economic Affairs.

Venture debt

Like venture capital, venture debt involves financing for a young company. Unlike venture capital, venture debt is a debt instrument that is tied to regular interest and principal payments.

Even though it may sound like a high investment, it is by no means enough to animate the funding landscape over the long term. At the initiative of the German Federal Ministry for Economic Affairs, the Federal Ministry of Finance and KfW, the KfW Supervisory Board took the decision in June 2017 to significantly expand KfW's equity finance. According to the resolution, the bank's equity financing business was to be carved out into a specialist subsidiary that can better meet the demands of VC fund investments. The subsidiary makes a substantial contribution to closing the gap in capital availability.

As of today, KfW Capital is taking over KfW's equity financing activities as a new player in its own right on the market. Managing Directors Dr Jörg Goschin and Alexander Thees have put together a highly competent team. The subsidiary's focus on equity investments strengthens professionalisation and marketability. It also makes the government's commitment to venture capital and the venture debt market in Germany visible. The volume is also set to increase considerably – to EUR 200 million by 2020. This will significantly improve the financial power of funds invested in Germany. Innovative technology companies in Germany will be the primary beneficiaries. It will be much easier for them to find professional and financially strong venture capitalists who can accompany them on their course of growth.

Published on KfW Stories: Tuesday, 9 October 2018