Five years of KfW Capital: double interview with Co-CEOs and Senior Managing Directors Dr Jörg Goschin and Alexander Thees
KfW Capital was launched in the European VC market on 15 October 2018. It started off with 20 employees, some from KfW and others recruited from the market. Similarly, Jörg Goschin was hired externally to be co-CEO with Alexander Thees, who came from KfW.
Jörg, Alex, what do you remember about the mood in those first days?
JÖRG GOSCHIN: One of the things I remember very clearly was the kick-off event with then Federal Minister Peter Altmaier in Berlin. That was on the 9th of October 2018, a few days before we entered the market. It was the first time we faced the public with our KfW Capital logo. That was a special moment for me. After an intensive project phase, things were finally moving: We were launching KfW Capital in the market.
ALEXANDER THEES: The time before that was also very eventful. We had worked intensively on the go-live, and almost every week new colleagues from KfW and the market were coming together to form the initial team. We were having to set up the various functions – investment and risk management and communication, to name only a few. Then, when we launched, we were elated, we really felt the urge to get up and get moving. At the same time, we asked ourselves: how will the market react to us? I have very fond memories of the positive feedback we received from many sides after our launch.
At the beginning, KfW Capital’s task was to lift the volume of KfW’s existing equity finance business to 200 million euros per year. The aim was to improve the funding situation of start-ups in Germany by providing venture capital funds with more capital. Why was such an increase even necessary?
THEES: Various studies identified a significant lack of finance for innovative start-ups in Germany, especially in the later-stage segment. Measured by investment in venture capital and GDP, Germany was well below the European average. It was a finding that alarmed many market players at the time, including policymakers. We have not yet reached our goal, but fortunately we are seeing the German VC market moving in the right direction.
GOSCHIN: The demand is there. In order to make the digital and sustainable transformation of the German economy a success, even today, five years after the launch of KfW Capital, we urgently need more disruptive technological innovations that have the potential to provide new, groundbreaking solutions to the great challenges of our time. More venture capital is needed to fund them. This is often provided by venture capital funds. That is why the sector needs to be strengthened! In what Stefan Wintels, the CEO of KfW and chair of KfW Capital’s Supervisory Board, fittingly named our ‘decade of decisions’, we therefore need to have sufficient venture capital available to fund the growth of innovative start-ups and technology firms.
KfW Capital is investing close to 500 million euros this year, far more than at the launch. During the pandemic, KfW Capital structured and successfully implemented the Corona Matching Facility as part of the first relief package for start-ups during a financial crisis. Besides, on behalf of the Federal Republic, KfW Capital coordinates the Future Fund of the Federal Government, which makes available more than 10 billion euros additionally for venture capital investments and leverages substantial private capital. It almost seems as if all of that had been planned…
GOSCHIN: In hindsight, KfW Capital was founded at precisely the right moment. The urgency of the digital and sustainable transformation has become increasingly more obvious since 2018, and with it the need to strengthen the venture capital market accordingly. Furthermore, the COVID-19 pandemic called for fast and systematic action so as not to jeopardise the budding start-up ecosystem. In that environment it was very helpful to have an institute in Germany that specialised in venture capital funds, had the capacity to quickly structure the relief package of the Federal Government and invest the funds jointly with the European Investment Fund. Now, besides our investment activities on behalf of the Federal Government, we are designing the building blocks of the Future Fund in close collaboration with the Federal Ministry for Economic Affairs and Climate Action and the Federal Ministry of Finance as well as the European Investment Fund, the Deep Tech and Climate Fund (DTCF) and the High-tech Start-up Fund.
Does that mean KfW Capital has become an all-purpose weapon for venture capital five years after its launch?
THEES: That’s not how I would label us. But our range of activities has surely broadened even faster than anticipated, both in operational terms and in market development. This has been and remains accompanied by equally fast company growth. Our various functions are more differentiated than at the start, and we are today a medium-sized securities institution and as such fall under the direct supervision of the German Financial Supervisory Authority. Above all, our team has grown steadily. Integrating new employees is very important to us, and this was a very significant challenge particularly during the pandemic. As we grow our workforce, we seek to ensure diversity. For example, our strong, interdisciplinary team is today 50% female and made up of seven nationalities. We also have a good mix of seniors and juniors.
KfW Capital invests exclusively in venture capital funds - why?
GOSCHIN: It enables us to very effectively use the expertise already existing in the market. Being a 'quasi' fund of funds means we have the possibility to efficiently strengthen the VC ecosystem, thereby leveraging our promotional impact. In terms of numbers, that means we have already invested in around 100 VC funds which have financed more than 1,900 start-ups. As part of our professional due diligence, which includes a comprehensive ESG assessment, we carefully ascertain whether the target funds are capable of identifying and funding the most promising start-ups.
THEES: Until recently, we invested 100% irrespective of the funding stage or sector. With the Green Transition Facility which we introduced in June of this year we are for the first time investing with a focus on one sector, namely the important climate tech sector.
To what extent is it expedient to broaden the investment approach?
GOSCHIN: Our sector- and stage-independent approach has aimed to strengthen the venture capital market across its full breadth right from the start. For elementary themes of the future such as ‘environmental protection and climate action’ – which by the way is another key promotional approach of KfW – it makes sense to make additional capital available for special investments in order to give the market a special boost. So, besides continually investing in all sectors and stages, including and especially in difficult times, we are broadening our investment approach by making additional funds available for areas requiring special support.
THEES: This structural expansion of our approach also enables us to effectively address further areas in which there are market weaknesses. We are already in close consultation on this with the ministries and KfW.
You mentioned that these are challenging times. What are your views of the market?
GOSCHIN: In my view, the venture capital market in the past years has demonstrated how resilient and consistently capable it is to rapidly adapt to new challenges. In Germany we are seeing increasing professionalism in both start-ups and VC funds. The returns of the past years, for example, are at least equal to those achieved in the US. Important investor groups such as pension funds and insurers, which tended to avoid the asset class of venture capital in the past, are increasingly seeing this as well. And this is important because in addition to public capital, we also need private capital in order to durably strengthen innovative capacity in Germany. We therefore always want our investment activity to send out a signal to private sector investors as well.
THEES: The clear improvement in VC sentiment, for example, which KfW Research surveys quarterly together with the German Private Equity and Venture Capital Association, shows how resilient the market is. Sentiment improved around the middle of the year despite the challenging environment, and investors are much more optimistic about the rest of the year. Investments in German start-ups have also increased again in the course of the year. The year 2021 was a year of superlatives for the asset class of VC. We are now seeing a normalisation and corresponding valuation corrections. This process has probably not yet been completed, but so far we believe the market is dealing with it in a professional manner.
Where do you see the greatest need for improvement in the market?
GOSCHIN: We need even more and, in particular, larger VC funds in Germany and Europe that are capable of remaining onboard in large to very large financing rounds, so that start-ups have sufficient capital at their disposal to scale up and internationalise their innovations. We also need further support from policymakers as well as more private capital to achieve this. Apart from that, greater transparency, specifically, more information about the VC funds and their portfolio companies would be desirable, as well as more liquidity in the market, including through secondary transactions.
THEES: ESG – environmental, social, governance – topics must also continue to grow in importance. After all, without a coherent ESG strategy that also takes into account portfolio selection it will be nearly impossible to find investors in the future. In our own activities, the topic of ESG has for years been an integral part of our appraisal of funds, and we are also in active dialogue about it with our portfolio funds. KfW Capital also offers ESG training with our partners VentureESG and the BMW Foundation, which are highly sought after. To some extent, we see ourselves as a market developer.
Final question: Five diversified years of KfW Capital are behind you – a moment to relish?
GOSCHIN: We are indeed receiving congratulations from many people these days, including Federal Minister of Economics Habeck and Federal Minister of Finance Lindner. We are very happy about this. But we are also using the anniversary to take a moment to say thank you – for the trust and the great support from policymakers, the colleagues in the ministries, our Supervisory Board under Chair Stefan Wintels, our excellent Advisory Board and all market stakeholders. We very much appreciate this outstanding support. It also spurs us on to continue refining the VC ecosystem in Germany and Europe as a reliable partner and investor – in good economic times and bad economic times!
THEES: Of course, we also thank the many colleagues at KfW who are providing outstanding support to us. Our deepest thanks go out to our motivated and motivating team, which we are very proud of. Without their great commitment and inventiveness, KfW Capital would not be what it is.
Published on KfW Stories on 12 October 2023.