Can Germany finally catch-up on growth financing?
The German “Zukunftsfonds” is great news – what other steps could follow?
It is a known fact: Germany, as many of its European peers, is still lagging behind when it comes to growth financing. Yes, conditions and support for start-ups in their early phase have improved significantly over the last decades. With a convincing business plan and team, it is less of a hassle to secure seed financing. That was our experience with Arioso Systems. With Brandenburg Kapital, HTGF (High-Tech-Gruenderfond), TGFS (Technologie-Gruenderfond Sachsen) and two business angels, we found highly supportive investors, who believe in the big potential of our technology.
However, there is no denying that there still is a massive gap in Germany in financing innovation all the way to mass-market scale:
While venture capital (VC) funding in the United States rose to a new record of 130 billion USD in 2020, VC activities in Europe reached only 46 billion EUR, according to Fortune. Although the European figure is higher than in previous years, this is still some serious discrepancy. The lack of growth financing over here leads to promising companies moving abroad or being bought by international corporations, delaying plans or implode in the end.
Financing growth is not as risky as getting left behind
If we want to keep our standard of living and maintain our technological leadership, our economy cannot afford to neglect this disparity. The new “Zukunftsfonds” (“Future Fund”) that was recently announced by the German government is good news. A step in the right direction. Facilitated by KfW, the government is planning to invest 10 billion EUR to be matched by private investors. In the end, about 30 billion EUR could help Germany catch-up on the VC front.
The plans show that German politics understands that our country can only profit from investing in innovative start-ups and helping them scale-up. If not only seed but also growth financing is provided, that money is not lost. Qualified jobs are created, know-how stays in the country. Not all ideas will be successful. But some will be to such an extent that the failures are compensated by far. Basically, every angel investor can confirm that.
There certainly is a risk in financing something new and innovative. But in the end, not investing in innovation will be much riskier for our future competitiveness and thus standard of living.
There will likely be further steps on the path to catching-up
It looks like the “Zukunftsfonds” is not the end of the road. There are a lot of discussions going on, how to further improve conditions for growth companies in Germany. We are observing them with great interest.
Do we need better possibilities for insurers and pension funds to invest in start-ups and thus diversify their allocations with potentially high-yield assets? This is common practice in other countries, like Switzerland. And what is going to happen to employee stock option plans (ESOP)? They are an instrument for many start-ups to attract talent. Expectations in the media and start-up scene exist that the newly elected government will re-open this file, after a recent reform did not result in any major change.
There is such an innovative start-up scene in Germany. We are seeing and speaking to fantastic companies with great ideas and bright and passionate founders – a big potential to tap. So, can Germany finally catch-up on growth financing? We believe, the “Zukunftsfonds” is an important step in the right direction. Let’s see what other steps will follow on that path.