State in the start-up: doping or downer?

With its new equity fund, the federal government wants to pump more venture capital into the German start-up system. Great hopes rest on the new instrument. But how successful it is depends heavily on how it is implemented.

It's been official for a few days now: the federal government's Future Fund, which is supposed to mobilize more venture capital for German start-ups, is coming. The budget politicians of the grand coalition have given their okay, now the Bundestag still has to agree.

But is there any need at all for state intervention in a market in which there are actually enough private providers? Despite all the complaints about the shortage, venture capital numbers in Europe are better than ever, even in the crisis year of 2020: 38 billion euros flowed into European start-ups this year, according to Pitchbook. Ideally, the German government's Future Fund will boost that figure in the coming years.

Experts definitely see a need. "Especially in the large financing rounds, we see that investors from the U.S., Asia or other parts of the world are often in the majority here," says Paul Wolter of the German Start-up Association: "Even European investors, however, become rare of a certain size, German ones are almost completely absent."

In this way, the state would fill a gap in the venture capital market and not push private competitors out of the way. Because until now, these companies have often had to raise money in the United States. For example, the Dresden-based space start-up Morpheus, which manufactures manoeuvring engines for satellites: In its first round of funding, there were six backers, five of whom came from the US.

The reasons for this are many. One important one is that large institutional investors have been comparatively reluctant to invest in Germany so far. For example, German life insurers alone had an investment portfolio of one trillion euros in 2019. However, little of this flows into venture capital. The risk of default is too high for insurers. This is due to the clear guidelines they have for handling policyholders' money. Experts doubt whether a fund alone can remedy this situation.

Politicians hope private investors will step in

Specifically, the equity fund is to be endowed with ten billion euros. In doing so, it will act as a fund of funds: the money will not go directly to start-ups, but to other programmes and smaller venture capital funds. These include the state-owned Kreditanstalt für Wiederaufbau (KfW), the European Investment Fund (backed by the European Investment Bank and the EU Commission) and the High-Tech Gründerfonds. In addition, the German government plans to have two other funds set up: the KfW Capital Fund of Funds, which will receive one billion euros, and a Deeptech Fund, which will support "breakthrough" technologies.

Politicians are also pinning their hopes on the fact that other investors will also get in on the act, thus pushing the capital sum of ten billion euros even higher. The state fund is to function as a fund of funds, which means that the money invested here will be put into other venture capital funds.

The hope is that the Future Fund will achieve a similarly good rate as private funds, i.e. that one successful investment will offset several unsuccessful ones. Companies in the deep-tech sector, whose development cycles are often lengthy and capital-intensive, could particularly benefit from the model - if it is implemented properly. "In the case of programs where the state invests directly, particular consideration should be given to those companies that have a hard time attracting private venture capital, but are not necessarily less likely to succeed because of it," says Paul Wolter of the Start-up Association.


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