According to the German Federal Government, “classic credit instruments are often a poor fit for young, innovative companies,” as they usually not meet the requirements for debt financing (e.g., positive earnings situation, existing securities and collateral objects or shareholder guarantees). Against this background, the German Federal Government has agreed on the following three-step aid plan, tailor-made to the needs of innovative entrepreneurs in all business sectors:
- Step 1: Enabling state-owned venture capital investors in funds and at fund level (e.g., KfW Capital, the investment arm of the German national development bank KfW, European Investment Fund (EIF), High-Tech Gründerfonds or coparion) through short-term public funding to co-invest along with private investors in financing rounds of start-ups, whereby the public funding shall not exceed 70 percent of the total co-investment.
- Step 2: Enabling KfW Capital and the European Investment Fund to acquire participation from exiting investors with additional public funds.
- Step 3: Facilitating financial support for young start-ups and small and medium-sized enterprises through venture capital and equity-like financing.
The three-step aid plan is intended to be implemented in April 2020. According to current planning, the financial support is to be provided in form of equity or debt (like) instruments, which shall ultimately be repaid in the future. Along with venture capitalists, eligible applicants for the proposed aid shall be the start-up shareholders, in particular founding teams. Details regarding the process for the granting are not yet final, but, in general, a long-lasting due diligence shall be avoided.
As medium-term support out of the Coronavirus crisis, the German Federal Government is currently further expediting the establishment of a Future Fund for Start-ups with a 10 billion euros start equity for future start-up financing which is planned to be launched by the end of the third quarter of 2020. Whether the 2 billion euros aid will be paid out of the Future Fund for Start-ups equity is yet to be determined.
How the suggested aid plan is going to be carried out, in particular, and whether and to what extent the desired outcomes and impact of such strategic initiatives on the venture capital sector are going to be achieved remains to be seen.
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