State Support Measures Bypass Start-ups (so far)
+++ Update as of 04 May 2020 +++
After long negotiations between the Federal Ministry of Economic Affairs and the Federal Ministry of Finance as well as VCs and start-ups, the matching fund for start-ups is finally a done deal!
The official press release of the Federal Ministry for Economic Affairs and Energy (BMWi) can be found here. The corresponding statement of the German Start-ups Association (Bundesverband für Deutsche Start-ups) can be found here.
The following has been decided:
- In addition to the measures implemented so far, the government is making a total of EUR
2 billion available to support start-ups.
- Both start-ups that are already VC-financed start-ups and those that are not will be eligible for support.
- The support for VC-financed start-ups will be administered by KfW Capital and the European Investment Fund, enabling them to support a financing round with up to 70 percent as long as 30 percent is contributed by private investors.
- Non-VC-financed start-ups are to be supported via state institutes for business promotion: The German Development Loan Corporation KfW will grant global loans to the state institutes for business promotion which will strengthen their existing instruments for financing start-ups.
- Details are further being mapped out how private investors such as business angels can also participate in a 70/30 solution.
+++ Update as of 15 April 2020 +++
The KfW Instant Loan is online: LINK
This means that companies with more than 10 employees that have been on the market since at least January 2019 and have made a profit in the sum of the years 2017-2019 or in 2019 can take out a loan from their regular bank for purchases and running costs (e.g. rent, leasing instalments, etc.) of up to EUR 500,000 with up to 50 employees, which is subsidised by KfW. The term is up to 10 years with up to 2 grace years on request. KfW assumes up to 100% of the default risk vis-à-vis the principal bank.
Maintaining liquidity - for many start-ups this is currently the most urgent question in the corona crisis. German policy has already taken far-reaching measures to support small and medium-sized enterprises in the current situation but not all are eligible for start-ups. This is because start-ups are usually equity-financed and only rarely via loans. In this respect, the German government's package of measures provides only limited help for the following reasons:
Most start-ups have few employees who must be retained by all means in order to keep the operative business running. To this extent, the simplified application for short-time work benefits, which is to be welcomed, will only be taken into consideration for a few German start-ups.
Young companies in particular make losses at the beginning so that no or little tax is payable, which would have to be deferred.
Reduced tax prepayments
This is an effective means of reducing the pressure on liquidity but it presupposes that revenues are already being generated which is by no means the case for all start-ups.
KfW Entrepreneur Loan
The company must have been on the market for at least five years which means that most start-ups are already excluded.
Federal state-related specific support and guarantee programmes
These loans and subsidies are granted by the specific infrastructure banks of the respective federal states (e.g. WI-Bank in Hesse or Investitionsbank Berlin) but always require the involvement of the main bank which must also be included in the liability. If there is a corresponding regular bank at all in the case of start-ups, lengthy application and procedural processes will tend to prevent rapid assistance. In addition, a joint liability of the founders is usually required which can only rarely be secured.
It is thus to be appreciated that initiatives have already been formed which are trying to influence politics in order not to forget start-ups which have regularly been on the market for only a short time, make few sales and/or many losses and are financed by equity capital and not by free capital when considering the aid and subsidies which have now been set in motion. The Federal Association of German Start-ups, for instance, is advocating that appropriate measures be defined and the Business Angels Network Germany has already made a proposal on how the existing INVEST - Venture Capital Grant Programme can be used to mobilise private capital to overcome the crisis. Although VCs will tend to be rather reserved with new investments in the short term and financing rounds will be much more strongly supported by existing investors - but this could be the hour of the business angels who can provide a boost to young companies in particular even in times of crisis.
UPDATE: On 19 March 2020, the Bundesverband Deutsche Startups e.V. published a proposal for a comprehensive protective umbrella for start-ups which can be found here: https://deutschestartups.org/wp-content/uploads/2020/03/20200319_SchutzschirmfuerStartups_StartupVerband.pdf
Dr Gesine von der Groeben