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When it comes to key areas of innovation financing, Germany exhibits structural weaknesses. Germany does indeed offer a variety of different tools and programmes that provide direct federal or state financial support. Whether it comes in the form of tax incentives for research and development or in the form of tax-funded government grants, this support offers businesses a variety of opportunities to flourish. But small and mediums sized enterprises (SME) are burdened in particular by the lack of clarity in the government support programmes at the state, national and EU levels. Germany’s venture capital market is unfortunately small, both in an international comparison and in relation to Germany’s economic strength. By Prof. Dirk Honold Ph.D, Oliver Schacht Ph.D. and Dr. Jan Schmidt-Brand


The German government has therefore introduced various funding instruments in order to make Germany more attractive for venture capital investments. The measures that support the early start-up stage can, for the most part, be assessed as positive. Measures targeting the later start-up and growth stage, however, put research-intensive biotechnology companies at a disadvantage, because such companies have high capital requirements over a long period of time. What is still missing are risk-taking funding instruments that are capable of attracting larger volumes of primarily private capital for innovation financing.

From R&D to the market

The swift commercial exploitation of research findings is an important pillar of a society’s innovative capacity. Breakthrough innovations must become marketable in a globally competitive time frame. New start-up companies in the United States and China, for instance, are able to successfully translate their research findings into marketable products in a significantly shorter period of time in comparison with their German counterparts. In particular when it comes to markets that are heavily regulated by the government, the barriers to market entry are high, which means higher risks for investors.

How do others do it?

Unlike in Anglo-American countries, Europe lacks for the most part a functioning innovation financing ecosystem which stems from a shortage of equity capital available for development and growth financing. The paradigm-shifting business models of companies such as Amazon, Facebook, Google and Tesla, and in the biotechnology sector Amgen, Biogen, Bluebird, Genentech, Gilead, Kite and others, are inconceivable in the absence of large sums of private venture capital for development financing. Such companies are financed through private equity (also known as venture capital, VC) provided by investors who become partners or co-founders of the company. The only possible way to level the playing field is by creating a more favourable environment for venture capital and/or for initial public offerings (IPOs) in early stages of company development.

What should we do?

In Europe, pension systems are usually financed on a pay-as-you-go basis, which means a key source of capital accumulation is missing, unlike e.g. in the United States, where this very source of capital accumulation provides the foundation for a very productive venture capital financing ecosystem. Such an ecosystem involves traditional venture capital in the early stage and institutional investors that invest in innovative development through listed companies. These forms of financing open up the possibility for active VC investors to recoup their investment and make a profit through cross-over rounds into early-stage IPOs, and enable growth companies to be financed through the stock market up to market readiness or market penetration. In Germany and Europe there is indeed a huge amount of capital and assets looking for investment possibilities, e.g. insurers, pension funds and private individuals. They all could contribute to innovative capacity by providing substantial inflows of capital.

Provide incentives to invest in VC

Government support is needed in order to make private investment in venture capital more attractive. Suitable measures could, for example, convert private assets into venture capital. The financial assets of private households totalled almost EUR 6 trillion at the end of the first quarter of 2018. One possible approach could be to establish a legal framework for German/European capital-collecting institutions to invest in venture capital. This relates both to investments in private companies via VC funds and investments in listed companies by institutional investors. In the post-2008 era, however, funds are in many cases prohibited from investing in such classes of venture capital. Another option is the introduction of tax incentives, especially ones that allow private investors to offset capital losses against other income or to exempt future profits when they invest in the VC asset class. Such incentives should apply to both the VC segment (pre-IPO) and investment via the stock market (development and growth financing). In addition, the “INVEST – Venture Capital Grant” programme should be expanded to create more incentives for VC investment.

Create “capital accumulating institutions”

Besides incentives to invest in venture capital, which we prefer to call “opportunity capital” (to counteract the emphasis on risk implied by the more traditional term), suitable capital-accumulating institutions should be created. The core idea is that the high level of economic cash flow in Germany is utilized to shape – and thus safeguard – the future. It will be implemented to support young, innovative companies through the following models: Innovation Norway (income from natural gas and oil sales), Australia’s Future Fund (accumulation of trade surpluses), US health insurance companies, CalPERS in California (the pension fund of the state’s public employees, which manages US$ 300–400 billion), TIAA (US pension fund for teachers and professors), Swiss Entrepreneurs Foundation (foundation supporting young companies) and the Dansk Vækstkapital fund in Denmark.

Alongside the size of the fund and the generated risk reducing diversification, it would be possible to provide government support or guarantees like those seen in the Danish fund model in order to provide market participants with a better tie-in with previous structures.

Establishment of a “Germany/Europe Future Fund”

A third and important approach is the establishment of a “Germany/Europe Future Fund” as a third pillar of pension provision. In order to supplement the pay-as-you-go system consisting of employee and employer contributions as well as the low-yielding second pillar of self-provision (based on contributions to the Riester pension scheme and similar instruments), a third pillar with a stronger orientation to capital markets could be established. The aim would be to pool assets from voluntary employer/employee-financed programmes in an innovation fund that invests in a broad range of new technology areas, either by taking a private equity stake in start-up companies or by investing in the development and growth financing of mature listed companies. It would, for example, be conceivable to place occupational pension schemes on an even broader basis and allow them to make such investments. An appropriate diversification in different sectors and companies would ensure a sound risk versus opportunity profile. Such a possibility has already been realized in the United States by pension funds for public employees and other groups.

If we want the German biotech sector to stay internationally competitive, we urgently need to revitalize and reshape the financial ecosystem. This will only work if we manage to provide more venture capital. In order to do so, we propose to make new sources of funds available. Otherwise, government support (and tax money) are wasted if promising start-ups financed with subsidies go elsewhere to grow and thrive.



Prof. Dirk Honold, Ph.D is professor for corporate financing at the TH Nürnberg.

Oliver Schacht, Ph. D., is CEO of Curetis N. V. and president of BIO Deutschland.

Dr. Jan Schmidt-Brand is CFO of Heidelberg Pharma AG.

Über den Autor

Holger Garbs ist seit 2008 als freier Redakteur für die GoingPublic Media AG tätig. Er schreibt für die Plattform LifeSciences und das VentureCapital Magazin.