German VCs call for more Covid-19 startup support

Governments all around Europe are attempting to minimise the economic damage wrought by the coronavirus outbreak. In Germany, the government introduced a €156bn package on 23 March to support the country's economy, including loans of up to €15,000 over three months for self-employed people and small businesses, as well as adjustments to the state welfare system.

Germany also launched a programme that aims to provide both small and large businesses with low-interest loans to support them through this time. The programme is led by state-run KfW (Kreditanstalt für Wiederaufbau) and currently has no financial limit.

KfW will take up to 90% of the risk on the loans to businesses, leaving Germany's house banks and regional banks to take the remaining proportion. The bank will guarantee up to 90% of capex for businesses.

However, there are concerns among VCs that the measures do not go far enough to support startups.

Vanessa Gstettenbauer, a principal at BtoV, told Unquote that the economic support provided by the German government is not yet in a form that can be accessed by startups. The fact that the risk profile of startups is not something that KfW and its partner banks have traditionally engaged with is a significant barrier, she says: "As of today, the government isn't providing suitable support for startups in Germany. The loans are to be organised by KfW and run through house banks, for which startup financing is absolutely not part of daily business. In addition, these house banks are supposed to take on 10-20% of the risk, which is very likely to close the doors, especially for startups that are usually not self-supporting."

Businesses only qualify for the scheme if they can prove that they were operating profitably as of 31 December 2019. Gstettenbauer points out that this creates another barrier for startups. "The money for business loans in Germany is going from the KfW through pre-existing banking partners to the loan receivers," she says. "The money will hence go through the small Hausbanken, Sparkassen and Volksbanken, and they will give out the loans based on their normal risk appetite, bearing 10-20% of the risk, with KfW bearing the rest. These banks will be bound by their internal risk specifications and will not be able to lend to startups that are making losses. However, making losses is normal in our industry – whose growth is financed by investor capital – at the beginning."

Gstettenbauer notes that private-equity-backed companies face different obstacles from the kinds of businesses that venture capital investors generally invest in. "Private equity firms usually work with companies that are profit-making, such as stable small or medium-sized businesses. But venture capital firms work with companies that have huge potential to scale fast but are dependent on growth capital."

She adds that a lack of support could have significant consequences for the startups affected: "These companies may lose a lot, plus a lot of value that the technology ecosystem has built in the last months and years could be destroyed."

Ripple effects
There may also be consequences for the German economy and its digitalisation effort as a whole, should startups fail to receive adequate funding and support. Says Gstettenbauer: "There is a risk that startups will not benefit from the liquidity support and that the entire sector will be set back 15 years. The economic impact and the consequences for the digitalisation of Germany would be immense."

Nevertheless, efforts are being made by industry players to guide startups through this challenging time. The German Startup Association held a townhall briefing in partnership with KMPG Legal to discuss the situation, addressing legal concerns regarding corporate and M&A law, as well as employment law. Topics included questions such as the issue of "Kurzarbeit", similar to the "lay-off" facility under employment law in England and Wales, which is a key concern for entrepreneurs who are keen to retain their employees.

The association and its members are keen to continue their work on the issue in cooperation with the German government and the startup ecosystem. "We have put together a lot of resources for founders," says Gstettenbauer. "But the liquidity and loan issues are much more in flux. The Federal Association of German Startups is currently in the process of communicating from founders to founders, sharing best practices and resources. We are also trying to gather new ideas for the problems I have described to help the ministries in this situation."

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