Earlybird’s Nagel on Germany’s new stock market tier

What do you think about Philipp Rösler's plans to create a new stock market tier?

We are able to raise quite a lot of seed funding and you will find plenty of business angels and incubators in the sector as well. However, there is a lack of later-stage and growth capital in Germany. And once you reach the state of raising growth capital, then it is understandable that you may consider an IPO for the business.

But simply recreating a new market tier with lower regulations is dangerous. Obviously, there were reasons why the new market crashed in the 2000s. Hence, simply repeating the situation and offering not-fully developed concepts to public investors on the stock market is too risky. We will have to make sure that everything that went wrong back then will not happen again. We have to consider that many public investors are inexperienced and may be fooled into investing in an undeveloped business that is actually not ready to be floated. Just because we need more capital for later-stage and growth phases, it is not necessarily right to be looking at the stock market for help.

Why would we list a young company on the stock market too early and then see it collapse? This is not the point of growing a business in the first place.

Do you think a new stock market tier is a bad idea overall?

It is not like we're missing stock market tier possibilities in Germany. We have the Early Standard – which is not very popular, however.

But as you can see, companies could potentially list on the German stock market if it is attractive enough for investors. There are possibilities for companies with enough liquidity and a certain free float provided.

Why is the Entry Standard not popular?

There is not much liquidity available. There is also not much coverage through investment banks. Overall, there is not much activity. That may also be because the tier was founded in 2005 after the Neuer Markt collapsed and traumatised investors indirectly connect it with the bubble. Therefore, we might need a completely new stock market subsidiary instead. It is necessary to proceed with caution, however.

We may need to adjust certain regulations that allow businesses to float. It is, of course, important to think about this. We have to think about how young companies can receive more funding in later stages and how we can open up the capital market towards growth capital investments.

However, it will be dangerous if we simply lower the regulations that restrict IPOs. And plainly creating a new subsidiary, which is structured similarly but calling it differently, will not help. When the new market was flourishing back in the 2000s, there were a lot of risks and no gains at all. The bubble burst and what was left of the companies? Nothing.

You might see a temporary success when inexperienced capital is listed. But after that, we will see 10 or 15 years of insecurity. Earlybird still copes with German limited partners remembering the market collapse in 2000 – after 13 years. They still vividly remember the crash when funds grew slowly.

We should consider if the tiers we have on the stock market in Germany at the moment are sufficient. More importantly, we should consider together with experienced limited partners how to make growth capital more attractive for public investors in existing tiers.

Furthermore, it is necessary to speak to experienced asset and fund managers to talk through ways to improve the possibilities of raising new capital for these investment stages.

Does Earlybird consider IPOs as a way to exit its portfolio companies?

We have arranged very successful IPOs in the past. It was in 2005, under new regulations and just after the crash, when we listed businesses on the stock market. If the portfolio company is attractive enough for public investors and flourishing, then there were and are enough possibilities to float the firm.

We currently have companies in our portfolio, which we would consider to list on the stock market at some point.

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