The Federation of German Industries (BDI) is calling on the federal government to mobilise more venture capital in key industrial sectors. Germany needs a growth and investment fund for these key technologies, the BDI writes in a recent position paper. The new fund is intended to complement the so-called Future Fund of the Federal Government. In addition, the BDI has further ideas on how more fresh capital can flow into growth companies. The position paper has been obtained by Börsen-Zeitung.

The BDI identifies weaknesses in the founding of companies, and financing growth in key technologies, and industrial transformation. This applies especially to later growth phases. „Meeting the challenges of transformation demands much more patient capital, especially in Germany, where industrial value creation is significant,“ Tanja Gönner, Managing Director of the BDI, told Börsen-Zeitung. „The instruments of the Future Fund must be designed in such a way that the bigger capital needs of industrial founders and deep-tech companies can be taken into account.“

According to the BDI, higher financing volumes and longer investment phases are necessary in key industries before companies become profitable. The current deployment of capital is inefficient. In industrial sectors, the time from the pilot phase to market entry takes longer than for startups in other sectors. That is why investment priorities worldwide lie there: in software, consumer goods, and services. In Germany, according to a study by consulting firm EY in 2021, the focus was primarily on fintech, e-commerce, mobility, and software. In contrast, less investment was made in hardware, or energy and climate technologies.

However, the deep-tech sector offers enormous opportunities for growth and innovation in Europe and Germany, the BDI emphasises. This includes sectors such as artificial intelligence (AI), robotics, mobility, Industry 4.0, energy, industrial biotech, medical technology, diagnostics, quantum computing, microelectronics, and software. At the same time, deep tech is the most resilient venture capital sector. In 2023, around 15 billion dollars were invested in this sector in Europe – the same as in the previous year. In contrast, total European venture capital financing declined by 38%.

The BDI makes concrete proposals for better promotion of the sector. Germany should create a growth and innovation fund for key technologies via existing financing instruments. Disruptive startups in the industrial and innovative technology segment, in particular, should be strengthened. At the same time, co-financing with private investors should be expanded beyond the current level. In the Deep Tech & Climate Fund (DTCF), the ratio of private to public capital is 30 to 70. In exceptional cases, grants or even 100% public co-financing should be possible.

The Future Fund was launched by the previous federal government as recently as 2021, with 10 billion euros. The concept is to use a number of instruments supported by various public funders. These include KfW, KfW Capital, the High-Tech Start-up Fund (HTFG), the Deep Tech & Climate Fund (DTCF), and the European Investment Fund (EIF). The DTCF is central for key technologies, with 1 billion euros available. Investments are made in company stakes ranging from 1 to 30 million euros.

According to the BDI, exit options for investors also need to be improved. For a better exit, stock analysis for key technologies needs to be revived. This way, chances of success can be better evaluated. The usual German approach only works to a limited extent, and leads to unattractively low valuations. Further, the circle of potential investors should be expanded. „Growth capital from pension funds, insurance companies, foundations, and family offices should play an important role in the overall financing of startups“, writes the BDI. Specifically, regulation could give greater weighting to negative correlation, to reduce the higher risks of investing in innovative startups. High equity requirements suppress returns. Even public institutions should be able to invest up to 10% in venture capital.

The BDI also insists on the importance of expanding tax allowances for research funding. Financing costs and the risk of R&D activities would thus decrease. Especially in technology-oriented startups, this could compensate for lower capital efficiency. An investment subsidy could also incentivise initial investments in VC and umbrella funds.

In general, the BDI wishes for a consistent funding landscape. Many of the strategies and programmes are not coordinated across ministries. Digital, future, and start-up strategies, as well as the coalition agreement, rely on „a variety of technologies at different stages of development, some of which contradict and/or are not strategically integrated into the German innovation landscape“.

It remains a fact that the gap in available venture capital compared to the US is still large. According to the Federal Association of Venture Capital (BVK), Germany would have had to invest 11.4 billion euros annually since 2018 to achieve a similar VC level as across the Atlantic. This corresponds to an annual growth rate of 19.3%.