German Federal government will provide 2 Billion Euros Corona aid for startups

German Finance minister Olaf Scholz has announced that the federal government plans to provide startups with help worth two billion euros. However, the sum should not flow directly into startups, but rather via private investors who want to support weakened companies, said Thomas Jarzombek, the startup commissioner of the federal government.

The majority of startups were excluded from the previously announced stability fund. The Ministry of Finance has now created the new 2 Billion fund to support rounds of financing for non profitable startups. Which will essentially be a co-investment fund.

According to Jarzombek, applications should not only be able to submit via VCs, but also small shareholders such as the founding team, if they plan a round of financing to keep the business going through the crisis, the Treasury also wants to contribute money. According to Jarzombek, funding rounds can legally be subsidised with a maximum of 70 percent public funds.

“companies with additional equity capital or elements similar to equity capital” fall under this new rescue umbrella, “says Jarzombek. That means startups and technology-oriented medium-sized companies that have raised money in the form of equity or convertible loans. No further requirements were considered.

This huge financial injection comes as a surprise to most in the German ecosystem. On Tuesday morning, Thomas Jarzombek said in a press conference that state funding in the single-digit billion range was unrealistic:

“April must be the goal”

A month-long due diligence was not considered for government aid. Nevertheless: “There must be testing mechanisms,” the CDU politician continues. How that will look is still unclear. “It is crucial for us that the money ultimately also reaches the founders and companies where it really makes sense.” The government therefore wants to check which portfolio startups the investors use the money for.

According to Jarzombek, the program is to be implemented “relatively promptly”: “April must be the goal in any case.” The federal government still needs the approval of the European Union for bootstrapped companies, which could take longer. However, the start-up rescue fund should not only be viewed as a grant. “Ideally, the money should flow back to the taxpayer with a return.”

Future funds not affected

The future fund is not affected by the Corona aid. The start of the ten billion euro package is currently planned for the third quarter. “It remains to be determined whether the two billion euros will be the first module from the fund or the corona help will run in parallel,” says Jarzombek.

The German government have really impressed me recently, with their quick action around Kurzarbeit which is a form of Furloughing, in which the state subsidises salaries, this has provided all startups including non profitable ones a lifeline during the current CO-VID19 crisis.

The quick reaction and proven ability to swiftly navigate turbulent times is very different with the situation in the UK currently, where support for startups has been a mixed bag, there have been calls by some areas of the UK ecosystem to create emergency funds, Lastminute.com founder Brent Hoberman wrote a piece in the Financial Times, in which he rally cries for the UK government to provide a £330m emergency runway fund for startups. He along with other investors, think tanks and quangos are lobbying to that end.

https://www.ft.com/content/d77102d6-6ea6-11ea-89df-41bea055720b

I’m told by several UK based VC funds they have declined to support this as the initial approach meant that there would be fees and carry. Meaning that those running it would be set to gain around £33m in management fees and also would get 10% in carry ( share of profits) so essentially would profit from a crisis, using tax payers money.

Apparently, this has prompted an altered plan where the proposed runway fund would be not for profit. The funds who have declined the initial iteration are yet to see amended details that demonstrate this, so they can make a conscious decision whether to support or not.

My personal take is that when the UK government acts as an LP via The British Business bank, there is a thorough due diligence process of those who will manage the money and with any emergency funds, it’s imperative that this is also the case.

https://app.dealroom.co/investors/british_business_bank

Whatever the UK government does, they need to perhaps take note of the fast action in Germany and follow suit, but of course have appropriate transparency, measures and process to ensure the money has the impact that it’s intended to have…. and I’m sure if thats the case – all stakeholders, groups and leaders in the UK ecosystem will get behind it.

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