State support for start-ups during the coronavirus crisis
Start-ups are particularly affected by the coronavirus crisis: they tend to have low liquidity reserves and have little or no access to traditional bank financing. Equity providers such as VC funds are currently hesitant to make new investments, as the current economic distortions make it difficult to validate business models and to determine an appropriate valuation.
It is true that start-ups also have access in principle to all the support measures launched in the wake of the coronavirus crisis. However, the specific conditions for eligibility for the funding are met by very few start-ups. The instruments available are often not suitable for start-ups. That is why state support schemes are now being adjusted. The aid set out below will be available to a much larger number of start-ups, since the group of beneficiaries has been extended, notably through a specific package of measures for start-ups.
€2 billion in support for start-ups
On 1 April 2020, the federal government adopted a special package of measures worth €2 billion for start-ups. This volume represents an initial tranche of the future fund of the state-owned aid bank KfW, which was already planned in any case. However, the funding will not go directly to the start-ups. Instead, the existing public aid funds, such as KfW Capital and the European Investment Fund EIF, will receive additional funding through the package to increase investment by private venture capitalists. The amount of investment can thus be increased and declining investment trends counteracted.
The package also aims to prevent planned financing rounds from being postponed or cancelled, as has already been observed in the start-up scene in recent weeks. Another objective of the aid fund is to enable public aid funds to take over shares from fund investors.
The package therefore includes the following main elements:
- Public venture capital investors at fund-of-funds and individual fund level (e.g. KfW Capital, European Investment Fund, High-Tech Start-up Fund, coparion) will quickly be provided with additional public funds to be used in co-investment with private investors for start-up financing rounds.The fund-of-funds investors KfW Capital and the European Investment Fund (EIF) will soon be enabled to take over the shares of failing fund investors with additional public funding.
- For young start-ups without venture capitalists among the shareholders and smaller midsized companies, the aim is to facilitate financing with venture capital and equity-replacing forms of financing.
Further details and the more detailed structure of the above support measures will be announced soon.
The fact that the federal government is taking specific measures to support young, technology-driven companies is to be welcomed. Until the outbreak of the coronavirus crisis, the start-up industry benefited from continuously increasing investment volumes and a growing group of investors (venture capital funds, growth capital funds, corporate venture capital, venture debt funds, etc.). The main objective of the public measures must now be to prevent a drying-up of funding opportunities for start-ups and to stimulate investment by private investors.
The effectiveness and practical usefulness of the measures will depend on their concrete terms and speed of implementation. The measures are deliberately not designed as direct aid to start-ups, but follow the recommendations of industry representatives, who called for implementation in line with the market. Only start-ups that private investors would have granted equity financing to regardless of the current coronavirus crisis will benefit. So start-ups must generally continue to go through the process of financing rounds, find private investors, and persuade them to invest. The measures adopted will support such investments mainly through co-investments of public venture capital funds, support for fund investors at fund level and by making equity instruments more flexible. Even without the coronavirus crisis, delaying a round of financing by just a few weeks can mean the end of a start-up. Good preparation and efficient management of financing rounds will thus be a decisive factor for success.
In parallel with the implementation of the package of measures, the federal government is currently coordinating the terms of the (already planned) future fund for start-ups, which is intended to support the way out of the coronavirus crisis in the medium term.
The Economic Stabilisation Fund
The new Economic Stabilisation Fund (ESF) aims to mitigate the negative impact of the coronavirus crisis on companies in Germany (see our feature on the bill to establish an Economic Stabilisation Fund, 26 March 2020). The legal provisions governing the ESF are reflected in sections 15 et seq. of the Stabilisation Fund Act (Gesetz zur Errichtung eines Finanzmarktstabilisierungsfonds – FMStFG).
Section 16(2) of the Stabilisation Fund Act initially provided that only companies in the real economy (i.e. commercial enterprises that are not financial sector companies or credit or bridging institutions) can only receive support if they have met at least two of the following three size criteria in the 2018 and 2019 financial years:
- Balance sheet total of more than €43 million
- Turnover of more than €50 million
- More than 249 employees as an annual average.
However, the Economic Stabilisation Fund Committee will now also be able to decide on applications from some start-ups. By extending the Stabilisation Fund Act with the addition of section 22(2), 3rd sentence, support measures are now also applicable to start-ups operating in one of the sectors referred to in section 55 of the Foreign Trade Ordinance (i.e. the operation of what is known as ‘critical infrastructure’ or the provision of cloud computing services) or ‘of comparable importance to security or the economy’, or which has been valued since 1 January 2017 at an enterprise value of at least €50 million in at least one completed round of financing by private investors, including the capital raised by that round (i.e. the post-money valuation).
The first two criteria will be met by very few start-ups, mainly by those active in the field of cyber-technology, for example. The third category at least opens up access to the ESF support measures to the somewhat more mature start-ups, regardless of the industry and business model. However, the additional access conditions according to section 25(1) Stabilisation Fund Act will also apply to these start-ups: applicant companies must not have any alternative financing available, and the stabilisation measures must provide a ‘clear forecast of an independent going concern once the pandemic is over’. In addition, the applicant companies must not have already fulfilled the European definition of a ‘distressed company’ as of 31 December 2019
The Economic Stabilisation Fund consists of the following support measures:
- €400 billion in state guarantees for liabilities
- €100 billion in direct state investments
- €100 billion in refinancing by KfW.
For start-ups that fulfil the general access conditions, mainly the support measure in the form of a state investment could be suitable, since the possible recapitalisation measures that may be carried out under section 22(1) Stabilisation Fund Act also include convertible bond financing, which is likely to be understood more broadly than convertible bonds under stock corporation law and thus to also cover the convertible loans that are customary in start-up financing. Any recapitalisation measure is to be carried out on market terms.
The KfW Special Programme 2020
Some start-ups could now also consider traditional bank loans. The ERP Start-up Loan as part of the KfW Special Programme 2020 is available to start-ups which have operated in the market for at least three years and had no financing difficulties up to 31 December 2019. As of 23 March 2020, KfW has opened up the possibility of taking out a loan at banks or savings banks with an interest rate of no more than 1.46% p.a. under this Special Programme, and guarantees the lending banks a 90% exemption from liability. This is conditional on the loan being used for investments and means of operation, including rent, personnel costs, energy costs or advertising expenses.
The ERP Start-up Loan with guaranteed risk assumption by KfW does not (yet) apply to start-ups that have operated in the market for less than three years. For many start-ups, the bank loan is therefore not an option even in these times.
The Federal Ministry for Economic Affairs and the Federal Ministry of Finance have launched a protection fund to mitigate the effects of the coronavirus pandemic. Emergency aid will be granted in the form of grants which do not have to be repaid. The emergency financial aid are available to all start-ups, whether or not they have been operating in the market for three years. However, applicants must confirm that they have been in economic difficulties as a result of the coronavirus pandemic and that they were not already in financial difficulties on 31 December 2019. Up to €9,000 as a one-off payment for three months for companies with up to five employees and up to €15,000 for three months for companies with up to ten employees can be applied for.
Some start-ups can also benefit from federal state-specific support measures, such as the Emergency Aid Package II in Berlin. The programme is to be transferred to a federal programme shortly, so applications for this are currently suspended until 6 April 2020. With the Emergency Aid Package I, the Senate Department for Economics, Energy and Public Enterprises has provided start-ups whose business is more than three years old with interest-free bridging loans of up to six months and up to €500,000. The loan must be requested from Investitionsbank Berlin. However, applications are currently suspended until further notice.
Other useful tips for start-ups
As the impact and duration of the coronavirus pandemic are not yet predictable, start-ups should pay particular attention to their fixed costs. Therefore, applying for short-time workers’ allowances should at least be considered in order to cut costs (see our feature on 16 March 2020). In addition, where store closures have been ordered by the authorities, the store should check whether it still has an obligation to pay the rent (see our feature on 19 March 2020).
This survey will be regularly updated to take account of recent developments and initiatives.
Any questions? Please contact: Felix Blobel, Ariane Neubauer and Dr. Inès Ben Miled
Practice group: Private Equity