The corona protection shield for start-ups

The first pillar of the aid programme is aimed at start-ups that are financed through venture capital investors. However, the actual application for funding must be submitted by the respective private venture capital fund (VC). Independently of their existing portfolio, the two umbrella funds of KfW and the European Investment Bank, KfW Capital and the European Investment Fund, are to provide suitable VCs with public funds in order to ensure that financing rounds of start-ups do not fail due to liquidity bottlenecks at the level of the investors.

The Federal Ministry of Finance emphasises that it wants to reach as many start-ups as possible. However, distributing funds more or less at random across all start-ups without an actual review of need should obviously be avoided.  Every VC must therefore first undergo a due diligence review. It is not yet possible to foresee what features this examination will be based on in detail and how much time it will take. In any case, start-ups themselves are not eligible to apply.

A precondition for support is that public funds are invested under the same conditions (pari passu) as private funds. The VCs should therefore be able to use the funds granted in total only at a maximum ratio of 70 (public funds) to 30 (private funds), with a maximum of half of the investment volume coming from CMF funds in a single financing round. This ratio between private funds and CMF funds must be binding on the beneficiary VCs, on the one hand for the increase of the existing portfolio and on the other hand for new investments. When determining the distribution rate, therefore, a distinction may only be made between new investments and investments in existing projects. An effective and equal distribution of funds is also to be achieved by requiring the participating VCs to offer for matching all further financing rounds until 31 December 2020, i.e. both financing rounds within and outside their portfolio (tender obligation).

Similar to other aid programmes, start-ups (indirectly) supported by Pillar I must not have experienced financial difficulties as of 31 December 2019. It remains to be seen how this criterion is to be interpreted in individual cases of venture capital financed start-ups.

A second approach is envisaged for start-ups for which the CMF programme is not suited because no private investors are within reach and a private-public pari passu investment is not possible. However, the publications of the Federal Ministry of Finance on this subject remain extremely vague. It merely states that - co-financed by federal funds - companies owned by the federal states [Laender] should provide venture capital or development institutions of the Laender should provide debt capital to start-ups. In this respect, start-ups falling under the second pillar should keep a constant eye on the publications of the relevant institutions (in Berlin, e.g. Investitionsbank Berlin - IBB).

Many questions remain unanswered concerning the implementation of the start-up shield. Nevertheless, the Federal Ministry of Finance promises, at least for CMF funds, that "money will be made available to the fundsfor disbursement in the course of May". However, it remains unclear whether the wording “the funds” refers to VCs or the umbrella funds here. It is also questionable whether the model chosen by the Federal Government, of matching linked to VCs instead of start-ups, will actually be successful. This is because VCs are expected to have their freedom of economic activity limited to a quite considerable extent.

At the same time, the second pillar offers little that is new, especially since the co-financing of the Laender makes the success of this programme largely dependent on the risk appetite of the institutions responsible in the Laender. It remains to be seen whether the necessary funds are released and at least the application procedure is unbureaucratic and short.

Further information on the responsibilities in the application procedure can be found here

Further reading: Dr Moritz Mentzel / Michael Ströbel, Fast Cash for Start-ups - Ways through the Corona Crisis

Susanne Abraham / Anton Spinty, Questions and answers on immediate coronavirus relief package for Berlin and Brandenburg entrepreneurs

Susanne Abraham / Anton Spinty,Update on corona aid schemes: start of the KfW instant loan