"INVEST" – Programme to Promote Venture Capital Thus Far Successful

With a venture capital totalling 29 million euros, the funding programme "INVEST – Subsidy for Venture Capital" launched by the Federal Ministry for Economic Affairs and Energy (BMWi) is by all means a success story. Since the programme's launch in May 2013, a total of 1,253 business angels have provided 536 young innovative businesses with venture capital of around 104 million euros. The main advantages of the programme are its orientation to markets and its clear focus on business angels and young businesses. These are the findings of a report conducted by the Centre for European Economic Research (ZEW) on behalf of the Federal Ministry for Economic Affairs and Energy (BMWi).

The INVEST programme aims to mobilise more venture capital in order to provide financial support to young businesses in Germany in the critical early stage. Investors benefit from a tax-free investment allowance of 20 per cent of their total investment, which is limited to 250,000 euros per year per investor, or a total of one million euros per year and business.

The programme also has a significant mobilising effect on the supply-side of the venture capital market. It can be assumed that approximately 20 per cent of first-time investors were specifically motivated to provide venture capital for young businesses by the INVEST programme. This group of investors has thereby provided young businesses with additional venture capital of around 14 million euros. The programme has also motivated venture capital investors (business angels) who were already active in the investment market to provide young businesses with additional investment amounting to 14.4 million euros.

These figures illustrate that the tax-free benefits provided by the INVEST programme have influenced the investment calculations of potential investors, resulting in a significant increase in the number and size of investments. The situation in financial markets has also contributed to this positive effect; investments in bonds or securities are currently unprofitable, making investments in real capital a relatively more favourable option.

Positive effects from the clear INVEST concept

Unlike many other state-run programmes aimed at promoting venture capital investments, the INVEST programme allows private investors to choose which business to invest in. "This mechanism fits the market and has proven very effective," says Dr. Sandra Gottschalk, researcher at ZEW and co-author of the report. The companies which have received funding are characterised by an above-average level of investment activities and a business strategy with a strong orientation towards growth.

Investments are therefore being made in young companies which are the most likely to show a high rate of growth and therefore contribute to increases in the number of jobs. "Participating businesses thus have a good chance of attracting further venture capital from other venture capital investors and subsequently see themselves in a position to both cover the huge amounts of capital needed during the research and product development stage – between foundation and market maturity –, and to finance the subsequent period of growth," explains Gottschalk.

These positive effects can be put down to the clear concept of the INVEST programme. The programme is characterised by a clear focus on business angels rather than on institutional venture capital investors. Focus is also placed on young businesses. The choice of which businesses to invest in is made according to "the market". It is hoped that this clearly defined concept shall remain intact and that the programme will not be too greatly broadened.

For more information please contact

Dr. Sandra Gottschalk, Phone +49(0)621/1235-267, E-Mail gottschalk@zew.de