Venture Capital in Baden-Württemberg Developing Positively

Venture capital (VC) is no mass product to finance young businesses. The type and volume of a VC offer must always be considered in view of the whole range of financing options available in a federal state. If there are good financing options for start-ups, as is the case in Baden-Württemberg, a lack of risk capital can be partially compensated for. A new study carried out by the Centre for European Economic Research (ZEW) on behalf of the L-Bank is the first study to comprehensively analyse the supply of venture capital in the State of Baden-Württemberg.

Baden-Württemberg's venture capital market is once again growing, with major deals for high-growth ventures doing particularly well. The ZEW study evaluates the current development in Baden-Württemberg as being positive. As the state's development bank, L-Bank has catered to this demand for growth venture capital. The bank already doubled the investment framework of its dedicated VC portfolio last year, increasing it from 50 to 100 million euro.

"With this expanded capacity, we can more efficiently support businesses during the critical inception phase," says Dr Axel Nawrath, Chief Executive Officer of the L-Bank. "This study, as well as the demand for our VC capital, confirms that the decision to increase our supply of VC was the right decision at the right time. In 2015 alone, we were able to grant around 15 million euro in venture capital." As Dr Georg Licht, head of the ZEW Research Department "Industrial Economics and International Management" and scientific head of the study on venture capital supply in Baden-Württemberg, explains, "those 15 million euro invested by the L-Bank have provided the market segment of medium-sized deals in Baden-Württemberg with essential backing. It has contributed to the far more positive developments seen in this market segment in comparison to other segments in Baden-Württemberg."

Hardly any venture capital financing by business angels

One of the critical obstacles facing young entrepreneurs on the way into the market is gaining financial backing. After the "foundation" hurdle has been taken, the vast majority of start-ups are quickly able to start making profit following entry into the market. In combination with the entrepreneurs’ private assets, this ensures that the financing of a new company is backed for its first stage of life. "About 93 per cent of the overall financing volume of start-ups from 2011 to 2014 were paid in this way. Only a very small number of young companies make use of financing via equity or risk capital, or by business angels," explains Georg Licht. "In 2014, only three per cent of companies founded between 2011 and 2014 did this." According to the companies that have participated in the Mannheim Enterprise Panel, the respective financing methods covered almost one per cent of these companies' overall financing demand in 2014.

The trend in VC supply is positive. During the last five years, a significant rise in the volume of venture capital investments in German companies has been observed. "In the years 2011 to 2014, Baden-Württemberg was the only federal state, along with Berlin, where VC investments were able to surpass the pre-crisis VC levels from 2009/2010," says Licht. "This was in particular due to medium-sized VC investments – a market segment in which the L-Bank is also strongly involved." On the contrary, the absolute number of all transactions fell in the period studied.

573 venture capitalists active in the market - 60 of them in Baden-Württemberg

The complexity of VC markets has increased. The increasingly greater involvements mean co-investments are more significant. Those transactions are more frequently conducted by multiple types of investors. New providers are appearing, beyond the hard core of public and private venture capital investors. Among the new players responsible for essential parts of VC transactions are business angels, lenders of corporate venture capital, private asset managers or companies which up until now were only active in the market segment of non-listed small and medium-sized enterprises. The study has identified 573 venture capital lenders in the market, 60 of them located in Baden-Württemberg. Regional platforms, such as VC-BW and events such as VC-Pitch BW, support networking among these lenders by providing the necessary transparency and a platform for initiation of joint involvements.

The regional use of VC varies. Since 2001, almost 7,800 VC investments have been made in German companies. Around nine per cent of these investments, equating to approximately 600 venture capital involvements, were made in companies in Baden-Württemberg. The share of new companies financed by VC is therefore rather low in Baden-Württemberg when compared to other federal states.

Berlin top in terms of VC for high-tech and software companies

The overall financing environment, however, determines the use of VC supply: venture credit instead of VC. Measured against the total number of new companies, the proportion of high-tech and software companies financed by VC is six times higher in Berlin than it is in Baden-Württemberg. High-tech industry in the state of Bavaria makes use of VC almost four times more often, and software providers twice as often, as companies located in Baden-Württemberg. It is generally thought that this is due to a supply gap in low-threshold early-stage VC in Baden-Württemberg. The ZEW study indicates that such a gap has indeed existed for the last few years. Nevertheless, start-up intensity still shows positive trends and the survival rate of start-ups in Baden-Württemberg is clearly above average.

The study is based on the Mannheim Enterprise Panel of ZEW, which made it possible to identify venture capital lenders' active partnerships in the years from 2001 to 2014.The subject of research is the supply side of the venture capital market in Germany and particularly in Baden-Württemberg. The number of VC investors, and of portfolio companies that received venture capital investments, was determined and closely analysed. In addition, the number and volumes of conducted VC transactions were identified. The study only considered transactions that led to the acquisition of minority holdings (no more than 50 per cent) of companies not being holding companies themselves. Furthermore, transactions were only considered if it involved at least one holding company active in Germany. The quantitative analysis was complemented by a survey among experts.

For more information please contact

Dr. Georg Licht, Phone +49(0)621/1235-177, E-mail licht@zew.de