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International and national financial activities with venture capital and crowd investing

Akademische Arbeit 2018 90 Seiten

BWL - Controlling


I nh altsverzeichnis



1 Introduction

2 Theoretical basics: Venture Capital
2.1 Definition and characteristics of venture capital.
2.2 Characterization of Venture Capital Financing
2.3 Characteristics of Venture Capital.
2.4 Distinction between venture capital and private equity..
2.5 Meaning and objectives of venture capital
2.5.1 Meaning and objectives of the venture capital providers
2.5.2 Meaning and Objectives of the Venture Participants.
2.5.3 Significance and objectives of venture capital companies.
2.6 Historical development of venture capital..
2.6.1 The historical development of VC in the USA
2.6.2 The historical development of VC in Germany.
2.7 Macroeconomic significance of venture capital and private equity
2.8 The financing phases and the financing process.
2.9 Legal and fiscal framework conditions.

3 Venture capital and private equity in the current environment
3.1 Venture Capital and Private Equity in Germany
3.2 Distribution of private equity investments by regions and sectors
3.3 Divestments of associated companies.
3.4 International comparison of the German venture capital market
3.5 Venture Capital Investments by Business Angels
3.6 Public venture capital financing in Germany
3.7 Deficits of the German equity and venture capital market and possible suggestions for improving the framework conditions
3.8 Summary and transition to start-up financing by crowd investing.

4 Venture capital as an asset class national / international

5 Upheavals in international corporate finance call for improved f ramework conditions for international venture capital financing activities

6 Practical Opportunities and Potential / Trends for Venture Capital in the I nternational Finance Sector 44

7 Interim conclusion on the subject of venture capital.

8 Start-up financing 2.0: crowd investing
8.1 Definition and definition of terms
8.2 The Web 2.0: Importance as infrastructure for crowd investing.
8.3 Functionality and significance of crowdfunding
8.4 General functioning of crowd investing
8.5 Legal framework of crowd investing.
8.5.1 Obligation of crowd investing platform operators to obtain permission.
8.5.2 Obligation to publish a prospectus
8.5.3 Forms of participation in crowd investing.
8.6 The crowd investing platforms in Germany
8.6.1 Overview: The German crowd investing platforms
8.6.2 Transactions on the German crowd investing platforms
8.7 Special Features of Other Crowd Investing Platforms
8.8 Categorisation of founding companies in crowd investing
8.9 Crowd investing for medium-sized companies.
8.10 Secondary benefits of crowd investing for companies
8.11 Summary and development forecast

9 Crowdinvesting as an innovative addition to the German venture capital market: comparison, result formulation and summary.
9.1 Resources for start-up financing in the current market environment
9.2 Classification and comparison of crowd investing as an innovative addition to venture capital financing by venture capital companies
9.3 Classification and comparison of crowd investing as an innovative
complement to venture capital financing by business angels.
9.4 Possibilities for the interaction of crowd investing and 'classic' venture capital financing
9.5 Summary formulation of results and conclusion


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Small and medium-sized enterprises, and specifically newly created enterprises, have limited possibilities to raise capital. The establishment of fast-growing and innovative young companies usually requires capital amounts that go well beyond personal finan- cial possibilities. Public subsidies are only available to a limited extent and are usually associated with very high requirements, which a young company in particular can hard- ly meet. Likewise the outside financing is very limited by not sufficient collateral. The procurement of capital on the stock exchange and the associated IPO of a company presupposes a certain development. 1 Thus, the possibilities to obtain larger sums of capital with hardly any securities, but with good product ideas, are very limited. These facts contribute to the fact that young and small enterprises have to switch to private markets for capital financing.

This is particularly true for technology-intensive companies 2 that have to carry out ex-tensive research and development work even before they enter the market. Further- more, the start-up phase always requires extraordinary investments, such as costs for patent applications, investments in production facilities, administrative and personnel costs as well as marketing measures - and it is precisely in these situations that sales revenues are not yet generated. Special investment requirements and financing possi- bilities within the scope of venture capital are required above all in the international environment. Here e.g. establishment costs become due, which can generate consid- erable basic costs in relation to countries - marketing and PR costs for the establish- ment of the product in the globalized market - various warranty costs and product liabil- ity costs, which are handled e.g. in the USA particularly strictly and can be very substantial concerning technical products - in this case damage compensation claims are to be considered - etc. - and the costs of the establishment of the product in the globalized market are also high.

Furthermore, the great benefit of venture capital for the economy as a whole should be emphasized. Here, the benefit of venture capital is primarily derived from the contribu- tions to the:

- Closure of the equity ratio of young and small companies
- Promotion of structural policy objectives of an increasing occupation of growing sectors and high innovative strength, and
- Creation of additional, often qualified jobs in personnel-intensive young compa- nies

It also argues that venture capital promotes structural change, innovation and econom- ic growth by creating new innovative and successful businesses. The development of entirely new products and technologies through erratic innovation, in contrast to the gradual further development of existing products, can therefore be promoted particular- ly well by young, partly small companies. Good examples of this are developments in the IT sector - where international ventures are permanently carried out to bring to- gether "profitable" ideas and to establish and exploit them in a certain market - where legal relief and tax advantages also play a certain role which favour a start-up or a technology. In addition, venture capital opens up the possibility of filling growing sec- tors more strongly, i.e. service and information sectors instead of primary and second- ary economic sectors. Because one thing is certain: growing production sites are be- coming smaller and smaller (resource problems) - here the sector of services, information, communication or services will always grow and here the future lies and will lie in the international innovative venture sector. Here, too, it must be noted that highly qualified jobs will be created that are internationally based and not tied to local locations (e.g. IT, video, communications technology, satellite technology, etc.). Structural change, innovation and growth also have positive effects on innovative em- ployment policies. These include, in particular, small and young companies that are technology-oriented and can act very flexibly and create new jobs.

Thus, by providing venture capital, highly innovative technology is generated for the national and international economic markets - research activities are encouraged - start-ups and self-employments are established - highly qualified employees are trained, which the international market needs, because technology and innovation is not "border-oriented" - and promotes the sustainability of the developed innovations. It is estimated throughout Europe that around €100 billion 3 of market volume is available for the venture capital market - so there is an investment volume here that leaves room for major growth and innovation investments.

In Europe, a study was conducted in 2012 by EVCA - Survey oft he Economic and So-cial Impact of Venture Capital in Europe: Venture capital is of existential importance for companies in the early development or expansion phase - almost 95% of those sur- veyed and companies financed with venture capital between 2005 and 2012 stated that they would not exist or would develop more slowly without venture capital financing. 4 2% of start-ups would never have existed without venture capital financing according to their own statements - 90% of companies increased the number of their employees after the investment. 5

The aim of this paper is to present venture capital financing (international financial ac- tivities) in more detail and to derive a sensible alternative to conventional forms of fi- nancing.

Progress in the field of information technology and the development of the Internet have created a new, almost inexhaustible market with enormous potential. The terms Internet and innovation are closely related. After all, they were innovative garage com- panies that have become leading Internet companies today. The Internet is also the platform for innovations in the area of corporate finance. Online platforms for financing start-ups are currently establishing themselves in Germany. The financing is not carried out here however by specialized venture capital companies or by Business Angels, but each interested private person can already contribute capital with smallest amounts to an enterprise. This new development, known as swarm financing or crowd investing, is still in its infancy in Germany and the process has only just begun. Due to the topicality and the fact that so far hardly scientific studies on this new topic, crowd investing as a way of financing companies is an ideal research topic.

The aim of the present study is to systematically analyse the market for crowd investing in Germany, which is in the process of development. In this context, crowd investing should be seen as an innovative complement to venture capital. A further goal of the work is thus the discussion with financing by venture capital. This ensures that the in- vestigation of crow-dinvesting is carried out and classified against a macroeconomic background.

Accordingly, the work is structured as follows: First, a system-tematic analysis of the forms of financing venture capital and private equity, or the German venture and equity capital market, is carried out. Beginning with an introductory definition and differentia-tion of venture capital from private equity, the investigation then extends to the players involved in the market and the overall economic significance of venture capital and equity capital. Furthermore, the financing phases and the financing process as well as the legal and tax framework will be analysed. The next chapter is devoted to the analy- sis of the current environment and the current situation in private equity and in particu- lar in the venture capital sector. In particular, the German venture capital market is evaluated and assessed on the basis of statistical measures. One focus of the work is the investigation of the novel instrument crowd investing carried out in Chapter 8. First, the general functioning of crowd investing is explained. Then the currently active crowd investment platforms in the market, on which the entire investment process takes place, will be compared with regard to regulations, activities and transacted transac- tions. Furthermore, it will be determined for which companies crowd investing is a suit- able alternative and how the development chances of the market can be estimated. A comparison of the financing forms venture capital and crowd investing is the subject of the tenth chapter. At the end the following questions will be answered: What is the cur- rent situation of the German venture capital market? What problems can arise with venture capital financing? How does crowd investing work? What is the current legal and market situation like? For which companies is crowd investing an alternative to venture capital, if it is one at all? What is the potential of crowd investing and can it be classified as an innovative complement to venture capital?

2 Theoretical basics: Venture Capital

21 Definition and characteristics of venture capital

Venture capital is an important part of the private equity market. 6 Literally translated into German, venture capital means venture capital. Venture capital is either brought into the company in the form of fully liable equity capital or equity-like financing instru- ments. Accordingly, a venture capital investment is the provision of equity capital by an investor in a company, usually during or shortly after the start-up phase. 7

In German, venture capital describes external equity financing for high-risk projects.The English term is literally translated into German as "Wagniskapital". Venture capital can thus be defined as a form of equity capital with increased risk, which is why the term risk capital is also used in the literature. 8 Another approach sees venture capital simply as equity capital that is invested in a company in order to effect certain devel- opments. Some see the definition of venture capital as too general and insufficiently specified. The translation of venture capital is also considered to be misleading, as it suggests a high degree of incalculability and a lack of seriousness. The Bun- desverband deutscher Kapitalbeteiligungsgesellschaften uses the translation venture capital in some places, but usually remains with the English term venture capital. 9 Fol- lowing this approach, further differentiations are dispensed with in the further course and simply the term "venture capital" or the abbreviation "VC" is used. Venture capital is capital made available to a company at an early stage to support growth. As can be seen in the following figure, this is a form of external financing as an alternative to an Credit financing. At the same time, it represents self-financing, as the financial re- sources are provided by third parties, but their character corresponds to the equity cap-ital raised. 10

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Figure 1: Financing possibilities 11

In addition, one can differentiate between direct and indirect capital participation. A direct participation in young growth companies takes place without intermediary institu- tions, such as venture capital companies. Indirect investments are the rule in Germany and are differentiated according to project and fund-oriented approaches. In the pro- ject-oriented approach, suitable investment opportunities are initially sought. The in- vestment commitment is often made before the capital acquisition. Suitable investors are sought only afterwards. The fund-oriented approach behaves exactly the opposite and is initially aimed at compiling an investor list. In a second step, suitable investment companies are selected. The difference described is illustrated again in the next fig- ure. 12

Further definitions and descriptions of the nature of venture capital can be made in the form of a comparison with debt financing by drawing on a bank loan. The VC investor provides the VC borrower with long-term capital without the VC borrower providing col- lateral. The long-term nature is not subject to any fixed time specification and also dif- fers depending on the time of the venture capital process as well as the type and struc- ture of the capital-raising company. In the literature, time periods of three to five years are sometimes given, while other authors define a much longer period of at least five to ten years.

The VC taker receives liable equity capital which he is not obliged to repay or pay in- terest on. Thus, the VC investor does not assume a creditor position like a bank, but becomes a liable partner of the VC borrower with his participation. The amount of the participation can also vary greatly depending on whether, for example, a single private investor finances the company or a venture capital company enters the market as a minority shareholder with a participation quota of less than 50%. Minority interests are usually the rule and are seen as a characteristic feature of VC financing. Another as- pect that distinguishes venture capital from debt financing by banks is that the VC pro- vider often provides active management support. This can range from simple advisory activities to active participation in concrete projects of the VC borrower. In addition, VC companies often demand rights of control and co-determination. On the one hand, this further strengthens and intensifies the supporting function and, on the other hand, such rights serve the control function that the portfolio company also acts in the interest of the VC company and ultimately in the interest of the investors and the funds provided are used for the agreed purpose. Control and co-determination rights make a consider- able contribution to being able to control and manage the risks taken with the invest- ment. 13

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Figure 2: Comparison of possible participation subtypes 14

The comparison of equity capital and equity capital with debt capital is shown in the table below. The list should give an overview of the differences against the background of venture capital or private equity financing. 15

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Figure 3: Comparison of equity and debt capital against the background of VC and pri- vate equity financings 16

If we take a closer look at the most common form of indirect participation, three actors can be identified, namely the VC provider, the venture capital company and the VC recipient. The venture capital companies act as intermediaries and bring together the supply and demand of capital. Against this background, capital takers are also referred to as portfolio companies of VC companies. The individual companies can vary greatly and pursue different approaches to VC financing depending on their orientation. The following figure shows the actors involved and their relationships to each other graph- ically. 17

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Figure 4: Actors of the most common form of indirect venture capital financing 18

22 Characterization of Venture Capital Financing

This form of financing is often used by young technology-oriented companies whose capital requirements are particularly high in the first few years of operation. The inves- tor then makes the equity capital available to the investment company and receives a share in the company in return. For the investor, however, venture capital is a return- oriented form of capital investment, which is why the venture capital company will gen- erally try to sell the company's interest profitably. As already mentioned, Venture Capi- tal is often translated as "venture capital" in the literature. However, the risk is not the "essential element", but rather an unavoidable side effect of the attempt to implement new combinations of productive factors in privately organised economic systems, e.g. "developable, technical innovations", the financing possibility of which has been made known as venture capital in Germany and Europe. 19

Venture capital can therefore be defined and characterized by summarizing the essen-tial points as follows: Venture capital financing exists when: 20

- An investor directly or as an intermediary between an investor and an invest- ment taker,
- An innovative, non-emissions, growth-oriented company,
- Provides liable funds without the usual loan collateral as an equity investment, and
- Extensive management support provided,
- With the medium to long-term objective of disposing of the acquired invest- ments at a high profit after successful expansion of the company. 21

The purpose of a venture capital investment is therefore not an ongoing interest rate that weakens the company's liquidity, but rather a subsequent sale of its capital share that is as profitable as possible for the investor. The parties involved in venture capital financing are: 22

- The capital taker, i.e. the company which receives capital = "venture company"also called portfolio company
- The investor, i.e. the venture capital company that makes its own or investors' funds available to the borrower.
- The investor, i.e. the person from whose assets the funds made available to the borrower ultimately originate.

In addition to monetary support services, there are also non-monetary support services for target enterprises in start-up phases. In this context, incubators, accelerators and business angels can be mentioned: 23

- Incubators: Service providers who predominantly advise target companies and provide network support, e.g. in all questions of setting up and running a com- pany.
- Accelerators : They support the target company in particular to accelerate the market penetration process. Often the resources, e.g. distribution channels, computer centres, etc. are made available for support.
- Business Angels: Usually individuals who hold or have held higher management positions. They accompany the target company in strategic questions, also through direct assumption of management functions.

Important aspects of capital allocation are no longer real securities and a sufficient eq- uity base of the debtor, but rather the venture capital provider or venture capital com- pany assesses the technical feasibility of the innovation, its future earning power and the qualification of the entrepreneur. The company's personality, drive and assertive- ness are rated higher than a first-class technological innovation. 24

23 Characteristics of Venture Capital

The focus of venture capital financing is on venture capital, which usually flows into the company to be financed as fully liable equity capital from investors. A venture capital financing can be represented by the following features : 25

- Venture capital is mostly interest-free money given away
- After a limited period of time, the equity investor aims for a planned withdrawal from the company participation and wants to achieve a high return in relation to the invested capital by selling his shares.
- Some venture capital financings provide for concrete management support (business and technical support as well as control rights).
- Venture capital is organised outside the regulated capital market (privately or- ganised, e.g. through corporate companies).

24 Distinction between venture capital and private equity

The definition and differentiation of private equity from venture capital is not quite clear. The terms are often used as synonyms in the literature. More precisely, venture capital represents the early-stage financing, on a larger scale also financing of later phases of companies, while private equity finances more the expansion and bridging, up to the sale. Venture capital is therefore considered to be part of private equity. The distinction between equity capital for private equity and venture capital for venture capital can also be found. The following figure shows a classification. 26

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Figure 5: Presentation of equity capital 27

Since the aim of this paper is to examine crowd investing and venture capital, i.e. pre- dominantly the early-stage financing of companies, as an innovative form of financing, it makes sense to use a delimitation of the terms. Therefore, the terms venture capital and private equity should be considered and analysed separately. 28 Macroeconomic analyses and market outlooks as well as figures and tables, if not further differentiated, refer to both private equity and venture capital, since there is often no subdivision and venture capital is integrated into the surveys as part of private equity. The following figure gives an overview of some of the differentiation criteria. As already mentioned,the transitions are often blurred and not always precisely defined. 29

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Figure 6: Comparison of Venture Capital and Private Equity 30

25 Meaning and objectives of venture capital

Now that a fundamental definition and consideration of the characteristics of venture capital has been carried out, the following chapter examines firstly the significance of VC financing and secondly the objectives of the players involved. The focus here is on a separate consideration for VC investors, VC companies and VC takers.

2.5.1 Meaning and objectives of the venture capital providers

In general terms, the objective of VC investors is to achieve an appropriate return. Cap- ital is not made available on the assumption of participation in interest or profits, but in anticipation of an increase in the value of the investment. 31

This increase in value occurs if the company successfully establishes itself on the mar- ket over the next few years or if the subsidised project was successful and contributes to the increase in value of the company. The exit takes the form of a so-called exit, which can take place in different ways. An IPO (going puplic) of the company, for ex- ample, is seen as the most elegant and sometimes also the most successful variant, as it provides access to the capital market and the path to public focus. 32 Other ways of exit are the sale of shares to other investors or the repurchase of shares by existing shareholders. The exit process is also referred to as divestment. 33

There are different VC donors who also have differentiated interests in comparison. In general, these are the state, private investors, institutional investors such as credit in- stitutions or insurers and industrial companies. 34

- State participations serve to promote and support business start-ups and are entered into for economic policy reasons. These can be the promotion of inno- vation, the support of certain regional industries or the creation of new jobs. 35
- Private investors, acting as business angels as investors and supplying Start-up companies with capital. Often, such investors also have experience in in the respective sponsored industry and make their know-how available. Business Angels operate on the so-called informal market for Venture capital. 36
- Institutional investors usually collect their capital in funds, from which they can selected investments can be financed. Frequently, risk-political Considerations in the foreground of investments. Thus, banks can allocate venture capital to their customers, reduce their existing risks, strengthen the customer's equity base and expand information, and control rights. 37
- The interest of industrial investors in becoming active as VC investors lies in the is often based on the creation of synergy effects. Strategic goals are access to new innovations and technologies as well as to research and development ca- pacities. The return aspect is often relegated to the background. 38

2.5.2 Meaning and Objectives of the Venture Participants

The aim of VC borrowers is to raise capital. The capital received is usually used to fi- nance growth or certain research activities. Typical venture capitalists are usually start- ups in the technology sector, especially in biotech or information technology. In a broader view, venture capital also serves to finance start-ups or research and product financing of companies from other sectors. In addition to the goal of obtaining capital at the most favorable conditions possible, further goals can be identified that relate pri- marily to the current financing phase. 39

In this way, minority shareholdings are sought to protect independence and autonomy.In addition, a fixed period of participation can be identified as the goal, which guaran- tees a certain degree of planning security. The objectives pursued are usually congru- ent with the objectives of the venture capital companies and the VC investors. Thus, minority shareholdings with different rights of co-determination of the investors are the rule and are regarded as the basic principle of VC financing. The objective of the fixed capital commitment period is usually guaranteed by the fact that the disinvestment of the shares is not carried out by termination but by sale. Other objectives are of a more general economic nature, such as overcoming financial deficits, scarcity of resources and insolvency risks. The possibility of external financing improved by the equity capital received, as well as the preservation of knowledge and management skills by the VC investors, can also be defined as further objectives. 40

2.5.3 Significance and objectives of venture capital companies

VC companies play a central role in venture capital financing as intermediaries be- tween investors and capital takers on the one hand and as independent, profit-oriented companies on the other. The success of VC companies is strongly dependent on the development of the portfolio companies.

In general, derivative and original targets can be distinguished. Derivative targets result from the balance of interests between VC investor and borrower. This is a basic pre- requisite for enabling transactions. Derivative targets are thus the balance between the return and security interests of the investors and the requirements of the capital takers. The original objectives are efficiency targets in business operations and remuneration targets for the services provided. 41

26 Historical development of venture capital

At this point, a historical development overview of venture capital will be given. The focus will be on the processes in the USA and Germany.

2.6.1 The historical development of VC in the USA

The year 1946 can be identified as the starting point of modern venture capital history. American Research and Development (AR&D) was founded in the USA and undertook the first equity financing transactions. In addition to equity capital support, the company also offered management support, thus helping companies such as Digitial Equipment Corporation (DEC) to great success (sales proceeds of the investment in 1971 for 255 million dollars). Further development in the 1960s was positively influenced by the Small Business Investment Companies (SBIC) program. Congress passed a bill after SBICs were formed as private equity firms and, under the supervision of the Small Business Administration (SBA), a governmental organization of the U.S. government, were given improved access to low-cost, state-guaranteed financing that allowed SBICs to raise their private equity capital to the top of the list. 42

In the late 1960s, many SBICs lost their good reputation due to mismanagement, with the result that their share was only around 1% in 1989.23 The negative development trend was halted by regulatory adjustments on the part of the SBA, which converted financing contributions from loans into "preferred equity", and increased guidelines for the capital adequacy of the SBICs. Today, SBICs provide young companies with equi- ty, long-term loans and management support, which means that they fulfil a role as venture capital providers, with government-sponsored benefits, but also with stricter regulations. 43

In the 1970s and 1980s, the venture capital industry continued its development away. During this time, a concentration of venture capital sponsored companies began in Silicon Valley, California, and near Boston, Massachusetts. State measures, such as the reduction of the capital gains tax rate from 49.5% in 1978 to 20% in 1981, favoured development. In addition, favorable economic conditions, such as the onset of econom-ic recovery, new technological developments and low interest rates promoted the ven- ture capital market. 44

2.6.2 The historical development of VC in Germany

Development in Germany began with the founding of the first investment companies in the 1960s. However, most of them were only established in already established com- panies, medium-sized companies. With the founding of the German Wagnisfi- nanzierungsgesellschaft mbH (WFG), to which 27 credit institutions belonged, the first attempts were made to promote early-stage venture capital. In the 1980s, the American venture capital financing model became more and more established in Germany, but the market was far from mature and many projects failed. 45

With the founding of the Association of German Investment Companies in 1988, the market became more structured and regular statistical market analyses ensured that the market became more and more professional. At the beginning of the 1990s, in the course of the first consolidations in the private equity market, a selection of market par- ticipants and at the same time a specialisation of some companies in early-stage fi- nancing occurred. After a consolidation phase at the beginning of the 1990s, the ven- ture capital market experienced a renewed upswing. The good mood on the stock market provided an attractive environment for divestments of investments in the form of an initial public offering. The founding of the Neuer Markt reinforced this effect even further, with the result that the total of early-stage financing rose rapidly and reached a peak in 2000 with a share of 40% of venture capital investments. 28 29 With the burst- ing of the bubble and the associated bear market on the stock markets, the venture capital market also lost momentum. The invested capital amounted to € 0.7 billion in 2003, compared to € 3.7 billion in 2000, i.e. only one fifth of the total. 46

27 Macroeconomic significance of venture capital and private equity

The macroeconomic influence of venture capital depends on the structure and level of development of the economy of the respective country or region. The primary and gen- eral economic benefit of venture capital is to close the equity gap of small, often start- up companies. This promotes growth and competition and creates new jobs. Venture capital financing can also increase the innovative capacity and, last but not least, the attractiveness of certain locations and regions. The overall economic relevance is closely related to the importance of small and medium-sized enterprises (SMEs), as these companies are the main recipients of venture capital and private equity. 47

According to the Institute for SME Research in Bonn, 79.2% (21.4 million) of all em-ployees were employed in SMEs in 2011. In addition, 83.2% (1.29 million) of all train- ees were employed in SMEs. The number of companies in the commercial sector and in the liberal professions amounted to 3.7 million in 2012, of which 99.6% (3.68 million) belonged to small and medium-sized enterprises. The following figure illustrates once again the importance of SMEs in Germany. The data refer to the year 2010. 48

As can be seen from the figure, over 80% of enterprises in the commercial economy and in the liberal professions have fewer than 10 employees. Any new start-ups or the promotion of new ideas and research projects can take place in this area through ven- ture capital financing. However, the ownership structure of German small and medium- sized enterprises must also be taken into account. A good 95% of SMEs are family- owned. The continuation of the tradition of the family business, but also the desire for independence, can stand in the way of external investors and lead to suitable candi- dates not wanting to expand their financial structure through private equity or venture capital from the point of view of capital providers. 49

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Figure 7: Companies and their employees and trainees by employment class in 2010 50

Furthermore, SMEs make a significant contribution to the structural change of an economy by responding to changing conditions more quickly than other companies. The resulting leaps and bounds of innovation,ensure a rapid adaptation of the economy, in contrast to large corporations, which are usually only interested in a gradual further development of existing products and solu- tions. It should be noted that the lack of resources often hampers companies in their research and innovation efforts. It should also be borne in mind that innovation re- search is only carried out by a small proportion of companies, namely those that are actually technology-oriented. 51

The overall economic significance of venture capital and private equity can be further specified in an analysis independent of the SME structure of a country. According to Joseph Schumpeter, the process of "creative destruction" is the basis for the develop- ment of an economy.34 Inventions and innovations of new products, technologies and services lead to a change in existing markets. Some companies develop successfully, others fail and form the basis for further growth of competitors. Venture capital and private equity financing, in the form of investments by specialized companies or busi- ness angels, can support and advance this process in an economy. Venture capital and private equity also influence the regional structures of a country. For example, young technology companies usually look for locations with direct proximity to scientific institutions, companies in the same industry and potential investors. This is also an explanation for the conurbations of Boston, with the famous Massachusetts Institute of Technology (MIT) and Silicon Valley in California. The following chart shows the five states with the most VC transactions in 2011. 52

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Figure 8: Top 5 US states by venture capital investment in 2011 53

The regions addressed are usually undergoing rapid change. In 1985 there were al- ready 750,000 and every year around 40,000 more jobs were created, mainly in the high-tech companies located there, but also in many service and other commercial enterprises that also benefited from the structural change and settled in Si-licon Valley. In Germany, too, there are technology clusters in certain regions, albeit on a less im- pressive scale. In the Berlin, Heidelberg and Munich metropolitan areas, biotechnology industry centres have developed. Information and communication technology clusters can be found in Berlin, Hamburg and the Ruhr area, and in the broadcasting and tele- vision sectors predominantly in Munich. All these clusters trigger synergy effects on other economic sectors, such as construction, trade and services. The following figure illustrates the structure of the biotechnology sector on the basis of the three most important German clusters. 54

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Figure 9: Overview of the three most important biotechnology clusters in Germany 55

The following chart illustrates the importance of venture capital financing for the bio- technology industry.

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Figure 10: Sources of financing for biotechnology companies 56

In summary, the macroeconomic analysis can be summarised as follows value:

- The importance of venture capital and private equity depends on the KMU structure of a country. The more people are employed in SMEs and the more start-ups there are, the greater the potential investment area for venture capital and private equity investments.
- Venture capital and private equity promote the process of "creative destruction" and thus contribute to the optimisation and restructuring of economic activities.processes.
- Regional structures are expanded and promoted through venture capital and private equity investments.
- Synergy effects lead to positive developments in other economic sectors. The labour market and growth are stimulated. 57

28 The financing phases and the financing process

In the following, the different financing phases for venture capital and private equity investments will be differentiated and systematized. In general, a distinction can be made between the start-up phase (early stage), the expansion phase (medium stage) and the maturity phase (later stage). The literature often contains a further subdivision of the phases. In the following figure graphically illustrate the corporate life cycle con- cept. 58

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Figure 11: Phases of venture capital and private equity financing 59

The foundation phase of a company is divided into seed and start-up phases.In the seed phase, the focus of activities is on product development and research. The start-up phase continues to be characterized by research and development. Other typi- cal processes include initial marketing steps and production preparations as well as the establishment of a suitable corporate structure. The start-up phase ends when the product or service is offered on the market for the first time and the company is brought to market in a suitable legal form. The expansion phase of newly founded companies is characterised by production expansion and the desired market penetration. If the prod- uct or service offered is successful and the management is target-oriented, the break- even point is usually reached in this phase. The maturity phase is usually characterized by a decreasing marginal turnover, which is caused by new competitors entering the market and increasing market saturation. In the context of venture capital and private equity financing, the maturity phase represents the beginning of the disinvestment. Bridge financing is used to raise capital in preparation for an IPO or to overcome growth thresholds before selling to an investor. Bridge financing is often provided by banking institutions.40 In addition to IPOs, management buy-outs (MBOs) and man- agement buy-ins (MBIs), i.e. the takeover of a company by existing or external man- agement, are other options, although IPOs are preferred as a "more elegant" solution. 60

29 Legal and fiscal framework conditions

This section provides an overview of the most important legal and tax framework condi- tions. The legal and tax treatment of new business start-ups depends on the chosen legal form. The choice is between sole proprietorships and companies. The question of the optimal legal form cannot be answered in general, as the personal and material requirements of the founder must be taken into account. The stock corporation (AG) makes it possible to generate capital (public equity) via the stock exchange. The for- mation of an AG is, however, associated with high costs and the possibility of raising capital via the stock exchange is usually out of the question for start-up companies. As a rule, these are open trading companies or limited liability companies, which are converted into AGs at the advanced stage of the company's IPO. 61

[ ]

1 Vgl. Schefczyk, M (2006), Finanzierung mit Venture Capital und Private Equity, S. 1 f.

2 Ibid.

3 Vgl. European Investment Fund.

4 Vgl. EVCA, Survey oft the Economic and Social Impact of Venture Capital in Europe, Brüssel,


5 Ibid.

6 Vgl. Eckstaller und Huber 2006, Private Equity und Venture Capital, S. 11 f.

7 Ibid.

8 Vgl. Damsen, J./Löwe, T. 2007, Seite 8.

9 Vgl. Bundesverband Deutscher Kapitalbeteiligungsgesellschaften 2002, S. 6f.

10 Vgl. Damsen, J./Löwe, T. 2007, Seite 9f.

11 Vgl. Heinen, J. 2012, S. 14.

12 Vgl. Schefczyk, M. 2004, S. 11f.

13 Ibid.

14 Vgl. Schefczyk, M. 2004, S. 12.


16 Vgl. BVCA Price Waterhouse Coopers 2004, S. 8.

17 Ibid.

18 Vgl. BVCA Price Waterhouse Coopers 2004, S. 9.

19 Vgl. Stadler, W. 2002, S. 8 f.

20 Vgl. Kollmann, T. 2012, S. 31 f.

21 Ibid.

22 Ibid.

23 Ibid.

24 Ibid, S. 33f.

25 Vgl. Brehm, C. 2012, S. 54 f.

26 Vgl. Eckstaller, H./Huber, M. 2006, S. 12f.

27 Own figure.

28 Vgl. Eckstaller, H./Huber, M. 2006, S. 12f.

29 Vgl. Eckstaller, H./Huber, M. 2006, S. 12f.

30 Vgl. Eckstaller, H./Huber, M. 2006, S. 12.

31 Vgl. Bundesverband Deutscher Kapitalbeteiligungsgesellschaften 2012b, S. 15f.

32 Ibid.

33 Vgl. Erkal, C. 2018, S. 24f.

34 Vgl. ebenda, Vgl. Ermisch, R./Thoma, P. 2002, Vgl. KfW-Bank 2018, S. 25f., Vgl. Kinne, K.

2011, S. 36f.

35 Ibid.

36 Ibid.

37 Ibid.

38 Ibid.

39 Vgl. Weitnauer, W./Guth, M. 2018, S. 28f.

40 Ibit.

41 Ibit.

42 Vgl. DRI-WEFA 2012, S. 29f.

43 Ibit.

44 Ibit.

45 Vgl. Bundesverband Deutscher Kapitalbeteiligungsgesellschaften 2012, S. 33f.

46 Ibit.

47 Vgl. Fromann, H./Dahmann, A. 2005, S. 12.

48 Ibit.

49 Ibit.

50 Institut für Mittelstandsforschung 2012b.

51 Vgl. Fromann, H./Dahmann, A. 2005, S. 13f.

52 Ibit.

53 National Venture Capital Association, Yearbook 2012

54 Ibit.

55 Rakau, H. 2011, Deutschlands Biotechnologieregionen, Frankfurt. Deutsche Bank Research

56 Ibit.2011, S. 13

57 Ibit.

58 Vgl. Fromann, H./Dahmann, A. 2005, S. 17f.

59 Ibit, S. 17.

60 Vgl. Tchervenlachki, V. 2007, S. S. 18f.

61 Vgl. Röhl, K.H. 2010, Institut der deutschen Wirtschaft Köln, S. 45.


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Titel: International and national financial activities with venture capital and crowd investing