What is venture capital?
Venture capital is a form of private equity that investors provide to young, innovative, new companies and small businesses. It is also known as working capital, risk capital, backing, or simply V.C. However, corporate venture capital is not a loan but equity capital that the investor makes available to the company. Venture capital is usually provided by affluent business angels, investors, investment banks, pension funds or other financial institutions. The investor doesn’t acquire a majority stake in the company but is integrated into the company as a co-partner with all rights and obligations. In contrast to a loan, the investor does not realize his profit through the interest, but only if the company is successfully sold, e.g., in an IPO or through the sale of his shares to third parties.
Advantages for companies
Every year in Germany, numerous entrepreneurs and founders with promising innovations get off the ground every year. However, many of these startups fail in the early stages (seed stage). The reason: too little capital to successfully finance capital market entry and the later stage (growth stage). Especially when it comes to the provision of venture capital by Germany still has considerable potential in an international comparison.
INVEST supports young innovative companies, which receive a certificate of eligibility as part of the application process. In addition to the certificate, the companies can obtain an eligibility logo from BAFA, which can be used on the website and in presentations to draw the attention of potential investors to the eligibility, thus increasing the chances of obtaining financing through venture capital investment. Furthermore, the startups get listed on a public database where potential institutional investors can scout them.
Advantages for investors
The acquisition subsidy reduces the high risk of an equity investment. The venture capital investor receives 20 percent of the tax-free reimbursement from the state for the amount invested in an innovative company. His shares in the business remain entirely with him. If the investor sells shares after a minimum holding period of three years or if the company fails, he does not have to repay the grant. This is just one of the many advantages for investors when it comes to small business investment.
If the investor (only natural persons) makes a profit on the sale of his or upon the sale of his shares, he receives the taxes to be paid as a lump-sum refund amounting to 25 percent of the capital gain. The prospects of profit are thus additionally increased for the investor. Per calendar year, a maximum of 500,000 euros per investor will be subsidized. Investments worth up to 3 million euros per company can be funded per calendar year.
Requirements for companies
Young innovative companies must fulfill specific requirements if they wish to obtain an equity investment from an angel investor who wishes to use INVEST.
Requirements for companies:
- not older than seven years
- less than 50 employees (full-time equivalents)
- annual turnover or annual balance sheet total of no more than ten million euros
- A corporation with its head office in the European Economic Area and at leastone branch in Germany entered in the Commercial Register or one permanent establishment entered in the registered in the trade registered
- Demonstrably innovative: The company belongs, according to the Commercial Register, to an industry defined as innovative. It is the holder of a patent or has received public funding for research public funding for research or innovation project in the two years preceding the application. Innovativeness can also be demonstrated by a separate short expert opinion from a named independent expert (since 01.02.2021 PWC).
- The company is economically active on an ongoing basis or commences its business activities no later than one year after the conclusion of the participation.
Requirements for Investors
For an investment in the startup to be supported by the INVEST grant, the investor must also fulfill several requirements:
- Business Angel has to invest as a natural person
- Alternatively, a holding-GmbH and -U.G. with up to ten shareholders, whereby only natural persons receive the subsequent exit grant
- Primary residence in the E.U. and of legal age
- The minimum holding period of the investment is three years
- Minimum investment: 10,000 euros.
- Acquire the shares with their own money (no loan financing of the shares).
- Share acquisition must be based on a business plan of the company and a realistic exit strategy pursue
- If the investors do not meet the requirements, BAFA will reject the application for the INVEST grant.
Venture capitalists are known to conduct extensive due diligence before investing in a company. This includes a thorough investigation of the business model, products, management team, and operating history. Due diligence is crucial in evaluating the potential success and risks associated with an investment. Additionally, having multiple groups involved during the due diligence process can provide portfolio diversification and help in managing the deal effectively.
———————— Tip ————————
A new feature since the beginning of 2017 is that follow-up investments are also eligible for funding, provided that INVEST has already funded the acquisition of the shares previously held by the investor.
Extra: Exit grant on sale of shares
A new feature of the INVEST grant for venture capital is the exit grant. Here, besides the acquisition grant, natural persons receive a lump-sum refund of taxes on profits that accrue when the acquired shares are sold.
The capital gain on the sale of shares must be at least 2,000 euros to receive the excess allowance. If this is the case, natural persons receive 25% of the profit from selling their INVEST shares as a tax refund. The excess subsidy is limited to 80% of the investment amount of the INVEST shares.
How do I apply to Bafa Invest?
The application for the INVEST grant is submitted to BAFA, where it is reviewed and approved if necessary. There are two variations when it comes to the application:
Variant 1: the company already exists
STEP 1: First, the start-up seeking growth capital must submit an electronic application to BAFA. BAFA checks and, if applicable, certifies the company’s eligibility for funding.
STEP 2: The funding decision is valid for six months. Once an investor has been found, he or she must also submit an online application to BAFA for the INVEST grant (i.e. the acquisition grant, so to speak).
Final step: Once BAFA has also positively approved the investor’s application, he makes the share purchase. In order to then receive the 20% refund, the investor requests this from BAFA and also submits the new partnership agreement.
Variant 2: Company is not yet established
STEP 1: If the investor participates in a start-up project, i.e. the company does not yet exist, the investor must first submit the application for the INVEST grant online.
STEP 2: The company submits the application for the INVEST grant after it has been founded and entered in the commercial register – this must be done within three months of the investor submitting the application.
What is venture capital and how does it differ from traditional funding methods?
Venture capital is a type of funding provided by investors to startups and small businesses that are deemed to have long-term growth potential. Unlike traditional funding methods like bank loans, venture capital involves investors taking equity in the company rather than issuing debt.
Further links on BAFA-Invest
The following links lead to German websites, and the BAFA primarily communicates in the German language. If you need any help, please don’t hesitate to contact us.
Online portal for application for companies
Online portal for application for investors
Invest-database of companies
Application for payment of the exit grant
