The German Government’s Start-Up Strategy – Ambitious Goals, Much to Do

On 27 July 2022, the federal cabinet (Bundeskabinett) adopted the first comprehensive start-up strategy of the German federal government. The aim of the strategy is to strengthen the start-up eco-systems in Germany and across Europe. The resolution of the cabinet fulfils an electoral promise that was reflected in the coalition agreement. In particular, the Greens and the Liberals had promised their voters to break with the traditionally rather stepmotherly treatment of start-ups in Germany. The strategy represents a clear commitment to the relevance of start-ups for the social and economic development of the (German) society, a plea for a good investment case. What is envisaged?

1. Areas of action

On 28 pages, the Federal Ministry for Economy and Climate Protection elaborates on a series of possible measures to be implemented during the current legislative period. Ten following areas of action have been identified:

1. Strengthen funding for start-ups,
2. Make it easier for start-ups to attract talent – make employee share programs more attractive,
3. Spark the start-up spirit - make the founding process easier and more digital,
4. Strengthen female start-up founders and promote diversity in start-ups,
5. Facilitate start-up spin-offs from academia,
6. Improve framework conditions for start-ups dedicated to the common good,
7. Mobilize start-up skills for public procurement,
8. Make it easier for start-ups to access data,
9. Strengthen real laboratories – facilitate access for start-ups,
10. Put start-ups at the center of economic policies.

2. In depth

2.1 Funding

With the Future Fund (Zukunftsfonds) and its individual modules, the government supports innovative technology-oriented start-ups in their growth phase and is making available EUR 10 billion in public funds through Kreditanstalt für Wiederaufbau (KfW) over an investment period until 2030. Together with private investors, the government aims to raise EUR 30 billion in private and public capital. These funds shall be used for important, yet to be prioritized areas of innovation and transformation, in particular artificial intelligence (AI), quantum technology, hydrogen, medicine, sustainable mobility, bioeconomy and circular economy and climate, energy and environmental technology.

The various modules aim at the provision of equity, debt and mezzanine capital to start-ups in their early to late growth phase, partly through direct investment funds, fund-of-funds and venture debt.

In addition to funds and financial instruments that the coalition had already announced or implemented, the federal government shall also provide further means for climate and sustainability technologies in the future. From mid-2022 to 2025, for example, at least one-fifth of new investments under the European Investment Fund shall flow into companies engaged in green innovation, sustainability or social impact. It is also envisaged to revive the INVEST program, which was recently discontinued to the annoyance of many founders. The corresponding funding guideline is planned for 1 January 2023.

Strengthening funding shall be accompanied by adjustments to the legal framework. Envisaged are inter alia adjustments to capital market and corporate laws as well as an improvement of the tax framework. In this context, e.g. the requirements for IPOs shall be eased, in particular with a view to facilitating capital market access of small and medium-sized enterprises (SMEs). In addition, the admission of dual class shares and the facilitation of capital increases are being considered. Unsurprisingly for a strategy paper, the resolution remains vague in this respect and it is certainly important to follow if and what concrete legislative changes are made.

2.2 Attracting talent

To attract talents and skilled specialists, existing immigration law hurdles shall be lowered and administrative procedures be simplified and sped up (e.g. by introducing a digital visa process). Recognition of foreign qualifications shall be facilitated and the full potential of the “blue card” be exploited. These respective measures are mainly aimed at attracting talents in the IT sector.

Share option programs and other employee participation programs shall be made more attractive for companies and their employees. Germany has some catching up to do compared to the USA and certain European and Asian countries. For start-ups in particular, the granting of company shares as a component of remuneration is an important instrument. Start-ups often do not have the financial means to attract qualified employees through competitive (cash) salaries. In order to make employee share ownership more attractive, the German government plans to amend income tax law. For example, the tax-free allowance for employee share ownership (section 3 number 39 EStG) shall be significantly increased. In addition, the regulations in section 19a EStG on deferred taxation of benefits in the form of shares shall be extended both in terms of time and substance. The aim is to base taxation as far as possible on the actual flow of liquidity. Starting points will be the extension of the 12-year period as well as the question of how taxation can be handled in practice in the case of a change of employer.

Further measures under consideration concern inter alia facilitating the legal framework for remote working and the strengthening of works councils in larger start-ups.

2.3 Spark the Start-Up spirit – making foundations easier

The process of founding a company in Germany can be challenging in terms of procedural requirements and time. This shall become easier. To this end, a notarial online procedure for the (cash) formation of a GmbH shall be provided. An establishment of a company within 24 hours shall be possible. This goal shall be achieved, among other things, by linking the relevant online services of the federal government, the federal states and notaries. A digital funding portal shall make it easy for founders to find, apply for and implement possible subsidies.

A significant step towards digitization was taken in August this year: Based on the German Act Implementing the EU Digitization Directive (“DiRUG”) as amended by amendment act dated 15 July 2022 and which came into force on 1 August 2022, an online formation of a German limited liability company is now permissible. The need for notarization is upheld by the DiRUG but may be satisfied by way of a videoconference held by a notary using a specific video portal provided via the Federal Chamber of Notaries. Certain related (unanimous) shareholder resolutions and powers of attorney may be included in the notarization process. Additionally, as of 1 August 2023 further measures shall be open for an online notarization, such as certain foundations in kind and unanimous changes of the articles of association of a GmbH (including capital increases). Restrictions in the online identification procedure (e.g. eID-capable ID cards are required) will probably lead to a rather dragging acceptance of the new procedures. However, a first step has certainly been taken.

2.4 Diversity

Studies show that diverse teams are more productive and successful. The promotion of women and diversity in the venture capital market shall be achieved, among other things, through the targeted financial support of funds with a diverse set-up. A new funding line EXIST Women shall be established in the EXIST funding program. In state funds and investment companies, the participation of women in investment committees shall be strengthened. It is envisaged to improve measures that reconcile family and work (expansion of childcare and modernization of parental allowance for self-employed persons). New forums shall be established to improve networking between founders with a migration background and start-ups, established companies and scientific institutions.

2.5 Spin-Offs from academia

More money shall also be made available for spin-offs in the field of science, including biotechnology. Additionally, the Federal government will provide more support for the transfer of intellectual property, including the implementation of standard solutions such as IP for (virtual) shares. Networks, including those at universities, shall be strengthened, and public tenders and procurement processes shall be made easier for educational institutions.

2.6 Fostering Start-Ups for the common good

Start-ups dedicated to the common good shall also be provided with suitable funding opportunities and receive a broader platform for public recognition.

2.7 Public procurement

In public procurement processes, start-ups shall be given more consideration in the future. Also, they should be able to present their innovations digitally on an e-marketplace which allows an enhanced public awareness. Award procedures in Germany shall be made easily accessible via a central digital announcement platform.

2.8 Data access

On an operational level, access to data is critical for future business models. Against that background, the German government envisages the implementation of a whole range of measures:

• The German government will, within the framework of the negotiations on the European Data Act and data rooms, advocate for appropriate incentives for sharing data and for selected mandatory data access. It aims at creating incentives for the economy and at the same time to ensure compliance with data protection standards at European and German levels.

• When setting up the planned data institute, the specific needs of start-ups shall be considered. Planned instruments such as data trustees and data donations should also benefit them.

• Open Data shall, as far as possible and legally permissible, be made available via open interfaces (“application programming interface”, “bulk download”) in a machine-readable form and free of charge.

• The German government is planning AI vouchers for SMEs if they cooperate with start-ups in the use of AI-based technologies. SMES are often still reluctant to implement AI projects. The vouchers are intended to reduce the SME’s financial risk by covering part of the project costs as a lump sum if the SME works together with a start-up. This benefits both, the SME and the start-up. Networking between start-ups and SMEs is promoted by appropriate formats (for example, networking events or funding competitions). In addition, such formats help start-ups to get in contact with and attract new customers.

• In the area of health care, a German and European legal framework should be created that enables the sensible, data protection-compliant handling of health data without hampering innovation and the improvement of care.

2.9 Access to reallabs

Real labs make it possible to test innovative technologies and business models in a real environment, which are still limited by the general legal framework. Within the framework of the planned Act on Reallabs, the German government aims to address specific concerns of start-ups, e.g., scalability after testing in the reallab and investment security.

2.10 Start-Ups in the centre of Economic Policies

A strong start-up ecosystem requires intense networking of all relevant actors. The German government promises to make its contribution and place start-ups even at the center of its activities by a large number of measures, e.g., by holding a “Start-Up Summit Germany” and by establishing a network of contact points for start-ups in all federal ministries and subordinated authorities.

3. Assessment

The strategy paper which evolved from an extensive participation process with workshops and online consultations of involved stakeholders offers a comprehensive and well thought-through concept for promoting young enterprises as drivers of economic, ecological and social dynamics. Accordingly, most reactions so far have been very positive, especially among young entrepreneurs.

At the heart of the government’s strategy lie improved financing opportunities for start-ups. Consequently, and quite rightly, Bundesverband Beteiligungskapital (BVK) emphasizes in its initial statement dated 27 July 2022, that it is particularly important that the Growth Fund (Wachstumsfond), as a central instrument of the Future Fund, is put in place soon.

In addition, the success of many intended measures will largely depend on how precisely the necessary legal regulations will be implemented. This is certainly true for the envisaged tax relief for employee shareholdings (avoiding dry income, i.e. taxation without any liquidity event), the regulations on the facilitated online formation of companies and potential adjustments in the area of IPOs. As far as online notarization procedures are concerned, to date, specific requirements in the identification process and the limited scope of application of the relevant provisions are likely to hinder a fast and widespread acceptance of the new legal framework. With regard to digitization (e.g. digital visa procedures, digital portals to search and apply for subsidies or the establishment of an e-marketplace to promote innovations), the success of the solutions offered will depend, among other things, on the user-friendliness of the corresponding sites. In the area of improved data access, it will be crucial to see how requirements for easy access to data will be reconciled with high data protection standards in Europe.