HTGF: The financing gap in the value chain has shifted

Bonn — Exits are crucial across indus­tries. But despite some attrac­tive invest­ment sales, experts believe that the bott­len­eck has shifted to the end of the value chain.

An exam­ple: You take your car and go on vaca­tion to the Medi­ter­ra­nean Sea. You have ever­y­thing well prepared. You don’t worry about the fact that your car will need more fill-ups so that you can reach your vaca­tion desti­na­tion. Because you are sure that you will find enough gas stati­ons along the way.

Start-ups are a comple­tely diffe­rent story. At the time of your startup, you realize that you will need addi­tio­nal funding if you want to grow. But you don’t know the inves­tors in the next round, nor do you know if there are any takers for your idea at all. A good seed inves­tor will certainly not do the initial finan­cing unless they believe they can find other inves­tors for the next phases of the company. No one wants to get stuck in the so-called valley of death. About ten years ago, seed invest­ments were the bottle-neck. A few years later, much more seed capi­tal was available, but signi­fi­cant growth invest­ments were hard to come by without global inves­tors. And these inves­tors were not easy to convince. Today, the situa­tion has impro­ved signi­fi­cantly. Start­ups that deal with tech­ni­cally driven inno­va­tions have a good chance of getting money for their deve­lo­p­ment at all stages. Larger rounds with volu­mes of over ten million euros are possi­ble. But still, from the perspec­tive of indi­vi­dual start­ups, it seems to be very chal­len­ging to get access to the right investors.

Choo­sing the right investor
That is why it is so important to select the right inves­tor, espe­ci­ally at the begin­ning of the company’s deve­lo­p­ment. This person should be able to open the doors to other inves­tors. The start-up finan­cing market is very intrans­pa­rent. Without cont­acts you will hardly get access to wealthy indi­vi­du­als, corpo­ra­ti­ons or inter­na­tio­nal venture capi­tal funds. You also need to be highly quali­fied, because a pitch to inves­tors is very diffe­rent from a sales pitch. Above all, it’s about trust in the team. In terms of addi­tio­nal funding rounds, you also need to ensure that inves­tors have the ability to conti­nue inves­t­ing in follow-on rounds.

The current finan­cing situa­tion seems to be in order. We are seeing large seed rounds of over €10 million in drug deve­lo­p­ment and excep­tio­nally large invest­ments in deep tech and soft­ware unicorns. It’s not just Vision Fund that has crea­ted new beacons in the Euro­pean startup ecosys­tem with its invest­ments in AUTO1 and Get Your Guide. Many signi­fi­cant rounds of finan­cing are taking place. In 2018 alone, HTGF port­fo­lio compa­nies were able to close more than 120 follow-on finan­cing rounds with a volume of around EUR 400 million.

Howe­ver, the situa­tion varies from sector to sector. If you want to go to the Medi­ter­ra­nean with your elec­tric car, you will think carefully about char­ging stati­ons in advance. You may even change your desti­na­tion as there are no char­ging faci­li­ties there. If you are start­ing a busi­ness in the chemi­cal indus­try, you will likely face signi­fi­cant finan­cing chal­lenges to expand your produc­tion faci­li­ties from pilot to demons­tra­tion or to indus­try stan­dard. These scale-up invest­ments are conside­red unsexy. Ther­e­fore, highly speci­fic invest­ment funds are needed here. These funds must be quali­fied inves­tors, who on the one hand contri­bute money, and on the other hand also have exper­tise and a network to other investors.

Across indus­tries, attrac­tive exits are key, as inves­tors seek high returns and are inspi­red by good success stories. Despite some attrac­tive invest­ment sales, experts believe that the bottle-neck has moved to the end of the value chain. Most medium and large compa­nies are incre­asingly inte­res­ted in high-tech start-ups, but they show little moti­va­tion to buy them even for an attrac­tive valua­tion. Although the major compa­nies in Germany conduct their mergers and acqui­si­ti­ons profes­sio­nally, they focus mainly on profi­ta­ble, high-earning compa­nies. Start­ups are often underva­lued by local buyers or in many cases bought by Ameri­cans or Asians who pay a premium for good German tech­no­logy compa­nies. To improve this situa­tion, we need more success stories to provide bench­marks and peers. The best way to create these beacons is through the stock market.

IPO
Howe­ver, initial public offe­rings (IPOs) of high-tech start­ups are not possi­ble or not attrac­tive enough, as Euro­pean stock exch­an­ges offer too little liqui­dity for tech IPOs. One reason for this is that in Europe we have around 30 exch­an­ges compe­ting with each other for liqui­dity, whereas in China and the U.S. there are only two and three exch­an­ges, respec­tively, which ther­e­fore have a lot of liquidity.

At the time a German biotech startup worth about €40 million is nearly star­ving on a Euro­pean stock exch­ange, Munich-based biotech Immu­nic has comple­ted a reverse take­over to list on NASDAQ in April 2019. Immu­nic will be presen­ting more clini­cal data shortly, so they have a very good chance of raising addi­tio­nal funds for the next stages of deve­lo­p­ment of their drugs — each with a market volume of over one billion dollars. This was an extre­mely smart and entre­pre­neu­rial tran­sac­tion that teaches us: as long as we don’t have a strong market­place for tech­no­logy start­ups in Europe, we need to connect more inten­si­vely with other ecosys­tems to remove the remai­ning bott­len­eck in the value chain, the exits.