KfW Capital was recently established in Frankfurt as a wholly owned subsidiary of the KfW Group. The new entity’s activities focus on venture capital financing and equity financing. With the support of the ERP Special Fund (see “KfW Capital: the company” below), it invests in venture capital funds and venture debt funds. By strengthening these funds’ financial resources, KfW Capital wants to help young, innovative and fast-growing (tech) companies in Germany gain easier access to capital during the expansion phase. KfW Capital’s business will target funds that are active in Germany and that themselves invest in firms looking to expand. Its investment activity is set to rise to an annual volume of €200 million per year by 2020.

Venture capital financing and equity financing in Germany

Venture capital plays a crucial role in helping new, innovative businesses to get started and to grow. But the venture capital and private equity markets in Europe and Germany are much smaller than their counterparts in the United States and Israel, for example. According to figures compiled by the Organisation for Economic Co-operation and Development (OECD), venture capital investment as a percentage of GDP is roughly 12 times higher in the United States than in Germany. This is partly due to the fact that, compared to Germany, the US market accords a greater role to capital markets and relies less on banks. As a result, private investment plays a larger role in business financing in the US. According to the German Private Equity and Venture Capital Association (BVK), venture capital investment in Germany totalled just over €1 billion in each of the past two years.1

Venture Capital

Venture capital is financing that investors provide to start-ups and new businesses that need capital in order to grow. Venture capitalists become shareholders in the firms they invest in, which means that they also stand to reap gains or losses depending on the firms’ level of success. In addition, they often share their expertise with the companies they invest in. Venture capital is different from venture debt, which is a type of high-risk loan that banks normally would not provide.

During the previous legislative period, the German government adopted numerous measures to beef up Germany’s venture capital market. Germany now ranks high in terms of early-stage financing, thanks in part to the many public funding programmes that have been put into place. However, the situation is different when it comes to follow-on investment and growth investment – i.e. more advanced financing stages when young companies’ capital needs can climb to €50 million and higher. During these later stages, businesses in capital-intensive technology sectors confront a scarcity of venture capital. KfW Research estimates that the financing gap for young businesses that are looking for follow-on investment to tap new markets or to expedite growth stands at about €500-600 million per year.

This means that, after achieving a successful launch, young firms in Germany often have trouble obtaining the additional capital they need in order to grow and to continue developing their products. This is the financing gap that KfW Capital aims to reduce substantially by making targeted investments. KfW Capital’s investment strategy includes leveraging private capital: when it invests in a fund, its share will not exceed 19.9%, which means that additional private investors must be found as well. At the same time, by establishing KfW Capital, the government is expressing its political will to acknowledge the importance of young, innovative businesses in Germany and to enhance the role that they play in boosting prosperity and economic growth.

Start-up financing involves several different stages:

  • Seed stage: During this phase, the new business has been set up and faces a high level of technological risk. In most cases, its services and/or products still have far to go before they are market-ready. Its owners often invest their own capital, or capital supplied by friends and family members. Angel investors – private investors who contribute capital and expertise to newly established firms – are also frequently involved at this stage.
  • Start-up stage: At this point, the business enters the market for the first time and makes and sells its own products.
  • Follow-on and growth stage: Here, the business has successfully established a market presence and now seeks to enter new markets and/or expand its product range. Its financing requirements increase as a result.

KfW Capital: the company

KfW Capital was founded on the basis of a resolution passed on 29 June 2017 by KfW’s Board of Supervisory Directors. Establishing the new entity fulfilled a request made by the German Bundestag during the 2013-2017 legislative term. The Bundestag had urged the German government and KfW to intensify KfW’s venture capital and equity financing activities and to create a durable and organisationally independent structure for this purpose.2

KfW Capital is an independent company within the KfW Group. This status enables it to maintain a clear focus on its core business and to build stronger links to the market. Its initial staff of 20 specialists have the authority and ability to make investment decisions quickly and professionally.

KfW Capital is led by two managing directors, Dr Jörg Goschin and Alexander Thees, who bring a wide variety of experience to the firm. Jörg Goschin is an entrepreneur himself. He also has extensive experience as an investment specialist with in-depth knowledge of the market, broad-based business expertise, and strong connections to a dense network of actors on the venture capital market. Alexander Thees has been with KfW since 1996 and has held a variety of senior management positions since 2002. He has extensive experience – in terms of both business policy and actual operations – in SME finance and structured finance. Six people belong to KfW Capital’s supervisory board: two representatives from KfW itself, one representative each from the Federal Ministry of Finance and the Federal Ministry for Economic Affairs and Energy, and two representatives from the private sector.

KfW Capital’s investments are conducted with the support of the ERP Special Fund. In terms of supervisory law, KfW Capital has the status of a financial company under section 1(3) of the German Banking Act, which means that it can make equity investments of any kind. As a KfW subsidiary, it is considered a subordinate company as defined in section 10a of the Banking Act, which means that it is subject to KfW’s risk management procedures. Its risk exposures will be incorporated into calculations of KfW’s capital requirements under supervisory law.

ERP Special Fund

Since 1948, money from the ERP Special Fund has been used to support the German economy. The Special Fund was created using resources from the European Recovery Program (ERP), the official title given to the Marshall Plan assistance that promoted the reconstruction of the German economy after the Second World War. Yields from the Special Fund are used to promote economic development, particularly by providing equity capital and low-interest loans to small and mid-sized businesses.

KfW Capital’s business model

KfW Capital’s business model focuses on investing in venture capital funds and venture debt funds that specialise in providing venture capital or making venture loans to young businesses in the start-up stage or growth stage. KfW Capital will spread its investments across the market – including investments not only in follow-on funds run by experienced fund management companies but also in first-time funds – with the aim of strengthening the entire market. It will not be a direct shareholder in any start-ups and will not issue loans. KfW Capital is also taking charge of KfW’s existing venture capital and equity finance programmes.

These encompass, first, KfW’s existing holdings in the three generations of the High-Tech Gründerfonds (HTGF), a provider of early-stage funding for highly innovative technology-driven companies that have been in actual operation for no more than one year. The criteria for receiving funds from the HTGF include promising research findings, an innovative technological approach, and good prospects for market success. In addition to capital, the HTGF also provides start-ups with advice and management support.

Second, KfW Capital will manage the fund holdings that KfW has invested in as part of the “ERP venture capital fund investment” programme that was launched in 2015. As of October 2018, this encompassed 18 investments made since 2015, with a total volume of €265 million.

Third, KfW Capital will take over responsibility for KfW’s holdings in the Coparion co-investment fund, which KfW launched in cooperation with Germany’s Federal Ministry for Economic Affairs and Energy. The Coparion fund targets new businesses that are in the start-up stage or growth stage.

Financing programmes managed by KfW Capital

The High-Tech Gründerfonds has been a successful market player for over ten years now and has grown to become Germany’s leading provider of seed funding. Three HTGF funds have been launched since 2005. Funds I and II have a total volume of €576 million. KfW is the second-largest investor in both of these funds (behind the ERP Special Fund), with commitments totalling €55 million (the ERP Special Fund’s commitments total €460 million). The HTGF includes private investors and companies as well: six in Fund I and 18 in Fund II, with holdings totalling €61 million. A third fund was established in 2017 with an investment volume totalling €316 million, including €106 million from private investors. To date, the HTGF has invested approximately €320 million in over 460 companies.

The “ERP venture capital fund financing” programme focuses on investments in German and European venture capital funds and venture debt funds. Under the programme’s rules, KfW Capital is authorised to invest a maximum of €25 million per fund, and its holdings may not exceed 19.99% of a fund’s total volume. In turn, the funds are required to make investments in German tech firms in an amount that equals or exceeds the amount that KfW Capital invested in the fund.

Coparion is a co-investment fund that has been in operation since 2016. It teams up with private lead investors to make joint investments – under the same conditions – in young, innovative tech companies. Coparion’s fund size is €225 million, which encompasses a €45 million share contributed by KfW and a €180 million share contributed by the ERP Special Fund. The European Investment Bank plans to invest an additional €50 million in Coparion in 2018, raising the fund’s total size to €275 million. Coparion is targeted towards young small and mid-sized tech firms that receive proactive guidance from the fund until an exit occurs. As of October 2018, Coparion has built a portfolio that encompasses investments in 25 companies.


All of these programmes are designed in a way that aims to close existing gaps in the financing available to innovative new companies but at the same time does not squeeze out other players on the investment market. KfW Capital is never the sole investor in the funds it decides to invest in. Instead, it aims to create incentives that encourage private investors, institutional investors and private-sector businesses to invest in these funds as well.

KfW Capital will conduct annual reviews to see if its investment portfolio can be expanded and/or new instruments can be added. Such steps are feasible only if the market is has the capacity to absorb additional funds without distorting prices or squeezing out private investors. Other important factors that will shape KfW Capital’s activities going forward are KfW’s risk-bearing capacity and KfW’s own success in building the requisite organisational and business structures.


Bundestag printed paper 18/12748.