Supplemental support

Public money for private equity is good news for start-ups in a recession, writes Rolf Dienst.

This year has started as 2008 had ended: The industrialised world is suffering a deep recession. For young companies this is particularly challenging. Firstly, it is now even more difficult to sell products and services to established players and secondly, the fundraising market is drying up. The current absence of investors has been caused by their reluctance to take new risks in hard times – although it is now a perfect time to invest – and by limited resources of many players.

In such an enviroment, the plan of the UK government to support the start-up industry with up to £1 billion sounds too good to be true. In the short-term, this would ease the situation for many tech venture capitalists and their promising young companies. And in the mid-term such an investment would lead to more jobs and more taxes; there are not many other current public initiatives which can produce a return on investment as good as this one.

Although I am generally sceptical about public interference in private markets, I have seen some other positive examples of government support during the last years. France has done well at strengthening its start-up scene by improving the general conditions on the market. The principle: Institutional and private investors invest pre-tax money in young companies and/or VCs and have the chance to receive possible tax-free gains.

The opposite is true in Germany: Here, people invest after-tax money and have to pay taxes on all their gains. The consequence has been that parts of the German VC industry are starving, while French VCs go for the huge opportunities east of the Rhine and open up new offices in Germany. In the last few years, the German MoRaKG legislation and the danger to loose loss-carry-forwards after capital increases has worsened the German situation. On the other side, there are also examples of a positive impact of public support in Germany as well. The Hightech Gruenderfonds has become an efficient resource for seed financing and the EIF, fed by public German money, has become a cornerstone investor for many funds.

These examples show that where markets fail temporarily, public support can close a gap. On the other side, it is always dangerous if a government starts to interfere in day-to-day business. Having that in mind, it will be essential that the UK government trust the private sector to invest the money in those companies that really have a chance to be large employers and taxpayers in the future. If it works, may this positive example then serve as a yardstick for other European governments.

Rolf Dienst is the chairman of the German Private Equity and Venture Capital Association and founding partner of pan-European venture firm Wellington Partners, based in London and Munich.