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.
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.