FRANKFURT (dpa-AFX) – Many in the start-up industry were delighted when Economics Minister Robert Habeck recently presented a draft to strengthen young companies. Easier financing, better access to public procurement and that sort of thing. The industry was already booming last year, both in Europe and in Germany. And 2021 was also a strong year in terms of IPOs. Nevertheless, 6 out of 30 German companies sought their stock market luck across the pond – including the air taxi manufacturer Lilium, which thus followed the path of the model company Biontech (BioNTech (ADRs)) and that of many others. What is the balance of power in the financial ecosystems of Germany, Europe and the USA?
Grow, grow, grow – that’s almost all the fintech Pleo is about right now. With a valuation of almost five billion euros, the Danish provider of corporate credit cards and automated expense reports is one of the largest start-ups in Europe. For a long time, going public was considered the next development step for companies of this size. It was not uncommon for the management then to pack their bags and relocate their headquarters to the USA or at least go to the capital market there.
But that time is now over, says Arun Mani, board member at Pleo. “We want to become a global company without moving our headquarters to the United States,” he said in an interview with the financial news agency dpa-AFX. And even with the IPO, the USA is no longer a necessity, according to management. According to Mani, Europe has plenty of capital and talent to draw on, and in doing so he is testing a long-held certainty: that start-ups can only be really successful if they are not based in London or Frankfurt, but in New York go to the stock market.
In order for start-ups to be ready for the stock market at all, they need intact start-up financing. Below the stock market threshold, in the private equity sector, Europe’s start-ups have recently been living in a kind of paradise. Overall, they received more than 88 billion euros in capital last year, according to an analysis by the consulting firm EY. Far more than twice as much as in the previous year. The experts identified the low interest rates as one of the main reasons for the flood of money. “The general economic conditions in recent years have led to unprecedented liquidity in the market, which had to be invested,” comments Thomas Prüver, an expert at EY.
Pleo also benefited from this. At the end of last year, the company reached a valuation of 4.7 billion in a financing round, tripling its value in six months. The unicorn (unicorn), as start-ups with a value of more than one billion are called, also received money from well-known financial investors such as Bain Capital. “Because of the low interest rates, the capital was scattered all over the world,” says boss Mani. Always looking for income.
Interesting from a German point of view: in terms of financing rounds, London remained the clear number one among Europe’s start-up capitals last year. However, half of the ten largest financing rounds went to German start-ups.
In a study, Christoph Kaserer, Professor of Financial Management and Capital Markets at the Technical University of Munich, examined how much momentum from the start-up world arrives on Europe’s stock exchange floor – and compared the results with those in the USA. The absolute number of start-ups, understood here as smaller companies, was therefore higher in Germany in 2021 than in Sweden or the Netherlands – in turn, well-known start-up centers. Great Britain produced almost twice as many start-ups as Germany, while the USA played in a completely different league.
So far so good. According to Kaserer, it becomes interesting when you put that in relation to economic power. Here Germany cuts off underground. Kaserer makes the reason out of a well-known circumstance.
“Measured against our economic power, the German capital market is simply far too small,” says Kaserer in an interview with dpa-AFX. That is the major structural barrier for start-ups with stock market ambitions. After all, the larger the capital market, the better the ecosystem for start-ups that go public. A lot has happened in Germany, both in terms of IPOs and pre-IPO financing. This can be seen, for example, in the number of unicorns and the number of first listings, which rose sharply in the past year. “If we don’t change something structurally, it will remain a flash in the pan,” Kaserer suspects. Especially since the turnaround in interest rates is likely to curb the joy of investing again.
It is important to keep the companies here, says the expert. With their headquarters to secure innovations and jobs. But also with their first listing, from which stock exchange operators and local investors benefit.
Kaserer sees the key to this in a strengthened equity culture. The local stock market could be enlarged by a capital-covered old-age provision. A mammoth task, but: “Until we can do it, we won’t solve all the problems,” Kaserer is sure. More savings must simply be brought to the stock exchange. The legislature can set quick, albeit small, successes with incentives for capital-covered savings. In other words, with financial products such as the Riester pension or life insurance, some of which could not develop their potential due to regulatory burdens, as Kaserer says.
And when it comes to Europe? You have to get more talents interested in the start-up industry first, says Arun Mani from Pleo. Interest in working for start-ups is also increasing in Europe. “In some European markets, however, there is traditionally a risk aversion,” he says. “Many still prefer to work for Bosch or BMW than for a start-up.”
Mani’s second point: Uniform rules on the capital market. Europe as a whole can keep up with the USA in terms of its economic power. However, the fragmented capital market is slowing down the potential. Mani considers a kind of “pan-European stock exchange” to be a possible solution. “Same rules in London and Frankfurt – that would be great”.
Kaserer reminds scientists that there have already been similar plans for this, meaning, for example, the planned capital market union of the EU. However, they hardly make any progress. “We’ve been talking about the fragmentation of the European capital market for twenty years,” says Kaserer.
The demands for structural measures seem all the more urgent as the cyclical tailwind for start-ups is already noticeably waning. Fintech investors around the world put 18 percent less money into start-ups in the first quarter – the biggest quarterly slump since 2018.
Many start-ups are concerned about rising interest rates, which make investments in their company more expensive. Generous financing rounds like in the past at Pleo are therefore likely to become rarer. Several successful fintech startups like Klarna have already started laying off employees.
The slowdown can also already be felt on the public capital market. The number of IPOs in Europe collapsed in the first quarter due to geopolitical tensions. And: The share prices of listed growth companies such as Delivery Hero or Zalando are largely in free fall this year.
It’s good for Pleo that the IPO says it’s not urgent. “We are basically looking for growth,” says Mani. However, this is only partially rewarded on the public capital market. Nevertheless, Pleo is already trying to introduce a reliability like in a listed company, says Mani. Because the board wants to keep the option of going onto the floor open in the future./jcf/men/zb
— By Jan Christoph Freybott, dpa-AFX —
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