The German government launched an aid program to support start-ups and young growth companies in the corona crisis aimed at providing start-ups with liquidity quickly. One of the pillars of this program is the Corona Matching Facility (CMF), where KfW Capital and the European Investment Fund (EIF) are “matching” investments of private venture capital funds (VC funds). The aid is therefore linked to the investments of VC funds.
“Matching” in this constellation means that a private VC fund makes an investment in a start-up which is matched by KfW Capital or the EIF. The public fund “matches” the private investment by investing at the same financial terms.
The existing VC fund or a specifically created special purpose vehicle must be accredited by KfW Capital or the EIF to be eligible for funding. In principle, any European independent VC fund in which predominantly private investors are holding stakes but in which no single investor or group of investors holds the majority is eligible for accreditation. Single family offices and business angels, for example, are therefore ineligible to be considered accredited investors. Investments by co-investors of the VC fund who invested in the start-up with the VC fund are also ineligible for “matching.”
Individual financial or strategic investors may not hold a majority interest in the company to be promoted either. In addition, the company must not have been in financial distress as of December 31, 2019 while it must have a German connection. The interested VC fund must submit an application to KfW Capital or to the EIF to go through the accreditation process either with KfW Capital or the EIF. The process is essentially the same as the accreditation process that VC funds have to go through when they want to attract the EIF or KfW Capital as an investor in the VC fund. The entire process may take up to several months.
It is interesting to note in this context that CMF is also an option for previous investments, provided they were made after April 2, 2020. In these cases, the CMF must be included in the financing documentation. It will then not be necessary to go through the accreditation process first and thus risk postponing a possibly urgently needed funding round. Instead, interested VC funds have the option of using matching in funding rounds that are now underway and, if necessary, check afterwards whether accreditation is possible.
Note: Only funding rounds signed by December 31, 2020 will be eligible.
The investment of KfW Capital or the EIF is made at the same financial terms as the matched VC fund and may take the form of both equity and quasi-equity investments (e.g., in the form of convertible loans). In addition, the accredited VC fund may decide at what rate it wants to benefit from the matching. Up to 70 percent of the accredited VC fund's total investment may come from CMF resources, as long as this amount does not exceed 50 percent of the total funding round. If the accredited investor intends to match a quota in excess of 50 percent, other investors whose investment is not matched will need to participate in the funding round. If additional accredited VC funds participate in the funding round, the quota of the individual matching may be reduced accordingly. Finally, it should be noted that if additional public investors are participating, the total amount of public funds (including grants outside the CMF) in a funding round may not exceed 70percent.
In case of matching, the accredited investor will hold the investment in trust for KfW Capital and the EIF, i.e., in its own name but on behalf of the state-owned funds. The accredited VC fund alone will determine timing and nature of the exit.
The accredited VC fund will not receive any management fee or carry from KfW Capital or the EIF for its activities as trustee. It will need to ensure, however, that the reporting standards of KfW Capital or the EIF are adhered to in the investment.
When considering whether a VC fund should be accredited, attention needs to be paid to the fact that an accredited VC fund is subject to a tender obligation for all investments made until December 31, 2020. This means that it must submit an application for matching by KfW Capital and the EIF for all funding rounds during this period. The accredited VC fund may only decide whether matching should merely be applied for existing investments or also for new investments. The tender obligation serves to prevent the VC fund from matching only riskier investments. This is intended to achieve balanced risk allocation for the CMF. The selected matching ratio will then apply generally to all of the fund’s existing investments, provided that it is not influenced by the participation of other accredited investors or the overall amount of the funding round. Different matching ratios may be selected for new investments.
The question of whether CMF funds can be interesting for a start-up will be answered in the affirmative by many start-ups and VC funds, as it allows for a collected funding round to be doubled overall. It is also possible, for example, to compensate for the loss of other investors due to the current situation. It should be carefully examined, however, whether accreditation of VC fund is possible, thus allowing it to enter into a matching commitment for all follow-up investments still to be made this year, or whether to establish a company specifically for the purpose of accreditation (SPV).