EUROPEAN COMMISSION

Brussels, 20.09.2011 K(2011)6482 endgültig

In the published version of this decision, some PUBLIC VERSION information has been omitted, pursuant to articles 24 and 25 of Council Regulation (EC) No 659/1999 of 22 March WORKING LANGUAGE 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, concerning non-disclosure of This document is made available for information covered by professional secrecy. The information purposes only. omissions are shown thus […].

Subject: State aid SA.32520 (2011/N) – Germany. Risk Capital Scheme ´High-Tech Gründerfonds II´

Sir,

1. PROCEDURE

(1) By letter dated 4.2.2011, registered by the Commission on the same day, the German authorities notified, pursuant to Article 108 (3) of the Treaty on the Functioning of the European Union (TFEU),1 the risk capital scheme High-Tech Gründerfonds II (hereinafter: 'the Fund', or 'HTGF II' ).

(2) By letter dated 5.4.2011, the Commission asked for additional information on the measure’s subject matter. The German authorities responded by letter dated 20.4.2011, registered by the Commission on the same day.

(3) The Commission requested further information by letter of 16.6.2011. The German authorities responded by e-mails dated 12 and 15.7.2011. By letter dated 12.8.2011, registered by the Commission on the same day, the German authorities formally transmitted the information that had previously been sent by aforesaid e-mails.

1 With effect from 1 December 2009, Articles 87 and 88 of the EC Treaty have become Articles 107 and 108, respectively, of the TFEU. The two sets of provisions are, in substance, identical. For the purposes of this Decision, references to Articles 107 and 108 of the TFEU should be understood as references to Articles 87 and 88, respectively, of the EC Treaty where appropriate. Seiner Exzellenz Herrn Dr Guido WESTERWELLE Bundesminister des Auswärtigen Werderscher Markt 1 D - 10117 Berlin

Commission européenne, B-1049 Bruxelles/Europese Commissie, B-1049 Brussel – Belgium Telephone: 00- 32 (0) 2 299.11.11. 1 2. DESCRIPTION OF THE MEASURE

2.1. Objective

(4) According to the German authorities, the objective of the notified measure is to close the persisting financing gap that affects new technology firms in their seed-phase in Germany. Small- and micro enterprises invested-in by the Fund must have an R&D- project as their core activity. Financing under the notified measure aims at enabling them to continue that project until the production of a prototype, respectively until the 'proof of concept'. Thus, the measure would help enterprises invested-in to endure the difficult seed phase and to become mature enough for further investors.

(5) The notified measure is the successor to the previous risk-capital scheme High-Tech Gründerfonds (thereinafter HTGF I). Pursuant to Commission decision of 16.3.2005, that measure did not constitute State aid in the sense of Article 87 (1) of the EC Treaty [Article 107 (1) of the TFEU].2 The German authorities informed the Commission that the predecessor Fund's investment phase will in principle last until August 2011 or until the start of the notified measure at most. After closure of the investment phase, a 7-year disinvestment phase will follow.

2.2. Legal basis

(6) The measure’s legal base is:

– The Fund's Articles of Association: Gesellschaftsvertrag der High-Tech Gründerfonds II GmbH & Co. KG; – Investment Guidelines: Anlagerichtlinien für den High-Tech Gründerfonds; – Statutes of the Fund's Investment Committees: Geschäftsordnungen für die Investitionskomitees der High-Tech Gründerfonds Komitee GmbH. 2.3. Implementing authority

(7) The Fund will be launched by the Federal Republic of Germany, as represented by the Federal Ministry for Economy and Technology (Bundesministerium für Wirtschaft und Technologie).

2.4. Budget and duration

(8) The estimated total volume of the Fund will be in the range of EUR 240 – 280 million. Of the total volume, EUR 240 million will be provided by the German authorities, from the German Federal budget. Private investors are expected to commit up to 10% of the Fund's capital. At the time of notification of the measure, private investors had already committed EUR 19 million.

(9) The notified Fund's operations are scheduled to start in August 2011; the German authorities however committed to put the measure into effect only after approval by the Commission. The overall duration of the Fund measure is 12 years from the date of its approval. First, the Fund is planned to enter into an investment phase of in principle 5 years, so that first-investment decisions (Erstbeteiligungen) can be taken until July

2 Commission Decision of 16.3.2005 in N 34/2005, High-Tech Gründerfonds. 2 2016 inclusive. The Fund's Investors Council (Investorenbeirat) may extend the investment phase twice by one year, so that it could end in July 2018 at the very latest.

(10) The subsequent divestment phase will last 7 years. According to the German authorities, this is the time necessary to develop investments held and sell them with a reasonable profit. During that divestment phase, the Fund may make follow-on investments in firms that are already part of its portfolio, in order to avoid dilution of its shares (Anschlussfinanzierungsrunden).

2.5. The Fund' legal form and structure

(11) The Fund is created by the German Ministry of Economy and Technology, on behalf of the Federal Republic of Germany. The Fund will have the legal form of a limited partnership with a limited-liability company as a general partner under German law (GmbH & Co. KG):

– limited partners (Kommanditisten): the Federal Ministry of Economic Affairs; State-owned Kreditanstalt für Wiederaufbau (thereinafter KfW); other investors; – unlimited partner (Komplementär): the Fund's management (HTGF- Komplementär GmbH). (12) The Fund will be used for the sole purpose of financing investments in accordance with the Fund's Investment Guidelines.

(13) Private investors are invited by a public call (öffentliche Ausschreibung) to acquire stakes in the Fund. The German authorities informed the Commission that they intended to publish a call also in the in the Official Journal of the European Union. On 20.4.2011, the German authorities informed the Commission that they are continuing the quest for private investors. The call will end with the Final Closing on 31.12.2011. The German authorities expect that eventually, the public stake in the Fund will be in the range of 85-90%. At the time of notification of the Fund measure, 8 private investors had already promised to provide EUR 19 million altogether.

(14) Public and private investors in the Fund will share exactly the same rights and obligations. Profit- and loss participation will be proportionate to the shares acquired in the limited partnership (Anteil der gezeichneten Anleihen in der Kommanditgesellschaft).

(15) The Fund will be under the supervision of both the Investors Council (Investorenbeirat) and the General Assembly (Gesellschafterversammlung). The Investors Council will carry out supervisory and steering tasks. It will consist of 4 seats, of which 2-3 seats will be held by public authorities (1 - 2 seats held by the Federal Ministry of Economic Affairs, 1 seat by KfW), and the rest by private investors.

(16) The Fund's investment decisions will be taken by 3 Investment Committees, each being responsible for certain technology fields:

– Committee 1: Information technology (hardware), automation, optical technologies and related fields;

3 – Committee 2: Life science, material science, energy and related fields; – Committee 3: Telecommunication (software), media, the internet and related fields. (17) Committee members will be appointed by the shareholders (Gesellschafter). Each Committee will consist of five members: 1 member representing private investors, 1 member representing KfW (State-owned), 3 members nominated by the Ministry of Economic Affairs. The German authorities declared that in the unlikely event of private investors holding more than 20% of the Fund's capital, voting rights in the Committees will be adapted correspondingly. The German authorities declared that the Committee members are independent experts coming from the private sector with significant experience in the targeted sectors.

(18) The German authorities explained that the Committee members nominated by the Ministry of Economic Affairs for each Committee will be external experts with the following professional profiles:

– one scientific and technological expert (a university professor or the head of a non- university research institute) – one successful founder with corresponding technological and managerial experience – an experienced expert from the venture-capital sector who has a focus on the technology field covered by the respective Committee. (19) The German authorities declared that the Fund's Investment Committees will be independent of the Fund's management. Pursuant to the respective Statutes of the Investment Committees, the Committees decide on the basis of proposals submitted by the Fund management. An investment proposal shall be deemed as rejected if 2 of a Committee's 5 members vote against it. A proposal to sell shares or to authorise an IPO is deemed rejected if 3 of its 5 members vote against it. The statutes do not provide for any obligation of the Committees to follow directives of the Fund management.

2.6. Investment instruments; investment phases

(20) The Fund will provide capital preferentially in the form of equity investments (offene Beteiligungen) in combination with subordinated convertible loans (wandelbares Nachrangdarlehen).

2.6.1. Equity investments

(21) The Fund will acquire shares in target companies, through an increase in capital stock, at nominal value. In principle, equity stakes will be acquired to up to 15% of the nominal value of a target company's shares and will at no time exceed 25% of the target company's shares, also in exceptional cases of an equity-only investment at pari- passu conditions, as described further below in recital (28).

2.6.2. Equity investments in combination with subordinated convertible loans

(22) Investments in equity will, as a rule, be combined with subordinated convertible loans (SCL's). According to the German authorities, such SCL's constitute quasi-equity instruments as defined in point 2.2. lit. c) of the Community Guidelines on State aid to promote risk capital investments in small and medium-sized enterprises (thereinafter

4 'the Guidelines).3 SCL's will in no case be granted separately, without an equity investment.

(23) According to the German authorities, the Fund aims at converting SCL's at the time of subsequent rounds of financing, in order to protect its stake from dilution without having to provide fresh capital. In that context, the Fund's objective is to generate return flows not from interest payments but rather from the sale of equity (i.e. converted subordinate loans).

(24) According to information provided by the German authorities, SCL's that are provided by the Fund will show the following characteristics:

– they are provided for a duration of 7 years; – they are unsecured; – disbursement depends on the achievement of milestones; – the fixed interest rate will be at least 400 basis points (bp) above the reference rate of the European Union and will presumably be in the region of 10%; – interest will be deferred (gestundet) for the first 4 years and is due in the 5th year; – they fall due at the end of their duration (endfällig) – they will be converted progressively, including accrued interest, into equity at the time of a subsequent financing round; – conversion will be made at the same conditions as other investors acquire shares in the company; – they will be subordinated, senior only to those loans granted by shareholders that are treated as equity in case of bankruptcy of the company (eigenkapitalersetzende Gesellschafterdarlehen); – the SCL-contract (Nachrangdarlehensvertrag) stipulates certain information rights and the right of termination for important reasons or in case when shares of the company are listed on the stock exchange. The German authorities pointed out that an SCL will always be provided in combination with an equity investment, the latter ensuring the Fund the full rights of an equity investor. A proper notice of termination (ordentliche Kündigung) of an SCL-contract is not possible.

(25) According to the German authorities, equity in combination with SCL's is more advantageous for the Fund than an equity-only investment, since in combined equity/SCL investments made by the Fund, equity is acquired only to the amount of the nominal value of the target company's shares, i.e. without taking account of the share premium (Agio). According to the German authorities, establishing the value (i.e. nominal value + premium) of a typical target company's shares is difficult, as seed companies usually have no history and only uncertain prospects.

3 OJ C 194, 18.8.2006, p. 2. 5 2.6.3. Total investment per target enterprise

(26) According to the Fund's Private Placement Memorandum, total investments per target enterprise, including all financing rounds, will in principle (grundsätzlich) amount to EUR 2 million. […]*.

2.6.4. Seed-phase investments

(27) The Fund will aim at first-round investments of EUR 500,000 per target enterprise. As regards the overall seed-phase, the German authorities declared that tranches of finance provided by the Fund will in no case exceed EUR 2.5 million per target enterprise over each period of 12 months.

(28) The German authorities expect that in very few cases, where already in the seed phase more capital than usual is required for certain projects (i.e. more than usually EUR 500,000 – 600,000 and presumably around EUR 1 million), the Fund would invest in equity stakes only. The German authorities confirmed that in each of such cases, private investors acting alongside the Fund will provide at least 50% of the investment and will be independent of the target enterprises, and that the Fund's investment will be made at the same conditions as the private investment is made (pari-passu conditions).

2.6.5. Follow-on investments (up to the start-up phase inclusive)

(29) To a limited extent, the Fund may also provide follow-on investments into target companies that already received aided capital injections in their seed phase. Such investments may be made up to the end of the start-up phase of an enterprise. According to the German authorities, follow-on investments will be made in cases where it is necessary, firstly, to avoid dilution of its own shares and secondly, to signalise the new investors that the Fund is still confident of the enterprise. The German authorities pointed out that the Fund will only participate in follow-on rounds to the extent that is strictly necessary and together with its network will actively help the firms invested-in to acquire more capital. Whenever possible, the Fund will not use fresh capital for follow-on rounds but rather opt for the conversion of subordinated loans.

(30) The German authorities guaranteed that in any follow-on investment, by which the total investment per target enterprise is raised beyond EUR 2.5 million per target enterprise over each period of 12 months, the Fund will provide less than half of the follow-on investment, and will only invest at the same conditions as private investors who will be independent of the target enterprise (pari-passu conditions).

2.7. Target enterprises invested-in

(31) According to the German authorities, the Fund will only invest in micro and small enterprises falling within the Community SME-definition.4 Eligible enterprises must either have their registered office (Sitz) and location (Standort), or operating site (Betriebsstätte), or any other establishment (Niederlassung) where economic activities are carried out, in Germany. At the time of submission of a financing request to the

* Business secret 4 OJ L 124, 20.5.2003, p. 36. 6 Fund, an eligible micro and small enterprise must not be older than one year as from the start of its commercial operations.

(32) The German authorities expect that the Fund will invest in approximately 40 – 50 enterprises per year and that 250 - 300 enterprises could be financed over the Fund's lifetime.

(33) The scheme is not sector specific. The following companies/sectors/activities do not qualify for financing under the scheme:

– Firms in difficulty, as defined in the Community Guidelines on State aid for rescuing and restructuring firms in difficulty;5 – Firms in the shipbuilding, coal and steel sectors; – Export-related activities: The Fund's investments will not be directly linked to the quantities exported, to the establishment and operation of a distribution network or to other current expenditure linked to the export activity, and will not be contingent upon the use of domestic in preference to imported goods. 2.8. Limitation to provision of seed- and start-up capital

(34) The Fund's investments will in principle be limited to the seed phase of eligible enterprises. Follow-on investments may be made up to the start-up phase inclusive.

2.9. Participation of private investors

(35) At the level of the Fund, private investors are expected to commit up to 10% of the Fund's capital. At the time of notification, private investors had already promised to provide EUR 19 million, while EUR 240 million will be committed from the Federal budget. Drawing from experience both with the predecessor measure HTGF I and with responses thus far received after the call for investors in the planned measure HTGF II, the German authorities explained that they do not expect the private-investment quota to attain or even exceed 50%. The German authorities informed the Commission of their efforts to invite private investors: Firstly, private investors will be invited to acquire stakes in the Fund, by a call published in the Official Journal of the EU. Secondly, the German authorities will directly contact industry, in order to encourage investment. In the predecessor measure HTGF I, the private investors did not come from the financial sector, but were major industrial undertakings.

(36) The Fund will strive to involve so-called business angels and other funds, private or public, at the level of individual investments in eligible enterprises. With respect to business angels, the German authorities explained that under the predecessor Fund, approximately one third of first-round Fund investments had been made concomitantly with business angels and that in follow-on investments, business angels still provided 10% of the capital. The German authorities pointed out that the Fund prefers business angels as its regional-level partners, as they could carry out important coaching tasks on site. The German authorities further pointed out that the Fund is in regular and close contact with business angels and related networks6 and even has established its

5 OJ C 244, 01.10.2004, p. 2. 6 The Fund is a member of Business Angel Netzwerk Deutschland 7 own private-investor network in order to establish direct contacts between wealthy individuals and eligible target enterprises.7

(37) The Commission further notes that in exceptional cases where a target company's project requires larger seed-financing than usual, the Fund will only provide equity and will involve private investors in the individual investment at pari-passu conditions, i.e. the latter will provide 50% of the investment, at exactly the same conditions as the Fund does, and will be independent of the target companies.

2.10. Investment decisions and due-diligence:

(38) The German authorities described how the Fund's management will appraise funding requests. Such appraisal will be based on comprehensive documentation and a business plan. The Fund management will carry out due-diligence checks with the assistance of external experts:

– technical due-diligence: assessment of innovative content, feasibility, the situation of intellectual-property rights (IPR); – market due-diligence: assessment of market potential, market growth, market- entry strategy; – legal due-diligence: scrutiny of existing contracts and intellectual property – management due-diligence: assessment, in individual conversations, of experience, know-how and potential of the target companies' management – financial due-diligence: detailed appraisal of the existing and planned financial structure (total volume, financial range of coverage, plausibility and conclusiveness of planning). 2.11. Investment decisions – assessment of exit strategies.

(39) According to the German authorities, the Fund will establish a clear and realistic exit strategy for each investment. An investment will only be made if an assessment of opportunities and risks shows that the sale of the shares, the initial public offering or a buy back from management or the founder is possible in the case of success.

2.12. Management of the risk capital measure

(40) The Fund will be managed by HTGF II-Komplementär GmbH, which is fully owned by the Fund company, High-Tech Gründerfonds II GmbH&Co. KG. Actual management will be carried out by High-Tech Gründerfonds Management GmbH, on the basis of a service contract with HTGF II-Komplementär GmbH.

(41) The German authorities explained that, when the existing predecessor Fund was established in 2005, no external management was sought but that the objective was rather to build an own management company from scratch. The German authorities guaranteed that the management company will not diverse into any other economic activities than management of the predecessor Fund measure HTGF I (phasing out) and the notified Fund measure, HTGF II.

7 Private Investor Circle 'PIC' 8 (42) Fund management will operate in accordance with the standards developed by the European Private Equity and Venture Capital Association (EVCA). The German authorities explained that the Fund's governance, appraisal and reporting procedures will be based on EVCA-Guidelines.

(43) The management company receives an annual management fee. That management fee is not fixed throughout the duration of the Fund but must be approved on an annual basis by the Investors Council. The management fee will be a percentage of the Fund's committed volume (zugesagtes Fondsvolumen). Depending on the phase of the Fund, such fee will vary between 0.4% and 2.5% of the Fund's committed volume. The German authorities declared that the average management fee will not exceed 2% per year.

(44) The German authorities estimate that annual market fees are in the range of approx. 2.8 to 3% and that the fee in question is significantly below that rate. In order to substantiate that estimation, the German authorities have asked KfW to assess whether the management fee applied under the Fund in question is customary on the market. […]*.

(45) According to the German authorities, KfW's assessment showed that:

– the management fee of early stage funds is 2.5%/year, and in some exceptional cases even up to 2.75%, of the committed fund volume in the investment phase, and of invested capital (investiertes Kapital) in the disinvestment phase. Alternatively, the percentage in the disinvestment phase is reduced by 10 to 15% each year.

– KfW's assessment is only partially transferable to the Fund in question, since

– on the one hand, seed funds usually make smaller investments in more enterprises with more mentoring and supervision efforts (Betreuungsaufwand) and therefore would apply higher management fees; – on the other hand, the Fund in question could in principle benefit from effects of scale, however only to a limited extent. (46) The German authorities informed the Commission that most of the funds examined by KfW had been set up before 2007 and that in Germany, VAT on management fees is due for funds that were established after 2007. The German authorities conclude that therefore, current market fees would be approx. 0.5% above the fees customary before 2007 inclusive, thus being in the range of approx. 2.8 to 3%.

(47) Positions in the management company are advertised. The executive board of the management company (Geschäftsführung) was chosen unanimously by the Fund's shareholders (i.e. the Federal Government, KfW and private shareholders) in an application procedure. According to the German authorities, the selection was made by a public tender procedure (öffentliche Ausschreibung), organised by the Fund's shareholders. Further, all vacant positions in the Fund's management will be publicly advertised. The Investors Council must consent to each employment. The German authorities provided detailed information on the qualification and professional experience of each managing director, fund manager and administrative employee of the management company. According to the Fund's Private Placement Memorandum, 9 the 22 individual investment managers will build on experience gained in the implementation of the predecessor Fund, where the management company examined more than 3,000 business plans, of which 220 were selected for investment, of which 190 could later receive follow-on financing from other investors to the amount of EUR 260 million. Further, 10 stakes have already been sold in exit. According to the German authorities, the management company has thus carried out approximately 400 transactions in total for the predecessor Fund.

(48) The remuneration of individual managers will be linked to the profitability of the Fund and will consist of a fixed and a variable element, depending on the Fund's objectives. The variable component will represent up to 20% of the total salary. Both the Fund's overall objectives and the objectives of the managing directors will be fixed annually by the Investors Council. In that context, the German authorities declared that the objectives of the Fund and the proposed timing of the investments will be provided for in an agreement between the managers and the Fund's participants. Further, managers will receive a long-term bonus (Langfristbonus) as an incentive. That bonus is due when distributed profits exceed a predetermined threshold.

(49) According to documentation provided by the German authorities, the Fund's managers will implement the objectives of the fund and the proposed timing of investments.

2.13. Best practice and regulatory supervision

(50) The German authorities explained that the Fund's management will base itself on well- proven practices applied in the predecessor fund and that management will be made in accordance with the standards of the European Private Equity and Venture Capital Association (EVCA).

(51) The German authorities further explained that the Fund is subject to external auditing by an independent audit firm (Wirtschaftsprüfungsgesellschaft) that will be reporting regularly to the Investors Council. Lastly, the Fund will be audited in accordance with the principles of the German Federal Budget (Haushaltsgrundsätze der Bundesrepublik Deutschland) and is subject to the audit of the Federal Court of Auditors (Bundesrechnungshof).

2.14. Market failure

(52) With the Fund in question, the German authorities intend to address a perceived market failure in the private venture-capital market, which would be due to the risk aversion of private venture-capital investors, in particular as regard early-stage investments. The German authorities argue that technology start-ups on which the Fund will be focusing are particularly affected by that market failure.

(53) The German authorities have assessed the magnitude of the market failure, based on several reports and statistics8 and on an evaluation of the predecessor Fund.9 In

8 Fleischhauer, Hoyer & Partner, Das Anlageverhalten institutioneller Investoren in Deutschland in Venture Capital, 2008. Achleitner/Metzger/Reiner/Tchouvakhina, Beteiligungsmarkt nach der Krise (KfW-Research), 2010; Zentrum für Europäische Wirtschaftsforschung (ZEW), High-Tech Gründungen in Deutschland – Hemmnisse junger Unternehmen, 2010; Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK), BVK-Statistik 2009: 'Entwicklung des Seedmarkts in Deutschland seit 1999' (Sonderauswertung) 10 summary, the German authorities conclude that a financing gap exists in the early and growth phase of SME's and that public-sector VC financing could only partially bridge that gap. The main findings of that assessment are summarised hereunder:

– in the years 2004 – 2008, private venture capital that was invested in the seed, start-up and expansion phases amounted to 0.06% of the German GDP, while in the EU that percentage is 0.13% of the EU-GDP, and in the US it is 0.12% of the US-GDP (expressed in EUR). The German authorities pointed out that in the UK, that percentage is even 0.3% of the UK's GDP expressed in EUR). – In 2008, EUR 1.107 billion were invested in shares of German enterprises in their seed, start-up and later stage phases. In 2009, such investments dropped to EUR 612 million. In the period 2007-2009, the venture-capital market in Germany shifted the focus to the later stages of enterprises. – In the overall period 2001-2009, the moving three-year average of seed-capital financing dropped from approx. EUR 2 million in 2001 to EUR 400,000 in 2009. The corresponding average for start-up financing dropped from EUR 2 million to EUR 850,000 in the same period. The German authorities conclude from expert reports that such decrease is due to the withdrawal of venture-capital firms who would rather seek higher investment volumes. – In 2008, the German authorities conducted a survey among venture-capital firms operating in Germany. According to the responses, fund raising took longer than initially planned and 16% of firms could not attain the fund's target volume. A more recent survey among venture-capital firms, from the last quarter of 2010, indicates that the closing of new funds on average took 23 months and took thus 8 months longer than initially planned. That survey shows that the share of funds that could not attain their target volume has risen to 27%. – In 2009, the German authorities evaluated the predecessor scheme and found that since its start in 2005 it had helped reducing the financing gap that had opened after the withdrawal of private venture capital and thus stabilised the number of seed- investments.10 That finding is also confirmed by another report.11 According to the German authorities, the predecessor fund presently has a market share of approx. 50% of seed-capital investments registered by the German Venture-Capital Association (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften). – Aforesaid evaluation of the predecessor fund further showed, based on statistics covering the years 1999 – 2008,12 that private-equity investments in the EU has more than doubled. At the same time, however, the number of enterprises invested-in has fallen almost by half. The evaluation report finds that this must be due to a shift towards later-stage investments, with higher individual investment volumes. In particular, statistics show that the growth of venture-capital investments in that period has mostly benefited buy-out financing, and also later-stage investments (including

9 technopolis und Frankfurt School of Finance & Management, (2010): Evaluierung des High-Tech Gründerfonds-Endbericht; http://www.bmwi.de/BMWi/Navigation/Service/publikationen,did=335930.html 10 technopolis und Frankfurt School of Finance & Management, (2010): Evaluierung des High-Tech Gründerfonds-Endbericht, p.1. 11 Fleischauer, Hoyer & Partner, Das Anlageverhalten institutioneller Investoren in Deutschland in Venture Capital, pp. 10, 20. 12 several statistics provided by Bundesverband Deutscher Kapitalbeteiligungsgesellschaften (BVK) and European Private Equity and Venture Capital Association (EVCA) 11 the expansion stage, replacement financing and turnarounds), while early-stage financing (including the seed- and start-up stage) could at best only marginally benefit from that growth. – The German authorities also examined venture-capital (VC) funds operating in the US and in the UK and compared them to German private VC Funds. They found that 350 private VC funds with a volume of more than USD 100 million are operating in the US, a third of them with a volume of more than USD 500 million. In the UK, 13 private VC funds with a volume of more than EUR 100 million are operating. In Germany, however, only 4 private VC funds are operating with a volume around EUR 100 million. The German authorities found that, due to their smaller volumes, German VC funds would rather intervene in later stages of financing, with lower risk, while large funds such as in the US and in the UK would be able to provide successive financing to their portfolio enterprises from the seed phase (durchfinanzieren). 2.15. The Germany authorities' assessment of the planned measure's impact

2.15.1. Impact assessment

(54) The German authorities have assessed the impact of the Fund (on the base of the existing predecessor Fund HTGF I) and its interaction with other measures that aim at strengthening risk capital. In summary, that assessment showed the following results:

– The Fund is part of a wider strategy to promote technology start-ups. Such strategy consists of information events, amendments to insolvency law in order to give failed entrepreneurs a second chance, the promotion of the idea of entrepreneurship, the promotion of spin-outs from academia, the improvement of the environment for business angels, the overhaul fiscal regulations that could be discriminatory compared to the international standard. – Further, the Fund is embedded in a package of financing measures that also comprise the German ERP-Start-Fund and the ERP/EIF Fund of Funds. These funds are focusing on the start-up and later stages and thus intervene at a later stage than the Fund in question, which is primarily aimed at seed-stage financing. – The existing predecessor Fund did not crowd out private investment but in all probability had a "crowding-in" effect. According to data obtained from the predecessor Fund HTGF I,13 almost all parties confirmed the absence of any danger of crowding-out of private investment by public measures such as HTGF. The majority of parties confirmed that, without HTGF, the market for seed-capital financing in Germany would "practically be non-existent". Further, the evaluation confirmed that HTGF I is designed in a way that it established a "financing chain" (Finanzierungskette) which enabled beneficiary enterprises to attract financing by private venture-capital companies in follow-on rounds. – According to the evaluation of the predecessor fund HTGF I, the incentive for private investors to acquire shares were of a long-term, strategic nature rather than sort-term and profit-oriented; the incentives can be summarised as follows: immediate access to new ideas and technological developments, cooperation

13 Based on: 12 interviews with other venture-capital companies; a complete online-survey among 147 enterprises financed by HTGF I until a certain cut-off date; a survey among 1,167 applicants for HTGF I- funding. 12 with starting enterprises, the possibility of taking over the starting enterprise, promoting spin-offs together with the Fund; conveying a positive image as responsible actors in the German innovation system. – The majority of other venture-capital companies interviewed consider the Fund as well designed, as providing a good opportunity for next-phase financing by both the public ERP-Start Fund and private investors, and as having a positive effect on their own economic activities. – The overall result of the survey was that the Fund was perceived by the market as exemplary for appropriate public intervention. (55) The German authorities pointed out that the existing Fund HTGF I could only satisfy a very small share of demand. They explained that until the end of the first quarter of 2011, the Fund had received 3,300 applications for funding in total, of which only 280 were selected for a commitment (Investitionszusage).

(56) Given above findings, the German authorities decided that the Fund in question should be based on the basic principles of the predecessor Fund.

2.15.2. Other policy options

(57) The German authorities considered alternative options, based on experience made with public measures prior to the existing predecessor Fund. The German authorities summarised their findings as follows:

– Non-selective instruments, in particular fiscal advantages, do not provide sufficient incentives for technology-focused start-ups; as such undertakings as a rule do not show profits during longer periods and thus cannot reduce their tax on profits. – Non-selective instruments are usually not well targeted (mit Streuverlusten verbunden) and could cause windfall gains (Mitnahmeeffekte) and therefore are in most cases more costly for the State budget. – The predecessor Fund has turned out to be the most effective and efficient instrument to close the equity gap that affects innovative undertakings in their seed phase. 2.16. Cumulation with other aid

(58) Aid under the notified Fund measure may be cumulated with other aid. The German authorities declared that where capital provided to a target enterprise under the Fund measure is used to finance initial investment or other costs eligible for aid under other block exemption regulations, guidelines, frameworks, or other State aid documents, the relevant aid ceilings or maximum eligible amounts will be reduced by 50 % in general and by 20 % for target enterprises located in assisted areas during the first three years of the first risk capital investment and up to the total amount received.

(59) The aforementioned reduction will however not be applied to aid intensities provided for in the Framework for State aid for Research and Development14 or any other successor framework15 or block exemption regulation in this field.

14 OJ C 45, 17.2.1996, p. 5. 15 On 1.1.2007, the successor Framework to the Framework for State aid for Research and Development entered into force: Community Framework for State aid for Research and Development and Innovation; OJ C 323, 30.12.2006, p. 1. 13 2.17. Monitoring and reporting

(60) Germany committed to provide an annual report on the measure’s implementation, containing:

(a) A summary table with a breakdown of the investments effected under the risk capital measure including a list of all the enterprise beneficiaries of risk capital measure: (b) A brief description of the activity of the Fund with details of potential deals scrutinised and of the transactions actually undertaken; (c) Performance of the Fund, with aggregate information about the amount of raised capital. (61) Germany further committed to maintain detailed records on the risk capital aid for at least 10 years. Such records will contain all information necessary to establish that the provisions of the Community Guidelines on State aid to promote risk capital investments in small and medium-sized enterprises16 have been complied with, in particular as regards the size of investment tranches, the size of enterprises invested-in, the stage of financing, the sector of activity (preferentially at the 4-digit NACE-code level), as well as information on Fund management and other criteria set forth in aforesaid Community Guidelines. The German authorities will provide these records to the Commission on request.

(62) The German authorities further committed to publish the full text of the scheme on the internet.17

3. ASSESSMENT

3.1. Compliance with the obligation to notify in Article 108 (3) of the TFEU

(63) Germany notified the scheme in accordance with Article 108 (3) of the TFEU. The scheme will not be implemented prior to the Commission's approval.

3.2. Applicable Community rules

(64) The Commission assessed the measure in question under Article 107 (1) and (3), as interpreted by the Community Guidelines on State aid to promote risk capital investments in small and medium-sized enterprises (thereinafter “the Guidelines”), of the TFEU.18

3.3. Presence of “State aid” within the meaning of Article 107 (1) of the TFEU and compatibility with the internal market

(65) The biggest part of the Fund's capital, presumably in the range of 85-90%, will be funded from the Federal Budget of Germany. Thus, the notified scheme will be financed with State resources. The Fund measure was planned and established, and in

16 OJ C 194, 18.8.2006, p. 2. 17 the full text of the existing Fund measure is published under http://www.high-tech-gruenderfonds.de/. 18 OJ C 194, 18.8.2006, p. 2, as modified by the Communication from the Commission amending the Community guidelines on State aid to promote risk capital investments in small and medium-sized enterprises, OJ C 329, 7.12.2010, p.4. 14 particular the Fund's mandate was defined, by the German Ministry of Economic Affairs and Technology, together with the State-owned Bank KfW. Hence, the Fund measure in question is imputable to the State. The further conditions stipulated by Article 107 (1) of TFEU, namely advantage, selectivity of the measure and affectation of trade, will be treated at the level of the recipients of State aid, further below.

3.3.1. State aid at the level of private investors in regular cases

(66) For the reasons set out in Section 3.2 of the Guidelines, the Commission considers investments to be effected pari passu between public and private investors, and thus not to constitute State aid, where its terms would be acceptable to a normal economic operator in a market economy in the absence of State intervention. This is assumed to be the case only if both public and private investors share the same upside/downside risks and rewards and level of subordination, and normally if 50% of the funding of the measure will be provided by private investors, who are independent of the target companies.

(67) As was described in recitals (13), (35) and (36) above, there is no guarantee that at least 50 % of the investments under the notified scheme are made by private investors who act alongside the Fund or those who have a stake in the Fund. Therefore the Commission assumes that private investors who participate in the scheme may receive advantages. Given that only a limited number of investors will be selected, the measure is also selective.

(68) Further, it cannot be excluded that private investors at the Fund level or private side- investors, insofar as they exercise an economic activity, compete with undertakings in other Member States. The measure therefore distorts competition and is likely to affect trade between Member States.

(69) Therefore, the Commission concludes that the scheme in question constitutes State aid in the sense of Article 107 (1) of the TFEU at the level of private investors.

3.3.2. State aid at the level of private investors in exceptional cases where large seed-financing is required or in certain follow-on financing rounds

(70) As was explained in recital (28), with respect to possible exceptional cases of larger seed-financing, private investors will invest alongside the Fund at pari-passu conditions. Hence in the limited context of such individual transactions, neither private investors who hold a stake in the Fund capital, nor private investors acting alongside the Fund receive State aid in the sense of Article 107 (1) of the TFEU, for the reasons set out in Section 3.2 of the Guidelines

(71) Further, as was explained in recital (30), certain follow-on financings beyond the seed phase and up to the start-up phase inclusive may raise the total tranche of finance that is provided to a target enterprise over a 12-months period above EUR 2.5 million.

(72) In these situations, the follow-on financing will be provided at pari-passu conditions, too. However, contrary to the situation where the private investors are at pari passu terms already at the seed phase, in the case of such follow-on investments, the fund has already invested into the target enterprise. According to the case-law of the Court, in such a situation where a first investment has already taken place and constituted aid, it

15 is necessary to analyse whether the second investment can reasonably be severed from the first and classed, for the purposes of the private investor test, as an independent investment. The criteria to be used for this analysis are: the chronology of the capital injections in question, their purpose, and the company's situation at the time when each decision to make an injection was made.19

(73) The Commission observes that the time that elapses between the first and the second investment will usually be relatively short, as they both will take place in the early stage (seed and start-up) of the company. Their purpose is linked: they both have the objective of enabling the company to develop its products before they sell their first product and start to have revenues. The company's situation is similar in the entire early stage: it does not generate any profit on its own, and therefore is dependent on risk capital to survive. Therefore, the Commission considers that the two investments cannot be severed, and accordingly, that also the follow-on financing described in recital (30) constitutes State aid to the private investors.

3.3.3. State aid at the level of the Fund

(74) For the reasons set out in Section 3.2 of the Guidelines, the Commission generally considers an investment fund to be an intermediary vehicle for the transfer of aid, rather than a beneficiary of aid itself.

(75) The Fund will not diversify into any other activities than those necessary for the implementation of the notified measure, as described in recital (12). The Commission therefore does not consider the Fund to be a separate aid beneficiary.

(76) Based on said information, the Commission concluded that the Fund's single purpose is to transfer funding to eligible target enterprises. It is therefore no beneficiary of State aid in the sense of Article 107 (1) of the TFEU.

3.3.4. Selection of the Fund's management; State aid at the level of the Fund's management

(77) For the reasons set out in Section 3.2 of the Guidelines, aid to the fund's managers or the management company is present if their remuneration does not fully reflect the current market remuneration in comparable situations. That section provides for the presumption of no aid if the managers or management company are chosen through an open and transparent public tender procedure or if they do not receive any other advantages granted by the State.

(78) The Commission has assessed the selection of the Fund's management. The Commission notes that the German authorities did not resort to a public tender procedure. Instead, the Funds shareholders of the Fund, namely the German Federal Ministry of economic Affairs, KfW and private shareholders, entrusted the management of the existing predecessor Fund with the management of the notified Fund. To justify the refrain from a public tender, Germany invoked the concept of in- house-contracting. In that context, Germany referred to the Federal Ministry's majority stake in the Fund and asserted that thereby, the management company is under the Ministry's control.

19 Case T-11/95, BP Chemicals/Commission, ECR [1998] II- 3235, points 170 and 171. 16 (79) However, the Commission notes that according to the case-law of the Court, the presence of an in-house situation does not exclude the presence of State aid.20 It is therefore not necessary, for the purpose of the present decision, to take a view on the question as to whether Germany complied indeed with the jurisprudence of the Court on in house procurement.

(80) The Commission notes the German authorities’ assurance that the Fund’s managers remuneration, being 2% on average per year of the Fund's committed volume, will correspond to market rates, being in the range of 2.8-3%. However, this statement has not been evidenced. In particular, the German authorities have not demonstrated that the management fee is the market fee for early-stage funds of a comparable size. According to expertise provided by the German authorities, only 4 venture-capital funds in Germany are operating with a fund volume of EUR 100 million, while the Fund in question will have a volume in the range of EUR 240-280 million. Further according to data provided by the German authorities, private venture-capital funds are only reticently providing seed-phase capital, while the Fund in question will intervene in the seed phase. Lastly, data provided was only gathered from German funds were KfW took a stake. Hence, the Commission has doubts on the comparability of the management fee in question with the market rate as cited by the German authorities.

(81) The management of funds must be considered as economic activity, as it is usually conducted for profit. Given that, firstly, the Fund's management had not been chosen by an open and transparent public tender procedure and, secondly, the market conformity of its remuneration has not been demonstrated, presence of an advantage to the management company in the form of a possible overcompensation can not be excluded. As a result of the choice of the management company, the measure is selective at the level of the Fund's management. The management of capital funds is an activity that is the subject of competition and trade between Member States. Subsequently, the scheme may affect competition and trade between Member States. Consequently, the Commission considers that it is not excluded that the measure constitutes aid at the level of the Fund's management, in the sense of Article 107 (1) of the TFEU.

3.3.5. State aid at the level of the target enterprises

(82) In Section 3.2, last paragraph of the Guidelines, the Commission has drawn up a list of factors which it may take into account for the determination of whether or not enterprises invested in can be considered as recipients of State aid. In particular, where aid is present at the level of investors, the Commission, for the reasons set out in the Guidelines, considers that it is at least partly passed on to the target enterprises and thus that aid is also present at their level.

(83) Considering in particular the presence of State aid at the level of the private investors involved where these provide less than 50% of the funding of the measure, the Commission therefore presumes an advantage for the micro and small enterprises invested-in.

(84) No State aid is however passed on to target enterprises through investments made pari-passu, as assessed above in recital (70), as in such cases no aid is present at the levels the Fund nor of the investors.

20 T-297/02, ACEA/Commission, ECR 2009, II-1683, points 83 to 96. 17 (85) Only a limited number of micro and small enterprises, selected by the Fund managers, will receive financing. Investment transactions will be funded through the scheme's limited resources, for a limited period of time. The measure is therefore selective at the target enterprise level. The very object of financing under the measure is to improve the target enterprises' overall financial condition by enabling those enterprises to receive equity capital that would not otherwise be available to them and thus enhance their market position. Funding under the measure therefore constitutes an advantage to enterprises invested-in. These enterprises can operate in sectors open to competition and trade between Member States. Hence, competition and trade could be affected.

(86) In conclusion, the Commission finds that the measure constitutes State aid in the sense of Article 107 (1) of the TFEU at the level of the enterprises invested-in. This is with the exception of pari-passu investments as discussed above.

3.4. Compatibility

(87) As stated above, the measure in question constitutes State aid at the level of the fund management, private investors involved and the enterprises invested-in. Consequently, the measure's compatibility with the internal market has to be assessed pursuant to the conditions laid down in the Guidelines. Section 4.3 of the Guidelines provides for specific compatibility criteria.

3.4.1. Maximum level of investment tranches

(88) Point 4.3.1 of the Guidelines21 stipulates that tranches of finance, whether wholly or partially financed through State aid, must not exceed EUR 2.5 million per target-SME over each period of 12 months.

(89) Seed-phase investments under the measure, as described above in recitals (27) and (28), will be provided within said limit.

(90) Follow-on investment up to the start-up stage inclusive may exceed that limit. Any such follow-on financing by which that limit is exceeded will however be made under pari-passu conditions, together with private investors who will be independent from the target companies, as describe above in recital (30).

(91) In order to ascertain whether follow-on investments made pari-passu can be classed as an investment which satisfies the private market economy investor test, the Commission had to determine whether such follow-on investment could reasonably be severed from the first-round investment and be classed as an independent investment.22 For the reasons set out above in recital (73), the Commission considers that it is not possible to severe the two rounds of investments.

(92) Consequently, tranches of financing under the measure are in line with Point 4.3.1 of the Guidelines, except for follow-on investments described in recital (30).

21 as amended by the Communication from the Commission amending the Community guidelines on State aid to promote risk capital investments in small and medium-sized enterprises; OJ C 329 of 7.12.2010, p.4. 22 T-11/95, BP Chemicals Limited, ECR 1998 II-03235, point 170. 18 3.4.2. Restriction to seed-, start-up and expansion financing

(93) According to Point 4.3.2 of the Guidelines, the measure must be restricted to small enterprises up to their expansion stage, respectively to medium-sized enterprises up to their start-up stage (outside assisted areas). Medium-sized enterprises located in assisted areas may be financed even up to their expansion stage.

(94) As was described above in recital (34), financing will only be provided for micro- and small enterprises in their seed and start-up phases. According to the notification document, these phases are in accordance with the definitions of point 2.2, lit e) and f) of the Guidelines. Hence, the measure complies with Point 4.3.2 of the Guidelines.

3.4.3. Prevalence of equity and quasi-equity investment instruments

(95) Point 4.3.3 of the Guidelines requires that at least 70% of the measure’s budget must be provided in the form of equity and quasi-equity investment instruments. According to information provided by the German authorities, the Fund's investments will consist of a mix of equity investments and subordinated convertible loans (SCL's).

(96) With respect to the assessment of the quasi-equity character of investment instruments, point 4.3.3 of the Guidelines stipulates that, "…the Commission will have regard to the economic substance of the instrument rather than to its name and the qualification attributed to it by the investors... [taking] … into account the degree of risk in the target company's venture borne by the investor, the potential losses borne by the investor, the predominance of profit-dependent remuneration versus fixed remuneration, and the level of subordination of the investor in the event of the company's bankruptcy […], the treatment applicable to the investment instrument under the prevalent domestic legal, regulatory, financial, and accounting rules, if these are consistent and relevant for the qualification."

(97) The Commission assessed the possible quasi-equity character of SCL's as described above in recitals (22)-(25), on the basis of the definitions of 'quasi-equity instruments' and 'debt investment instruments' set out in point 2.2 lit. c) and d) of the Guidelines, and notes the following:

– potential losses; duration of the investment

(98) On the one hand, SCL's do not bear the full exit risk as equity investments would. In case of losses of the target enterprise, only the equity-part of the combined investment will suffer from a loss whereas the SCL has to be paid back entirely.

(99) On the other hand, SCL's will only be paid back after a relatively long period of time, namely 7 years. They are due only at the end of this duration, and interest will be deferred for 4 years and be due as from the 5th year. Moreover, termination of the contract is only possible for important reasons or, with an extraordinary notice of termination, when the company is listed on the stock exchange. Thus, in the event of a deterioration of the target company's financial situation, the contract cannot be terminated. When the company invested-in fails to reach a certain milestone, only the disbursement of future instalments of an SCL can be suspended. Considering these points, SCL' are akin to equity rather than to debt investment instruments.

19 – Degree of collateralisation

(100) The Guidelines require under point 2.2 lit. d) that a debt instrument, in order to qualify as such, must be at least partly secured. The Commission took into consideration that the SCL's are completely unsecured. The Commission can therefore conclude that the SCL's under the scheme do not meet this condition for debt instruments as stipulated in the Guidelines.

– Predominance of profit-dependent remuneration versus fixed remuneration

(101) Similar to debt instruments, the contractual obligations of the SCL require the repayment of the principal at the end of the loan term while interest will be due after 4 years. The interest rate is fixed and does not provide for any profit-dependent element. However, SCL's will be converted including accrued interest. Thus, a profitable development of the enterprise invested-in would augment the value of accrued interest when it is converted. Consequently, the remuneration of SCL's contains a certain, albeit indirect and non-quantifiable, profit-based element. Nevertheless, the Commission finds that SCL- remuneration is predominantly fixed and in this respect is similar to debt-financing.

– Level of subordination

(102) SCL's are subordinated to all other debt, senior only to those shareholder-loans that are according to German jurisprudence treated as equity in case of bankruptcy of the target company (eigenkapitalersetzende Gesellschafterdarlehen). Due to its subordinated nature, the SCL is therefore available to cover losses in the case of insolvency or liquidation. The Commission therefore finds that the substantial subordination of the SCL's is an element economically similar to equity rather than debt.

– Annexe-nature

(103) The Fund will provide SCL's exclusively in combination with equity financing. Thus, each SCL will be linked to an equity investor risk, namely an uncertain profit at time of exit. The Commission finds that this annexe-nature to an investment into shares is a characteristic that is typical for quasi-equity rather than debt.

– Conversion to equity

(104) SCL's are granted with the objective to convert them to shares in a subsequent financing round. Given that conversion into real equity appears to be likely when an SCL is granted, it is a transitory instrument rather than debt financing. Convertibility thus makes SCL's similar to a quasi-equity instrument.

– Conclusion

(105) Having examined the economic nature of the SCL's, the Commission notes on the one hand that both the fixed interest rate as well as the obligation to fully repay the loan are typical features of a debt financing. On the other hand, the long duration of the investment, the restrictive conditions for termination of the SCL, the absence of collateralisation, the significant level of subordination, the annexe-nature of the SCL and the provisions for subsequent conversion into shares are typical features of a quasi-equity instrument, as these features are linked with the economic performance of

20 the target company. Balancing these factors, the Commission comes to the conclusion that typical quasi-equity factors prevail. Hence, SCL's as provided by the Fund can be economically categorised as quasi-equity instruments.23

(106) Therefore, the requirement laid down by Point 4.3.3 of the Guidelines is met.

3.4.4. Participation by private investors

(107) As stipulated by Point 4.3.4 of the Guidelines, at least 50% of the funding of the investments made under the measure must be provided by private investors.

(108) As was shown above, (13), the Fund will most probably operate under predominant public ownership. Moreover, the presence of private side-investors is not compulsory to trigger the Funds´ investments, except in few cases where higher seed-financing is necessary.

(109) Therefore, Point 4.3.4 of the Guidelines is not complied with.

3.4.5. Commercial management

(110) Point 4.3.6 of the Guidelines stipulates that the management of a risk capital measure or fund must be effected on a commercial basis. This is fulfilled if all conditions in Point 4.3.6 of the Guidelines are met.

(111) With regard to the fund management, Section 4.3.6 (a) of the Guidelines requires an agreement between the fund management and the fund’s participant, providing that the management’s remuneration is linked to performance. Said agreement must further set out the objectives of the fund and the proposed timing of investments.

(112) According to documentation provided by the German authorities, as explained in recital (48), the responsible managers' remuneration is linked to performance. Further, as explained in recital (49), the Fund's objectives and the proposed timing of investments will be set out in an agreement between the fund managers and the participants in the Fund. The measure is therefore in line with the criteria set out in Point 4.3.6 (a) of the Guidelines.

(113) Point 4.3.6 (b) of the Guidelines requires that private market investors are represented in decision-making such as through an investors´ or advisory committee.

(114) As stated in recitals (16) - (18), private investors who hold a stake in the Fund will be represented both through the Fund's Investors Council and in each of the Fund's Investment Committees. Furthermore, together with the three independent and external experts nominated for their risk capital experience, they have the majority in the Investors Council and the Investment Committees, and can outvote the representative of the public body KfW. This ensures that there is no political influence on the Funds investment decisions, which will be taken merely based on the commercial merit of the projects. Therefore the criteria set out in Point 4.3.6 (b) of the Guidelines are fulfilled.

23 this is in line with previous Commission decisions, of 17.3.2009 in State aid N 481/2008, Germany - Clusterfonds Innovation GmbH & Co.KG (Risikokapitalfonds), recitals (105)-(116); of 12.5.2010 in State aid N 406/2009, Germany - Risk Capital Scheme Clusterfonds Seed GmbH & Co. KG, recital (101). 21 (115) Point 4.3.6 (c) of the Guidelines requires that best practices and regulatory supervision apply to the management of funds. Applicable best practices and regulatory supervision are described above in recitals (50)-(52). On that base, aforesaid criteria can be deemed as fulfilled.

(116) Hence, the Commission concludes that all conditions laid down in Point 4.3.6 of the Guidelines are met.

(117) In summary, the Commission concludes that except from the condition in Point 4.3.4 of the Guidelines (Participation by private investors) and, for the follow-on investments, the condition in Point 4.3.1 (size of the tranches), all other conditions for compatibility as laid down in Section 4 of the Guidelines are fulfilled.

3.5. Compatibility with the internal market: detailed assessment

(118) As the notified measure does not satisfy all of the conditions set out in Section 4 of the Guidelines, the Commission assessed it in detail, pursuant to Section 5 of the Guidelines.

(119) Section 5.1 of the Guidelines provides for certain types of measures that do not comply with one or more of the conditions set out in Section 4 of the Guidelines and that are subject to the detailed assessment. Section 5.1 (e) of the Guidelines refers to measures providing seed capital to small enterprises which may provide for less or no private participation by private investors, and/or the predominance of debt-investment instruments as opposed to equity and quasi-equity.

(120) The measure in question is exclusively aimed at the provision of seed capital to micro- and small enterprises, with a private participation that could be lower than 50 % (or 30 % in assisted areas). Nor is private co-investment, that would increase total private funding under the measure to up to 50 respectively 30%, ensured.

(121) Hence, according to section 5 of the Guidelines, the assessment must be based on a balancing of positive and negative elements. No single element is determinant, nor can any set of elements be regarded as sufficient on its own to ensure compatibility. In some cases, their applicability, and the weight attached to them, may depend on the form of the measure.

3.5.1. Positive effects of the aid

3.5.1.1. Existence and evidence of a market failure

(122) For the purpose of assessing the measure's appropriateness, the Commission examined the data provided by the German authorities, as summarised in point 2.14 above. Based on that information, the following can be stated:

– In the years 2004 – 2008, private venture capital that was invested in Germany in seed, start-up and expansion phases amounted to 0.06% of the German GDP and was significantly below the EU-average, which is 0.13% of the EU-GDP. – In the period from 1999 to 2009, the venture-capital market in Germany shifted the focus away from the seed-stage to the later stages of enterprises. Enterprises in their seed- and start-up stage could only marginally benefit from the growth of private-equity investments in the EU. 22 – In the period between 2008 and 2010, the percentage of venture-capital firms operating in Germany that could not attain their target volume has risen from 16% to 27%. (123) Further, as spelled out in Point 5.1 (e) of the Guidelines, the Commission is aware of the fact that the market failures affecting enterprises in their seed stage are more pronounced due to the high degree of risk involved by the potential investment and the need to closely mentor the entrepreneur in this crucial phase,.

(124) Based on information provided by the German authorities, the Commission concludes that in Germany, a market failure affecting the Fund's target enterprises exists.

3.5.1.2. Appropriateness of the instrument

(125) Point 5.2.2 of the Guidelines stipulates that an important element in the balancing test is whether and to which extent State aid in the field of risk capital can be considered as an appropriate instrument to encourage private risk capital investment. In its detailed assessment, the Commission takes particular account of any impact assessment of the proposed measure which the Member State has made. Where the Member State has considered other policy options and the advantages of using a selective instrument such as State aid have been established and submitted to the Commission, the measures concerned are considered to constitute an appropriate instrument. The Commission also assesses evidence of other measures taken or to be taken to address the "equity gap" notably ex post evaluations and both supply and demand side issues affecting the targeted SME's, to see how they would interact with the proposed risk capital measure.

(126) The Commission has evaluated information on the German authorities' impact assessment of the proposed measure as well as information concerning consideration of other policy options and the advantages of using the selective instrument in question. Based on that information, as shown above in section 2.15.1, the Commission notes that, firstly, the measure is part of a wider strategy that aims at promoting technology start-ups, and therein has the task to facilitate seed-stage financing. Secondly, Germany has sufficiently substantiated that non-selective policy options are not suitable to address the specific requirements of early stage enterprises in need of financing. Thirdly, the German authorities have assessed the impact of the notified measure and informed the Commission of their findings.

(127) As Germany has demonstrated the appropriateness of the selective instrument in question and has carried out a proper impact assessment of the measure, the Commission considers the Fund in question to be in line with Point 5.2.2 of the Guidelines.

3.5.1.3. Incentive effect and necessity of the aid

(128) Point 5.2.3 of the Guidelines stipulates that the incentive effect of risk capital aid measures plays a crucial role in the compatibility assessment. The Commission believes that the incentive effect is present for measures meeting all the conditions in Section 4 of the Guidelines. However, as for the measures subject to the detailed assessment pursuant to Section 5 of the Guidelines, the presence of the incentive effect becomes less obvious. Therefore, Section 5.2.3 of the Guidelines obliges the

23 Commission also to take into account the additional criteria laid down in Points 5.2.3.1 – 5.2.3.4 of the Guidelines.

– Commercial management

(129) Pursuant to Section 5.2.3.1 of the Guidelines, and in addition to the conditions laid down in Section 4.3.6, the Commission will consider it positively that the risk capital measure or fund is managed by professionals from the private sector or by independent professionals chosen according to a transparent, non-discriminatory procedure, preferably an open tender, with proven experience and a track record in capital-market investments ideally in the same sector(s) targeted by the fund, as well as an understanding of the relevant legal and accounting background for the investment.

(130) On the basis of detailed documentation provided by the German authorities, described above in recital (47), the Commission has no doubts that the Fund is managed by private-sector professionals with proven experience and a track record in capital- market investments ideally in the same sector(s) targeted by the fund, as well as an understanding of the relevant legal and accounting background for the investment. Hence, the positive element of the presence of a commercial management pursuant to Point 5.2.3.1 of the Guidelines can be taken into account.

– Presence of an investment committee

(131) Pursuant to Point 5.2.3.2 of the Guidelines, a further positive element would be the existence of an investment committee, independent of the fund management company and composed of independent experts from the private sector and with significant experience in the targeted sector, and preferably also of representatives of investors, or independent experts chosen according to a transparent, non-discriminatory procedure, preferably an open tender.

(132) Given the structure and the members of the Fund's investment committees, as described above in recitals (16)-(18), the Commission finds that 3 independent investment committees, each composed of independent experts from the private sector and with significant experience in the targeted sector, and preferably also of representatives of investors, exist.

– Size of the measure/fund

(133) In accordance with Point 5.2.3.3 of the Guidelines, the Commission will consider it positively where a risk capital measure has a budget for investments into target SME's of a sufficient size to take advantage of economies of scale in administering a fund and the possibility of diversifying risk via a pool of a sufficient number of investments. The size of the fund should be such as to ensure the possibility of absorbing the transaction costs and/or financing the later more profitable financing stages of target companies. Larger funds will be considered positively also taking into account the sector targeted, and provided the risks of crowding-out private investment and distorting competition are minimised.

(134) As was described above in recital (8), the Commission notes that the Fund's estimated volume will be in the range of amount to EUR 240-280 million and that EUR 259 million will be committed by both the public investor (EUR 240 million) and private investors (EUR 19 million). Moreover, the Fund's total volume may be increased to up

24 to EUR 280 million through additional private investment in the Fund. As mentioned above, in recital (32), the German authorities expect that up to 300 target enterprises will be funded through the measure.

(135) On that basis, the Commission concludes that the Fund's size is sufficient, that the risk is adequately diversified and that the Fund's transaction costs can be absorbed.

– Presence of Business Angels

(136) With respect to measures targeting seed capital, Point 5.2.3.4 of the Guidelines stipulates that the Commission will consider positively the direct or indirect involvement of business angels in investments.

(137) Although it is not guaranteed that business angels will be involved in each investment, the Fund's management will strive to ensure such involvement as explained in recital (36). Moreover, the Fund provides for a networking structure that facilitates contacts between business angels and enterprises in need of follow-on investments. Hence, the involvement of business angels plays a significant role in the measure's overall framework.

(138) Therefore, although business angels might not intervene concomitantly in each Fund investment, the Commission considers positively the Fund's efforts to involve them in the measure.

– Conclusion

(139) Based on above considerations, the Commission finds that the measure provides an incentive effect to private investors.

(140) In particular, as was shown above in recital (54), the evaluation of the predecessor measure HTGF I has shown that such incentive effect consists in the possibilities to pursue strategic objectives such as access to new ideas and technological developments, cooperation, later take-overs, promotion of spin-offs and conveying a positive image of industry.

3.5.1.4. Proportionality of the aid

(141) Point 5.2.4 of the Guidelines Compatibility stipulates that the aid amount should be limited to the minimum necessary. The Commission will consider that a transparent, non-discriminatory open tender for the choice of the management company and a public invitation to investors positively influence the assessment of proportionality as they represent a best-practice approach.

(142) As to the choice of the management company, the Commission notes that no open tender has been carried out.

(143) As to the public invitation to private co-investors to the Fund, the Commission notes that the German authorities' efforts, described above in recital (35), to invite private investors to participate in the Fund by a public call.

(144) In the light of above considerations, the Commission can conclude that the aid is proportionate.

25 3.5.2. Negative effects of the aid

(145) Point 5.3 of the Guidelines requires that the potential negative effects of risk capital measures, as regards the distortion of competition and the risk of crowding-out private investment, shall be balanced against their positive effects. These potentially negative effects will have to be analyzed at each of the three levels where aid may be present.

(146) The measure in question grants aid at the levels of the investors, the fund management and the target enterprises. Point 5.3 of the Guidelines refers to several distortions of competition.

– Crowding out private investment

(147) Pursuant to Point 5.3.1 of the Guidelines, State aid may result in crowding out private investment. This risk becomes more relevant, the higher the amount of an investment tranche invested into an enterprise, the larger the size of an enterprise, and the later the business stage, as private risk capital becomes progressively available in these circumstances.

(148) Based on information provided by the German authorities, the Commission finds that the measure does not entail a risk of crowding out private investors, for the following reasons:

– The amount invested per target enterprise is low: As was described above in recitals (26)-(28), total investment per target enterprise will usually amount to EUR 2 million, and first-round investments to EUR 500,000 only. […]*. – The Fund will only intervene at a very early stage: As was explained above, recital (31), the Fund's first-round investments will only be made at the earliest stage of small- and micro enterprises, namely the seed stage; eligible enterprises must not be older than 12 months. As was shown above, recital (53), such early- stage investments are targeting a demand that private venture capital funds are not ready to meet. – Follow-on investments after the seed-stage and only up to the start-up phase inclusive will be made to a limited extent only, as was described above in recitals (29)-(30). Beyond that, larger follow-on investments, by which the total amount invested per target enterprise-12 months-period would be exceeded, will be made at pari-passu conditions, with the public investment being less than the amount provided by private investors. – The measure is not sector-specific. – The measure does not involve State aid at the level of the Fund. (149) Point 5.1 (e) of the Guidelines provides for a legal presumption, according to which the reluctance and near absence of private investors to provide seed capital, implies no or very limited risk of crowding-out. Further, according to that legal presumption, there is reduced potential for distortion of competition due to the significant distance from the market of these small-size enterprises. Hence, these reasons may justify a more favourable stance of the Commission towards measures targeting the seed stage, also in light of their potentially crucial importance to generate growth and jobs in the Community.

26 (150) In the light of above considerations on the planned measure's potential to crowd-out private investment, the Commission concludes that such potential will be extremely limited.

– Other distortions of competition

(151) Pursuant to point 5.3.2 of the Guidelines, the Commission also considers other distortions of competition, such as keeping inefficient firms or sectors afloat, an over- supply of risk capital funding maintaining production in non-competitive sectors, an inefficient allocation of production factors between regions through region-specific aid.

(152) In that respect, the Commission notes firstly, that there is no evidence that the measure allows for funding for inefficient firms, or for firms in non-competitive sectors. Rather, the measure is aimed at profitable investments that are made with a commercial logic, as described above, in recitals (10), (16), (38), (39) and (48).

(153) Secondly, target enterprises will not be over-supplied, as the equity gap on the seed capital market in Germany will most likely remain present despite both the existing and the planned Fund measures. This is corroborated by data obtained from an evaluation of the existing Fund HTGF I, as described above in recital (55), according to which that Fund could only satisfy a fraction of demand. On that base, there is no reason to doubt that the planned measure HTGF II, which is comparable to HTGF I as regards size and structure, would also provide only a limited supply of risk capital.

(154) Lastly, it is unlikely that micro and small enterprises in their seed-phase and which are not older than 12 months at the time of application for funding, will gain a significant market share due to the Fund's investments, as they will not have developed any commercial product yet. Therefore, the Commission finds that the risk of distortion of the risk capital market by this measure or the distortion of the product markets concerned will be unlikely.

3.5.3. Balancing positive and negative effects of the aid

(155) Pursuant to point 5.4 of the Guidelines, the Commission will balance the effects of the risk capital measure and determine whether the resulting distortions adversely affect trading conditions to an extent contrary to the common interest. Such analysis case will be based on an overall assessment of the foreseeable positive and negative impact of the State aid.

(156) As regards the notified measure, the Commission considered positively that

– investments will be made in the form of equity and quasi-equity to micro and small enterprises only in their seed-stage, and which are not older than 12 months at the time of application for funding; – follow-on investments will be limited, and only be made until the start-up stage inclusive; – in principle, total investment per target enterprise will be limited to EUR 2 million, thus being below the permissible maximum investment tranche per enterprise/per 12-months;

27 – the scheme will address an existing market failure, namely an equity gap on the seed capital market; – the scheme will in all probability stimulate private risk capital investment rather than crowding it out; – private investors are openly called to acquire shares in the Fund; – the Fund management will strive to involve business angels in individual investments, but also in coaching activities and in networking; – the Fund will be managed commercially; – the size of the Fund is sufficient. (157) In comparison, any possible negative effects such as crowding-out of private risk- capital investment and an oversupply of risk capital will be strictly limited.

(158) Having assessed these positive and negative effects of the aid, the Commission considers that the positive effects prevail.

3.5.4. Cumulation with other aid

(159) Section 6 of the Guidelines provides for a reduction of aid intensities granted under the measure in question when used to finance investments or other costs eligible for aid under other block exemption regulations, guidelines, frameworks or other State aid documents. It also provides that no such reduction is applicable to aid intensities provided for in the Community Framework for State aid for Research and Development or any successor framework.

(160) Based on information provided by Germany, the Commission concluded that the scheme complies with the cumulation rules set out in Section 6 of the Guidelines.

3.5.5. Monitoring and reporting

(161) Section 7.1 of the Guidelines stipulates that Member States shall submit annual reports on a risk capital measure's implementation and further sets forth which information such reports must comprise.

(162) The annual reports Germany committed to provide will comply with the requirements set out in Section 7.1 of the Guidelines.

3.6. Conclusion

(163) Based on the above reasoning, the Commission concludes that the aid granted under the notified risk capital scheme 'High-Tech Gründerfonds II´ fulfils the conditions as set out in the Community Guidelines on State aid to promote risk capital investments in small and medium-sized enterprises.

4. DECISION

(164) The Commission concludes that the notified risk capital scheme ‘'High-Tech Gründerfonds II´ is compatible with the internal market pursuant to Article 107(3) (c) of the TFEU. This decision does not prejudice the position the Commission might take

28 on the compatibility of the relevant measures with the EU rules on public procurement and concessions.

(165) The Commission reminds Germany that all plans to modify this aid scheme have to be notified to the Commission.

(166) The Commission further reminds Germany to provide an annual report on the measure’s implementation. This report will contain:

(a) A summary table with a breakdown of the investments effected under the risk capital measure including a list of all the enterprise beneficiaries of risk capital measures: (b) Details of potential deals scrutinised and of the transactions actually undertaken; (c) Performance of the investment vehicles, with aggregate information about the amount of raised capital. (167) Said report will be published on the internet site of the Commission.

If this letter contains confidential information, which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter, in the authentic language, on the Internet site http://ec.europa.eu/eu_law/state_aids/state_aids_texts_de.htm

Your request should be sent by registered letter or fax to:

European Commission Directorate-General for Competition Directorate for State Aid State Aid Registry B-1049 Brussels Fax No: +32 2 296 12 42

Yours faithfully,

For the Commission

Joaquin ALMUNIA Vice-President

29 EN Factsheet for publication in the OJ, C series

Authorisation for State aid pursuant to Articles 107 and 108 TFEU Cases where the Commission raises no objections

Text with EEA relevance

Date of adoption of the decision

Reference number of the aid SA.32520 (2011/N)

Member State Germany

Region

Title (and/or name of the High-Tech Gründerfonds II beneficiary) Gesellschaftsvertrag der High-Tech Gründerfonds II GmbH & Co. KG; Anlagerichtlinien für den High-Tech Legal basis Gründerfonds; Geschäftsordnungen für die Investitionskomitees der High-Tech Gründerfonds Komitee GmbH Type of measure Aid scheme

Risk capital, Research and development, Small and medium- Objective sized enterprises

Form of aid Provision of risk capital

Budget Annual budget: -; Overall budget: EUR 240 million

Intensity -

Duration (period) until 31.07.2018

Economic sectors All sectors

Name and address of the granting Bundesministerium für Wirtschaft und Technologie, authority Villemombler Straße 76, D-53123 Bonn

Other information

The authentic text(s) of the decision, from which all confidential information has been removed, can be found at: http://ec.europa.eu/eu_law/state_aids/state_aids_texts_en.htm

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