Monday, August 10, 2020

Start-up crisis: “Absurd behavior by politics”

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Politicians understood it: many start-ups are systemically important. Leaving her alone in the corona crisis will result in mass death. That is why startups have become part of the Corona rescue package, which was passed last week. In the explanatory memorandum to the legislative package, it rightly states that start-ups can become of great economic importance for Germany’s technological sovereignty.

It is just absurd to be clear about systemic relevance, but not to do so. The Corona rescue package is only open to start-ups with a valuation of at least 50 million euros. At least nine out of ten German startups are excluded. With digital health start-ups there are even more, because the market has so far been smaller because there are hardly any functioning market entrances.

Those responsible have already announced that they are looking for solutions for smaller start-ups. A so-called matching fund is the focus of the considerations. The existing investors, which are important for the start-ups, are encouraged to further finance by the state contributing a convertible loan through the fund. A convertible loan is a loan to a start-up that gives you the option of repaying a company investment.

That sounds sensible to bridge the crisis – but it is not enough. A matching fund depends on existing investors actually continuing to invest. Many venture capitalists and business angels are already saying that they want to sit out the crisis for now.

This is not a sign of a lack of solidarity in the crisis, but part of an investment logic: venture capital is capital that an investor does not need to secure his own livelihood. At the same time, we need the big exit, which is less likely in the recession that follows a crisis.

Markus Müschenich

The author is a co-founder and managing partner of Eternity.Health and the Flying Health incubator and chairman of the Federal Internet Medicine Association. Previously, he was a board member of the Sana clinics.

(Photo: Flying Health)

When in doubt, venture capital can and must wait a long time for a crisis-proof investment. This behavior is well known from previous crises. Corporate capital is also likely to become scarce because the lending groups are often themselves in crisis.

Government support for an investment is of no use if there are no more investments. In addition, pure lenders are not allowed to enter management operations. This would be imperative especially for inexperienced entrepreneurs, because many lack the experience to maneuver themselves out of a crisis.

Capital without surgical support is like treating appendicitis with pain medication, but without a surgeon: it is hard to reconcile with survival. A matching fund in particular will not be able to save the many young digital health start-ups.

It can be foreseen: if one of the start-ups goes bankrupt, a chain reaction is triggered by also withdrawing the last investor funds from this market. The consequences are clear: Germany is losing touch with the global digital healthcare market that it has just successfully fought for.

The political statement that start-ups are of great importance for the ‘technological sovereignty of Germany’ applies in particular to digital health start-ups. With their solutions, these not only form the backbone of the current health care reform.

Rather, digital health technologies are existential, especially in the corona crisis, in that they ensure care via online consultation hours and remote monitoring. And the massive cost-cutting programs to be expected in the healthcare system after the crisis will certainly not be successful without digital solutions.

System relevance can hardly be determined better. System relevance, however, requires a change of perspective. Away from the perspective that classifies start-ups as supplicants who can apply for help, towards the active care of the state.

The change of perspective also offers a great opportunity. That is when a financing model ensures more than just the capital requirement in times of need or bridges the remaining terms of investment funds. A model whose goal is not a profitable investor exit, but leads to real corporate sustainability. Why not pursue the goal of establishing a digital middle class in Germany out of the crisis?

We have built up our Eternity.Health Holding sustainably and with the aim of establishing a relevant digital medium-sized company in Germany. From 2022 it was planned to also make acquisitions. Our contribution to coping with the crisis will be to develop system-critical technologies and digital health companies today and to secure them for Germany as a business location – a kind of intensive care unit for digital health start-ups in the current market environment.

We are convinced that the corona rescue package for start-ups must become an active instrument with a fund of funds for the capital resources of rescue companies. In this way, the crisis is overcome and at the same time the nucleus for a new digital medium-sized company is created.

How cynical it would also be to make the everlasting promise of those in charge of politics that they want to promote Germany as a digital health location so as not to be overwhelmed by data or state-driven business models in health care from the USA or China. If politics were to let German digital health start-ups fall through the cracks with the previous solutions, that would be exactly what would happen.

This post is an extract from our new newsletter “Handelsblatt Inside Digital Health”. We analyze the latest developments in digital health twice a week.

To register, click here.

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