Peter Terhart
German Private Equity and Venture Capital Association (BVK)

Mr. Terhart said he would comment on several aspects of the German financial system, beginning with the statement by Dr. Kritikos that only about 0.1 percent of Germany’s GDP is dedicated to venture capital. How could this be? he asked. An important reason is a condition that “fundamentally sets us apart from the United States: we do not have pension funds. This means that a very big player is omitted from the venture capital market.” One reason this is so important, he said, is that a pension fund “thinks in terms of generations, in terms of long-term and stable investments,” and knows that a nation must invest in its future if is to continue to develop. In Germany, pensions are for the most part paid by labor.

Another feature of the financial system needing attention, he said, was the banking sector. After World War II, the government compensated for the lack of a “financial economy” by creating a large public banking sector. These public banks were intended to finance the “real economy,” including companies that needed capital for early-stage activities, growth, and expansion. During the 1950s and 1960s, he said, all sizes of companies were financed by the banks, which, in principle, had surplus funds. The scarcity of private funding for companies, such as angel investors and venture capital, had little consequence as long as the banks could fill the needs. This changed with the beginning of the current crisis, however, and banks that had had enough money for decades were no longer willing or able to provide venture capital.

A second aspect of the financial system was its long-term orientation. This has allowed sustained corporate development in the “real economy.” After the war, this financing nourished the small and medium-sized businesses and “hidden champions” mentioned earlier. The real economy and the financial economy developed hand in hand, supported the number of companies that constitute today’s SMEs, as well as the heavy legacy industries. Thus, innovation and the creation of new companies took place within existing companies. In other words, he said, “the reinvention of the economy was not happening by way of entrepreneurship and start-ups, but rather through incremental steps in the small and medium sector, heavy industry, and other established organizations. This lead, he said, to more conservative, step-by-step change, rather than more radical or disruptive innovation.

Third, Mr. Terhart said, the legacy of support for long-standing, successful companies influenced the career choices made by young potential entrepreneurs. A young engineer, for example, who may contemplate starting a new firm, will also be offered positions with SMEs and large firms of the existing economy. They will face a difficult choice: Should I take the risk of establishing myself independently with my own firm, or should I go to Siemens

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