The Scandinavian growth company stock market as a role model
Why Germany needs financing alternatives for nanocaps?
The Swedish growth company stock market emerged as early as 1984 but only gained public attention in the late 1990s. Parallel to this development, regulations have been tightened to increase the quality of listed companies, ensure verification, and increase transparency. Ecosystems emerged around the trading venues, consisting of news agencies, analysis firms, online brokers, and trading venues themselves. This has been instrumental in giving the growth stock market credibility with investors. Today, an infrastructure of news flow is also supplemented by social media, further increasing security for investors. This development led to the present situation that hundreds of thousands of Swedish private individuals invest in one of the 1000 listed growth companies. For Swedish private investors, it has long been standard to trade growth companies as part of their portfolio. Following this, the trading volume in 2021 was more than 15 billion Euros with more than 8active investors. Besides the innovative possibility for small companies to finance themselves through a public issue, this development also brought a great societal benefit. The new financing alternative for growth companies allowed them to continue their business and hence, from a socio-economic point of view, create new jobs and increase tax revenue. Furthermore, many growth companies conduct research activities, which is an important part of driving society forward through innovation. In summary, the Swedish market for growth companies seems to be a well-functioning ecosystem that benefits the society from multiple point of views. Observing this, a crucial question arises: Would Germany benefit from a comparable ecosystem?
Founding a startup in Germany gets more and more popularity. Even though there was a slight downturn due to the covid-pandemic, between 2019 and 2022 the numbers of newly founded startups increased by more than 30% (Startup Verband Deutschland, 2022). Even the current government acknowledged the importance of startups to drive innovation, create new jobs and strengthen Germany’s economic landscape. Thus, several additional financing opportunities for growth companies emerged recently. These mainly consist of government funded programs, which will secure the first stage of a company lifecycle. As soon as more capital is needed, most startups look for a Venture Capitalist, external investors or scholarships which will allow them to continue their business. Nevertheless, a study from Startup Verband, published in Sept. 2022, shows that 69,7% of the German startups will be in capital need within the next 12 months, with an average demand of 3 Million Euros (Startup Verband Deutschland, 2022). This numbers clearly indicate that there is a great need for alternative financing options in Germany. Furthermore, it is a striking fact that the average IPO volume in Sweden is roundabout 3 million euros. Keeping this in mind, the implementation of an ecosystem for nanocap IPOs could solve the problem of insufficient financing alternatives for startups.
The current federal cabinet in Germany just released a startup-strategy that aims to support the startup culture and ecosystem with ten different fields of action (BMWK, 2022). Using the Scandinavian stock market for growth companies as a role model, establishing a comparable ecosystem in Germany would support these government plans of action in all aspects.
But what does it need to implement such an ecosystem in Germany? Since this is a completely new concept, there must be a mindset shift on four levels.
1st Level – There is a need of general awareness about the functionality and possibilities. Startups need to learn about the existence of a new financing alternative, while private investors must learn about the unprecedented access to private capital markets and institutional investors about the additional opportunity of a liquid investment in growth companies.
2nd Level – Along with greater awareness about the topic, educational aspects are indispensable to understand the market.
3rd Level – If this succeeds, an atmosphere of trust and transparency needs to develop to generate acceptance for this kind of investment possibility among the society before an execution of an actual ecosystem can take place.
4th Level – The legal regulations need to be adapted on a national level in such a way that they ease up certain regulations to encourage participation in such a model, for both companies and investors.
If these crucial criteria can be implemented, Germany faces an excellent opportunity to offer growth companies a new financing option and thus, create a socio-economic contribution in the long term by creating new jobs, driving innovation, and increasing tax revenues. In addition, the participation and access to this new market will hopefully lead to a market-based determination for company valuations as well as the need for future topics, and thus to public welfare-oriented investments and thereby to a better distribution of wealth.
Concluding, using the Scandinavian microcap market as a role model, a well-functioning nanocap stock exchange could close the gap of startups having capital need. This results in
- private retail investors having the great possibility to invest in companies with outstanding potential returns, and
- German startups can finance themselves through an IPO, continue to drive innovation and create new jobs – all without the need of financial support by the government.