The investor believes that the higher key interest rate will complicate the situation for the start-up scene.
Everyone was actually in agreement: economists, insurers and banks all welcomed the latest increase in the key interest rate in the euro zone. Calming down the markets, increasing financial stability and such. So far, however, what the central bank’s decision means for the start-up scene in Europe and Germany has been lost in this chorus of satisfied voices.
In short: nothing good. The higher key interest rate will do what Corona and the Ukraine war could not: stifle the vitality of an economic sector that the political elites of the euro zone are always so proud of in Sunday speeches and similarly cheerful occasions – rightly so, by the way.
Why is that? Start-ups are even more dependent on financing than other sectors. About financing that has recently become more expensive and is now becoming even more expensive – and therefore rarer. After all, everyone will think twice about putting their money in high-risk investments when they can generate comfortable returns elsewhere.
Few things are as important for Europe as a business location as a thriving start-up ecosystem
The higher interest rate will further aggravate a difficult situation. Rarely has 0.5 percentage points been so inconvenient. After all, the ECB’s decision was not made in a vacuum: increased production costs and falling consumer spending have reduced the already limited scope for start-ups. If venture capital is no longer available on a larger scale, it will be gloomy.
Getting the money somewhere else would be an idea, but where? With the customers? Difficult when they themselves are struggling with inflation and fear of the future. At the banks? In view of the risks, customers will either dismiss it with a mild smile or hand over an interest rate table that no start-up can manage with.
For example, anyone who has been able to finance current assets of 100 million euros cheaply in recent years with interest payments of 600,000 to one million euros now has to put down five million euros with a bit of bad luck.
In most industries, something like this would kill operating profit (EBIT). It is an economic impossibility in an industry that has mostly put growth before profit for strategic reasons.
It’s my own fault, I can hear it now: All the alleged valuations in the billions that have been jazzed up in recent years have long since deserved a course correction. The argument is obvious but wrong.
It’s true, we have overvaluations in the market and certainly not a few. But for one thing, this cold shower hits not just pumped-up reviews, but everyone. There are thousands upon thousands of solidly performing, value-added startups that don’t have blown reviews but now have a real problem.
>> Also read: Start-ups are demanding better conditions to survive the crisis
Allowing this majority to pay for the excesses of a few is not only unfair, but also extremely negligent: little is as important for Europe as a location for innovation – and thus for our future competitiveness – than a flourishing start-up ecosystem.
The state also helped the auto industry in 2009
On the other hand, the ECB only overcorrects its own negligence: During the last financial crisis, the ECB massively lowered the key interest rate to support southern Europe. That was a sensible measure to ultimately avert an impending collapse of the entire euro zone.
In the years after the crisis, however, it did not slowly scale back its policy of cheap money, as common sense might have dictated. This policy has favored overvaluations.
And now, after the economy has stumbled due to a multi-year pandemic and has been defying a war in Europe for a year now, now, of all times, the interest rate screw must be tightened!
So what to do? I’m not a fan of government aid. But the situation has changed, and the only thing I think will help now is a rate hike for those who really need it. The state should now set up an interest relief program for start-ups and start-ups with loans that can be refinanced cheaply – and make them available quickly and unbureaucratically.
In Germany there has already been state support for a critical sector in a critical situation – in 2009 the car industry was kept on its feet with the scrappage bonus. Is that ideal? No. But neither is the situation.
We don’t have to argue about whether or not the interest rate hike made sense. Instead, we have to answer the question of whether we want to help now or continue to stall.
The author: Marcus Diekmann is a transformation consultant and start-up investor.
More: The federal government suspends the grant program for start-up investors – the start-up scene is running out of money