The future of financing: how stock exchanges can contribute to closing financing gaps

By: The WFE Focus Team Nov 2016

Hauke Stars, Executive Board Member, Deutsche Boerse Group explains how stock exchanges can contribute to closing financing gaps in an ever-changing market environment.

Emerging players as well as new, alternative providers have been changing market dynamics across all industries.

We probably all know many examples from our daily lives: Skype, a telecommunication provider with millions of clients worldwide does not have its own telecommunication infrastructure. Alibaba, one of the world’s largest retailers, does not have any inventory or a warehouse. And one of the world’s largest and most successful accommodation providers, Airbnb, does not own a single hotel room. Everyone could add more examples.

Let’s have a look at Germany: very few of such businesses that have radically influenced or changed an industry are German companies. Examples actually hardly exist. In July of this year, the Berlin-based digital association Bitkom released a survey showing that less than half of the entrepreneurs in Germany would once again found their company in the country; one in three would rather launch their franchise in the US. 55 percent stated that access to financing is their biggest problem. However, 47 percent of the start-ups admitted that the situation had improved in the past two years.

In terms of innovation and entrepreneurial culture, the US clearly is a role model. One of the reasons is that companies in the US can receive the financing they need at various stages of maturity. In Germany, the limited access to financing is a major issue, putting the innovative power and competitiveness of the country at stake. However, this situation is not exclusive to Germany. In many countries, similar challenges exist. Although quite often these issues are identified and things move in the right direction, they do so often too slowly, and without the necessary alignment of all players involved. What we need in Germany is a changed environment, and various stakeholders need to contribute to its success.

Especially today, in a low interest environment with excess liquidity and capital, there seems to be less need for traditional funding sources compared to how it used to be. Moreover, regulatory requirements in the areas of risk and capital allocation force banks to take a much more conservative approach when it comes to third party funding. Digital business models, with no if any tangible assets, sometimes don’t really allow for a proper risk assessment. Therefore, new platforms, like crowd funding or peer-to-peer lending, have emerged to see some successes. So, will the provision of financing shift to new providers?

PwC has recently assessed that German companies alone will require some €40 billion of funding until 2020 to transform their business models in order to be prepared for the digital era. This means that many sources of funding will be required, and different providers will have their value proposition: banks, new entrants, but also stock exchanges. So in the short to mid term, we will see a very rich environment and solid framework for those who require funding.

At Deutsche Börse our aim is to create an ‘Ecosystem for Growth’, which is about providing funding and financing solutions to companies at different levels of maturity: start-ups, SMEs, established players. In Germany we have a funding gap especially for those companies that have taken part in first financing rounds, but now need follow-up financing in the double-digit millions. So, what we need in Germany is a growth ecosystem, just as the US has already had for decades. Only in such an environment can companies of different sizes and at different stages of maturity – start-ups, smaller and larger SMEs, multinationals – fund their ideas and ambitions.

But creating such an ecosystem cannot be a task for a single institution; it takes various stakeholders to work hand in hand to succeed. This includes traditional investors like banks and stock exchanges, as well as new models like crowd funding or peer-to-peer lending platforms; and governments also have their role to play in setting fiscal, scientific and academic frameworks, to foster an entrepreneurial mindset and culture. In addition, advisors must be part of this ecosystem – consultants who accompany firms and provide administrative and legal advice from their early stages on to more mature levels.

Deutsche Börse will play a significant role in this ecosystem for growth. For that reason, we have broadened our value chain in the area of growth financing before companies actually consider going public. We have established a Fintech Hub in Frankfurt, where we host selected fintech start-ups and provide advice to them.

In June 2015, we launched Deutsche Börse Venture Network, a platform that brings together investors and companies who have already had first financing rounds and are now looking for investments in the double digit millions. More than 110 companies, of which about 20 are from abroad, are connected to the platform. Equally, more than 200 investors from Germany, Europe and, increasingly, from the US and Asia, are using the platform. To date, 23 financing rounds have been conducted via the platform, totalling €720 million. The largest financing rounds, about €40 million, were and eGym. And on September 30 we had the first IPO from a Deutsche Börse Venture Network company when va-Q-tec AG successfully went public. We look forward to seeing more such examples in 2017.