Start-ups in Germany face structural obstacles in financing that their international competitors do not encounter. Business angels and seed investors typically fund the early stages, but capital is often lacking in the growth phase. In particular, larger financing rounds frequently fail due to the shortage of investors in Germany with a long-term investment horizon.

A recent resolution of the Bavarian State Parliament seeks to close this gap (cf. BayLT-Drs. 19/7737)Bavarian foundations are to be expressly permitted to invest a portion of their assets—approximately 1 to 5 percent—in venture capital funds or fund-of-funds structures. Foundations often exist for decades and are therefore ideally suited for (even large-scale) investments with a long-term horizon. A look at the United States shows that the so-called endowments of major universities achieve impressive returns (most notably the “Yale Endowment“).

The Bavarian initiative provides an important impulse for the financing of innovation and entrepreneurship and strengthens international competitiveness.

Current Legal Framework

Under the current legal framework, foundations face a tension between different investment objectives in managing their assets. On the one hand, they are required to preserve the value of their core capital permanently. On the other hand, they must fulfil their charitable purpose from the economic returns generated by their assets and may therefore need to achieve excess returns in a low-interest-rate environment.

Tax-exempt foundations must additionally consider (i) the arm’s-length principle, (ii) statutory limits on administrative expenses, and (iii) restrictions on generating commercial income. To reconcile these competing requirements, the foundation’s governing board—generally the competent decision-making body—has broad discretion. The guiding principle is modern portfolio theory, under which an appropriate overall risk profile can be achieved through diversification across asset classes.

Individual asset classes such as private equity and venture capital are therefore not excluded per se. Accordingly, they are often included in the portfolios of large foundations. Nevertheless, supervisory authorities continue to view such investments with scepticism. This scepticism, combined with concerns among foundation bodies about potential liability for erroneous investment decisions, frequently leads to self-imposed restrictions in favour of more “conventional” asset classes.

Core of the Initiative

The motion titled “More Money for Start-ups – Winning Foundations as Capital Providers for Start-ups” aims to overcome this self-restraint. It provides that state-owned foundations and foundations co-established by the Free State of Bavaria are to be explicitly authorised to invest a small portion of their assets in venture capital funds—primarily German and European funds, with a particular focus on Bavarian start-ups.

This would, for the first time, establish a statutory framework that provides legal certainty for such investments.

Opportunities for Founders and Start-ups:

New source of capital: Foundations manage assets worth billions. If even a small percentage were invested in venture capital, substantial additional funds would become available for innovation.
Long-term orientation: Foundations think in generational terms and could establish themselves as stable partners in growth-stage financing.
Strengthening the location: Bavaria would significantly enhance the attractiveness of its start-up ecosystem and could serve as a model for other German federal states.

Challenges

From a practical perspective, it remains to be seen how the Free State of Bavaria can technically implement such an investment policy for Bavarian foundations. Since 1 July 2023, foundation civil law—including the legal requirements governing asset management—has been conclusively and uniformly codified at the federal level in the German Civil Code (BGB). Bavaria therefore lacks legislative competence in this area.

It is conceivable that the Free State could make use of its powers as a foundation body—where it is represented as such within a foundation—to influence investment policy accordingly, for example by adopting amendments to foundation statutes.

In addition, Bavaria could counteract any restrictive practices of Bavarian foundation supervisory authorities regarding investments in alternative asset classes by issuing corresponding administrative guidelines.

Risks nevertheless remain: venture capital investments are risky and illiquid. Foundations must be prepared to absorb losses and must establish robust compliance and risk management structures to ensure the preservation of core capital and the sustainability of their activities.

Conclusion

The Bavarian initiative promotes innovation and contributes to a favourable investment climate. Founders may hope for long-term-oriented investors who assume social responsibility. Foundations, in turn, have the opportunity to further diversify their assets, achieve excess returns and actively strengthen the innovation ecosystem.