consequence, KGBs did not invest in “highly risky” projects.20 Moreover, there was a maturity
cap of ten years for all investments, and the contractual arrangement between KBGs and portfolio
companies was clearly biased in favor of the latter: portfolio companies had the opportunity to
repay the financial intermediary prematurely. Thus, KBGs were often left with poor investments.
Furthermore, suppliers of equity were not allowed to influence the daily business of the
management. As a consequence of the lack of attention the European Recovery Program received
in these times, individual German Lander (Federal States) supported the establishment of so-
called Mittelstandische Beteiligungsgesellschaften (MBGs: equity finance companies for small
and medium-sized firms). Apart from the Lânder, the owners of such MBGs consisted of the
banking community including regional banks and often the respective regional Chambers of
Industry and Commerce. Accordingly, publicly subsidized equity for investment purposes
became relatively more important.
Schlegelmilch (1976) reports that in late 1975 the major part of capital was provided by
private banks (about 42%), savings banks (about 36%) and MBGs (about 10%). The financing of
new ventures was rather an exception. All in all, during the second phase the market for direct-
investment capital was essentially stagnant, both with regard to the number of companies offering
equity and to the total volume invested.21 The latter amounted to approximately € 385 million by
the end of 1982 compared to a credit volume of about € 409 billion used by the corporate and
self-employed sector (Gerke, 1983).
In 1983 (beginning of third phase) for the first time the German venture capital market
could be said to be expanding. The growth and changes in activities were triggered by a positive
investment climate in Germany and euphoric reports on the success of the US-venture capital
market. Several equity investment companies were founded. Although banks continued to play
the major role as founders and investors in such companies, the importance of private persons,
insurance companies, and commercial enterprises as sponsors of VC companies grew
considerably. Also, foreign venture capitalists started to establish subsidiaries in Germany, and
20 See for instance the report of the Bundesministerium für Wirtschaft (1995).
21 In 1972 (1982) the number of venture companies amounts to 33 (26). Among them was Deutsche Wagnis-
finanzierungsgesellschaft (WFG), which has attracted some attention in the literature. (See for instance Becker
and Hellmann, 2002.) In 1975 this venture capital fund was set up as a joint company between major German
banks, partially guaranteed by the government. Although it “was an outright failure” (Becker and Hellmann,
2002, p. 6), from today’s point of view, WFG was important for the further development of the German venture
capital industry.