Venture capital and German foundations: An unlikely pair?

For those familiar with the rather risk-averse German philanthropy sector, the phrase “venture capital and German foundations” might sound like the setup to a joke. After all, German foundations guard their capital with the same seriousness as a Bavarian brewer guards the purity of his beer. Venture capital (VC) thrives on experimentation and the acceptance of losses as part of the game. While VC asks, “What may be the possible impact if this start-up takes off?”, German foundations traditionally ask, “What are the risks and what does the tax code say about it?” Unsurprisingly, their participation in venture capital (VC) remains limited, both in terms of investment of endowment capital into VC and the use of programme capital to fund innovative start-ups. Some of the reasons are rooted in a lack of legal clarity and regulatory hurdles.

In April 2025, the German Federal Ministry for Economic Affairs and Energy (BMWE) sought to better understand these barriers by organising a “Praxis-Check on Venture Capital investments of foundations” – a workshop with a practical review involving inter alia foundations, ministries, financial experts and the Association of German Foundations and published its results in a brief summary (three pages). The goal was to identify the legal and administrative obstacles that deter foundations from VC investments and propose solutions.

Before diving into some of the results, two circumstantial aspects seem noteworthy to me: Firstly, the interactive workshop format of the “Praxis-Check” itself. This format of “Praxis-Checks” had been introduced in 2023 by Robert Habeck, the then German Minister of Economic Affairs to reduce bureaucracy and is now used by other ministries as well. Similar instruments had been developed earlier inter alia in the Netherlands and Switzerland to test the functionality of administrative procedures. While such workshops were originally geared towards specific topics affecting small and medium enterprises (SMEs), they have now also applied to non-profit organisations (once in the area of German associations and registrations and now regarding VC and foundations). So far, it seems to be a very constructive way to discuss a problem by the actual stakeholders on equal footing with administrators and law makers.

Secondly, the topic of VC and foundations in Germany is discussed amid a wider context of growing attention to the topic of “impact investing” in other countries as it has been pointed out in Philea’s overview on impact investing, with changes in the Canton of Zurich (a reform based on a legal opinion by Professor Opel), new rules in the Netherlands, as well as indicated by the appointment of a new “Head of Impact Investing and Philanthropy” in the UK Department for Business and Trade.

What emerged from the workshop in Germany was a map of legal uncertainties accompanied by a set of reform proposals regarding the regulations and their implementation. While laws in Germany do not explicitly prohibit foundations from investing in venture capital, they often lack the clarity and guidance needed for foundations to act with confidence. This leads to overly cautious behaviour, especially among foundation boards concerned about violating charitable regulations and jeopardising tax exemptions.

• One of the central issues discussed was the role of foundations in supporting economic development. Although foundations may fund scientific research, the transition from research to marketable technology – the domain of startups- is a grey area in German tax law. The relevant regulation (§ 52 of the German tax code) does not explicitly mention support for innovation or technological development. As a result, many foundations withdraw support precisely when financial backing is most needed.
• Participants proposed amending the tax code to clarify that promoting science and research includes support for technology development, provided it complies with EU competition law. This would be a comparatively small change that could have a big impact, making it easier for foundations to contribute to Germany’s innovation without fearing legal repercussions.
• Another major concern is the capital preservation requirement. German law obliges foundations to maintain their core assets (Grundstockvermögen) indefinitely, which discourages investments with long-term or uncertain returns – like venture capital. While current legislation already allows for some flexibility (e.g., temporary use of capital if replenished later), this possibility is not widely known. The workshop suggested clarifying that a replenishment period of up to 15 years is legally permissible. Communicating this more clearly, particularly through foundation associations, could unlock long-term investments.
• The issue of financial risk also plays a critical role. VC investments often result in delayed or uneven returns, and even the best-performing portfolios carry some losses. To address this, the group proposed introducing a limited “loss tolerance” into the legal framework. For example, foundations could be allowed to invest 5 to 10% of their assets in VC – even if such investments occasionally result in losses – without threatening their charitable status.
• Liability fears further complicate matters. Foundation executives often operate under a personal risk when making financial decisions, particularly those involving innovative or uncertain ventures. Even though corporate law and foundation law includes a “Business Judgment Rule” that protects decision-makers who act in good faith, such safeguards should also explicitly be extended to decisions taken within the risks associated to the tax code. Extending this rule may reduce hesitation, encouraging more proactive investment strategies.
• Beyond legal reform, the workshop highlighted the need for better administrative guidance. Foundations often struggle to determine whether VC activities fall under tax-exempt asset management or taxable business operations. These distinctions matter greatly, as they affect whether gains are taxed and how losses are treated. Clearer interpretations from tax authorities would go a long way in reducing confusion and facilitating informed decision-making.
• The practical side of investing is another hurdle. Many foundations lack the internal expertise or access to high-quality information needed to assess venture opportunities. To address this, the participants called for improved data transparency and stronger intermediary structures. For instance, fund-of-funds models could help foundations pool resources, diversify risk and rely on professional managers. Public institutions like the European Investment Fund (EIF) could contribute by sharing reliable performance data. Training programmes and dedicated foundation roundtables would further support knowledge exchange and capacity building.

Interestingly, the Praxis-Check took place during a government transition. As of May 2025, a new federal government is now evaluating the proposals to determine their feasibility. While none of the ideas are binding, they offer at least a map of the possible “construction sites” and “levers” where philanthropic capital may be unlocked for innovation. The potential benefits may be: more funding for early-stage technologies, greater diversity in innovation finance and stronger alignment between public interest and private investment. However, one cannot help to also point out the autonomy of foundations and the will of its founders. Foundations are confronted with many societal expectations, some of which should be met with caution.

Still, the overall message from the Praxis-Check is clear: there are German foundations willing to engage more in venture capital – but only if the legal framework is clarified. What is needed is a concerted effort for clear rules, reduced administrative burdens and empowered foundations with the information they need.