Venture debt instead of venture capital: This form of financing has become more important since the decline in venture capital rounds from VCs. Now the Austrian-German PropTech Gropyus is also completing such financing with its wood hybrid construction method for apartment buildings. Gropyus around CEO Markus Fuhrmann is getting 40 million euros from the European Investment Bank (EIB). The loan is granted as an equity-like venture debt, based on a guarantee from the European InvestEU program – with the EU goal of decarbonization in housing construction as well.
The EIB financing will support further product development and the expansion of production, which will reach a level of automation of up to 86 percent, it is said. With this, Gropyus wants to almost halve the construction time, which should ultimately reach customers as more cost-effective living space.
In a double interview, Gropyus CEO and co-founder Markus Fuhrmann and Philippe Hoett, Senior Investment Officer, Growth Capital & Innovation Finance at the EIB, talk about the details of the financing, Gropyus’ wood hybrid construction, the real estate crisis and venture debt. EIB offers for European scale-ups.
The new EIB funds will be used to finance further product development and expansion of production. How many of the multi-family homes are planned by 2025?
Markus Fuhrmann: In Immendingen near Lake Constance, we are planning a project with a total of around 100 two, three and four-room apartments in nine buildings. We are confident that construction will begin promptly. Further projects with construction starting this year are also being planned. By converting our factory in Richen, we are increasing our production capacity to over 240,000 square meters of gross floor area per year.
How many families at which locations will be able to move into the apartments and when?
Markus Fuhrmann: After the renovation, our annual production capacity of over 240,000 square meters of gross floor area per year corresponds to around 3,500 apartments. Where these projects are located depends on the properties that our customers for whom we build bring with them. In addition to the described project in Immendingen, the current pipeline primarily includes projects in the Munich, Berlin, Hanover and Frankfurt area. We are therefore active throughout Germany.
There is always talk of “affordable living space”: What types of apartments are being built, how can they be classified, especially in terms of price for tenants or buyers? For example, how much does a square meter cost on average?
Markus Fuhrmann: It is not possible to make a general statement about the rental price, as it depends on our customers, the property owners, and on many factors – most importantly, for example, on the corresponding property costs. In general, however, our costs per square meter of gross floor area are already at the same level as buildings with conventional concrete construction. At the same time, our apartments are state-of-the-art in terms of sustainability and aesthetically sophisticated. Through our building operating system, we provide residents with smart services and functionalities that are otherwise only available in luxury apartments – at an affordable price.
If wood hybrid construction replaces reinforced concrete – what does that mean in terms of CO2 reduction across the entire value chain?
Markus Fuhrmann: Wood hybrid construction is a very broad term used by many, which can mean different construction methods and mix of materials used. Very specifically at GROPYUS: If you compare a wood-frame building with a conventional building, the wood construction alone saves a third of the CO2.
Where does the renewable raw material, i.e. wood, come from?
Markus Fuhrmann: Our suppliers come from Germany, Austria and Finland. We ensure at all times that we do not source wood with significant risk at origin level or conflict wood. It goes without saying that compliance with local, national and international law as well as the exclusion of raw materials from countries that have significant sanctions imposed. Ecological criteria such as the exclusion of genetically modified organisms and raw materials that result from the conversion of forests into other types of vegetation are also taken into account. In addition, we require our suppliers to comply with social criteria and occupational health and safety requirements in the chain of custody.
Will it be ensured that this wood is reforested?
Markus Fuhrmann: We use softwoods from PEFC or FSC-certified forestry companies for our products. The biggest challenge is that due to the expected climate change, the most important construction woods, namely spruce and pine, will be lost due to calamities. Due to storms and drought, there is currently a rapidly growing supply of spruce. This will accelerate the necessary forest conversion back to natural and more drought-resistant tree species. However, these types of wood will only be available in a few decades, so the use of spruce is planned for the next few years. It is to be expected that this tree species will continue to be increasingly removed from existing forests in the near future. We know from reports from sawmills that market supply is greater than regional demand.
Although venture debt is similar to equity, it is still debt. What differences do you see with the financing means compared to venture capital or financial investors – especially with regard to the repayment of the loan?
Markus Fuhrmann: The advantage of debt over equity is the lower interest rate, which means the cost of capital for the company is lower. For a company that generates revenue and holds significant fixed assets, this is a very suitable form of financing.
© Gropyus
The Signa bankruptcy is just a symptom, albeit a very large one, of the crisis-ridden real estate world. What are the causes of this real estate crisis and how can we combat it?
Markus Fuhrmann: Many market participants have continuously increased valuations for over a decade, while at the same time capital was very cheap due to low interest rates. Due to substantial crises (Covid, Ukraine war) in the last two years, a lot has come together within the real estate industry: interest rates and construction costs have risen massively, while at the same time material bottlenecks have increased significantly. These causes are compounded by the shortage of skilled workers, which will continue to increase significantly. Innovations are necessary to address these causes. Through digitalization and industrialization of the value chain, construction costs can be reduced and, above all, planned.
Almost completely automated prefabrication is the key to achieving shorter, more reliable production and construction times that are less dependent on external factors – and thus counteract high interest rates. At GROPYUS we are largely independent of the shortage of skilled workers due to our high prefabrication and automation rates. In this way, we enable the dwindling number of skilled workers to work where they are really needed, so that more can be built overall.
How hard is the real estate crisis hitting Gropyus in terms of the order situation? The major strategic investor Vonovia has just reported a massive loss of 6 billion euros.
Markus Fuhrmann: It is important to differentiate at this point: Vonovia has reported a devaluation. Although this is a balance sheet loss, operational business is running very positively. However, the crisis in the construction industry has of course not left us unscathed. Our customers are finding it much more difficult than before to get their projects financed and implement them economically. However, we have a business model that precisely addresses the problem areas of the industry.
How did the legal dispute with investor Fritsch, whom Gropyus reported to the Vienna public prosecutor’s office for fraud in 2022, develop?
Markus Fuhrmann: Florian Fritsch resigned from the GROPYUS supervisory board in October 2021 and has had no role in the company since then. The proceedings at the Vienna public prosecutor’s office are still pending. Please understand that we will not comment further on this ongoing process.
Mr Hoett, to what sustainability guidelines is an EIB loan like the one to Gropyus bound to? What does the scale-up have to demonstrate (e.g. in terms of CO2 reduction) to get the loan?
Philippe Hoett: To obtain an EIB venture debt loan, the borrower must meet various criteria, not only before the loan is granted, but also during the subsequent term. EIB experts analyze the company’s strategy, markets, products, operations, team and financials to provide the most comprehensive picture of the business opportunity. Sustainability criteria are important in all EIB financing. This is particularly true for operations supported by the European Commission and its InvestEU “Green Transition mandate”, such as the financing of Gropyus AG. However, it does not follow that the project will be evaluated based on established guidelines or thresholds. Instead, the evaluation team looks at the overall climate impact of the project. With the prototype of its residential building, Gropyus AG is already 95% below the greenhouse gas value set by the German Sustainable Building Council and the German Building Energy Act. That was one of the biggest positives in our analysis.”
What are the terms and conditions of the loan? What interest rates apply and when does the loan have to be repaid?
Philippe Hoett: I can’t talk about the details of Gropyus financing. Typically, EIB venture debt loans have a term of 4-6 years with repayment at maturity, i.e. no repayment during the life of the loan. This structure is tailored to growth companies that are still making significant investments and therefore still have negative cash flow, which would make ongoing debt repayment difficult. The EIB’s remuneration consists of a mix of interest and equity participation, usually in the form of option rights.
The EIB aims to mobilize around €1 trillion for climate and environmental sustainability in the ten years to 2030. Can you draw an interim conclusion?
Philippe Hoett: The EIB Group indeed considers one of its most important tasks to be supporting the ecological transition and disseminating new green technologies. Consequently, more than half of our financing last year was intended for climate and environmental protection measures: 49 billion euros. In 2022 it was only 36.5 billion. And this financing triggers many times more investments. This will help us reach the trillion euro target. We are indeed on the right track: with our operations we have mobilized around 349 billion euros since 2021.
How much does the EIB invest itself and how much is leveraged by other investors?
Philippe Hoett: For an average EIB transaction, the leverage is approximately 1 to 4. This means that each EIB euro supports additional investments of up to 4 euros. Our venture debt has even more impact on the market: the EIB deploys around EUR 700-900 million in risk loans annually. On average, this triggers private investment of 8.9 times this amount.
Which startups or scale-ups have been provided with loans to date?
Philippe Hoett: Since 2015, the EIB has lent venture debt worth EUR 6.9 billion to over 290 companies. The recipients come from different sectors. The focus is on bio and medical technology, software and Industry 4.0, renewable energies, climate technology and mobility.
Fully automated factory: PropTech Gropyus cooperates with automation specialist KUKA