Germany wants to attract more investor money, financing rounds are making headlines. This improves the mood of venture capitalists - but exits from investments remain difficult.
The business climate in the venture capital sector is improving: The investor barometer from the development bank KfW and the Federal Association of Venture Capital (BVK), which is available to the Handelsblatt in advance, indicates a greater willingness to invest and large financing rounds.
However, the exit options, i.e. the resale of investments, remain difficult.
Financing rounds focus on fewer start-ups, which means the invested capital is focused on fewer companies and investors.
Frankfurt. The mood among venture capital investors is improving significantly. After a deterioration in the second quarter, several indicators point to a positive third quarter.
This is shown by the investor barometer from the development bank KfW and the Federal Association of Participation Capital (BVK), which is available to the Handelsblatt in advance. Accordingly, the business climate in the venture capital (VC) sector, which often fluctuates greatly, is improving significantly and is at minus 16.6 points. Although it is still in negative territory, it has increased by 19 points compared to the previous quarter.
If the values are above the zero line, the business climate is considered positive. The indicator is based on an assessment of the current business situation and expectations of business in six months.
BVK board spokeswoman Ulrike Hinrichs says: "The mood on the German venture capital market is brightening again. This is a positive signal, but not yet a trend reversal." She attributes the improvement to an increased willingness to invest and to large rounds of financing.
At the same time, exit options remained difficult. Exits usually refer to exits from existing investments through a sale or an IPO.
Despite slight improvements, the exit climate in the third quarter is still deeply negative at minus 46.2 points. Both so-called tradesales – the resale of investments to a strategic investor – and secondaries – the purchase or sale of investments in portfolio companies or their funds on the secondary market – lose.
KfW chief economist Dirk Schumacher says: “VC investors are in a better mood compared to the previous quarter, but the majority are still more dissatisfied than the long-term average.” This mood corresponds to the actual market development, he explains.
Fundraising, i.e. the opportunity to set up new funds and also collect investor money, is improving. The corresponding indicator in the investor barometer rose by 20.7 points to minus 13 points.
Capital is concentrated in a few companies
The financing rounds of start-ups are particularly noteworthy. “The willingness to invest is there, but while individual large financing rounds attract attention, the number of financed start-ups is falling,” says BVK board spokeswoman Hinrichs.
Schumacher from KfW confirms: "The start-ups financed in the third quarter were convincing. Overall, it was the strongest quarter in terms of volume in recent years, even if individual billion-dollar deals were decisive for this."
However, because the number of financing rounds is falling, “the invested capital is concentrated on fewer and fewer companies and therefore tends to have fewer investors involved,” explains Schumacher. “This spread is reflected in the mood,” he says.
The indicator for the level of deal flow, i.e. the transaction volume on the venture capital market, increased slightly by 3.3 points to 5.9 points. However, the indicators for the quality and innovativeness of the deal flow have lost significantly - by 10.1 points to minus 0.7 points and by 14.2 points to minus 8.3 points, as the barometer shows.
In the last two quarters, VC investors have become significantly less satisfied with the quality and innovativeness of their deal flow. According to the studies, the structure of start-up activity has changed: the proportion of start-ups in whose product or business model artificial intelligence (AI) plays a role has increased significantly. This could lead to business ideas becoming less distinguishable - and investors becoming less convinced, explain the study authors.
Hinrichs from the BVK demands: “If we want innovative start-ups to become internationally successful companies, we have to mobilize more private and institutional capital for venture capital.” Germany has the potential to be a leading start-up location, she adds.
“Now we have to create the conditions so that this potential can be exploited,” she emphasizes. According to her, this includes better framework conditions for growth financing, functioning exit markets and less bureaucracy.
Medium-sized businesses rely on private capital
The business climate in the private equity market also improved in the summer quarter. The corresponding indicator for the equity market rose by 17.4 points to minus 14.6 points. Investment companies assess the current business situation and, in particular, business expectations significantly more positively than in the previous quarter.
Investment companies are nevertheless pessimistic about the exit environment and the fundraising conditions. Although both indicators rose, they are still clearly in negative territory.
Hinrichs, meanwhile, is calling for more private capital for German companies. “German medium-sized businesses in particular rely on equity capital to drive growth, innovation and transformation,” she says.
