Berlin The start-up industry celebrated a record year in 2021. Now, at the end of 2022, the situation looks very different. The turnaround in interest rates, the war in Ukraine, persistently high inflation and the global economic weakness are causing caution on the part of venture capitalists. The majority of investors shy away from risky and expensive business models.
The financing market collapsed drastically in the current year. According to calculations by the data service provider Refinitiv for the Handelsblatt, venture capitalists invested around eight billion euros in German start-ups from January to November. In the entire previous year, the sum was almost twice as high. This means that promising start-ups still have good chances of raising new rounds of financing.
The forecasts show that nothing will change in 2023 either. However, this status quo will put more start-ups under pressure. If you haven’t been able to collect fresh money this year, it will probably be tight next year.
This particularly affects start-ups whose economic survival largely depends on financing. “Companies that are prone to recession or do not have a long-term, functioning and self-sustaining business model face massive problems,” says Julian Riedlbauer, partner at the M&A consulting firm GP Bullhound. “We will see a lot more fire sales and bankruptcies at these companies.”
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The takeover of the Berlin fast delivery service Gorillas by Getir from Turkey and the bankruptcy of the crypto start-up Nuri should therefore only be the beginning of a wave.
Kai Hesselmann, co-founder of the M&A consulting start-up Dealcircle, is also certain of this. During the pandemic, a wave of insolvencies was constantly expected, which ultimately never came, says the consultant: “But that is changing now, and the development will certainly intensify next year – also because of the increased energy prices.”
Most start-ups are currently trying to reduce their costs: they are laying off employees, reducing their marketing expenses or streamlining their offerings. This extends the period with which they can make ends meet with the funds they have already collected. But those opportunities are finite. After years of broad investment in the market, the following suddenly applies: If you are not profitable, you will run out of money.
It is likely to be particularly difficult for start-ups that have been on the market for some time but have never come close to breaking even despite comparatively high financing rounds. They typically require more capital than start-ups that have just been formed, and their company valuation is more dependent on stock market developments.
“We will see insolvencies in the later-stage area next year,” says Gerhard Wacker, a lawyer at the management consultancy PwC. After gorillas and the herb-growing start-up Infarm, other unicorns – young companies with a company valuation of more than one billion dollars – could also have problems in Germany.
Venture capital sums far from records
“2023 will be the year of selection,” Riedlbauer is certain. “The days of the very high and sometimes completely exaggerated ratings from 2021 will be over next year and in the foreseeable future.” Getir’s takeover of Gorillas can serve as an example here again: As part of the acquisition, the value of the merged company was halved seven billion dollars.
Europe analyst Nicolas Moura from the data provider Pitchbook puts it a little differently: he expects a “healthy level” on the venture capital market, which could even settle somewhere between 2021 and 2022.
>> Read also: Getir from Turkey buys Berlin delivery service Gorillas
Moura even assumes that more deals will be closed again in the second half of the year. Start-ups in the early stages of their business are likely to benefit from this in particular. Gerhard Wacker confirms this assessment: “In our opinion, these continue to function reasonably, perhaps at slightly lower ratings.”
In this context, he refers to the high cash reserves of venture capitalists, whose investors were looking for attractive investment opportunities in view of the long-standing zero interest rate level: “A number of new funds were also recently initiated in Germany.”
crisis years? A good environment for start-ups
For example, Speedinvest and EQT have launched fresh funds to invest in the crisis. Not much of this has been spent yet, which is why the cash reserves in Europe have reached the record value of 60 billion euros according to the Pitchbook.
Ultimately, this money should not only be used for new rounds of financing, but also for the consolidation of the industry. IPOs – the investors’ preferred exit option – will hardly exist in 2023, at least in the technology sector. Inflation, war and low valuations made sure of that, says Riedlbauer.
>> Read also: Experts rely on IPO comeback from summer – These are the German stock market candidates for 2023
This year in the tech industry in Europe, only two companies with a valuation of more than one billion dollars dared to go public. According to experts, a first test of the receptiveness of the market in 2023 could be the listing of the cloud provider Ionos.
Difficult economic times, however, are also considered to be a motor for innovation and pave the way for innovations. The success of companies such as Uber, WhatsApp or Airbnb, all of which emerged at the height of the financial crisis, is evidence of this.
Hesselmann is confident that similar successes could also come about now: “Years of crisis are a good environment for start-ups. A lot of VC-backed companies have to cut costs, lay people off, and ex-employees start up again.”
More: The end of mega deals – Six trends that will shape the M&A market