Frankfurt Despite the currently very difficult framework conditions for venture capital (VC) and start-ups in Germany, the co-managing director of KfW Capital is confident about the new year. “I am convinced that the VC market as a whole has a good time ahead of it,” says Jörg Goschin in an interview with the Handelsblatt.
A decline in investments and valuations can currently be observed. But it must be taken into account that 2021 was a boom year with records before the slowdown started in 2022. “Corrections in the VC sector are significantly smaller than the sharp corrections on the stock exchanges,” says Goschin.
A distinction must also be made between more mature tech companies, whose valuations are often based on comparable companies that are already listed, and early-stage start-ups, whose valuations have often remained stable. There have even been some increases here. KfW Capital invests in venture capital funds so that young tech companies can grow with a strong financial basis.
The situation assessment of the VC subsidiary of the state development bank KfW should give encouragement to the industry, which is currently suffering from high interest rates and which is likely to be confronted with a recession for the first time in many years.
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According to an analysis by the consulting company EY, a total of 9.9 billion euros flowed to German start-ups last year – 43 percent less than in 2021. The number of deals was also lower and fell from 1160 deals to 1008. This was the second time in It surpassed 1,000 deals in a year, according to the study.
The start-ups in the capital once again collected the most venture capital: 4.9 billion euros were invested in young Berlin companies in 2022, but in 2021 it was still 10.5 billion euros. With the cost of capital rising and valuations falling, investors are paying more attention to profitability than long-term growth promises, according to EY. According to EY partner Thomas Prüver, young companies must adapt to this and also show a clear path to profitability.
Funds feel restrained
According to the expert Goschin, one of the major challenges of the VC market in the next few years is to mobilize enough private venture capital. “So far, for every euro from KfW Capital, around 4.6 euros have flowed from the VC funds into German start-ups.” This multiplier should at least be maintained, ideally increased. The institutional financiers could weight the venture capital asset class even more, especially since there are great opportunities for returns there, adds the VC expert.
According to industry observers, funds for venture capital are feeling the reluctance of institutional lenders such as insurance companies and pension funds because rising interest rates mean that virtually risk-free government bonds from industrialized countries are once again becoming an investment alternative.
According to the analysis company Pitchbook, the uninvested venture capital in Europe at the end of 2022 was a good 56 billion euros. The experts here assume that this capital should also increase in 2023, but more because there could be fewer investments.
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Goschin sees it as one of KfW Capital’s tasks to invest continuously even in difficult times. In 2022, around 400 million euros were invested in VC funds through the programs of the development bank subsidiary. For the current year 2023, the expert expects a further increase. The fight against climate change and the digital transformation would be important topics.
“If you want to take something positive out of the current geopolitical crisis situation, then it’s the fact that it is making investors more concerned with climate-friendly technologies,” says Enrico Reiche, Director at the management consultancy PwC Germany.
According to a study with the participation of PwC, significantly more financiers than in the previous year, at 62 percent, often or always regard this sector as a focus of investment.
Invested in 77 funds
As of November 30, KfW Capital was invested in a total of 77 VC funds, almost half of which was in the Information & Communication Technology sector, 20 percent in Life Science and five percent in Industrial Tech. The rest are generalist funds that cover multiple themes and phases.
An example of the investments is Acton Capital Partners, a European venture capital fund based in Munich. The Acton team has been investing in Internet companies since 1999. The portfolio includes Seatti, for example, which is dedicated to topics such as “shared workspace” and “hybrid work”.
The co-head of KfW Capital continues to focus on investments.
(Photo: KfW Capital/W.Vorjohann)
Another investment by KfW Capital is Cusp Capital, a VC fund launched in 2021 with offices in Essen and Berlin. Most recently, the fund invested in the German companies Sides (software for catering businesses), Hero (software for craft businesses) and Immerok (technology platform for processing large amounts of data in real time).
Federal Future Fund got off to a good start
According to Goschin, the future fund of the federal government, which KfW Capital is coordinating on its behalf, got off to a good start. “Of the ten billion euros that will be invested by 2030, 8.2 billion euros are already available. 1.2 billion euros have been pledged.”
There are often relatively few women in management positions among venture capitalists and start-ups. Goschin still sees potential here, because mixed teams in start-up companies or VC funds are often more successful.
The topic of sustainability, on the other hand, is now established. Venture capital funds know what is expected of them in this respect and take ESG criteria into account in the investment process. Compliance with the KfW exclusion list at the level of the portfolio companies is a key requirement, says Goschin.
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