N26, Trade Republic, Gorillas: Start-up valuations under pressure

Dusseldorf, Frankfurt Several billion German start-ups are apparently experiencing difficulties in their financing rounds. It can be heard from those close to the companies and investors that fundraising at Trade Republic, N26 and Gorillas is not going according to plan. In the current market situation, these companies are now suffering from the fact that valuations have often been driven more recently by the general hype surrounding technology stocks than by fundamental indicators.

Fear of “flat rounds” or even “down rounds” is already rife in start-up circles. This refers to rounds of financing in which the company valuation no longer increases or even decreases. This means that holding companies may have to write off. Employees involved often lose money. Above all, devaluations send an extremely bad signal to the market.

Companies that were just in high demand are also affected. Including several of the German unicorns, i.e. start-ups with valuations of more than one billion dollars. Because the uncertainty on the investor side is great: “It’s really frustrating that even the most well-known investors act driven by mood,” says a Berlin investor. “Instead of looking at the fundamental metrics, they act like lemmings.”

Sums and names are rumored about three companies in particular. The companies do not want to comment specifically on current negotiations and figures on request.

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1. The Trade Republic case

The neo-broker from Berlin was able to collect 740 million euros almost exactly a year ago and was temporarily the most valuable start-up in Germany with a valuation of 4.3 billion euros. And not only that: After star investor Peter Thiel, the renowned US fund Sequoia also joined the financial technology start-up (Fintech) in 2021. With Doug Leone, the fund placed one of its bosses on the board of directors.

But as much as the rapid rise of the neo-broker was fueled by the new hype about shares, funds and savings plans in the corona pandemic, the price slumps in technology shares in recent months have depressed the mood.

Trade Republic is still doing well operationally, according to people close to the company. Even if the number of new customers is not increasing as quickly as last year, the growth is decent. Customer acquisition is relatively cheap. And internationalization is going very well “in most countries”.

Trade Republic founders Thomas Pischke, Christian Hecker and Marco Cancellieri (from left)

So far, despite solid results, it has not been possible to attract new investors.

(Photo: Andreas Pein/laif)

So far, however, Trade Republic boss Christian Hecker has not succeeded in winning new investors with these results. He is said to have started fundraising in late February or early March. In mid-May, there are still no reports of completion. This is surprising for a company where investors are said to have just stood in front of the door if they were not invited.

Rumors of an imminent round of funding were already circulating: According to them, the Canadian teachers’ pension fund OTPP should lead a new round of funding. People familiar with the matter gave a total of about $300 million.

But now, according to people familiar with the matter, everything is hanging in the balance again. The Canadians are said to have had doubts. The changed market environment has brought about new considerations. OTPP and Trade Republic did not want to comment on the Handelsblatt.

2. The N26 case

When the Berlin neobank announced its new valuation of around eight billion euros in October, it already caused some experts to frown. After all, there had only been bad news about the company for weeks. Among other things, because of problems with money laundering prevention and compliance, the smartphone bank is under close observation by the financial regulator Bafin.

The high rating and a round of financing of over 700 million euros did not really go together with the problem situation. However, it is now becoming increasingly clear why US investors Third Point Ventures and Coatue got involved. At that time, new investors were probably offered particularly good conditions.

>> Now also read: Incorrect account terminations: N26 pays compensation to individuals affected

In financial circles there is talk of liquidation preferences. With such constructions, the beneficiary investors initially receive a fixed, negotiated return on their investment in the event of liquidation – i.e. when selling a company or going public. Only then will the remaining money be divided among all investors, employees and founders.

Specifically, according to financial circles, investors in the last round were guaranteed a minimum return of either 1.5 times their investment or 25 percent annual return (IRR). As a result, they were willing to invest at a higher valuation. For early investors and collaborators, that means they come second. On the other hand, however, there are certain valuation limits which, if exceeded, eliminate the liquidation preferences.

N26 founder Valentin Stalf

Among other things, because of problems with money laundering prevention and compliance, the smartphone bank is under close observation by the financial regulator Bafin.

(Photo: Philipp Spalek/laif)

Now the market is saying that potential new investors also want such structures. Early owners need to consider what they’re willing to give given the drop in tech ratings.

In many other cases, new investors should try to protect themselves against losses in a similar way to the N26 investors (in start-up slang: “downside protection”). Companies that do not urgently need the money are therefore considering opening up ahead of time to refrain from expanding the group of investors.

An N26 spokeswoman said on request that they generally do not comment on talks with investors. “However, we would like to point out that N26 is excellently financed with 900 million US dollars from the last financing round in October 2021,” said the spokeswoman. N26 is currently not in a financing round.

3. The case of gorillas

The Berlin express delivery service for supermarket products is one of the fastest unicorns in Germany. Just nine months after it was founded in 2020, Kagan Sümer valued the company at one billion dollars. According to Handelsblatt information, the valuation is now said to be three billion dollars. Trend: It stays that way for the time being. A Gorillas spokesman said they would not comment on the current round until it is complete.

At the beginning of the year, Sümer said in an interview that he was hoping for at least 630 million euros for the next round of financing. Now it is said by people familiar with the matter that the round of financing coordinated by JP Morgan could probably only jump out to 200 million euros at a stable valuation – i.e. a flat round. The company and the investment bank declined to comment.

4. The counter-example Wefox

However, the Berlin insurer Wefox could provide proof in just a few days or weeks that start-ups with very good business can continue to get a lot of money and significantly increase their ratings.

The demand is strong, company boss Julian Teicke has spoken to other prominent investors, said people familiar with the financing round. However, it was unclear whether they would already have a turn in this round. In an interview with the Handelsblatt at the beginning of April, Teicke said that despite the market conditions, he was receiving significantly higher valuation offers than last year.

In the most recent round of financing in the summer of 2021, the digital insurer was valued at three billion dollars, “post-money”, i.e. including the new funds.

>> Also read: IPO a long way off: Wefox is aiming for another round of financing on the private capital market

In corporate circles, it is assumed that the new investors will now agree on a “pre-money” valuation of a good six billion dollars and thus on more than doubling the valuation. The financing sum is then added to this.

Wefox has not confirmed the information on the Handelsblatt request. A spokesman said that regular discussions with investors and partners are part of day-to-day business at Wefox, as is the case with all high-growth scale-ups.

More to hear: Tech reporter Holzki at Handelsblatt Disrupt: “Germany has the chance to have its own start-up DNA.”

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