In late financing rounds, start-ups want to avoid their valuation stagnating or falling.
Frankfurt For years, the young entrepreneurs in Germany and Europe have been spoiled with equity in ever larger financing rounds. But with the war in Ukraine and the risk of a recession, traditional credit is becoming increasingly important again.
“We see a healthy, good environment for seed financing for very young start-ups and Series A financing,” says Andrew Parker, Managing Director of Silicon Valley Bank (SVB) in Frankfurt.
In the later rounds of financing, however, some start-ups wanted to avoid “flat rounds” or “down rounds”. This refers to rounds of financing in which the company valuation no longer increases or even decreases. That is why the demand for outside capital and outside financing is increasing – and the SVB is benefiting from this, Parker adds in an interview with the Handelsblatt.
“We have 3,600 customers in Europe, 80 percent of whom come from Great Britain and ten percent from Germany,” explains the manager. He does not provide any information on the regional business volume.
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“The valuation excesses of the past year have come to an end for the time being. Start-ups in particular feel this in the late stages close to a sale or IPO,” says Julian Riedlbauer, partner at the consulting firm GP Bullhound.
SVB works with a wide range of interest rates
Because the macroeconomic challenges are unclear and the word of the recession is making the rounds, start-ups want to conserve their liquidity, suspects Parker from the SVB. “Start-ups are changing their business plans. They are trying to produce fewer losses and some are aiming for positive cash flows.”
Parker also said they would consider borrowing more frequently than they used to, as it would avoid diluting the stakes of the founding teams and existing investors.
SVB is a US bank based in Silicon Valley that has had a branch in Germany since 2018. It finances high-tech companies and start-ups. The main industries in which it lends are software, fintechs, life sciences and e-commerce. According to their own statements, their customers include Sennder (logistics), Sofatutor (education), Personio (software), Getyourguide (travel), Quantilope (market research) and Hellofresh (cooking).
“The increasing number of start-ups and investments in Germany allows us to continue to grow, which is why we will soon be opening an office in Berlin,” announced Parker. The extent to which a European banking license makes sense as part of the future strategy is being examined.
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Since the business models, shareholder structures, degree of maturity and level of innovation of the financed companies are very different, the interest rate spectrum is wide and, according to industry observers, ranged between eight and 15 percent after the Ukraine war. The further design with equity options (“equity warrants”) and variable, sales-dependent payments influence the interest rate or the Gtotal cost.
The IPO window will remain closed for the foreseeable future. deThat’s why venture capital funds would have to consider alternatives for their portfolio companies, such as equity or debt financing, Parker expects.
The high price fluctuations on the stock exchange currently make it almost impossible to set a price range for the issue of new shares. Only when this volatility subsides are stock market debuts on a larger scale conceivable. At the group level, SVB was able to increase its net interest income in the first quarter by 15 percent to $1.1 billion. With the prospect of rising key interest rates, the bank expects a further boost in interest income.
Credit quality remains high
Bank executives are also always exploring opportunities to collaborate with fintech startups. The SVB leaves open whether this also includes acquisitions. The experts do not yet see a higher need for depreciation. “Of course we are looking at how the start-ups are adapting their business models, for example to higher inflation. However, we continue to see high levels of credit quality across our loan portfolio,” said Parker.
A look at the United States allows an estimate of the market potential for growth loans in Europe and Germany. “In the USA, around 20 percent of venture capital financing is outside capital, compared to around three to five percent on the European continent,” estimates Sven Janssen, partner at Tradition Meets Future GmbH.
Last year, Germany made a quantum leap by tripling its venture capital financing volume to over 17 billion euros. In this respect, the market potential and the current demand for growth loans is well over one billion euros per year in Germany.
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