Frankfurt The war in Ukraine and the change of course in energy policy towards renewable energies are causing venture capitalists to reorient themselves. For example, the sharp rise in energy prices provides incentives for innovations in the field of energy efficiency. Investments in start-ups with business models in green tech and climate tech are therefore attractive. On the other hand, investors are pessimistic about the e-commerce sector, which has long attracted the most capital.
According to an analysis by the state development bank KfW, three quarters of investors assume that greentech and climatetech will play a greater role in the future. A good two-thirds also see the deeptech and cybersecurity sectors on the rise.
Deeptech includes, for example, biotechnology and machine learning, where the development times are usually long and the capital investment high. The escalation of the war in Ukraine raised awareness of the relevance of cyber security, as cyber attacks by Russia also had an impact in Western Europe.
A majority of 63 percent of the venture capitalists surveyed by KfW also expects the artificial intelligence (AI), cleantech and other sectors to gain in importancerd more relevant for 58 percent, foodtech/agtech (innovations in agriculture) and healthtech each consider promising for over 50 percent.
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The majority of VC investors, each with 53 percent, assume that the importance of the fintech and Internet of Things sectors will remain the same. Investors give a bad forecast for the e-commerce sector. Half see a loss of importance here.
Turnaround in interest rates slows down investors
“Very high growth rates have been achieved in online retail over the past two years. This was due to the changed consumer behavior during the pandemic. However, there are currently signs of a slowdown. This could be reflected in investors’ negative expectations for e-commerce,” says Fritzi Köhler-Geib, KfW’s chief economist.
The sharp fall in valuations for e-commerce business models on the stock exchange is also likely to play a role. “Because of the accelerated turnaround in interest rates, investors are currently rather cautious. It can be expected that investment behavior and ratings in e-commerce will follow the general market trend,” adds Köhler-Geib.
Last year, e-commerce providers were still among the top financing rounds, including the delivery services Gorillas and Flink and the virtual marketplace specialist SellerX. The mood for e-commerce is also weighed down by the poor balance sheet of some IPOs from the investors’ point of view, such as Auto1 or the online optician Mister Spex.
When the market for IPOs picks up again, topics such as renewable energies will certainly be in the spotlight, says a lawyer in Frankfurt.
The widespread pessimism towards the e-commerce sector is important insofar as it is by far the largest single sector in Germany in terms of deal volume. In KfW’s view, a declining importance of e-commerce could result in a potentially large deal volume being distributed to other sectors. For these segments, the inflow of capital could be considerable compared to the investments made there to date.
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According to KfW, venture capital deals (VC deals) in Germany, apart from e-commerce, focus primarily on future technologies that build on classic engineering strengths, above all in the areas of production technologies and in the automotive sector. There is a particular need for action in the case of technologies that do not have traditional industrial strengths.
So far, donors in Germany have primarily rewarded automotive technology. According to KfW, around 2.56 percent of venture capital deals in the years 2019 to 2021 related to the future technology of electric and hybrid vehicles and 1.08 percent to autonomous driving. These proportions are higher than in the comparison countries USA, Great Britain and France.
A higher proportion of VC deals in Germany than in other countries also related to all technologies in the field of production engineering. Future digital technologies related to cybersecurity and blockchain play a lesser role for venture capitalists in Germany than in other countries. A particularly high proportion of VC deals in the USA are focused on these technologies.
Despite many efforts in recent years, the venture capital ecosystems in important comparison countries are still more efficient than in Germany, according to KfW. Measured in terms of economic power, the German VC market is smaller than comparable markets in the USA or Great Britain, for example.
Not only is more venture capital flowing into start-ups there. A comparison with the USA in particular also shows that individual start-ups in this country raise lower volumes per round.
In the USA in particular, the amount of funds invested in start-ups in relation to gross domestic product was higher for all future technologies. In the case of technologies for energy storage and batteries, this value was even 118 times higher.
Still pent-up demand in Germany
Economics Minister Robert Habeck is now planning a broad-based strategy to reduce the gap to the comparable markets. “The future fund, which was launched last year, will make an important contribution to the development of the German VC market,” says KfW chief economist Köhler-Geib.
In addition, there is the European Tech Champions Initiative as a pan-European fund of funds. This would address the existing financing difficulties in the growth area.
Köhler-Geib also sees the simplification of employee capital participation and the stronger capital market orientation of statutory and private old-age provision with minimum investment quotas in VC funds as central. Here even a small percentage would make a big difference for the venture capital market. It is now important to implement these measures consistently.
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