Dusseldorf Although the start-up scene is currently in crisis after years of unchecked growth, numerous venture capitalists are starting up new investment funds. The internationally active company Headline announced three funds for early-stage investments on Thursday.
Headline wants to invest 320 million euros in start-ups in Europe. 400 million euros are available for new US investments, 166 million euros for Brazil. Headline has never raised so much money for start-up investments.
The situation seems paradoxical. On the one hand, large start-ups across Europe are currently laying off employees because they are at risk of running out of money. On the other hand, investors are always announcing new million-euro investments for start-up companies.
Current figures from the analysis company Pitchbook for the USA confirm this trend: in 2021 US venture capital companies invested around 139 billion dollars. In the first half of 2022 alone, it was almost $122 billion.
But instead of investing in companies that already exist or are planning growth, the lenders are mainly looking for completely new companies with their early-stage funds. And the new pots of money are more comprehensive than ever. The semi-public high-tech start-up fund was able to fill its “HTGF IV” fund with 400 million euros, the predecessor only had 320 million.
Earlybird from Berlin and Munich has raised 350 million euros for its seventh “Digital West Fund”, twice as much as its predecessor. Project A was also able to double it, the fourth fund of the Berliners is now worth 360 million euros.
However, more money does not always equate to better. “Many investment firms are raising as much money as they can get. Of course that’s wrong,” says Christian Leybold, co-founder of venture capital firm Headline. According to its own statement, the company has therefore recently even rejected interested parties for the US fund after the internally set upper limit was reached.
Less is more: When in doubt, funds have to turn investors away
The background: The funds not only grow when more people invest more and want to see a return on every cent. Venture capital firms first plan how many start-ups they want to include in their portfolio. The following applies: the more companies, the lower the risk. But that also means more administrative work. Typically, venture capitalists spread their money over 25 start-ups in a fund.
Because shares in young companies became more expensive during the boom, venture capitalists recently had to collect more money. But what to do with the capital when prices are down again? And will the willingness to invest also continue with funds that are only now starting to collect money?
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Whether Headline, Earlybird and Project A: the investment managers are still calm. After the stock prices of many tech companies have fallen sharply since December, start-ups are also being valued lower. However, according to the scene, the effects of early-stage financing are still relatively small.
Most of these start-ups will go public in five to ten years at the earliest, by which time the mood on the markets should have normalized again. Insiders estimate that the valuations of young companies are currently 10 to 20 percent lower than last year.
Safety first: Investors want to save money
“We will set aside a larger proportion of our capital for subsequent investments,” says Hendrik Brandis, co-founder of venture capital firm Earlybird. Most recently, start-up investors have often distributed 40 percent of a fund to their portfolio companies. The remainder was reserved for follow-up at the most promising of these companies.
Florian Heinemann plans to do the same with Project A: “We will invest in 30 start-ups as planned, maybe a little more,” he says. Above all, more money should be available for “the winners”.
On the one hand, the German early-stage investors want to become somewhat more independent of follow-up investors. Your business is always based on the assumption that other financiers will step in later and make much larger sums available. The larger the reserves, the longer start-ups can develop solely with the capital of their existing investors.
On the other hand, if you want to keep ownership of a start-up, you need your own capital to fund it. Because in the case of follow-up investments by other funds, the participation and thus also the share of the proceeds shrink when a start-up finally goes public or is resold.
Invest more slowly: New funds will last longer
Leybold, Brandis and Heinemann also assume that the funds that have now been launched will invest their money over a longer period of time become than their predecessors. One indicator of this trend are market numbers from venture capital firm Morpheus. According to this, the number of rounds of financing for German start-ups fell by more than 13 percent from January to May 2022. 92 percent of all financing rounds were the first or second financing round of the respective company.
At the same time, there are indications that the number of start-ups will decrease again, resulting in fewer investment opportunities. Morpheus recorded a 16 percent drop in newly registered startups for January to May compared to the previous year.
“We fully invested the predecessor fund over a good two and a half years, now we will probably go to three to three and a half years,” says Florian Heinemann. This in turn has advantages and disadvantages. The earlier the investments are made, the longer the portfolio companies have to generate the expected returns.
Headline investor Leybold emphasizes that those who are more patient are more independent of market fluctuations. Funds that have allocated all of their capital over the past 18 months are now more affected by the slide in valuations than those investors who have been more consistent.
Investors rely on frugal founders
When looking for new technologies and digital business models, investors want to pay more attention to the fact that companies can also do business with less money. “Against capital-intensive firms or thin-margin business models we would certainly shy away even more than last year,” says Earlybird partner Brandis.
His company has invested in the rocket start-up Isar Aerospace, which will need many millions of euros before the first sales are possible. Brandis reports that he would now have to discuss this with his colleagues at length.
Investors are currently shying away from capital-intensive companies.
(Photo: Isar Aerospace)
“In times of crisis, companies are successful that initially focus on product development,” says Christian Leybold. Those who can prove that their product is in demand and that their business model is economical will then also receive money for expansion. In the past few months, however, companies had so much capital that they could try both at the same time.
Headline collected almost all of the money for the Europe fund this year. Fundraising for the US fund took place from April to June, i.e. already in crisis mode.
In its current search for investors, Leybold identified two groups of investors. Those who want to maintain a certain ratio between investments in the stock market and in start-ups would now have to cut back on their venture capital investments after the share price on the stock exchanges had fallen. Others, however, are now particularly interested in start-ups, says Leybold: “Anyone who believes in technology as a driver of value creation, but recently thought the prices were crazy, says: ‘Especially now.'”
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