VC market in a positive mood: confidence indicators reach new peaks

• VC business climate at an all-time high
• Top results also for confidence indicators in the areas of fundraising, exits and strength of deal flow
• Competitive entry evaluations – investor satisfaction never worse

The upturn in sentiment on the German venture capital market continued in the second quarter of 2021. The business sentiment indicator of the early phase segment rose by 10.5 points to 37.8 balance points and so reached a new peak. The business climate was buoyed to a large extent by business expectations, while the current business situation improved only slightly. The indicator for the current business situation rose by 4.6 points to 36.0 balance points; the indicator for business expectations recorded a clear increase of 16.4 points to reach 39.6 balance points. Expectations for a six-months-term have therefore never been higher.

The development of three climate components in particular has fuelled the business confidence record: fundraising, exit opportunities and the strength of deal flow. All three indicators reached new highs. The fundraising indicator narrowly beats its previous record from the beginning of 2019 as a result of the clearly increased expectations for the next six-month period. In terms of exit sentiment, both the situation assessment and expectations have grown substantially. The previous record high from autumn 2018 was exceeded by a considerable margin. The assessment of the strength of deal flow came in slightly better than the previous high from autumn 2016, due to noticeably higher expectations for the coming six months.

The biggest change was in the satisfaction with entry evaluations, where the corresponding indicator plummeted by 33 points to an all-time low – this too dampened willingness to invest. In the second quarter, deal volumes from Series A/Round 1 financing actually recorded noticeable growth. In addition, three new start-ups reached valuations of USD 1 billion for the first time, earning them the title “unicorns”.

“Two mega deals each worth around USD 1 billion have pushed the German VC market to a new level in the second quarter; sentiment exceeds anything we have seen so far,” says Dr Fritzi Köhler-Geib, KfW’s Chief Economist. “Alone the increased entry evaluations are a fly in the ointment for many investors, but they have had no significant influence on business sentiment to date. The development in deal volumes indicates that the assessments have risen primarily in follow-on financing rounds and less in the context of seed financing. This can also be viewed as a success in the sense that more confidence is now placed in German start-ups that have ‘established’ themselves.”

“The second quarter was marked by lively investment activity and not least by some outstanding financing rounds. The emergence of more unicorns is a great success for company founders and their investors. This speaks for the German start-ups and is a source of great pleasure for us,” says Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK). “The jubilant mood is also further fired by satisfaction in the area of fundraising and exits. The flip side is the generally very high assessment level that has emerged and is now applied also in early financing rounds. Scepticism here seems already to be affecting the willingness of venture capitalists to invest. The challenge is that the start-ups must justify their high valuations – also over the long term.

KfW calculates the German Venture Capital Barometer together with the German Private Equity and Venture Capital Association (BVK) exclusively for Handelsblatt. For detailed analyses with data tables and graphs on the development of the business climate in the venture capital and later stage segments go to www.kfw.de/gpeb.