Sentiment in the German VC market is stabilising

• Situation assessments are slightly lower, but expectations have lifted moderately
• Fundraising climate continues to fall
• Interest environment remains on a historically poor level despite reversal

Sentiment in the German vVenture capital market stabilised in late summer. The mood in the market has thus stopped falling even though central banks again significantly raised key interest rates to fight inflation in the third quarter 2022. The sentiment indicator was hardly unchanged at -17.9 balance points (+0.3 points), with the sub-indicator for the current business situation dropping slightly to -12.8 balance points (-5.3 points) and the sub-indicator for business expectations rising moderately to -23.1 balance points (+6.0 points).

“VC sentiment stabilised in the third quarter of 2022 despite further strong key interest rate rises. The interest rate moves were apparently expected by VC investors and already priced in with the sentiment decline in the previous quarter. The central banks’ announcement of their intention to systematically fight inflation thus appears to have shaped the formation of expectations”, said Dr Fritzi Köhler-Geib, Chief Economist of KfW.

Unlike the interest environment and valuation-related indicators, the fundraising environment became more challenging as a result of the most recent interest rate hikes. As interest rates for safe-haven investments are rising, talks with investors for VC funds engaged in fundraising appear to be becoming increasingly difficult. But it will likely take some time for the cooling fundraising environment to translate into consistently reduced investment activity. After all, the very good financing environment of the past years has led to the formation of high levels of own funds that can still be used for investment purposes.

“The fundraising environment, however, has further deteriorated. The rise of ‘risk-free’ interest rates is therefore becoming more problematic for VC funds in the fundraising phase and will weigh on the VC offering for start-ups in two or three years. The successive launch of the individual Future Fund building blocks will therefore come exactly at the right time to provide some certainty in this environment”, added Köhler-Geib.

Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK), said: “The continuation of the downturn in sentiment was not unexpected in view of the economic and political conditions. Fortunately, the more muted sentiment among VC funds has not had an equally abrupt impact on their investment activity. Investments were robust in the first half-year. As a result of the successful fundraising years 2020 and 2021, companies still have considerable resources at their disposal with which to bring existing investments through the current difficult period and to seize the opportunities currently on offer. This is supported by high deal-flow quality and lower entry valuations. The exit situation gives more cause for concern. Successful sales at attractive valuations are likely to be difficult in the current environment.”

The exit environment is currently being regarded as dismal. Falling from its record high in the first half, it has deteriorated faster and more strongly than ever and stabilised on this level in the third quarter. One obvious explanation for this may be the lower valuations, meaning that despite strong acquisition activity, investors are currently unable to obtain the exit proceeds they hope for.

KfW produces the German Venture Capital Barometer in cooperation with the German Private Equity and Venture Capital Association (BVK) and the Deutsche Börse Venture Network (DBVN) exclusively for Handelsblatt. Detailed analyses with data tables and graphs illustrating the development of the business climate in the venture capital and later-stage segments can be retrieved at
www.kfw.de/gpeb.