VC sentiment still very low but slightly improved

• Current situation slightly worse, but expectations significantly more optimistic
• Insolvency of Silicon Valley Bank weighs on sentiment
• Sentiment regarding interest rate levels on capital markets at new record low

In the German venture capital market, sentiment improved slightly in the first quarter of 2023. The German Venture Capital Barometer increased by 7.6 to -34.9 balance points. Sentiment slumped in the final quarter of 2022, but remains very low. The increase was due to improved business expectations, the indicator for which increased to -23.2 balance points (+21.2). In contrast, the indicator for the current business situation fell to -46.6 balance points (-6.1).

The insolvency of Silicon Valley Bank threw the global VC markets into a state of shock for a weekend, which also affected the German market and only ended when the US government issued a comprehensive guarantee for customer deposits held at SVB. In Germany, SVB was only active in the area of venture debt. Its departure from the market is untimely, as start-ups are attempting to extend the time until the next VC financing round as long as possible in view of the current reluctance to invest in the VC market.

The rapid rises in key interest rates by central banks also generated uncertainty within the VC ecosystem and influenced sentiment. Since the turnaround in interest rates, the Nasdaq Composite Index has lost around 35% of its all-time high. This has led institutional investors to attach less weighting to investing in alternative investments such as venture capital. VC funds are therefore likely to find it difficult to attract new capital, so the fundraising climate is correspondingly frosty.

After the price slide on the Nasdaq in the final quarter of 2022, stock market prices rose again at the beginning of the year, which has put a slight strain on the indicator for entry-level valuations, but it remains within a positive range. The new investment climate improved again in the first quarter of 2023. This was due to the increase in the expectation component, which indicates an increase in investment activity by domestic investors over the course of the year. This would also be important for the start-up ecosystem, as investment activity is a signal to potential entrepreneurs.

KfW’s Chief Economist, Dr Fritzi Köhler-Geib: “VC sentiment improved slightly in the first quarter of 2023, but it's at a historically low level. The insolvency of Silicon Valley Bank has certainly prevented a stronger upturn in sentiment. In Germany, SVB mainly operates a venture debt business, so a lower supply is to be expected at first. This is very unfortunate timing in view of falling venture capital investment, which makes venture debt more important as bridge financing. However, VC business expectations have improved significantly, so the market appears to be assuming that the worst is behind us. A good signal for start-ups that need fresh capital.”

Ulrike Hinrichs, Managing Director of the BVK: “Even though the insolvency of Silicon Valley Bank affected sentiment at the start of the year, the slight recovery in sentiment and the increased business expectations are a hopeful signal for the remainder of the year. Together with the continued brisk investment activity, this is good news for business founders that innovative business ideas will continue to find VC financing. And investors have attractive entry opportunities in the current valuation environment. The fundraising and exit climate remains problematic, and is being primarily weighed down by the interest rate situation and the economy. However, if success stories follow here in the course of the year, sentiment should pick up again."

KfW calculates the German Venture Capital Barometer together with the Bundesverband Beteiligungskapital (BVK) and the Deutsche Börse Venture Network exclusively for Handelsblatt. Detailed analyses with data tables and graphs on changes in sentiment in the venture capital and later-stage segments can be found at www.kfw.de/gpeb.