Germany's VC market continues to grapple for direction – including in the third quarter

• Number and volume of deals shrink after growth of deal volume during the first two quarters
• Follow-up financing in the scale-up segment remains challenging
• However, investment activity in 2023 remains solid by historical comparison

The German venture capital market has shown no clear direction in 2023. After the number and overall volume of financing rounds grew in the second quarter, the third quarter saw a drop in both deal volume (-28% QoQ) and number of deals realised (-22% QoQ). The decline in deal volume followed two consecutive increases in the first two quarters of the year. That has deflated the hope that the market might have returned to a growth path again in 2023 after cooling off since early 2022.

Broadly speaking, however, the German VC market remained in robust shape in 2023. If the current average investment activity continues until the end of 2023, the year would close with a deal volume of just over EUR 8 billion – a significantly higher level than what was realised in some of the pre-pandemic years. Given the more challenging interest environment and prolonged cyclical downturn, that would indicate that the market is maturing and on a long-term growth trend.

“The third quarter clearly shows that the German VC market is still searching for a course in adapting to the new framework conditions. After a temporary increase in the two previous quarters, the deal volume has now fallen again somewhat,"

said Fritzi Köhler-Geib, Chief Economist at KfW.

"However, the long-term view of the investment volume in start-ups as a whole is encouraging. Based on the volumes already realised to date, we could end up with an investment volume in German start-ups of just over EUR 8 billion by the end of this year. That would be a significantly higher level than a few years before the pandemic. However, downside risks are also relevant for the short-term development until the end of the year, particularly in the wake of the Middle East conflict."

Investment activity in the third quarter highlighted that follow-up financing in the growth segment remains very challenging. While it still accounted for well over half the total volume on average in the first three quarters, its share in the third quarter dropped to just 28%. Weaker investment activity in the scale-up segment in the third quarter is also reflected in the number of megadeals totalling EUR 100 million and more, which contracted by more than half to just three compared with the two prior quarters.

Investors also exercised restraint in their investment activity in the very early phase in the third quarter. The funds invested in the seed phase decreased by more than one fourth to EUR 184 million. Similarly as in the two previous quarters, this made up around 10% of the total market. By contrast, more funds were invested in the start-up phase (Series A and B) than in the previous quarter. Just under EUR 1.1 billion went to German start-ups here.

According to CB-Insights, the number of German unicorns – start-ups with a market valuation of EUR 1 billion and more – remains unchanged. Given the decreased valuations, especially in the scale-up segment, and the challenging economic environment, further additions are rather unlikely in the short term.

The exit activity of VC-financed start-ups in Germany remains characterised by takeovers. Buyers benefited from downward revisions in valuations in the current market phase. In addition to 22 turnovers, two buyout deals with German start-ups were recorded in the third quarter. A successfully completed IPO in the third quarter could be a first indicator that the window for IPOs that has been close for some quarters now may open further towards the end of the year.

Detailed analyses with data and graphs on the development of the venture capital market are available at:

Venture Capital-Markt in Deutschland