German Venture Capital Barometer: Coronavirus shock: VC sentiment crashes

• VC confidence drops to all-time low
• Sentiment deteriorates across a broad front, with almost all confidence indicators in the red
• Entry valuations are the only exception, but appetite for new investment is low

The uncertain consequences of the coronavirus pandemic have unsettled the German VC market. Business confidence has plummeted to an all-time low. In the first quarter of 2020 the business climate indicator of the early-stage segment nosedived by 72.3 points to -61.3 balance points – an unprecedented decline. VC investors’ assessments of both the current business situation and expectations have deteriorated dramatically. The indicator for the current business situation fell by -66.6 points to -52.6 balance points, while the indicator for business expectations dropped by 77.9 points to -69.9 balance points.

In the first quarter, almost all sentiment indicators fell deep into the red. Sentiment regarding fundraising, exit opportunities, new investments and value adjustments has dropped sharply. Only the assessments of entry valuations improved, and experience has shown that they tend to move in opposite direction. Given the uncertainty over the further development of the coronavirus pandemic, the economic outlook has become very bleak and a recession is imminent. Share markets and, thus, valuation benchmarks have slumped across the world. It is therefore understandable that pressure on portfolio and entry valuations has risen noticeably. Reluctance to undertake new investments is a well-known crisis phenomenon. However, the need for VC has not decreased. Although VC investors have a more negative view of the level and quality of their deal flow and its innovative character, the decline is relatively moderate.

“The coronavirus crisis in Germany abruptly ended the very good sentiment in the VC market”, said Dr Friederike Köhler-Geib, Chief Economist of KfW. “Experience has shown that in times of crisis, VC investors focus on portfolio maintenance and put off new investments for the time being. That puts downward pressure on the level of investments. But now in particular, it is important not to leave the very good start-ups that are still searching for VC investors out in the rain. Otherwise, they will have difficulty getting through the capital-intensive time to market. Losing a start-up generation would be a heavy hit. The very good fundraising climate of past years should actually make it possible to bridge this situation.”

“Demand for venture capital should not drop noticeably because of the pandemic”, added Ulrike Hinrichs, Managing Director of the German Private Equity and Venture Capital Association (BVK). “The challenge will be to secure continued financing for start-ups overall as well as for the large flagship start-ups. Otherwise, irreparable damage might be done to the start-up ecosystem that was so painstakingly built up in the past years. But the venture capital industry is well capitalised. Besides, the German Federal Government has responded and already put together a start-up programme to support it, which should now be launched as quickly as possible.”

KfW calculates the German Venture Capital Barometer exclusively for the Handelsblatt business daily together with the German Private Equity and Venture Capital Association (Bundesverband Deutscher Kapitalbeteiligungsgesellschaften – BVK). 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.